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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 000-1084561
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ZAPME! CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 91-1836242
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3000 EXECUTIVE PARKWAY
SAN RAMON, CALIFORNIA 94583
(Address of principal executive offices)
Registrant's telephone number, including area code: (925) 543-0300
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past (90) days. Yes [ ] No [X]
The number of shares of the issuer's Common Stock outstanding as of
October 31, 1999 was 43,750,156.
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INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (unaudited)
Balance Sheets as of September 30, 1999 and December
31, 1998.............................................. 3
Condensed Statements of Operations for the three
months and nine months ended September 30, 1999 and
1998.................................................. 4
Condensed Statements of Cash Flows for the three
months ended September 30, 1999....................... 5
Notes to Condensed Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 9
Risk Factors.......................................... 15
Item 3. Quantitative and Qualitative Disclosures about Market
Risk.................................................. 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................... 26
Item 2. Changes in Securities and Use of Proceeds............. 26
Item 3. Defaults Upon Senior Securities....................... 27
Item 4. Submission of Matters to a Vote of Security Holders... 27
Item 5. Other Information..................................... 27
Item 6. Exhibits and Reports on Form 8-K...................... 27
Signatures....................................................... 28
</TABLE>
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ZAPME! CORPORATION
Balance Sheets
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
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(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 23,249 $ 815
Restricted cash............................................... 566 -
Accounts receivable........................................... 628 -
Other receivables............................................. 1,651 105
Notes receivable from stockholder............................. 151 127
Prepaid expenses and other current assets..................... 717 45
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Total current assets............................................ 26,962 1,092
Equipment, net.................................................. 16,072 2,471
Other assets.................................................... 1,505 40
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Total assets.................................................... $ 44,539 $ 3,603
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--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses......................... $ 4,227 $ 1,541
Accrued compensation and related expenses..................... 1,247 446
Deferred revenue.............................................. 653 -
Current portion of capital lease obligations.................. 3,700 118
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Total current liabilities....................................... 9,827 2,105
Capital lease obligations....................................... 7,658 269
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Total liabilities............................................... 17,485 2,374
Redeemable convertible preferred stock, $0.01 par value, issuable in
series:
Authorized shares - 600,000
Issued and outstanding shares - 600,000 at September 30, 1999 and
December 31, 1998 (liquidation preference at September 30,
1999 - $5,012) 6,550 3,352
Stockholders' equity (deficit):
Convertible preferred stock, $0.01 par value:
Authorized shares - 18,387,671 at September 30, 1999 and 12,857,671
at December 31, 1998 (including 600,000 shares designated as
redeemable convertible preferred stock)
Issued and outstanding shares - 17,181,781 at September 30, 1999
and 9,557,671 at December 31, 1998 (liquidation preference at
September 30, 1999 of $43,013).............................. 53,477 2,783
Common stock, $0.01 par value:
Authorized shares - 50,000,000 at September 30, 1999 and December
31, 1998
Issued and outstanding shares - 15,673,879 at September 30, 1999
and 14,208,730 at December 31, 1998......................... 27,191 6,212
Deferred stock compensation................................... (14,238) (4,900)
Receivable due from stockholder............................... (6,500) -
Accumulated deficit........................................... (39,426) (6,218)
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Total stockholders' equity (deficit)............................ 20,504 (2,123)
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Total liabilities, redeemable convertible preferred stock and
stockholders' equity (deficit) ............................... $ 44,539 $ 3,603
--------------- --------------
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</TABLE>
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ZAPME! CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Revenue................................... $ 297 $ - $ 444 $ -
Costs and expenses:
Cost of services........................ 1,257 22 2,504 30
Research and development................ 676 319 1,710 748
Sales and marketing..................... 1,683 338 4,139 514
General and administrative.............. 1,942 387 3,917 802
Amortization of deferred stock
compensation.......................... 1,815 274 4,346 274
-------------- ------------- ------------- -------------
Total costs and expenses.................. 7,373 1,340 16,616 2,368
-------------- ------------- ------------- -------------
Loss from operations...................... (7,076) (1,340) (16,172) (2,368)
Other and interest income (expense), net.. 397 (12) 426 (47)
-------------- ------------- ------------- -------------
Net loss.................................. (6,679) (1,352) (15,746) (2,415)
Accretion and dividend on redeemable
convertible preferred stock............. (13,691) (142) (17,462) (142)
-------------- ------------- ------------- -------------
Net Loss applicable to common stockholders $ (20,370) $ (1,494) $ (33,208) $ (2,557)
-------------- ------------- ------------- -------------
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Net loss per share:
Basic and diluted....................... $ (1.49) $ (0.12) $ (2.44) $ (0.21)
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Pro forma basic and diluted............. $ (0.22) $ (0.07) $ (0.58) $ (0.17)
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Shares used in calculation of net loss per
share:
Basic and diluted....................... 13,630 12,763 13,590 12,069
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Pro forma basic and diluted............. 30,706 18,727 27,285 14,079
-------------- ------------- ------------- -------------
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</TABLE>
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ZAPME! CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
----------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss............................................... $ (15,748) $ (2,414)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred stock compensation....... 3,900 274
Depreciation and amortization..................... 1,664 72
Common stock issued for services.................. 387 -
Warrant issued for services ...................... 59 -
Changes in operating assets and liabilities:
Restricted cash................................. (566) -
Accounts receivable............................. (628) -
Other receivables............................... (1,546) -
Prepaid expenses and other current assets....... (671) (17)
Other assets.................................... (106) (3)
Accounts payable and accrued expenses........... 2,686 412
Accrued compensation and related expenses....... 801 (18)
Deferred revenue................................ 653 -
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Net cash used in operating activities.................. (9,115) (1,694)
INVESTING ACTIVITIES
Purchase of equipment, net............................. (3,315) (579)
Notes receivable from stockholder...................... (24) (125)
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Net cash used in investing activities.................. (3,339) (704)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock, net......... 36,063 2,586
Proceeds from issuance of common stock, net............ (396) 16
Proceeds from borrowings on notes payable.............. 700 1,000
Payments on notes payable.............................. (500) -
Payments on lease obligations.......................... (979) -
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Net cash provided by financing activities.............. 34,888 3,602
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Increase in cash and cash equivalents.................. 22,434 1,204
Cash and cash equivalents at beginning of period....... 815 275
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Cash and cash equivalents at end of period............. $ 23,249 $ 1,479
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SUPPLEMENTAL DISCLOSURES:
Conversion of notes payable to stockholders to
preferred stock..................................... $ 200 $ 1,300
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Issuance of common stock for notes receivable.......... $ 6,500 $ 162
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Accretion and dividends of redeemable preferred stock.. $ 1,406 $ 142
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Accretion of mandatory dividends and guaranteed return of
preferred stock...................................... $ 3,874 $ -
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Accretion of beneficial conversion of convertible
preferred stock...................................... $ 12,180 $ -
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Capital lease obligations incurred..................... $ 11,950 $ -
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Warrants issued in connection with lease financing..... $ 1,359 $ -
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Stock options issued in connection with consulting
agreement............................................ $ 60 $ -
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Warrants issued in connection Products and Services
Agreement............................................ $ 1,238 $ -
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Cash paid for interest................................. $ 371 $ 26
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</TABLE>
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ZAPME! CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. BASIS OF PRESENTATION
The interim financial information as of September 30, 1999 and for the three
months and nine months ended September 30, 1999 and 1998 is unaudited, but
includes all adjustments (consisting only of normal recurring adjustments) that
the Company considers necessary for a fair presentation of the results for the
periods shown. The results of operations for such periods are not necessarily
indicative of the results expected for the full fiscal year or for any future
period. These financial statements should be read in conjunction with the
financial statements as of December 31, 1998 and related notes included in the
ZapMe!'s registration statement on Form S-1.
2. BASIC AND DILUTED EARNINGS PER SHARE
Basic and diluted net loss per share information for all periods is
presented under the requirements of FASB Statement No. 128, "Earnings per
Share." Basic loss per share has been computed using the weighted average
number of common shares outstanding during the period, less shares that may
be repurchased and excludes any anti-dilutive effects of options, warrants
and convertible securities. Potentially dilutive issuances have also been
excluded from computation of diluted net loss per share as their inclusion
would be antidilutive.
Pro forma net loss per share has been computed as described above and also
gives effect, under Securities and Exchange Commission guidance, to the
conversion of preferred shares not included above that automatically converted
to common shares upon completion of the Company's initial public offering in
October 1999, using the if-converted method.
The calculation of historical and pro forma basic and diluted net loss per
share is as follows (in thousands, except per share amounts):
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<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 1999 1998
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Historical:
Net loss.................................. $ (6,679) $ (1,352) $ (15,746) $ (2,415)
Accretion and dividend on redeemable
convertible preferred stock............. (13,691) (142) (17,462) (142)
-------------- ------------- ------------- -------------
Net Loss applicable to common stockholders $ (20,370) $ (1,494) $ (33,208) $ (2,557)
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Weighted average shares of common stock
outstanding............................. 14,627 12,905 14,418 12,211
Less: Weighted average shares subject to
repurchase.............................. (997) (142) (828) (142)
-------------- ------------- ------------- -------------
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share.............. 13,630 12,763 13,590 12,069
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Basic and diluted net loss per share.... $ (1.49) $ (0.12) $ (2.44) $ (0.21)
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Pro forma:
Net loss.................................. $ (6,679) $ (1,352) $ (15,748) $ (2,415)
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share (from above). 13,630 12,763 13,590 12,069
Adjustment to reflect the effect of the
conversion of preferred stock from the
date of issuance........................ 17,076 5,964 13,695 2,010
-------------- ------------- ------------- -------------
Weighted average shares of common stock
outstanding used in computing pro forma
basic and diluted net loss per share.... 30,706 18,727 27,285 (14,079)
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Pro forma basic and diluted net loss
per share.............................. $ (0.22) $ (0.07) $ (0.58) $ (0.17)
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</TABLE>
3. STOCKHOLDERS' EQUITY
SERIES E PREFERRED STOCK
In August 1999, ZapMe! sold 2,030,000 of Series E convertible preferred
stock for $5.00 per share with gross proceeds of approximately $10.2 million.
The holders of Series E 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 the 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 per share 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 October 1999, the Company completed an
initial public offering and all shares of Series E preferred stock was converted
into 2,065,758 shares of common stock.
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 recorded an increase to the net loss available to common shareholders of
approximately $12.2 million, which represents the difference between the $5.00
per share purchase price and the deemed fair value of $11.00 per share.
WARRANTS
In connection with lease financing agreements, ZapMe! issued warrants
for 100,000 shares of Series D convertible preferred stock and 192,500 shares of
common stock during the three months ended September 30, 1999. Using the
Black-Scholes option
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valuation model, the Company recorded an asset of approximately $1.4 million
representing the value of the warrants, which will be amortized over the term of
the underlying leases.
INITIAL PUBLIC OFFERING
In October 1999, the Company completed an initial public offering in
which the Company sold 9,000,000 shares of its common stock at a price of
$11.00 per share. Concurrently with the underwritten initial public offering,
the Company sold to various stockholders associated with Gilat Satellite
Networks, at $10.23 per share, an aggregate of 488,753 shares of the
Company's common stock. The proceeds to the Company from the offerings, after
deducting underwriting discounts and commissions, were approximately $97.1
million. Upon closing of the underwritten offering, all of the Company's then
outstanding preferred stock converted into common stock. After the offering,
the Company's authorized capital consists of 205,000,000 shares of capital
stock (200,000,000 shares of common stock and 5,000,000 shares of preferred
stock) of which approximately 43,750,000 shares of common stock were
outstanding at October 31, 1999.
4. COMMITMENTS AND CONTINGENCIES
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 was approximately $4.0 million. In
September 1999, the agreement was amended and the fixed monthly fee on the
minimum number of sites was increased, which increased the maximum obligation on
installed sites to approximately $60.6 million. Additionally, the Company will
record an asset and related lease obligation for all equipment for which
ownership is transferred to the Company. As of September 30, 1999, approximately
120 sites have been installed under the agreement.
5. RELATED PARTY TRANSACTIONS
In August 1999, a majority of the Company's directors, approved the issuance
of an immediately exercisable option to purchase 300,000 shares of the Company's
common stock to an director of the Company at an exercise price of $5.00 per
share. The shares are subject to a right of repurchase in favor of the Company,
which will expire at a rate of one third each anniversary date of the date of
grant. In September 1999, the officer exercised the right to purchase the
shares. The Company recorded deferred stock compensation of approximately $1.8
million, which will be amortized by charge to operations over the vesting period
of the stock using a graded vesting method. 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 note has a term of
four years and bears an interest rate of 5.98%.
In September 1999, the Company hired a new chief executive officer. As part
of the officer's employment agreement, the Company granted a right 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 the
Company, 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. In September 1999, the officer exercised the right and
the Company recorded deferred stock compensation of approximately $6.0 million,
which will be amortized by a charge to operations over the vesting period of the
stock using a graded vesting method. 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 note has a term of
four years and bears an interest rate of 5.98%.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in this Report on Form 10-Q contains certain trend analysis
and other forward-looking statements. Words such as "anticipate," "believe,"
"plan," "estimate," "expect," "seek," and "intend," and words of similar import
are intended to identify such forward-looking statements. These statements are
not guarantees of future performance and are subject to business and economic
risks and uncertainties which are difficult to predict. Therefore, our actual
results of operations may differ materially from those expressed or forecasted
in the forward-looking statements as a result of a number of factors, including,
but not limited to, those set forth in this discussion under "Certain Risk
Factors Which May Impact Future Operating Results" and other risks detailed from
time to time in reports filed with the SEC.
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 September 30,
1999, 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 November 30, 1999, there were over 400 school districts,
representing over 6,000 schools, including more than 2,000 middle, junior
high 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 November 30, 1999, we had deployed ZapMe! lab equipment to over 1,000
schools, which had an average of more than 1,000 students, representing
approximately 1,000,000 students, each of whom has access to a free ZapMe!
account.
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We have incurred net losses of approximately $21.4 million for the period of
inception through September 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. Three sponsors, Toshiba, General
Electric and Gilat Satellite Networks, accounted for approximately 90% of our
revenue in the nine months ended September 30, 1999. We intend to derive revenue
from three primary activities: sponsorship, e-commerce and network services and
other. Sponsorship revenue, which 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 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 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 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 $13.3 million during the nine months ended September 30,
1999 as a result of stock options granted during 1998 and 1999 and shares of
common stock sold to officers of ZapMe! at prices below the deemed fair
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market value at the date of grant. Amortization of deferred stock compensation
of approximately $1.1 million was recognized in 1998 and approximately $3.9
million was recognized for the nine months ended September 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.
Future amortization expense is estimated to be approximately $2.3 million
for the remaining three months of 1999, and approximately $7.0 million, $3.2
million, $1.4 million and $376,000 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.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. 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 $1.4 million for the nine
months ended September 30, 1999. For the nine months ended September 30, 1999,
we have also recorded approximately $2.1 million for accretion of a liquidation
preference for our convertible preferred stock, approximately $1.8 million for
accretion of a guaranteed initial public offering price for our redeemable
convertible preferred and $12.2 million for the difference between the $5.00 per
share purchase price of our Series E convertible preferred stock and the deemed
fair value based upon an initial public offering of $11.00 per share. The
preferred stockholders are entitled to these amounts in the event of an initial
public offering.
RESULTS OF OPERATIONS
REVENUE. Total revenues increased to approximately $297,000 for the three
months ended September 30, 1999. No revenue was reported for the three months
ended September 30, 1998. Total revenues increased to approximately $444,000 for
the nine months ended September 30, 1999. No revenue was reported for the nine
months ended September 30, 1998. Revenue is primarily attributed to content
sponsorship of our network. Three sponsors, General Electric, Gilat Satellite
Networks and Toshiba accounted for substantially all of our revenue for the
three months, and nine months ended September 30, 1999.
COST OF SERVICES. Cost of services increased to approximately $1.3
million for the three months ended September 30, 1999 from approximately
$22,000 for the three months ended September 30, 1998. Cost of services
increased to approximately $2.5 million for the nine months ended September
30, 1999 from approximately $30,000 for the nine months ended September 30,
1998. The increase was due primarily to depreciation related to network
equipment installed in more schools, space segment costs related to the
increased number of installed schools and call center costs to support users
at schools. We expect cost of services to continue to increase due to
depreciation on network equipment and additional costs for space segment
associated with the deployment of the ZapMe! network in additional schools.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to
approximately $676,000 for the three months ended September 30, 1999 from
approximately $319,000 for the three months ended September 30, 1998. Research
and development expenses increased to approximately $1.7 million for the nine
months ended September 30, 1999 from approximately $748,000 for the nine months
ended September 30, 1998. The increase was due primarily to increased payroll
and consulting fees. 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 future periods.
SALES AND MARKETING. Sales and marketing expenses increased to approximately
$1.7 million for the three months ended September 30, 1999 from $338,000 for the
three months ended September 30, 1998. Sales and marketing expenses increased to
approximately
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$4.1 million for the nine months ended September 30, 1999 from $514,000 for the
nine months ended September 30, 1998. 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 increased to
approximately $1.9 million for the three months ended September 30, 1999 from
approximately $387,000 for the three months ended September 30, 1998. General
and administrative expenses increased to approximately $3.9 million for the nine
months ended September 30, 1999 from approximately $802,000 for the nine months
ended September 30, 1998. 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
as we expand our management and staff, incur additional costs related to
expansion of our operations, and incur the additional costs associated with
being a publicly-traded company.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred stock
compensation increased to approximately $1.8 million for the three months ended
September 30, 1999 from approximately $274,000 for three months ended September
30, 1998. Amortization of deferred stock compensation increased to approximately
$4.3 million for the nine months ended September 30, 1999 from approximately
$274,000 for nine months ended September 30, 1998. The deferred stock
compensation is amortized over the vesting period of the related options using a
graded vesting method.
OTHER AND INTEREST INCOME (EXPENSE), NET. Other income and interest income
(expense), net increased to approximately $397,000 for the three months ended
September 30, 1999 from approximately $(12,000) for the three months ended
September 30, 1998. Other income and interest income (expense), net increased to
approximately $426,000 for the nine months ended September 30, 1999 from
approximately $(47,000) for the nine months ended September 30, 1998. The
increase is due to a $350,000 arbitration settlement and an increase in interest
income on cash balances derived primarily from proceeds from the sale of
preferred stock offset by interest expense on capital leases.
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.
LIQUIDITY AND CAPITAL RESOURCES
We have historically satisfied our cash requirements primarily through
the private placement of preferred stock and lease and debt financing. On
October 25, 1999, we closed our underwritten initial public offering and a
concurrent offering of our Common Stock, which resulted in the net proceeds
of approximately $97.1 million
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Net cash used in operating activities increased to approximately $9.1
million for the nine months ended September 30, 1999 from approximately $1.8
million for the nine months ended September 30, 1998. In each period, cash used
by operating activities was primarily a result of the net losses for such period
offset by amortization deferred stock compensation.
Net cash used in investing activities increased to approximately $9.8
million for the nine months ended September 30, 1999 from approximately $579,000
for the nine months ended September 30, 1998. The uses in each period resulted
from the acquisition of capital assets, primarily leased computer equipment
installed in schools and our office, as well as notes receivable from
stockholders in the current period.
Cash provided by financing activities increased to approximately $41.4
million for the nine months ended September 30, 1999 from $3.8 million for the
nine months ended September 30, 1998. In each period, the cash provided by
financing activities resulted primarily from the issuance of capital stock in
private placements.
Capital lease obligations incurred increased to approximately $12.0
million for the nine months ended September 30, 1999. Lease financing was
used primarily to acquire and install computer equipment in schools.
In June 1999, we 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. In September 1999,
the agreement was amended and the fixed monthly fee on the minimum number of
sites was increased, which increased the maximum obligation on installed
sites to approximately $60.6 million.
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 $10.2 million. The
$5.00 share price does not necessarily represent fair value of the preferred
stock issued. We recorded approximately $12.2 million 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 $40.0 million. We estimate that this level of expenditure
will enable us to install approximately 1,200 schools during 1999. Under our
agreements with school districts, as of November 30, 1999, we are permitted
to install ZapMe! labs in over 6,000 schools. Such expenditures are expected
to be made pursuant to cancelable purchase orders when made. Although we have
no material commitments other than our capital equipment and facilities
leases and cancelable commitments to purchase school network equipment in the
ordinary course, 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. 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.
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 twelve months.
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
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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 have reviewed our Year 2000 readiness and developed a plan for
verifying the proper operation of our internally developed software. Although
our Year 2000 readiness assessment will not be totally complete until
December 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
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.
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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 December 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).
CERTAIN RISK FACTORS WHICH MAY IMPACT FUTURE OPERATING RESULTS
ZapMe! operates in a rapidly changing environment that involves a
number of risks, some of which are beyond its control. The following discussion
highlights some of these risks and the possible impact of these factors on
future results of operations.
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 material 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.
WE HAVE A HISTORY OF LOSSES, AND WE EXPECT LOSSES AND SIGNIFICANT INCREASES IN
OUR OPERATING EXPENSES FOR THE FORESEEABLE FUTURE.
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We incurred net losses of approximately $21.4 million for the period of
inception through September 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 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 September 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 material e-commerce
revenue through September 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.
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
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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.
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: Yahoo!, Ask Jeeves,
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 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
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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. Three sponsors, GE, Toshiba and Gilat, accounted for
approximately 90% of our revenue during the nine months ended September 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.
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
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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.
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.
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
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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 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.
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.
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.
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WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FUND OUR OPERATIONS WHEN
NEEDED
We expect to use the net proceeds of our initial public 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 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.
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.
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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.
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 October 26, 1999,
DoubleClick, an Internet advertising provider, acquired NetGravity in a
stock-for-stock transaction. Although we have experienced no change in our
relationship, we can not predict how the accquisition will affect our
relationship with DoubleClick in the future.
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
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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 nine
months of 1999, we added 70 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 and President, Don Kingsborough, our Senior Vice President,
Sales and Marketing, William S. Burwell, our Chief Information Officer and Bob
Rudy, our Vice President of Operations, joined us within the last nine 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
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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.
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.
ZapMe! recorded deferred stock compensation of approximately $1.2 million
during the nine months ended September 30, 1999. The amount was computed using
the Black-Scholes option valuation model, and will be remeasured at each
measurement date. ZapMe! 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;
- 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.
- 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,
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registering, policing or defeating challenges to our intellectual property
rights, or that we will avoid claims that we are infringing the rights of
others.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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 September 30, 1999 or December 31, 1998, 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.
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PART II.
OTHER INFORMATION
ITEM 1. 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!
Each party to the arbitration has asserted various defenses to the claims
and counterclaims. We cannot provide any assurance 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 our offering of Common Stock in October 1999 resulted 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable
(b) Not applicable
(c) The sales of the securities listed below were deemed to be exempt
from registration under the Securities Act of 1933, as amended (the
"Securities Act") in reliance on Section 4(2) of the Securities Act 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 Company.
(i) During the period from July 1, 1999 through September 30, 1999,
the Company granted options to purchase an aggregate of 369,750
shares of common stock to an aggregate of 41 directors,
officers, employees and consultants pursuant to the Company's
1999 Stock Option Plan (the "Option Plan").
(ii) During the period from July 1, 1999 through September 30, 1999,
options to purchase an aggregate of 14,499 shares of common
stock were exercised by an aggregate of two directors, officers,
employees and consultants pursuant to the Option Plan.
(iii) In August 1999, the Company sold and issued an aggregate of
2,030,000 shares of Series E preferred stock at a price of $5.00
per share to certain investors. Each share of Series E preferred
stock converted into approximately 1.017 shares of common stock
upon the closing of our initial public offering in October 1999.
(iv) In September 1999, The Company sold and issued and aggregate of
1,300,000 shares of common stock at a price of $5.00 per share
to certain directors of the Company under Restricted Stock
Purchase Agreements.
26
<PAGE>
(d) On October 20, 1999, we commenced our underwritten initial public
offering of 9,000,000 shares of common stock at $11.00 per share and
a concurrent offering of 488,753 shares of common stock, at $10.23
per share, pursuant to a registration statement (No. 333-84557) (the
"Initial Registration Statement") and a related registration
statement (333-89367) filed pursuant to Rule 462(b) of the
Securities Act. The Initial Registration Statement was declared
effective by the Securities and Exchange Commission on October 19,
1999. The offering has been terminated and all shares were sold. The
managing underwriters for the underwritten initial public offering
were Merrill Lynch & Co., Deutsche Bank Securities Inc., Thomas
Weisel Partners LLC and Wit Capital Corporation. Proceeds to the
Company from the offering (after deducting underwriting fees) were
approximately $97.1 million. In addition, we incurred approximately
$1.6 million for expenses related to the initial public offering.
To date, none of the net offering proceeds have been used. All
net proceeds were invested in short-term financial instruments.
No payments constituted direct or indirect payments to any of
our directors, officers or general partners or their associates,
to persons owning 10% or more of any class of our equity
securities, or to any of our affiliates.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fiscal quarter ended September 30, 1999, we solicited written
consent from our stockholders to approve (a) our reincorporation from California
to Delaware, including approval of certain changes to our certificate of
incorporation and bylaws in connection with our initial public offering; (b) the
amendment and restatement of our 1998 Stock Plan; (c) the adoption of our 1999
Employee Stock Purchase Plan; and (d) our indemnification agreements with our
current and future officers and directors. We also solicited written consent
from those stockholders who are parties to the fourth amended and restated
investor rights agreement (the "Investor Rights Agreement") to waive the
registration rights and right of first refusal described in the Investor Rights
Agreement.
Each written consent and each matter contained therein was approved by a
majority of our stockholders and classes of securities entitled to vote on each
matter.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON 8-K
a) Exhibits
10.25 Restricted Stock Purchase Agreement dated September 13, 1999 by
and between the Company and Rick Inatome.
10.26 Restricted Stock Purchase Agreement dated September 13, 1999 by
and between the Company and Lance Mortensen.
27.1 Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1999.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZAPME! CORPORATION
(Registrant)
By: /s/ Rick Inatome
-------------------------------
PRESIDENTS AND CHIEF EXECUTIVE
OFFICER (PRINCIPAL EXECUTIVE
OFFICER)
By: /s/ Robert Stoffregen
-------------------------------
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Date: December 3, 1999
28
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------- ----------------------
<S> <C>
10.25 Restricted Stock Purchase Agreement dated September 13, 1999 by
and between the Company and Rick Inatome.
10.26 Restricted Stock Purchase Agreement dated September 13, 1999 by
and between the Company and Lance Mortensen.
27.1 Financial Data Schedule.
</TABLE>
29
<PAGE>
EXHIBIT 10.25
ZAPME! CORPORATION
RESTRICTED STOCK PURCHASE AGREEMENT
THIS RESTRICTED STOCK PURCHASE AGREEMENT is made by and between ZapMe!
Corporation, a Delaware corporation (the "Company"), and Rick Inatome (the
"Purchaser").
WHEREAS, in order to give the Purchaser an opportunity to acquire an
equity interest in the Company as an incentive for the Purchaser to participate
in the affairs of the Company, the Company is willing to sell to the Purchaser
and the Purchaser desires to purchase shares of Common Stock according to the
terms and conditions contained herein.
THEREFORE, the parties agree as follows:
1. PURCHASE AND SALE OF SHARES. The Company hereby agrees to
sell to the Purchaser and the Purchaser hereby agrees to purchase an
aggregate of 1,000,000 shares of the Company's Common Stock (the "Shares"),
at the price of $5.00 per share for an aggregate purchase price of
$5,000,000.00, such offer to sell the Shares subject to expiration on
September 30, 1999.
2. PAYMENT OF PURCHASE PRICE.
(a) The purchase price for the Shares may be paid by
delivery to the Company at the time of execution of this Agreement of cash,
check, duly executed full recourse promissory note in the form attached
hereto as EXHIBIT A (the "Note"), or any combination thereof.
(b) With respect to the Note, the parties agree to the
following:
(1) The Note shall become payable in full upon
the earlier of four (4) years from the date of this Agreement, thirty (30)
days following termination of Purchaser's employment with or services to the
Company except for death or disability, or one (1) year following termination
as a result of death or disability.
(2) The Purchaser shall deliver to an escrow
holder designated by the Company (the "Escrow Holder") all certificates
representing the Shares and two executed blank stock assignments, in the form
attached hereto as EXHIBIT B, for use in transferring all or a portion of
said Shares to the Company, as required under this Section 2(b) or under any
other provision of this Agreement including Section 4, and shall enter into a
set of Joint Escrow Instructions in the form attached hereto as EXHIBIT C.
(3) As security for the payment of the Note and
any renewal, extension or modification thereof, the Purchaser hereby grants
to the Company, pursuant to the Security Agreement attached hereto as EXHIBIT
D, a security interest in and pledges with and delivers to the Company the
certificate or certificates representing the Shares.
<PAGE>
(4) In the event of any foreclosure of the
security interest, the Company may sell the Shares at a private sale or may
itself repurchase any or all of the Shares. The parties acknowledge that,
prior to the establishment of a public market for the Shares of the Company,
the securities laws applicable to the sale of the Shares make a public sale
of the Shares commercially unreasonable. The parties agree that the
repurchasing of said Shares by the Company, or by any person to whom the
Company may have assigned its rights hereunder, is commercially reasonable if
made at any of the following prices: (i) a price determined by the Board of
Directors in its discretion, fairly exercised, representing what would be the
fair market value of the Shares diminished by any limitation on
transferability, whether due to the size of the block of Shares or the
restrictions of applicable securities laws, or (ii) the book value per Share
as recorded on the Company's books at the end of the last fiscal quarter
prior to the date of sale of the Shares upon foreclosure (whether or not such
book value per share is unaudited and subject to adjustment), or (iii) the
price at which the Shares were originally purchased by the Purchaser.
(5) In the event of default in payment when due
of any indebtedness under the Note, the Company may elect then, or at any
time thereafter, to exercise all rights available to a secured party under
the California Commercial Code, including the right to sell the Shares at a
private or public sale or repurchase the Shares as provided above. The
proceeds of any sale shall be applied in the following order:
(i) To pay all reasonable expenses of the
Company in enforcing this Agreement,
including without limitation
reasonable attorneys' fees and legal
expenses incurred by the Company.
(ii) In satisfaction of the remaining
indebtedness under the Note.
(iii) To the Purchaser, any remaining
proceeds.
(6) Upon full payment by the Purchaser of all
amounts due on Purchaser's Note, the Escrow Holder shall deliver to the
Purchaser the certificate or certificates representing the Shares in the
Escrow Holder's possession belonging to the Purchaser, the blank stock
assignment and the executed original of the Note marked "canceled" by the
Company, and the Escrow Holder shall be discharged of all further obligations
hereunder; provided, however, that the Escrow Holder shall nevertheless
retain said certificate or certificates and stock assignment as escrow agent
if so required pursuant to other restrictions imposed pursuant to this
Agreement.
3. VESTING. The Shares shall vest and be released from the
Company's Repurchase Option (as hereinafter defined) in accordance with the
following provisions:
Subject to your continued full time employment by the Company,
twenty-five percent (25%) of the Shares purchased pursuant to this Restricted
Stock Purchase Agreement shall vest on September 7, 2000, and one
forty-eighth (approximately 2.08%) of the Shares shall vest at the end of
each month thereafter, so that all of the Shares shall become fully vested on
September 7, 2003,
-2-
<PAGE>
provided you shall continue to be a full time Employee of the Company. In
addition, the Shares will become vested in the event of a Change of Control,
as more fully described in your employment offer letter dated September 7,
1999.
4. REPURCHASE OPTION. In the event of any voluntary or
involuntary termination of the Purchaser's employment by or services to the
Company for any or no reason (including death or disability) before all of
the Shares are released from the Company's repurchase option (see Section 5),
the Company shall, upon the date of such termination (as reasonably fixed and
determined by the Company) have an irrevocable, exclusive option for a period
of ninety (90) days from such date to repurchase all (but not less than all)
of the Shares that shall constitute the Unreleased Shares (as defined in
Section 5) at such time, at the original purchase price of $5.00 per share
(the "Repurchase Price"). Such option shall be exercised by the Company by
written notice to the Purchaser or the Purchaser's executor (with a copy to
the Escrow Holder) and, at the Company's option, (i) by delivery to the
Purchaser or the Purchaser's executor with such notice of a check in the
amount of the purchase price for the Shares being repurchased, or (ii) by
cancellation by the Company of an amount of the Purchaser's indebtedness to
the Company equal to the purchase price for the Shares being repurchased, or
(iii) by a combination of (i) and (ii) so that the combined payment and
cancellation of indebtedness equals the aggregate Repurchase Price. Upon
delivery of such notice and the payment of the purchase price in any of the
ways described above, the Company shall become the legal and beneficial owner
of the Shares being repurchased and all rights and interests therein or
relating thereto, and the Company shall have the right to retain and transfer
to its own name the number of Shares being repurchased by the Company.
5. RELEASE OF SHARES FROM REPURCHASE OPTION.
(a) Shares shall be released from the Company's
repurchase option as set forth in Section 4, above.
(b) Any of the Shares which have not yet been released
from the Company's repurchase option are referred to herein as "Unreleased
Shares".
(c) The Shares which (i) have been released from the
Company's repurchase option, (ii) have been paid for in full, and (iii) no
longer secure Shares not yet paid for in full, shall be delivered to the
Purchaser at the Purchaser's request (see Section 7).
6. RESTRICTION ON TRANSFER. None of the Shares or any beneficial
interest therein shall be transferred, encumbered or otherwise disposed of in
any manner, except for the deposit of the Shares into escrow pursuant to Section
2 and 7 hereof or the release of the Shares to the Company pursuant to such
provisions, until the release of such Shares from the Company's repurchase
option in accordance with the provisions of this Agreement.
7. ESCROW OF SHARES. The Shares issued under this Agreement
shall be held by the Escrow Holder, along with a stock assignment executed by
the Purchaser in blank in the form
-3-
<PAGE>
attached hereto as EXHIBIT B, pursuant to the terms of the Joint Escrow
Instructions attached hereto as EXHIBIT C and the Security Agreement attached
hereto as EXHIBIT D.
8. COMPANY'S RIGHT OF FIRST REFUSAL. Before any Shares held
by Optionee or any transferee (either being sometimes referred to herein as
the "Holder") may be sold or otherwise transferred (including transfer by
gift or operation of law), the Company or its assignee(s) shall have a right
of first refusal to purchase the Shares on the terms and conditions set forth
in this Section (the "Right of First Refusal").
(a) NOTICE OF PROPOSED TRANSFER. The Holder of the
Shares shall deliver to the Company a written notice (the "Notice") stating:
(i) the Holder's bona fide intention to sell or otherwise transfer such
Shares; (ii) the name of each proposed purchaser or other transferee
("Proposed Transferee"); (iii) the number of Shares to be transferred to each
Proposed Transferee; and (iv) the bona fide cash price or other consideration
for which the Holder proposes to transfer the Shares (the "Offered Price"),
and the Holder shall offer the Shares at the Offered Price to the Company or
its assignee(s).
(b) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time
within thirty (30) days after receipt of the Notice, the Company and/or its
assignee(s) may, by giving written notice to the Holder, elect to purchase
all, but not less than all, of the Shares proposed to be transferred to any
one or more of the Proposed Transferees, at the purchase price determined in
accordance with subsection (c) below.
(c) PURCHASE PRICE. The purchase price ("Purchase
Price") for the Shares purchased by the Company or its assignee(s) under this
Section shall be (i) the Offered Price in the case of Shares that are Vested
Shares, or (ii) in the case of Shares that are not Vested Shares, the lower
of the Offered Price or the Repurchase Price as defined in subsection (c)
hereof. If the Offered Price includes consideration other than cash, the cash
equivalent value of the non-cash consideration shall be determined by the
Board of Directors of the Company in good faith.
(d) PAYMENT. Payment of the Purchase Price shall be
made, at the option of the Company or its assignee(s), in cash (by check), by
cancellation of all or a portion of any outstanding indebtedness of the
Holder to the Company (or, in the case of repurchase by an assignee, to the
assignee), or by any combination thereof within thirty (30) days after
receipt of the Notice or in the manner and at the times set forth in the
Notice.
(e) HOLDER'S RIGHT TO TRANSFER. If all of the Shares
proposed in the Notice to be transferred to a given Proposed Transferee are
not purchased by the Company and/or its assignee(s) as provided in this
Section, then the Holder may sell or otherwise transfer such Shares to that
Proposed Transferee at the Offered Price or at a higher price, provided that
such sale or other transfer is consummated within 120 days after the date of
the Notice and provided further that any such sale or other transfer is
effected in accordance with any applicable securities laws and the Proposed
Transferee agrees in writing that the provisions of this Section shall
continue to apply to the Shares
-4-
<PAGE>
in the hands of such Proposed Transferee. If the Shares described in the
Notice are not transferred to the Proposed Transferee within such period, a
new Notice shall be given to the Company, and the Company and/or its
assignees shall again be offered the Right of First Refusal before any Shares
held by the Holder may be sold or otherwise transferred.
(f) EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything
to the contrary contained in this Section notwithstanding, the transfer of
any or all of the Shares during the Optionee's lifetime or on the Optionee's
death by will or intestacy to the Optionee's immediate family or a trust for
the benefit of the Optionee's immediate family shall be exempt from the
provisions of this Section. "Immediate Family" as used herein shall mean
spouse, lineal descendant or antecedent, father, mother, brother or sister.
In such case, the transferee or other recipient shall receive and hold the
Shares so transferred subject to the provisions of this Section, and there
shall be no further transfer of such Shares except in accordance with the
terms of this Section.
(g) TERMINATION OF RIGHT OF FIRST REFUSAL. The Right
of First Refusal shall terminate as to any Shares ninety (90) days after the
first sale of Common Stock of the Company to the general public pursuant to a
registration statement filed with and declared effective by the Securities
and Exchange Commission under the 1933 Act.
9. INVESTMENT REPRESENTATIONS. In connection with the
purchase of the Shares, the Purchaser represents to the Company the following:
(a) The Purchaser is aware of the Company's business
affairs and financial condition and has acquired sufficient information about
the Company to reach an informed and knowledgeable decision to acquire the
securities. The Purchaser is purchasing these securities for investment for
the Purchaser's own account only and not with a view to, or for resale in
connection with, any "distribution" thereof within the meaning of the
Securities Act of 1933, as amended (the "Securities Act").
(b) The Purchaser understands that the securities have
not been registered under the Securities Act by reason of a specific
exemption therefrom, which exemption depends upon, among other things, the
bona fide nature of the Purchaser's investment intent as expressed herein. In
this connection, the Purchaser understands that, in view of the Securities
and Exchange Commission (the "Commission"), the statutory basis for such
exemption may not be present if the Purchaser's representations meant that
the Purchaser's present intention was to hold these securities for a minimum
capital gains period under the tax statutes, for a deferred sale, for a
market rise, for a sale if the market does not rise, or for a year or any
other fixed period in the future.
(c) The Purchaser further acknowledges and understands
that the securities must be held indefinitely unless they are subsequently
registered under the Securities Act or an exemption from such registration is
available. The Purchaser further acknowledges and understands that the
Company is under no obligation to register the securities. The Purchaser
understands that the certificate evidencing the securities will be imprinted
with a legend which prohibits the transfer of
-5-
<PAGE>
the securities unless they are registered or such registration is not
required in the opinion of counsel satisfactory to the Company.
10. STOCK CERTIFICATE LEGENDS. The share certificate
evidencing the Shares issued hereunder shall be endorsed with the following
legends:
(a) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO
SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR
AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE
SECURITIES ACT OF 1933.
(b) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN
AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A
COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE
COMPANY.
(c) Any legend required by any applicable state
securities laws.
11. MARKET STAND-OFF AGREEMENT. The Purchaser hereby agrees,
if so requested by the managing underwriters in such offering, that, without
the prior written consent of such managing underwriters, the Purchaser will
not offer, sell, contract to sell, grant any option to purchase, make any
short sale or otherwise dispose of or make a distribution of any capital
stock of the Company held by or on behalf of the Purchaser or beneficially
owned by the Purchaser in accordance with the rules and regulations of the
Securities and Exchange Commission for a period of up to 180 days after the
date of the final prospectus relating to the Company's initial public
offering.
12. ADJUSTMENT FOR STOCK SPLIT. All references to the number
of Shares and the purchase price of the Shares in this Agreement shall be
appropriately adjusted to reflect any stock split, stock dividend or other
change in the Shares which may be made by the Company after the date of this
Agreement.
13. TAX CONSEQUENCES. The Purchaser has reviewed with the
Purchaser's own tax advisors the federal, state, local and foreign tax
consequences of this investment and the transactions contemplated by this
Agreement. The Purchaser is relying solely on such advisors and not on any
statements or representations of the Company or any of its agents. The
Purchaser understands that the Purchaser (and not the Company) shall be
responsible for the Purchaser's own tax liability that may arise as a result
of this investment or the transactions contemplated by this Agreement. The
Purchaser understands that Section 83 of the Code taxes as ordinary income
both (i) the difference
-6-
<PAGE>
between the fair market value of the Shares when the Company granted the
Purchaser the right to purchase the Shares and the fair market value of the
Shares on the date of this Agreement, and (ii) the difference between the
amount paid for the Shares and the fair market value of the Shares as of the
date any restrictions on the Shares lapse. In this context, "restriction"
includes the right of the Company to buy back the Shares pursuant to its
repurchase option. In the event the Company has registered under the Exchange
Act, "restriction" with respect to officers, directors and 10% shareholders
also means the period after the purchase of the Shares during which such
officers, directors and 10% shareholders could be subject to suit under
Section 16(b) of the Exchange Act. The Purchaser understands that the
Purchaser may elect to be taxed at the time the Shares are purchased rather
than when and as the Company's repurchase option or the Section 16(b) period
expires by filing an election under Section 83(b) of the Code with the I.R.S.
within thirty (30) days from the date of purchase.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION
83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE
THIS FILING ON THE PURCHASER'S BEHALF.
14. ADMINISTRATION. The Board of Directors of the Company
shall have all authority to make determinations deemed necessary or advisable
for administering this Agreement. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
this Agreement 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.
15. GENERAL PROVISIONS.
(a) This Agreement shall be governed by the laws of
the State of California as they apply to contracts entered into and wholly to
be performed in such state. This Agreement represents the entire agreement
between the parties with respect to the purchase of Common Stock by the
Purchaser and may only be modified or amended in writing signed by both
parties.
(b) Any dispute, claim or controversy of any kind
(including but not limited to tort, contract and statute) arising under, in
connection with, or relating to this Agreement shall at the request of either
party be resolved exclusively by binding arbitration in San Ramon, California
in accordance with the Commercial rules of the American Arbitration
Association then in effect. The Purchaser and the Company agree to waive any
objection to personal jurisdiction or venue in any forum located in San
Ramon, California. Judgment may be entered on the arbitrator's award in any
court having jurisdiction.
-7-
<PAGE>
(c) Any notice, demand or request required or
permitted to be given by either the Company or the Purchaser pursuant to the
terms of this Agreement shall be in writing and shall be deemed given when
delivered personally or deposited in the U.S. mail, First Class with postage
prepaid, and addressed to the parties at the addresses of the parties set
forth at the end of this Agreement or such other address as a party may
request by notifying the other in writing.
(d) The rights and benefits of the Company under this
Agreement shall be transferable to any one or more persons or entities, and
all covenants and agreements hereunder shall inure to the benefit of, and be
enforceable by the Company's successors and assigns. The rights and
obligations of the Purchaser under this Agreement may only be assigned with
the prior written consent of the Company.
(e) Either party's failure to enforce any provision or
provisions of this Agreement shall not in any way be construed as a waiver of
any such provision or provisions, nor prevent that party thereafter from
enforcing each and every other provision of this Agreement. The rights
granted both parties herein are cumulative and shall not constitute a waiver
of either party's right to assert all other legal remedies available to it
under the circumstances.
(f) The Purchaser agrees upon request to execute any
further documents or instruments necessary or desirable to carry out the
purposes or intent of this Agreement.
(g) PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING
OF SHARES PURSUANT TO SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING SERVICE
AS A FULL TIME EMPLOYEE AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF
BEING HIRED AT THIS DATE, AND NOT THROUGH PURCHASING SHARES HEREUNDER).
PURCHASER 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 AN
EMPLOYEE OR CONSULTANT FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND
SHALL NOT INTERFERE WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE PURCHASER'S EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH
OR WITHOUT CAUSE.
(h) Purchaser has reviewed this Agreement in its
entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Agreement and fully understands all provisions of this
Agreement.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the day and year first set forth above.
ZAPME! CORPORATION PURCHASER:
a Delaware corporation
By:_______________________________ _______________________________________
(Signature)
Title:___________________________
(Type or Print Name) _______________________________________
_______________________________________
(Address)
-9-
<PAGE>
CONSENT OF SPOUSE
-----------------
I, ____________________, spouse of Rick Inatome, have read and
approve the foregoing Restricted Stock Purchase Agreement (the "Agreement").
In consideration of the offer to my spouse to purchase shares of ZapMe!
Corporation, a Delaware Corporation (the "Company") as set forth in the
Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to
the exercise of any rights under the Agreement and agree to be bound by the
provisions of the Agreement insofar as I may have any rights in said
Agreement or any shares issued pursuant thereto under the community property
laws of the State of California or similar laws relating to marital property
in effect in the state of our residence as of the date of the signing of the
foregoing Agreement.
Dated: September 13, 1999
Signed: _________________________________
<PAGE>
EXHIBIT A
PROMISSORY NOTE
September 13, 1999
$5,000,000.00
For value received, the undersigned promises to pay to ZapMe! Corporation a
Delaware corporation (the "Company"), or order, at its principal office the
principal sum of $5,000,000.00 with interest thereof at the rate of 5.98% per
annum, compounded annually, on the unpaid balance of the principal sum. Said
principal shall be due on the earlier to occur of the fourth anniversary of the
date of this Note, thirty (30) days after termination other than for death or
disability, or one year after termination for death or disability. Said interest
shall be paid as it accrues by means of regular payroll deductions in the case
of an employee and by such other means as the Board may approve in the case of a
member of the Board.
Should the undersigned fail to make full payment of principal or interest for a
period of ten (10) days or more after the due date thereof, the whole unpaid
balance on this Note of principal and interest shall become immediately due at
the option of the holder of this Note.
This Note is subject to the terms of a Stock Purchase Agreement, dated as of
September 13, 1999. This Note is secured by a pledge of the Company's Common
Stock under the terms of a Security Agreement of even date herewith and is
subject to all the provisions thereof.
The holder of this Note shall have full recourse against the undersigned
personally for failure to pay the Note as and when due.
The principal is payable in lawful money of the United States of America. The
privilege is reserved to prepay any portion of the Note at any time.
If the undersigned shall default in the payment of amounts hereunder when due,
the holder of this Note shall be entitled to payment by the undersigned of all
costs of collection, including, without limitation, reasonable attorneys' fees
and costs incurred in connection with such collection efforts, whether or not
suit on this Note is filed. The maker waives presentment for payment, protest,
notice of protest and notice of non-payment of this Note. This Note shall be
governed by the laws of the State of California as they apply to contracts
entered into and wholly to be performed within such state.
_____________________________
Rick Inatome
<PAGE>
EXHIBIT B
---------
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, Rick Inatome, hereby sell, assign and transfer unto
ZapMe! Corporation one million (1,000,000) shares of the Common Stock of ZapMe!
Corporation standing in my name of the books of said corporation represented by
Certificate No. _____ herewith and do hereby irrevocably constitute and appoint
Bruce D. Bower, to transfer the said stock on the books of the within named
corporation with full power of substitution in the premises.
This Stock Assignment may be used only in accordance with the Restricted Stock
Purchase Agreement between ZapMe! Corporation and the undersigned dated
September 13, 1999.
Dated: September 13, 1999
__________________________________________
(to be signed exactly as name is to appear
on stock certificate)
<PAGE>
EXHIBIT C
---------
JOINT ESCROW INSTRUCTIONS
September 13, 1999
Corporate Secretary
ZapMe! Corporation
3000 Executive Parkway
San Ramon, CA 94583
Dear Corporate Secretary:
As Escrow Agent for both ZapMe! Corporation, a Delaware corporation (the
"Company"), and the undersigned purchaser of stock of the Company (the
"Purchaser"), you are hereby authorized and directed to hold the documents
delivered to you pursuant to the terms of the Restricted Stock Purchase
Agreement (the "Agreement") between the Company and the undersigned, in
accordance with the following instructions:
1. In the event the Company and/or any assignee of the Company
(referred to collectively for convenience herein as the "Company") exercises
the Company's repurchase option set forth in the Agreement, the Company shall
give to Purchaser and you a written notice specifying the number of shares of
stock to be purchased, the purchase price and the time for a closing
hereunder at the principal office of the Company. Purchaser and the Company
hereby irrevocably authorize and direct you to close the transaction
contemplated by such notice in accordance with the terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, cancellation of indebtedness or some combination thereof) for
the number of shares of stock being purchased pursuant to the exercise of the
Company's repurchase option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with
respect to such securities all documents necessary or appropriate to make
such securities negotiable and to complete
<PAGE>
any transaction herein contemplated, including but not limited to the filing
with any applicable state blue sky authority of any required applications for
consent to, or notice of transfer of, the securities. Subject to the
provisions of this paragraph 3, Purchaser shall exercise all rights and
privileges of a shareholder of the Company while the stock is held by you.
4. Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's repurchase option has been exercised, you
will deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company's repurchase option,
provided that such shares have been fully paid for and do not secure an
unpaid promissory note or shares not fully paid for. Within ninety (90) days
after cessation of Purchaser's continuous employment by the Company or any
parent or subsidiary of the Company except for death or disability and within
one year after cessation for death or disability, you will deliver to
Purchaser a certificate or certificates representing the aggregate number of
shares held or issued pursuant to the Agreement and not purchased by the
Company or its assignees pursuant to exercise of the Company's repurchase
option.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities or other property belonging to
Purchaser, you shall deliver all of the same to Purchaser and shall be
discharged of all further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as
are specifically set forth herein and may rely and shall be protected in
relying or refraining from acting on any instrument reasonably believed by
you to be genuine and to have been signed or presented by the proper party or
parties. You shall not be personally liable for any act you may do or omit to
do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while
acting in good faith, and any act done or omitted by you pursuant to the
advice of your own attorneys shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all
warnings given by any of the parties hereto or by any other person or
corporation, excepting only orders or process of courts of law and are hereby
expressly authorized to comply with and obey orders, judgments or decrees of
any court. In case you obey or comply with any such order, judgment or
decree, you shall not be liable to any of the parties hereto or to any other
person, firm or corporation by reason of such compliance, notwithstanding any
such order, judgment or decree being subsequently reversed, modified,
annulled, set aside, vacated or found to have been entered without
jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or
called for hereunder.
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<PAGE>
10. You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
12. Your responsibilities as Escrow Agent hereunder shall terminate if
you shall cease to be an officer or agent of the Company or if you shall
resign by written notice to each party. In the event of any such termination,
the Company shall appoint a successor Escrow Agent.
13. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the
securities held by you hereunder, you are authorized and directed to retain
in your possession without liability to anyone all or any part of said
securities until such disputes shall have been settled either by mutual
written agreement of the parties concerned or by a final order, decree or
judgment of a court of competent jurisdiction after the time for appeal has
expired and no appeal has been perfected, but you shall be under no duty
whatsoever to institute or defend any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit
in the United States Post Office, by registered or certified mail with
postage and fees prepaid, addressed to each of the other parties thereunto
entitled at the following addresses or at such other addresses as a party may
designate by ten (10) days' advance written notice to each of the other
parties hereto.
COMPANY: Lance Mortensen, Chairman
ZapMe! Corporation
3000 Executive Parkway
San Ramon, CA 94583
PURCHASER: Rick Inatome
1800 West Maple Road
Troy, MI 48084
ESCROW AGENT: Corporate Secretary
ZapMe! Corporation
3000 Executive Parkway
San Ramon, CA 94583
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<PAGE>
16. By signing these Joint Escrow Instructions, you become a party
hereto only for the purpose of said Joint Escrow Instructions; you do not
become a party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of
the parties hereto, and their respective successors and permitted assigns.
18. These Joint Escrow Instructions shall be governed by, and construed
and enforced in accordance with, the laws of the State of California.
Very truly yours,
ZapMe! Corporation
By: ____________________________________
Lance Mortensen, Chairman
PURCHASER
________________________________________
Rick Inatome
ESCROW AGENT:
____________________________________________
Bruce D. Bower, Corporate Secretary
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<PAGE>
EXHIBIT D
---------
SECURITY AGREEMENT
This Security Agreement is made as of September 13, 1999 between ZapMe!
Corporation, a Delaware corporation ("Pledgee"), Rick Inatome ("Pledgor"), and
Bruce D. Bower, Secretary of Pledgee, as the agent of Pledgee and holder of the
Securities pledged hereunder ("Pledgeholder").
RECITALS
Pursuant to the Restricted Stock Purchase Agreement dated September 13, 1999
(the "Agreement"), between Pledgor and Pledgee and Pledgor's election under the
terms of the Agreement to pay for such shares with Pledgor's promissory note
(the "Note"), Pledgor has purchased 1,000,000 shares of Pledgee's Common Stock
(the "Shares") at a price of five dollars ($5.00) per share, for a total
purchase price of five million dollars ($5,000,000.00). The Note and the
obligations thereunder are as set forth in EXHIBIT A to the Agreement.
NOW, THEREFORE, it is agreed as follows:
1. CREATION AND DESCRIPTION OF SECURITY INTEREST. In consideration of
the transfer of the Shares to Pledgor under the Agreement, Pledgor, pursuant
to the California Uniform Commercial Code, hereby pledges all of such Shares
(herein sometimes referred to as the "Collateral") represented by certificate
number ______, and herewith delivers said certificate to Pledgeholder, who
shall hold said certificate on behalf of Pledgee subject to the terms and
conditions of this Security Agreement.
The Shares (together with an executed blank stock assignment or assignments)
shall be held by Pledgeholder on behalf of Pledgee as security for the repayment
of the Note, and any extensions or renewals thereof, to be executed by Pledgor
pursuant to the terms of the Agreement, and Pledgeholder shall not encumber or
dispose of such Shares except in accordance with the provisions of this Security
Agreement.
2. PLEDGOR'S REPRESENTATIONS AND COVENANTS. To induce Pledgee to enter
into this Security Agreement, Pledgor represents and covenants to Pledgee,
its successors and assigns, as follows:
(a) PAYMENT OF INDEBTEDNESS. Pledgor will pay the principal sum of
the Note secured hereby, and interest thereon, at the time and in the manner
provided in the Note.
(b) ENCUMBRANCES. The Shares are free of all other adverse claims,
encumbrances, defenses and liens (other than restrictions on transfer imposed
by applicable securities laws), except for (i) Pledgee's rights to repurchase
Shares pursuant to Section 4 of the Agreement and (ii) the
<PAGE>
pledge of the Shares hereunder as security for payment of the Note, and
Pledgor will not further encumber the Shares without the prior written
consent of Pledgee.
(c) MARGIN REGULATIONS. In the event that Pledgee's Common Stock is
now or later becomes margin-listed by the Federal Reserve Board and Pledgee
is classified as a "lender" within the meaning of the regulations under Part
207 of Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor
agrees to cooperate with Pledgee in making any amendments to the Note or
providing any additional collateral as may be necessary to comply with such
regulations.
3. VOTING RIGHTS. During the term of this pledge and so long as all
payments of principal and interest are made as they become due under the
terms of the Note, Pledgor shall have the right to vote all of the Shares
pledged hereunder.
4. STOCK ADJUSTMENTS. In the event that during the term of the pledge
any stock dividend, reclassification, readjustment or other changes are
declared or made in the capital structure of Pledgee, all new, substituted
and additional shares or other securities issued by reason of any such change
shall be delivered to and held by the Pledgee under the terms of this
Security Agreement in the same manner as the Shares originally pledged
hereunder. In the event of substitution of such securities, Pledgor, Pledgee
and Pledgeholder shall cooperate and execute such documents as are reasonable
so as to provide for the substitution of such Collateral and, upon such
substitution, references to "Shares" in this Security Agreement shall include
the substituted shares of capital stock of Pledgor as a result thereof.
5. OPTIONS AND RIGHTS. In the event that, during the term of this
pledge, subscription Options or other rights or options shall be issued in
connection with the pledged Shares, such rights, Options and options shall be
the property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then
held by Pledgeholder shall be immediately delivered to Pledgeholder, to be
held under the terms of this Security Agreement in the same manner as the
Shares pledged.
6. DEFAULT. Pledgor shall be deemed to be in default of the Note and of
this Security Agreement in the event:
(a) Payment of principal or interest on the Note shall be
delinquent for a period of ten (10) days or more; or
(b) Pledgor fails to perform any of the covenants set forth in the
Agreement or contained in this Security Agreement for a period of ten (10)
days after written notice thereof from Pledgee; or
(c) A bankruptcy or insolvency proceeding is instituted by or
against Pledgor, or if a receiver is appointed for the property of Pledgor; or
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<PAGE>
(d) Pledgor makes an assignment for the benefit of creditors.
In the case of a default, as set forth above, Pledgee shall have the right to
accelerate payment of the entire amount on the Note, and Pledgee shall
thereafter be entitled to pursue its remedies under the California Uniform
Commercial Code.
7. RELEASE OF COLLATERAL. Subject to any applicable contrary rules
under Regulation G, there shall be released from this pledge a portion of the
pledged Shares held by Pledgeholder hereunder upon payments of the principal
of the Note. The number of the pledged Shares which shall be released shall
be that number of full Shares which bears the same proportion to the initial
number of Shares pledged hereunder as the payment of principal bears to the
initial full principal amount of the Note. Notwithstanding the foregoing,
upon any release of pledged Shares hereunder any such Shares which shall
continue to constitute Unreleased Shares as defined in the Agreement shall
continue to be held in escrow pursuant to Sections 4 and 7 of the Agreement.
8. WITHDRAWAL OR SUBSTITUTION OF COLLATERAL. Pledgor shall not sell,
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
9. TERM. The within pledge of Shares shall continue until the payment
of all indebtedness secured hereby, subject to the provisions for prior
release of a portion of the Collateral as provided in paragraph 7 above.
10. PLEDGEHOLDER LIABILITY.
(a) Pledgeholder shall not be liable to any party for any of his
acts, or omissions to act, as Pledgeholder unless Pledgeholder is proved to
have acted in bad faith. Any act done or omitted pursuant to the advice of
legal counsel, other than an act or omission involving gross or willful
negligence, shall be deemed to be done or omitted in good faith.
(b) Pledgeholder shall be entitled to employ such legal counsel and
other experts as Pledgeholder may deem necessary properly to advise
Pledgeholder in connection with its obligations hereunder, and Pledgeholder
may rely upon the advice of such counsel. Such counsel's reasonable fees and
costs shall be borne 50% by Pledgor and 50% by Pledgee.
(c) It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the
securities held by Pledgeholder hereunder, Pledgeholder is authorized and
directed to retain in Pledgeholder's possession as agent of Pledgee without
liability to anyone all or any part of said securities until such disputes
shall have been settled either by mutual written agreement of the parties
concerned or by a final order, decree or judgment of the arbitrator provided
for in Section 15 of the Agreement or of a court of competent jurisdiction
after the time for appeal has expired and no appeal has been perfected, but
Pledgeholder shall be under no duty whatsoever to institute or defend any
such proceedings.
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<PAGE>
In addition, upon any dispute Pledgeholder should be entitled to engage
legal counsel, one-half of whose fees and expenses shall be borne by Pledgor and
one-half by Pledgee.
11. INVALIDITY OF PARTICULAR PROVISIONS. Pledgor and Pledgee agree that the
enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.
12. SUCCESSORS OR ASSIGNS. Pledgor and Pledgee agree that all of the
terms of this Security Agreement shall be binding on their respective
successors and assigns, and that the term "Pledgor" and the term "Pledgee" as
used herein shall be deemed to include, for all purposes, the respective
designees, successors, assigns, heirs, executors and administrators.
13. GOVERNING LAW. This Security Agreement shall be interpreted and
governed under the laws of the State of California.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"PLEDGOR" By: Rick Inatome
________________________________________
(Signature)
___________________________________
___________________________________
(Address)
"PLEDGEE" ZapMe! Corporation
a Delaware corporation
By: ____________________________________
Lance Mortensen, Chairman
"PLEDGEHOLDER" By: Bruce D. Bower
________________________________________
Secretary of Pledgee
-5-
<PAGE>
ELECTION UNDER SECTION 83(b)
----------------------------
OF THE INTERNAL REVENUE CODE OF 1986
------------------------------------
The undersigned taxpayer hereby elects, pursuant to the above-referenced Federal
Tax Code, to include in taxpayer's gross income for the current taxable year,
the amount of any compensation taxable to taxpayer in connection with his
receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year
of the undersigned are as follows:
NAME: TAXPAYER: Rick Inatome SPOUSE:
ADDRESS:
IDENTIFICATION NO.: TAXPAYER: SPOUSE:
TAXABLE YEAR:
2. The property with respect to which the election is made is
described as follows: 1,000,000 shares (the "Shares") of the Common
Stock of ZapMe! Corporation (the "Company").
3. The date on which the property was transferred is: SEPTEMBER 13, 1999
4. The property is subject to the following restrictions:
The Shares may be repurchased by the Company, or its assignee, on certain
events. This right lapses with regard to a portion of the Shares over time.
5. The fair market value at the time of transfer, determined without
regard to any restriction other than a restriction which by its
terms will never lapse, of such property is:
$5,000,000.00
6. The amount (if any) paid for such property is:
$5,000,000.00
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
THE UNDERSIGNED UNDERSTANDS THAT THE FOREGOING ELECTION MAY NOT BE REVOKED
EXCEPT WITH THE CONSENT OF THE COMMISSIONER.
Dated: ______________, 1999 ________________________________________
Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated: ______________, 1999 ________________________________________
Spouse of Taxpayer
<PAGE>
Exhibit 10.26
ZAPME! CORPORATION
RESTRICTED STOCK PURCHASE AGREEMENT
THIS RESTRICTED STOCK PURCHASE AGREEMENT (this "AGREEMENT") is made by
and between Lance Mortensen ("PURCHASER") and ZapMe! Corporation, a Delaware
corporation (the "COMPANY") effective September 13, 1999.
In consideration of the mutual covenants and representations herein set
forth, the Company and Purchaser hereby agree as follows:
1. PURCHASE AND SALE OF SHARES. Purchaser hereby purchases from the
Company, and the Company hereby issues and sells to Purchaser, an aggregate of
300,000 shares of Common Stock (as hereinafter defined) (the "Shares"), at a
price of $5.00 per share or an aggregate purchase price of $1,500,000. The
Company shall, promptly after execution of this Agreement, issue a certificate
representing the Shares registered in the name of Purchaser, which certificate
shall be held in escrow pursuant to the provisions of Section 6 hereof. In
return, the Purchaser shall deliver to the Company (a) an executed counterpart
of this Agreement, and (b) the purchase price of the Shares in the form of (i) a
check payable to the Company, (ii) a wire transfer of immediately available
funds to an account designated by the Company, (iii) a full-recourse promissory
note, or (iv) any combination of the foregoing.
2. ADJUSTMENTS. All references to the number of Shares and the purchase
price of the Shares in this Agreement shall be appropriately adjusted to reflect
any further stock split, stock dividend or other change in the Shares which may
be made by the Company after the date of this Agreement.
3. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "BOARD" means the Board of Directors of the Company.
(b) "CHANGE OF CONTROL" shall mean the occurrence of any of the
following events:
(i) the approval by stockholders of the Company of a
merger or consolidation of the Company with any other corporation, other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation;
<PAGE>
(ii) any approval by the stockholders of the Company
of a plan of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's assets;
or
(iii) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becoming the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the total voting power represented by the Company's then outstanding
voting securities.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMON STOCK" means the Common Stock of the Company.
(e) "CONSULTANT" means any person, including an advisor, who
is engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not.
(f) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" means the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee shall not be considered interrupted
in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of
absence approved by the Company, provided that such leave is for a period of not
more than ninety (90) days, unless reemployment upon the expiration of such
leave is guaranteed by contract or statute, or unless provided otherwise
pursuant to Company policy adopted from time to time; or (iv) in the case of
transfers between locations of the Company or between the Company, its
Subsidiaries or its successor. Continuous Status as an Employee or Consultant
shall not be considered interrupted in the case of a change in status from
Employee to Consultant, or vice versa.
(g) "EMPLOYEE" means any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the Company,
PROVIDED that the payment of a director's fee by the Company shall not, in and
of itself, be sufficient to constitute "employment" by the Company.
(h) "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 of the National Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") Stock Market, its Fair Market Value shall be the
closing sale price for such stock (or the closing bid, if no sales were
reported, as quoted on such system or exchange, 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 Board deems reliable;
(ii) if the Common Stock is quoted on the Nasdaq Stock
Market (but not on the Nasdaq National Market thereof) or regularly quoted by
a recognized securities dealer but
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<PAGE>
selling prices are not reported, its Fair Market Value shall be the mean
between the high and low asked prices for the Common Stock; or
(iii) in the absence of an established market for the
Common Stock, Fair Market Value thereof shall be determined in good faith by the
Board.
(i) "INVOLUNTARY TERMINATION" means (i) without the
Purchaser's express written consent, a significant reduction of the Purchaser's
duties, position or responsibilities relative to the Purchaser's duties,
position or responsibilities in effect immediately prior to such reduction, or
the removal of the Purchaser from such position, duties and responsibilities,
unless the Purchaser is provided with comparable duties, position and
responsibilities; provided, however, that a reduction in duties, position or
responsibilities solely by virtue of the Company being acquired and made part of
a larger entity (as, for example, when the Chief Executive Officer of the
Company remains as such following a Change of Control but is not made Chief
Executive Officer of the acquiring corporation) shall not constitute an
"Involuntary Termination"); (ii) without the Purchaser's express written
consent, a substantial reduction, without good business reasons, of the
facilities and perquisites (including office space and location) available to
the Purchaser immediately prior to such reduction; (iii) a reduction by the
Company of the Purchaser's base salary as in effect immediately prior to such
reduction; (iv) a material reduction by the Company in the kind or level of
employee benefits to which the Purchaser is entitled immediately prior to such
reduction with the result that the Purchaser's overall benefits package is
significantly reduced; or (v) without the Purchaser's express written consent,
the relocation of the Purchaser to a facility or a location more than fifty (50)
miles from his current location; (vi) any purported termination of the Purchaser
by the Company which is not effected for Cause or for which the grounds relied
upon are not valid.
(j) "PARENT" means a "parent corporation", whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(k) "SUBSIDIARY" means a "subsidiary corporation", whether now
or hereafter existing, as defined in Section 424(f) of the Code.
(l) "UNVESTED SHARES" means those Shares that, as of any
particular date, have not vested in accordance with the vesting schedule set
forth in Section 4 below.
(m) "VESTED SHARES" means those Shares that, as of any
particular date, have vested in accordance with the vesting schedule set forth
in Section 4 below.
4. VESTING.
The Shares shall vest and be released from the Company's
Repurchase Option (as hereinafter defined) in accordance with the following
provisions:
(a) One-third (1/3) of the Shares shall vest twelve (12)
months after the date hereof, and one-third (1/3) of the Shares shall vest at
the end of each year thereafter, so that all the Shares shall be Vested Shares
on September 13, 2002.
-3-
<PAGE>
(b) Vesting under this subsection shall cease in the event
that Purchaser's Continuous Status as an Employee or Consultant terminates. At
such times, the repurchase provisions of Section 5 hereof shall apply to all
Shares that are Unvested Shares as of the date of such termination.
(c) Notwithstanding anything contained in this Agreement to
the contrary, if the Purchaser's employment with the Company terminates as a
result of an Involuntary Termination at any time within twelve (12) months after
a Change of Control, then 100% of the Shares shall become Vested Shares and the
repurchase provisions of Section 5 shall immediately lapse.
5. REPURCHASE OPTION.
(a) If Purchaser's Continuous Status as an Employee or
Consultant terminates for any or no reason, including for cause, death, or
disability, the Company shall have the right and option to purchase from
Purchaser all of Purchaser's Shares which are Unvested Shares as of the date of
such termination, at the price paid by Purchaser for such Shares (the
"REPURCHASE OPTION").
(b) Upon the occurrence of such termination, the Company may
exercise its Repurchase Option by delivering personally, by registered or
certified mail, or by overnight courier, to Purchaser (or Purchaser's transferee
or legal representative, as the case may be) and to the Escrow Agent (as
hereinafter defined), within sixty (60) days of such termination, a notice in
writing indicating the Company's intention to exercise the Repurchase Option and
setting forth a date for closing not later than fifteen (15) days from the date
of such notice. The closing shall take place at the Company's office. At the
closing, the holder of the certificates for the Unvested Shares being
transferred shall deliver the stock certificate or certificates evidencing the
Unvested Shares, and the Company shall deliver the purchase price (the
"REPURCHASE PRICE") therefor.
(c) Payment of the Repurchase Price may be made, at the option
of the Company, in cash (by check), by cancellation of all or a portion of any
outstanding indebtedness of Purchaser to the Company or by any combination
thereof. If the Company elects to pay the entire Repurchase Price by check, it
may make such payment to a bank selected by the Company. The Company shall avail
itself of this option by a notice in writing to Purchaser which states the name
and address of the bank, the date of closing, and waives the closing at the
Company's office.
(d) If the Company does not elect to exercise the Repurchase
Option conferred above by giving the requisite notice within sixty (60) days
following the termination, the Repurchase Option shall terminate.
6. TRANSFER OF SHARES; ESCROW.
(a) Purchaser hereby authorizes and directs the Secretary of
the Company, or such other person designated by the Company, to transfer any
Unvested Shares as to which the Repurchase Option has been exercised from
Purchaser to the Company.
(b) To ensure the availability for delivery of Purchaser's
Unvested Shares upon repurchase by the Company pursuant to the Repurchase
Option under Section 5 above, Purchaser
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<PAGE>
hereby appoints the Corporate Secretary of the Company, or any other person
designated by the Company, as escrow agent (the "ESCROW AGENT") and as
Purchaser's attorney-in-fact to sell, assign and transfer unto the Company
such Unvested Shares, if any, as may be repurchased by the Company pursuant
to the Repurchase Option and shall, upon execution of this Agreement, deliver
and deposit with the Escrow Agent the share certificates representing the
Unvested Shares, together with two stock assignments duly endorsed in blank
and in the form attached hereto as EXHIBIT A-1. The Unvested Shares and stock
assignment shall be held by the Escrow Agent in escrow pursuant to Joint
Escrow Instructions in the form attached hereto as EXHIBIT A-2, until (i) the
Company exercises its Repurchase Option as provided in Section 5 above, (ii)
such Unvested Shares become Vested Shares, or (iii) such time as this
Agreement no longer is in effect. Upon vesting of the Unvested Shares, the
Escrow Agent shall promptly deliver to Purchaser the certificate or
certificates representing such Shares in the Escrow Agent's possession
belonging to Purchaser, and the Escrow Agent shall be discharged of all
further obligations hereunder. Notwithstanding any of the foregoing, however,
the Escrow Agent shall nevertheless retain such certificate or certificates
as Escrow Agent if so required pursuant to other restrictions imposed
pursuant to this Agreement.
(c) The Escrow Agent shall not be liable for any act it may do
or omit to do with respect to holding the Shares in escrow and while acting in
good faith and in the exercise of its judgment.
(d) Transfer or sale of the Shares is subject to restrictions
on transfer imposed by any applicable state and federal securities laws. Any
transferee shall hold such Shares subject to all the provisions hereof and shall
acknowledge the same by signing a copy of this Agreement.
(e) No Shares may be sold, pledged, hypothecated or otherwise
transferred by Purchaser until such Shares have become Vested Shares and are no
longer subject to any security agreement for the benefit of the Company.
7. OWNERSHIP, VOTING RIGHTS, DUTIES. This Agreement shall not affect in
any way the ownership, voting rights or other rights or duties of Purchaser,
except as specifically provided herein. Purchaser shall enjoy rights as a
stockholder until such time as Purchaser disposes of the Shares or the Company
and/or its assignee(s) exercises either the Repurchase Option or the Right of
First Refusal hereunder. Upon any such exercise, Purchaser shall have no further
rights as a holder of the Shares so purchased except the right to receive
payment for the Shares so purchased in accordance with the provisions of this
Agreement, and Purchaser or the Escrow Agent, as the case may be, shall
forthwith cause the certificate(s) evidencing the Shares so purchased to be
surrendered to the Company for transfer or cancellation.
8. COMPANY'S RIGHT OF FIRST REFUSAL. Before any Shares held by
Purchaser or any transferee (either being sometimes referred to herein as the
"HOLDER") may be sold or otherwise transferred (including transfer by gift or
operation of law), the Company or its assignee(s) shall have a right of first
refusal to purchase the Shares on the terms and conditions set forth in this
Section (the "RIGHT OF FIRST REFUSAL").
(a) NOTICE OF PROPOSED TRANSFER. The Holder of the Shares shall
deliver to the Company a written notice (the "NOTICE") stating: (i) the
Holder's bona fide intention to sell or
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otherwise transfer such Shares; (ii) the name of each proposed purchaser or
other transferee ("PROPOSED TRANSFEREE"); (iii) the number of Shares to be
transferred to each Proposed Transferee; and (iv) the bona fide cash price or
other consideration for which the Holder proposes to transfer the Shares (the
"OFFERED PRICE"), and the Holder shall offer the Shares at the Offered Price
to the Company or its assignee(s).
(b) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within
thirty (30) days after receipt of the Notice, the Company and/or its assignee(s)
may, by giving written notice to the Holder, elect to purchase all, but not less
than all, of the Shares proposed to be transferred to any one or more of the
Proposed Transferees, at the purchase price determined in accordance with
subsection (c) below.
(c) PURCHASE PRICE. The purchase price for the Shares
purchased by the Company or its assignee(s) under this Section shall be the
Offered Price. If the Offered Price includes consideration other than cash, the
cash equivalent value of the non-cash consideration shall be determined by the
Board in good faith.
(d) PAYMENT. Payment of the purchase price shall be made, at
the option of the Company or its assignee(s), in cash (by check), by
cancellation of all or a portion of any outstanding indebtedness of the Holder
to the Company (or, in the case of repurchase by an assignee, to the assignee),
or by any combination thereof within 30 days after receipt of the Notice or in
the manner and at the times set forth in the Notice.
(e) HOLDER'S RIGHT TO TRANSFER. If all of the Shares proposed
in the Notice to be transferred to a given Proposed Transferee are not purchased
by the Company and/or its assignee(s) as provided in this Section, then the
Holder may sell or otherwise transfer such Shares to that Proposed Transferee at
the Offered Price or at a higher price, provided that such sale or other
transfer is consummated within ninety (90) days after the date of the Notice and
provided further that any such sale or other transfer is effected in accordance
with any applicable securities laws and the Proposed Transferee agrees in
writing that the provisions of this Section shall continue to apply to the
Shares held by such Proposed Transferee. If the Shares described in the Notice
are not transferred to the Proposed Transferee within such period, a new Notice
shall be given to the Company, and the Company and/or its assignees shall again
be offered the Right of First Refusal before any Shares held by the Holder may
be sold or otherwise transferred.
(f) EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything to the
contrary contained in this Section notwithstanding, the transfer of any or all
of the Shares during Purchaser's lifetime or on Purchaser's death by will or
intestacy to Purchaser's Immediate Family or a trust for the benefit of
Purchaser's immediate family shall be exempt from the provisions of this
Section. "IMMEDIATE FAMILY" as used herein shall mean spouse, lineal descendant
or antecedent, father, mother, brother or sister. In such case, the transferee
or other recipient shall receive and hold the Shares so transferred subject to
the provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.
(g) TERMINATION OF RIGHT OF FIRST REFUSAL. The Right of First
Refusal shall terminate as to any Shares upon (i) the first sale of Common
Stock of the Company to the general
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public pursuant to a registration statement filed with and declared effective
by the Securities and Exchange Commission under the Securities Act of 1933,
as amended (the "SECURITIES ACT"), or (ii) a merger of the Company with a
corporation whose stock is publicly traded on a national exchange.
9. RESTRICTIVE LEGENDS; STOP-TRANSFER ORDERS; MARKET STANDOFF.
(a) LEGENDS. Purchaser understands and agrees that the Company
shall cause the legends set forth below or legends substantially equivalent
thereto, to be placed upon any certificate(s) evidencing ownership of the
Shares together with any other legends that may be required by state or
federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN
THE OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO
THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER,
PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER, RIGHTS OF REPURCHASE,
RIGHTS OF FIRST REFUSAL AND OTHER RESTRICTIONS FOR THE
BENEFIT OF THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN A
RESTRICTED STOCK PURCHASE AGREEMENT BETWEEN THE ISSUER AND
THE ORIGINAL HOLDER OF THESE SHARES, COPIES OF WHICH MAY BE
OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER
RESTRICTIONS, RIGHTS OF REPURCHASE, RIGHTS OF FIRST REFUSAL
AND OTHER RESTRICTIONS ARE BINDING ON TRANSFEREES OF THESE
SHARES.
(b) STOP-TRANSFER NOTICES. Purchaser agrees that, in order to
ensure compliance with the restrictions referred to herein, the Company may
issue appropriate "stop transfer" instructions to its transfer agent, if any,
and that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) MARKET STANDOFF. Purchaser hereby agrees that, if so
requested by the Company or any representative of the underwriters in
connection with any registration of the offering of any securities of the
Company under the Securities Act, Purchaser shall not sell or otherwise
transfer any Shares or other securities of the Company during the 180-day
period (or such other period as may be requested in writing by the
representative of the underwriters and agreed to in writing by the Company)
following the effective date of a registration statement of the Company filed
under the Securities Act. Such restriction shall apply only to the first
registration statement of the Company to become effective under the
Securities Act that includes securities to be sold on behalf of the Company
to the public in an underwritten public offering under the Securities Act.
The
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Company may impose stop-transfer instructions with respect to securities
subject to the foregoing restrictions until the end of such market standoff
period.
(d) REFUSAL TO TRANSFER. The Company shall not be required (i)
to transfer on its books any Shares that have been sold or otherwise transferred
in violation of any of the provisions of this Agreement or (ii) to treat as
owner of such Shares or to accord the right to vote or pay dividends to any
purchaser or other transferee to whom such Shares shall have been so
transferred.
10. REPRESENTATIONS.
(a) INVESTMENT REPRESENTATION. Purchaser represents to the
Company the following:
(i) Purchaser either (1) has a preexisting personal
or business relationship with the Company or any of its officers, directors or
controlling persons, or (2) by reason of Purchaser's business or financial
experience or the business or financial experience of Purchaser's professional
advisors who are unaffiliated with and who are not compensated by the Company or
any affiliate or selling agent of the Company, directly or indirectly, could be
reasonably assumed to have the capacity to protect Purchaser's own interests in
connection with the purchase of the Shares.
(ii) Purchaser is aware of the Company's business
affairs and financial condition and has acquired sufficient information about
the Company to reach an informed and knowledgeable decision to acquire the
Shares. Purchaser is acquiring these Shares for investment for Purchaser's own
account only and not with a view to, or for resale in connection with, any
"distribution" thereof within the meaning of the Securities Act.
(iii) Purchaser acknowledges and understands that the
Shares constitute "restricted securities" under the Securities Act and have not
been registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Purchaser's investment intent as expressed herein. In this connection,
Purchaser understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Purchaser's representation was predicated solely upon a present intention to
hold these Shares for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Shares, or for a period of one year or any other fixed
period in the future. Purchaser further understands that the Shares must be held
indefinitely unless they are subsequently registered under the Securities Act or
an exemption from such registration is available. Purchaser further acknowledges
and understands that the Company is under no obligation to register the Shares.
Purchaser understands that the certificate evidencing the Shares shall be
imprinted with a legend which prohibits the transfer of the Shares unless they
are registered or such registration is not required in the opinion of counsel
satisfactory to the Company, a legend enumerating the restrictions on transfer
of the Shares, and any other legend required under applicable state securities
laws.
(iv) Purchaser is familiar with the provisions of Rule 144,
promulgated under the Securities Act, which, in substance, permits limited
public resale of "restricted securities"
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<PAGE>
acquired, directly or indirectly from the issuer thereof, in a non-public
offering subject to the satisfaction of certain conditions.
(v) Purchaser further understands that in the event
all of the applicable requirements of Rule 144 are not satisfied, registration
under the Securities Act, compliance with Regulation A, or some other
registration exemption will be required, and that, notwithstanding the fact that
Rule 144 is not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rule 144 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk. Purchaser understands that no assurances can be given that
any such other registration exemption will be available in such event.
(b) TAX REPRESENTATIONS. Purchaser has reviewed with its own
tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. Purchaser is
relying solely on such advisors and not on any statements or representations of
the Company or any of its agents. Purchaser understands that it (and not the
Company) shall be responsible for its own tax liability that may arise as a
result of this investment or the transactions contemplated by this Agreement.
11. SECTION 83(B) ELECTIONS. Purchaser understands that Section 83 of
the Code, taxes as ordinary income the difference between the amount paid for
the Shares and the fair market value of the Shares as of the date any
restrictions on the Shares lapse. In this context, "restriction" means the right
of the Company to buy back the Shares pursuant to the Repurchase Option. In the
event the Company has registered equity securities under the Securities Exchange
Act of 1934 (the "EXCHANGE ACT"), "restriction" with respect to officers,
directors, and 10% stockholders also includes the six-month period after the
purchase of the Shares during which sales of certain securities by such
officers, directors, and 10% stockholders would give rise to liability under
Section 16(b) of the Exchange Act. Purchaser understands that he or she may
elect to be taxed at the time the Shares are purchased rather than when any
restrictions applicable to the Shares lapse, by filing an election under Section
83(b) of the Code with the Internal Revenue Service within 30 days from the date
of purchase. Even if the fair market value of the Shares equals the amount paid
for the Shares, the election may be made to avoid adverse tax consequences in
the future. Purchaser understands that failure to make this filing in a timely
manner shall result in the recognition of ordinary income by Purchaser, as any
restrictions applicable to the Shares lapse, on any difference between the
purchase price and the fair market value of the Shares at the time such
restrictions lapse. A form of Election under Section 83(b) is attached to the
Agreement as EXHIBIT A-3 for reference.
PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPONSIBILITY
AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b) OF THE
CODE, EVEN IF PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE
THIS FILING ON PURCHASER'S BEHALF.
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<PAGE>
12. ADDITIONAL ACTIONS. The parties shall execute such further
instruments and take such further action as may reasonably be necessary to carry
out the intent of this Agreement.
13. NOTICES. All notices and other communications required or permitted
hereunder shall be in writing, shall be effective when given, and shall in any
event be deemed to be given (a) five (5) days after deposit with the U.S. Postal
Service, if delivered by first class mail, postage prepaid, (b) upon delivery,
if delivered by hand, or (c) one business day after the business day of deposit
with Federal Express or similar overnight courier, freight prepaid, and shall be
addressed (i) if to Purchaser, at Purchaser's address as set forth beneath
Purchaser's signature to this Agreement, or at such other address as Purchaser
shall have furnished to the Company in writing, (ii) if to the Company, to
ZapMe! Corporation with a copy to Wilson Sonsini Goodrich and Rosati, 650 Page
Mill Road, Palo Alto, California 94304-1050, Attention:, or at such other
address as the Company shall have furnished to Purchaser, or (iii) if to the
Escrow Agent, to the Corporate Secretary, at ZapMe! Corporation, or at such
other address as the Escrow Agent shall have furnished to the parties.
14. ASSIGNMENT. The Company may assign its rights and delegate its
duties under this Agreement. If any such assignment or delegation requires
consent of the California Department of Corporations, the parties agree to
cooperate in requesting such consent. This Agreement shall inure to the benefit
of the successors and assigns of the Company and, subject to the restrictions on
transfer herein set forth, be binding upon Purchaser, Purchaser's heirs,
executors, administrators, successors and assigns.
15. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the Joint Escrow
Instructions executed in connection herewith constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof, and no party shall be liable or bound to any other party in
any manner by any warranties, representations or covenants except as
specifically set forth herein. Except as expressly provided herein, neither this
Agreement nor any term hereof may be amended, waived, discharged or terminated
other than by a written instrument signed by the party against whom enforcement
of any such amendment, waiver, discharge or termination is sought.
16. ARBITRATION. At the option of either party, any and all disputes or
controversies, whether of law or fact, and of any nature whatsoever arising from
or respecting this Agreement, unless otherwise expressly provided herein, shall
be decided by arbitration by the American Arbitration Association in accordance
with the rules and regulations of that Association.
(a) The arbitrators shall be selected as follows: In the event
the Company and Purchaser agree on one arbitrator, the arbitration shall be
conducted by such arbitrator. In the event the Company and Purchaser do not so
agree, the Company and Purchaser shall each select one independent, qualified
arbitrator and these two arbitrators shall select a third arbitrator. The
Company reserves the right to reject any individual arbitrator who shall be
employed by or affiliated with a competing organization.
(b) Arbitration shall take place in San Ramon County, California,
or any other location mutually agreeable to the parties. At the request of
either party, arbitration proceedings shall be conducted in secrecy. In such
case all documents, testimony, and records shall be received,
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<PAGE>
heard, and maintained by the arbitrators in secrecy under seal, available for
inspection only by the Company and Purchaser and their respective attorneys
and their respective experts who shall agree in advance and in writing to
receive all such information confidentially and to maintain such information
in secrecy until such information shall become generally known. The
arbitrator, who shall act by majority vote, shall be able to decree any and
all relief of an equitable nature, including but not limited to such relief
as a temporary restraining order, a temporary or a permanent injunction, or
both, and shall also be able to award damages, with or without an accounting,
costs, and reasonable attorneys' fees. The decree or judgment of an award
rendered by the arbitrators may be entered in any court having jurisdiction
thereof.
(c) Reasonable notice of the time and place of arbitration
shall be given to all persons, other than the parties, as shall be required by
law, in which case such persons or their authorized representatives shall have
the right to attend and participate in all the arbitration hearings to the
extent and in such manner as the law shall require.
17. GOVERNING LAW. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of California as they
apply to contracts entered into and wholly to be performed within such state.
Purchaser represents that Purchaser has read this Agreement and
is familiar with its terms and provisions. Purchaser hereby agrees to accept
as binding, conclusive and final all decisions or interpretations of the
Board upon any questions arising under this Agreement.
18. NO EFFECT ON EMPLOYMENT/CONSULTING RELATIONSHIP. PURCHASER
ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
HEREUNDER DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED
ENGAGEMENT AS AN EMPLOYEE OR CONSULTANT OF THE COMPANY FOR ANY PERIOD OR AT ALL.
NOTHING IN THIS AGREEMENT SHALL AFFECT IN ANY MANNER WHATSOEVER OR INTERFERE
WITH THE RIGHT OR POWER OF THE COMPANY, OR A PARENT OR SUBSIDIARY OF THE
COMPANY, TO TERMINATE PURCHASER'S EMPLOYMENT OR CONSULTING RELATIONSHIP WITH THE
COMPANY AT ANY TIME, FOR ANY OR NO REASON, WITH OR WITHOUT CAUSE.
19. ADVICE OF COUNSEL. Purchaser has reviewed this Agreement in its
entirety, has had an opportunity to obtain the advice of independent counsel
prior to executing this Agreement and fully understands all provisions hereof.
20. AUTHORIZATION OF TRANSFER. Purchaser hereby authorizes and directs
the Secretary or transfer agent of the Company to transfer the Stock as to which
the Repurchase Option has been exercised from Purchaser to the Company or the
Company's assignees.
21. WAIVER. Either party's failure to enforce any provision or
provisions of this Agreement shall not in any way be construed as a waiver of
any such provision or provisions, nor prevent that party thereafter from
enforcing each and every other provision of this Agreement. The rights granted
both parties herein are cumulative and shall not constitute a waiver of either
party's right to assert all other legal remedies available to it under the
circumstances.
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IN WITNESS WHEREOF, this Agreement is deemed made as of the date first
set forth above.
ZAPME! CORPORATION
-------------------------------------
Rick Inatome
President and Chief Executive Officer
PURCHASER
-------------------------------------
Lance Mortensen
ADDRESS:
-------------------------------------
-------------------------------------
-------------------------------------
[SIGNATURE PAGE FOR RESTRICTED STOCK PURCHASE AGREEMENT]
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CONSENT OF SPOUSE
I, ___________________________, spouse of Lance Mortensen, have read
and approve the foregoing Agreement. In consideration of the granting to my
spouse of the right to purchase shares of ZapMe! Corporation, as set forth in
the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect
to the exercise of any rights under the Agreement and agree to be bound by
the provisions of the Agreement insofar as I may have any rights in the
Agreement or in any shares issued pursuant thereto under the community
property laws of the State of California or similar laws relating to marital
property in effect in the state of our residence as of the date of the
signing of the Agreement.
Dated:
------------------------------ ----------------------------------
(SIGNATURE OF SPOUSE)
<PAGE>
PROMISSORY NOTE
$1,500,000.00 September 13, 1999
For value received, the undersigned promises to pay to ZapMe! Corporation a
Delaware corporation (the "Company"), or order, at its principal office the
principal sum of $1,500,000.00 with interest thereof at the rate of 5.98% per
annum, compounded annually, on the unpaid balance of the principal sum. Said
principal shall be due on the earlier to occur of the fourth anniversary of the
date of this Note, thirty (30) days after termination other than for death or
disability, or one year after termination for death or disability. Said interest
shall be paid as it accrues by means of regular payroll deductions in the case
of an employee and by such other means as the Board may approve in the case of a
member of the Board.
Should the undersigned fail to make full payment of principal or interest for a
period of ten (10) days or more after the due date thereof, the whole unpaid
balance on this Note of principal and interest shall become immediately due at
the option of the holder of this Note.
This Note is subject to the terms of a Stock Purchase Agreement, dated as of
September 13, 1999. This Note is secured by a pledge of the Company's Common
Stock under the terms of a Security Agreement of even date herewith and is
subject to all the provisions thereof.
The holder of this Note shall have full recourse against the undersigned
personally for failure to pay the Note as and when due.
The principal is payable in lawful money of the United States of America. The
privilege is reserved to prepay any portion of the Note at any time.
If the undersigned shall default in the payment of amounts hereunder when due,
the holder of this Note shall be entitled to payment by the undersigned of all
costs of collection, including, without limitation, reasonable attorneys' fees
and costs incurred in connection with such collection efforts, whether or not
suit on this Note is filed. The maker waives presentment for payment, protest,
notice of protest and notice of non-payment of this Note. This Note shall be
governed by the laws of the State of California as they apply to contracts
entered into and wholly to be performed within such state.
-------------------------------------
Lance Mortensen
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SECURITY AGREEMENT
This Security Agreement is made as of September 13, 1999 between ZapMe!
Corporation, a Delaware corporation ("Pledgee"), Lance Mortensen ("Pledgor"),
and Bruce D. Bower, Secretary of Pledgee, as the agent of Pledgee and holder of
the Securities pledged hereunder ("Pledgeholder").
RECITALS
Pursuant to the Restricted Stock Purchase Agreement dated September 13, 1999
(the "Agreement"), between Pledgor and Pledgee and Pledgor's election under the
terms of the Agreement to pay for such shares with Pledgor's promissory note
(the "Note"), Pledgor has purchased 300,000 shares of Pledgee's Common Stock
(the "Shares") at a price of five dollars ($5.00) per share, for a total
purchase price of five million dollars ($1,500,000.00).
NOW, THEREFORE, it is agreed as follows:
1. CREATION AND DESCRIPTION OF SECURITY INTEREST. In consideration
of the transfer of the Shares to Pledgor under the Agreement, Pledgor,
pursuant to the California Uniform Commercial Code, hereby pledges all of
such Shares (herein sometimes referred to as the "Collateral") represented by
certificate number ______, and herewith delivers said certificate to
Pledgeholder, who shall hold said certificate on behalf of Pledgee subject to
the terms and conditions of this Security Agreement.
The Shares (together with an executed blank stock assignment or
assignments) shall be held by Pledgeholder on behalf of Pledgee as security
for the repayment of the Note, and any extensions or renewals thereof, to be
executed by Pledgor pursuant to the terms of the Agreement, and Pledgeholder
shall not encumber or dispose of such Shares except in accordance with the
provisions of this Security Agreement.
2. PLEDGOR'S REPRESENTATIONS AND COVENANTS. To induce Pledgee to
enter into this Security Agreement, Pledgor represents and covenants to
Pledgee, its successors and assigns, as follows:
(a) PAYMENT OF INDEBTEDNESS. Pledgor will pay the principal
sum of the Note secured hereby, and interest thereon, at the time and in the
manner provided in the Note.
(b) ENCUMBRANCES. The Shares are free of all other adverse
claims, encumbrances, defenses and liens (other than restrictions on transfer
imposed by applicable securities laws), except for (i) Pledgee's rights to
repurchase Shares pursuant to Section 5 of the Agreement and (ii) the pledge of
the Shares hereunder as security for payment of the Note, and Pledgor will not
further encumber the Shares without the prior written consent of Pledgee.
(c) MARGIN REGULATIONS. In the event that Pledgee's Common Stock
is now or later becomes margin-listed by the Federal Reserve Board and
Pledgee is classified as a "lender"
<PAGE>
within the meaning of the regulations under Part 207 of Title 12 of the Code
of Federal Regulations ("Regulation G"), Pledgor agrees to cooperate with
Pledgee in making any amendments to the Note or providing any additional
collateral as may be necessary to comply with such regulations.
3. VOTING RIGHTS. During the term of this pledge and so long as all
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.
4. STOCK ADJUSTMENTS. In the event that during the term of the pledge
any stock dividend, reclassification, readjustment or other changes are declared
or made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder. In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgor as a result thereof.
5. OPTIONS AND RIGHTS. In the event that, during the term of this
pledge, subscription Options or other rights or options shall be issued in
connection with the pledged Shares, such rights, Options and options shall be
the property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then held
by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.
6. DEFAULT. Pledgor shall be deemed to be in default of the Note and
of this Security Agreement in the event:
(a) Payment of principal or interest on the Note shall be
delinquent for a period of ten (10) days or more; or
(b) Pledgor fails to perform any of the covenants set forth in
the Agreement or contained in this Security Agreement for a period of ten (10)
days after written notice thereof from Pledgee; or
(c) A bankruptcy or insolvency proceeding is instituted by or
against Pledgor, or if a receiver is appointed for the property of Pledgor; or
(d) Pledgor makes an assignment for the benefit of creditors.
In the case of a default, as set forth above, Pledgee shall have the
right to accelerate payment of the entire amount on the Note, and Pledgee
shall thereafter be entitled to pursue its remedies under the California
Uniform Commercial Code.
7. RELEASE OF COLLATERAL. Subject to any applicable contrary rules
under Regulation G, there shall be released from this pledge a portion of the
pledged Shares held by Pledgeholder here-
-2-
<PAGE>
under upon payments of the principal of the Note. The number of the pledged
Shares which shall be released shall be that number of full Shares which
bears the same proportion to the initial number of Shares pledged hereunder
as the payment of principal bears to the initial full principal amount of the
Note. Notwithstanding the foregoing, upon any release of pledged Shares
hereunder any such Shares which shall continue to constitute Unreleased
Shares as defined in the Agreement shall continue to be held in escrow
pursuant to Sections 5 and 6 of the Agreement.
8. WITHDRAWAL OR SUBSTITUTION OF COLLATERAL. Pledgor shall not sell,
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
9. TERM. The within pledge of Shares shall continue until the payment
of all indebtedness secured hereby, subject to the provisions for prior release
of a portion of the Collateral as provided in paragraph 7 above.
10. PLEDGEHOLDER LIABILITY.
(a) Pledgeholder shall not be liable to any party for any of
his acts, or omissions to act, as Pledgeholder unless Pledgeholder is proved to
have acted in bad faith. Any act done or omitted pursuant to the advice of legal
counsel, other than an act or omission involving gross or willful negligence,
shall be deemed to be done or omitted in good faith.
(b) Pledgeholder shall be entitled to employ such legal
counsel and other experts as Pledgeholder may deem necessary properly to advise
Pledgeholder in connection with its obligations hereunder, and Pledgeholder may
rely upon the advice of such counsel. Such counsel's reasonable fees and costs
shall be borne 50% by Pledgor and 50% by Pledgee.
(c) It is understood and agreed that should any dispute arise
with respect to the delivery and/or ownership or right of possession of the
securities held by Pledgeholder hereunder, Pledgeholder is authorized and
directed to retain in Pledgeholder's possession as agent of Pledgee without
liability to anyone all or any part of said securities until such disputes shall
have been settled either by mutual written agreement of the parties concerned or
by a final order, decree or judgment of the arbitrator provided for in Section
16 of the Agreement or of a court of competent jurisdiction after the time for
appeal has expired and no appeal has been perfected, but Pledgeholder shall be
under no duty whatsoever to institute or defend any such proceedings.
In addition, upon any dispute Pledgeholder should be entitled to
engage legal counsel, one-half of whose fees and expenses shall be borne by
Pledgor and one-half by Pledgee.
11. INVALIDITY OF PARTICULAR PROVISIONS. Pledgor and Pledgee
agree that the enforceability or invalidity of any provision or provisions of
this Security Agreement shall not render any other provision or provisions
herein contained unenforceable or invalid.
12. SUCCESSORS OR ASSIGNS. Pledgor and Pledgee agree that all of the
terms of this Security Agreement shall be binding on their respective
successors and assigns, and that the term
-3-
<PAGE>
"Pledgor" and the term "Pledgee" as used herein shall be deemed to include,
for all purposes, the respective designees, successors, assigns, heirs,
executors and administrators.
13. GOVERNING LAW. This Security Agreement shall be interpreted
and governed under the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"PLEDGOR" By: Lance Mortensen
-------------------------------------
(Signature)
-------------------------------------
-------------------------------------
(Address)
"PLEDGEE" ZapMe! Corporation
a Delaware corporation
By:
-------------------------------------
Rick Inatome, President and Chief Executive Officer
-4-
<PAGE>
EXHIBIT A-1
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, Lance Mortensen hereby sells, assigns and
transfers unto ZapMe! Corporation, an aggregate of Three Hundred Thousand
(300,000) shares of the Common Stock of ZapMe! Corporation standing in the
undersigned's name on the books of said corporation represented by
Certificate No. _____, and does hereby irrevocably constitute and appoint
Wilson Sonsini Goodrich & Rosati to transfer the said stock on the books of
the within named corporation with full power of substitution in the premises.
This Stock Assignment may be used only in accordance with the
Restricted Stock Purchase Agreement between ZapMe! Corporation and the
undersigned dated ____________________, 1999.
Dated:
--------------------
--------------------------------------
(to be signed exactly as name is to
appear on stock certificate)
INSTRUCTIONS: Please do not fill in the blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise its
"repurchase option," as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE>
EXHIBIT A-2
JOINT ESCROW INSTRUCTIONS
, 1999
----------------
ZapMe! Corporation
Attn: Corporate Secretary
3000 Executive Parkway
San Ramon, CA 94583
Dear Corporate Secretary:
As Escrow Agent for both ZapMe! Corporation, a Delaware corporation
(the "COMPANY"), and the undersigned purchaser of stock of the Company
("PURCHASER"), you are hereby authorized and directed to hold the documents
delivered to you pursuant to the terms of that certain Restricted Stock Purchase
Agreement ("AGREEMENT"), dated as of September 13, 1999, between the Company and
the undersigned, in accordance with the following instructions:
1. In the event that the Company and/or any assignee of the Company
(referred to collectively for convenience herein as the "COMPANY") exercises the
Company's repurchase option set forth in the Agreement, the Company shall give
to Purchaser and you a written notice specifying the number of shares of stock
to be purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company. Purchaser and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of said notice.
2. At the closing, you are directed (a) to date the stock
assignments necessary for the transfer in question, (b) to fill in the number
of shares being transferred, and (c) to deliver same, together with the
certificate evidencing the shares of stock to be transferred, to the Company
or its assignee, against the simultaneous delivery to you of the purchase
price (by cash, a check, or some combination thereof) for the number of
shares of stock being purchased pursuant to the exercise of the Company's
repurchase option.
3. Purchaser irrevocably authorizes the Company to deposit with you
any certificates evidencing shares of stock to be held by you hereunder and
any additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with
respect to such securities all documents necessary or appropriate to make
such securities negotiable and to complete any transaction herein
contemplated, including but not limited to the filing with any applicable
state blue sky authority of any required applications for consent to, or
notice of transfer of, the securities. Subject to the provisions of this
paragraph 3, Purchaser shall exercise all rights and privileges of a
shareholder of the Company while the stock is held by you.
4. Upon written request of Purchaser, but no more than once per
calendar year, unless the Company's repurchase option has been exercised, you
shall deliver to Purchaser a certificate or
<PAGE>
certificates representing so many shares of stock as are not then subject to
the Company's repurchase option. Within sixty (60) days after cessation of
Purchaser's continuous employment by or services to the Company, or any
parent or subsidiary of the Company, you shall deliver to Purchaser a
certificate or certificates representing the aggregate number of shares held
or issued pursuant to the Agreement and not purchased by the Company or its
assignees pursuant to exercise of the Company's repurchase option.
5. If at the time of termination of this escrow you should have in
your possession any documents, securities, or other property belonging to
Purchaser, you shall deliver all of the same to Purchaser and shall be
discharged of all further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as
are specifically set forth herein and may rely and shall be protected in relying
or refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith,
and any act done or omitted by you pursuant to the advice of your own attorneys
shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all
warnings given by any of the parties hereto or by any other person or
corporation, excepting only orders or process of courts of law and are hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case you obey or comply with any such order, judgment or decree, you
shall not be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other
experts as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
12. Your responsibilities as Escrow Agent hereunder shall terminate if
you shall cease to be an officer or agent of the Company or if you shall resign
by written notice to each party. In the event of any such termination, the
Company shall appoint a successor Escrow Agent.
-2-
<PAGE>
13. If you reasonably require other or further instruments in
connection with these Joint Escrow Instructions or obligations in respect
hereto, the necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the
securities held by you hereunder, you are authorized and directed to retain in
your possession without liability to anyone all or any part of said securities
until such disputes shall have been settled either by mutual written agreement
of the parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15. All notices and other communications required or permitted
hereunder shall be in writing, shall be effective when given, and shall in any
event be deemed to be given (a) five (5) days after deposit with the U.S. Postal
Service, if delivered by first class mail, postage prepaid, (b) upon delivery,
if delivered by hand, or (c) one business day after the business day of deposit
with Federal Express or similar overnight courier, freight prepaid, and shall be
addressed to each of the other parties thereunto entitled at the following
addresses or at such other addresses as a party may designate by ten days'
advance written notice to each of the other parties hereto.
COMPANY: ZapMe! Corporation
3000 Executive Parkway
San Ramon, CA 94583
Attn: President
PURCHASER: Lance Mortensen
117 Warwick Court
Alamo, CA 94507
ESCROW AGENT: ZapMe! Corporation
3000 Executive Parkway
San Ramon, CA 94583
Attn: Corporate Secretary
16. By signing these Joint Escrow Instructions, you become a party
hereto only for the purpose of said Joint Escrow Instructions; you do not become
a party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of
the parties hereto, and their respective successors and permitted assigns.
-3-
<PAGE>
18. These Joint Escrow Instructions shall be governed by, and construed
and enforced in accordance with, the laws of the State of California as they
apply to contracts entered into and wholly to be performed within such state.
Very truly yours,
ZAPME! CORPORATION
-----------------------------------
PURCHASER:
-----------------------------------
Lance Mortensen
ESCROW AGENT:
-----------------------------------
Corporate Secretary
-4-
<PAGE>
EXHIBIT A-3
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to the
above-referenced Federal Tax Code, to include in taxpayer's gross income for the
current taxable year, the amount of any compensation taxable to taxpayer in
connection with his receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of
the undersigned are as follows:
NAME : TAXPAYER: Lance Mortensen SPOUSE:
ADDRESS:
IDENTIFICATION NO.: TAXPAYER: SPOUSE:
TAXABLE YEAR: Calendar Year 1999
2. The property with respect to which the election is made is described as
follows: 300,000 shares (the "Shares") of the Common Stock of ZapMe!
Corporation, a Delaware corporation (the "Company").
3. The date on which the property was transferred is: , 1999.
-------------
4. The property is subject to the following restrictions:
The Shares may be repurchased by the Company, or its assignee, on
certain events. This right lapses with regard to a portion of the
Shares based on the continued performance of services by the taxpayer
over time.
5. The fair market value at the time of transfer, determined without
regard to any restriction other than a restriction which by its terms
will never lapse, of such property is: $1,500,000.
6. The amount (if any) paid for such property is: $1,500,000.
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
THE UNDERSIGNED UNDERSTANDS THAT THE FOREGOING ELECTION MAY NOT BE REVOKED
EXCEPT WITH THE CONSENT OF THE COMMISSIONER.
Dated: , 1999
--------------------- ------------------------------------
Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated: , 1999
--------------------- ------------------------------------
Spouse of Taxpayer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, STATEMENT OF OPERATIONS, AND STATEMENT OF CASH FLOWS INCLUDED IN THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 23,249
<SECURITIES> 0
<RECEIVABLES> 628
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,962
<PP&E> 17,989
<DEPRECIATION> (1,917)
<TOTAL-ASSETS> 44,539
<CURRENT-LIABILITIES> 9,827
<BONDS> 0
0
60,027
<COMMON> 27,191
<OTHER-SE> (60,164)
<TOTAL-LIABILITY-AND-EQUITY> 44,539
<SALES> 444
<TOTAL-REVENUES> 444
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 16,618
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76
<INCOME-PRETAX> (15,748)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,748)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,748)
<EPS-BASIC> (2.44)
<EPS-DILUTED> (2.44)
</TABLE>
