<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 13, 1999
REGISTRATION NO. 333-84557
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
ZAPME! CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7370 91-1836242
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification Number)
incorporation or
organization)
</TABLE>
ZAPME! CORPORATION
3000 EXECUTIVE PARKWAY, SUITE 150
SAN RAMON, CA 94583
(925) 543-0300
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
LANCE MORTENSEN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
ZAPME! CORPORATION
3000 EXECUTIVE PARKWAY
SAN RAMON, CA 94583
(925) 543-0300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
MARK A. BERTELSEN, ESQ. NORA L. GIBSON, ESQ.
DON S. WILLIAMS, ESQ. PETER S. BUCKLAND, ESQ.
MICHAEL S. ELLIS, ESQ. TAYLOR L. STEVENS, ESQ.
JEFFREY A. EVANS, ESQ. BRIAN E. COVOTTA, ESQ.
WILSON SONSINI GOODRICH & ROSATI BROBECK, PHLEGER & HARRISON LLP
Professional Corporation Spear Street Tower
650 Page Mill Road One Market
Palo Alto, CA 94304 San Francisco, CA 94105
(650) 493-9300 (415) 442-0900
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM MAXIMUM
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED(1) SHARE OFFERING PRICE(1)(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, ($.001 par value)...... 10,350,000 $12.00 $124,200,000 $34,528
</TABLE>
(1) Includes shares that the Underwriters will have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(c) promulgated under the Securities Act.
(3) $27,800 has been previously paid.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
<PAGE>
Subject to Completion
Preliminary Prospectus dated , 1999
P_R_O_S_P_E_C_T_U_S
9,000,000 SHARES
[LOGO]
COMMON STOCK
--------------
This is ZapMe! Corporation's initial public offering of common stock and
consequently no public market currently exists for our stock.
We expect that the public offering price to be between $10.00 and $12.00 per
share. After pricing the offering, we expect that the common stock will trade on
the Nasdaq National Market under the symbol "IZAP."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
-----------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- --------------
<S> <C> <C>
Public offering price........................................ $ $
Underwriting discount........................................ $ $
Proceeds, before expenses, to ZapMe! Corporation............. $ $
</TABLE>
The underwriters may also purchase up to an additional 1,350,000 shares from
us at the public offering price, less the underwriting discount, within 30 days
from the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares of common stock will be ready for delivery in New York, New York
on or about , 1999.
------------------
MERRILL LYNCH & CO.
DEUTSCHE BANC ALEX. BROWN
THOMAS WEISEL PARTNERS LLC
WIT CAPITAL CORPORATION
------------------
The date of this prospectus is , 1999.
<PAGE>
INSIDE FRONT COVER PAGE
DIAGRAMS, DESCRIPTIONS AND CAPTIONS
1. Top caption: ZapMe! Network.
2. Center: Diagram of the ZapMe! network showing a map of the U.S. highlighting
ZapMe!'s network operating centers in Georgia and Virginia. This illustrates
the flow of information from the network operations centers via satellite to
PC labs in schools throughout the U.S.. Caption: ZapMe! is building a
broadband interactive network which 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 free "always on," bi-directional satellite-delivered connectivity
to the Internet. 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.
As of July 31, 1999, there were more than 250 school districts, representing
over 6,000 K-12 schools, including over 2,000 middle and high schools, that
have approved and signed a three-year contract with us. As of July 31, 1999,
we had installed ZapMe! labs in over 220 schools, which had an average of
over 1,000 students, providing a total addressable user base of over 220,000
students, each of whom is provided a free ZapMe! account upon request. In
the Fall of the 1999-2000 school year, ZapMe! will expand current programs
and incentives to encourage network usage.
INTERIOR FOLDOUT OF FRONT COVER PAGE
PHOTOGRAPHS, DESCRIPTIONS AND CAPTIONS
1. Top caption: ZapMe! Netspace.
2. Center: Color photo of ZapMe! Netspace.
Captions describing three key features of ZapMe! Netspace:
- ZapMail - Student email accessible through the Internet for home study.
- MyTools - An entire toolbox full of useful Microsoft Office Suite software
including Word, PowerPoint, and Excel.
- Dynamic Billboards - Rotating sponsor messages and public service
announcements. All content is age appropriate.
3. Bottom caption: The ZapMe! Netspace is our proprietary, easy-to-use
interface that provides access to over 10,000 pre-selected, indexed
educational sites and other aggregated content, applications, and services,
including Microsoft Word, Excel and PowerPoint. In addition, we provide a
range of educational and communication tools, including ZapMail, our network
email program, and ZapPoints, a membership program that rewards students for
using the ZapMe! network.
4. Far right side: Two color photos of students using the ZapMe! network in
school.
INSIDE BACK COVER PAGE
PHOTOGRAPHS AND CAPTIONS
1. Top caption: ZapMe! Network.
2. Center: Color photo of students using the ZapMe! network in school.
3. Bottom: Color photo of six students.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary......................................................................................... 1
Risk Factors............................................................................................... 5
Special Note Regarding Forward-Looking Statements.......................................................... 22
Use of Proceeds............................................................................................ 23
Dividend Policy............................................................................................ 23
Capitalization............................................................................................. 24
Dilution................................................................................................... 26
Selected Financial Data.................................................................................... 28
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 29
Business................................................................................................... 37
Management................................................................................................. 52
Certain Transactions....................................................................................... 63
Principal Stockholders..................................................................................... 65
Description of Capital Stock............................................................................... 67
Shares Eligible for Future Sale............................................................................ 72
Underwriting............................................................................................... 74
Legal Matters.............................................................................................. 76
Experts.................................................................................................... 76
Available Information...................................................................................... 76
Index to Financial Statements.............................................................................. F-1
</TABLE>
------------------------
Except as otherwise noted, all information in this prospectus assumes:
- our reincorporation from California to Delaware, which will be effective
prior to consummation of this offering, has already taken place;
- the conversion of all outstanding shares of our preferred stock into
common stock upon the completion of this offering; and
- no exercise of the underwriters' over-allotment option.
------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you different information. If anyone provides you different or inconsistent
information, you should not rely on it. We are not, and the underwriters are
not, making an offer to sell these securities in any jurisdiction where the
offer or sale is not permitted. You should assume that the information appearing
in this prospectus is accurate as of the date on the front cover of this
prospectus only. Our business, financial condition, results of operations and
prospects may have changed since that date.
------------------------
ZapMe! and the ZapMe! logo, ZapMail, ZapPoints, ZapSearch, ZapMe! Home, and
I Need To Know are unregistered trademarks of ZapMe!. All other brand names or
trademarks appearing in this prospectus are the property of their respective
holders.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY MAY NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO
YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL DATA AND
RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. YOU SHOULD CAREFULLY
CONSIDER, AMONG OTHER THINGS, THE MATTERS SET FORTH IN "RISK FACTORS."
OUR COMPANY
ZapMe! is building a broadband interactive network that brings the latest
technology tools and educational resources to schools for free. For each school
participating in the ZapMe! network, we provide free PCs, software, installation
and support, as well as a free, "always on" connection to the Internet using a
two-way satellite system. The ZapMe! network, which is designed primarily for
students aged 13-19, makes education more engaging and entertaining by providing
a rich media computer experience that is free and easy to use. We plan to extend
the ZapMe! network into the home in order to enhance a student's educational
experience and promote better communication among students, teachers and
parents.
Each school participating in the ZapMe! network typically receives 15
high-end, multimedia PCs with 17-inch monitors, a computer server that is
equipped to send and receive satellite transmissions, and a laser printer, as
well as broadband access to the ZapMe! Netspace and the Internet. The ZapMe!
Netspace is our proprietary, easy-to-use interface that provides access to over
10,000 Internet sites that we identify, review and index for easy reference and
other aggregated content, applications, and services, including Microsoft Word,
Excel and PowerPoint. In addition, we provide a range of educational and
communication tools, including ZapMail, our network email program, and
ZapPoints, a membership program that rewards students for using the ZapMe!
network. Because ZapMe!'s network employs a bi-directional satellite system, a
ZapMe! lab does not require extensive rewiring or phone access to connect to the
Internet.
We believe that by providing schools with free PCs and broadband
connectivity to the Internet, we will help to alleviate the significant
technology funding gap in schools, and provide greater educational and economic
opportunity to students of all demographic backgrounds by giving them access to
the digital tools and electronic information that are critical in today's
knowledge-based economy. Moreover, the ZapMe! network will provide a platform
for the school community to engage in many important activities, including
providing teachers and administrators with access to Internet-based educational
content, cost-effective school e-commerce solutions, and school fundraising
opportunities. In connection with many of these core activities, the ZapMe!
network has established strategic alliances with a wide range of companies,
including Dell Computer Corporation, Gilat Satellite Networks and its
subsidiary, Spacenet, Microsoft, New Sub Services, School Specialty, Sylvan
Learning Systems and Xerox to further enhance the educational experience. In
addition, we plan to enter into additional strategic alliances to enhance our
technology, gain access to compelling educational content, add new features and
functionality, or generate sponsorship and e-commerce revenues.
In particular, in the Fall of the 1999-2000 school year, the ZapMe! network
will:
- Enable schools and students to obtain equipment from leading technology
and document management companies, including Dell and Xerox, two of our
core OEM partners;
- Offer access to educational testing and training programs, through an
exclusive strategic relationship with Sylvan, a leading provider of
educational services to students in grades K-12;
- Create convenient, low-cost purchasing options for teachers and
administrators interested in purchasing school supplies, software and
supplementary materials from School Specialty, Inc., the largest supplier
of non-textbook education products to educators in the U.S.; and
1
<PAGE>
- Facilitate safe and effective implementation of school fundraising
activities, such as online magazine drives with New Sub Services, the
world's largest provider of magazine subscriptions.
Funding for the development, installation and maintenance of the ZapMe!
network is provided by a combination of corporate sponsorships and e-commerce
relationships. We expect to derive additional revenue from partners and other
sources from after-school use of ZapMe! labs and participation in fundraising
activities. In particular, we will receive additional revenue from Sylvan, which
has committed to sharing a percentage of its profits resulting from joint
activities on the ZapMe! network. Participating sponsors have the opportunity to
underwrite public service messages, as well as corporate sponsorships
appropriate for ZapMe! network users, including students aged 13-19, teachers
and administrators. The U.S. Army, for example, plans to use the ZapMe! network
to communicate recruiting opportunities to graduating high school seniors. Other
corporate sponsors scheduled for the Fall of the 1999-2000 school year include
Dell, General Electric, Johnson & Johnson, Labtech, Mercury Records, Microsoft,
New Sub Services, Proctor & Gamble, Sylvan, Toshiba, the U.S. Navy and Xerox.
We intend to aggressively grow our installed base of schools and increase
our number of users by installing ZapMe! labs in schools throughout the country.
As our installed base of schools and number of users grow, we intend to
stimulate demand for, and use of, our educational network at home. Students and
parents will be able to log on to the ZapMe! network from home in order to
communicate with other ZapMe! users, as well as access ZapMe! applications and
features unique to the home version. We believe that ZapMe! will increase
parental involvement in schools by facilitating communication with teachers.
As of July 31, 1999, there were more than 250 school districts, representing
over 6,000 K-12 schools, including more than 2,000 middle and high schools, that
have approved and signed a three-year contract with us that permits us to
install a ZapMe! lab at those districts' schools. As of July 31, 1999, we had
installed ZapMe! labs in over 220 schools, which had an average of more than
1,000 students, representing over 220,000 students, each of whom has access to a
free ZapMe! account upon request. While the home version of the ZapMe! Network
is free and is designed to work with a home user's existing Internet access
account, ZapMe! plans on directly offering home users a modestly priced ZapMe!
branded Internet access account in the event the home user does not have an
existing account or wishes to purchase Internet access through ZapMe!. In the
Fall of the 1999-2000 school year, ZapMe! will expand current programs and
incentives to encourage network usage.
CORPORATE INFORMATION
We incorporated in California in June 1997 under the name Satellite Online
Solutions, Inc. In October 1998 we changed our name to ZapMe! Corporation. Our
principal executive offices are located at 3000 Executive Parkway, San Ramon,
CA, 94583, and our telephone number at that location is (925) 543-0300. Our main
web site address is WWW.ZAPME.COM. The reference to our Internet address does
not constitute incorporation by reference of the information contained at this
web site.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by ZapMe!............... 9,000,000 shares
Common stock to be outstanding after this
offering................................... 41,906,289 shares
Use of proceeds.............................. For general corporate purposes, including
expansion of operations, working capital,
product development and other corporate
expenses.
Proposed Nasdaq National Market symbol....... IZAP
</TABLE>
The above table is based on shares outstanding as of June 30, 1999. This
table excludes, as of June 30, 1999:
- 2,512,857 shares of common stock issuable upon exercise of options
outstanding under our 1997 Stock Option Plan and 1998 Stock Option Plan at
a weighted average exercise price of $1.87 per share and 386,493 shares
reserved for future issuance under the plans; and
- 895,890 shares of common stock issuable upon exercise of outstanding
warrants, of which 655,890 shares at a weighted average exercise price of
$3.67 per share were outstanding at June 30, 1999.
"Common stock to be outstanding after the offering" in the above table
includes:
- 2,030,000 shares of Series E Preferred Stock sold in August 1999;
- 303,125 additional shares issuable to holders of the Series C preferred
stock on closing of this offering assuming an initial public offering
price of $11.00 per share and that the closing of the offering occurs on
September 30, 1999;
- 437,216 additional shares issuable to holders of the Series D preferred
stock on closing of this offering assuming an initial public offering
price of $11.00 per share and that the closing of the offering occurs on
September 30, 1999; and
- 24,787 additional shares issuable to holders of the Series E preferred
stock on closing of this offering assuming an initial public offering
price of $11.00 per share and that the closing of the offering occurs on
September 30, 1999.
The number of additional shares issuable to holders of the Series C
preferred stock, Series D preferred stock and Series E preferred stock would be
higher if the actual offering price is lower or the closing of the offering is
later, and lower if the actual offering price is higher or the closing of the
offering is earlier. See "Management--Incentive Stock Plans," beginning on page
57, for a detailed description of our incentive stock plans; "Description of
Capital Stock," beginning on page 67, for a detailed description of our capital
stock; and note 3 of "Notes to Financial Statements," beginning on page F-11,
for a detailed description of our stockholders' equity.
3
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 25,
1997
(INCEPTION) SIX MONTHS ENDED
THROUGH YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, --------------------
1997 1998 1998 1999
------------ ------------ --------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenue...................................................... $ -- $ -- $ -- $ 147
Loss from operations......................................... (570) (4,082) (1,028) (7,221)
Net loss..................................................... (581) (4,118) (1,063) (7,192)
Net loss applicable to common stockholders................... (581) (4,724) (1,063) (8,128)
Net loss per share, basic and diluted........................ $ (0.05) $ (0.40) $ (0.09) $ (0.60)
Shares used in calculation of net loss per share, basic and
diluted.................................................... 11,183 11,685 11,859 13,517
Pro forma net loss per share, basic and diluted
(unaudited)................................................ $ (0.26) $ (0.29)
Shares used in computing pro forma net loss per share, basic
and diluted (unaudited).................................... 15,993 25,462
</TABLE>
See note 1 of notes to financial statements, beginning on page F-9, for an
explanation of the determination of the number of shares used in computing per
share data.
<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................. $ 19,855 $ 29,355 $ 120,425
Working capital............................................................ 15,597 25,097 116,167
Total assets............................................................... 32,146 41,646 132,716
Capital lease obligations.................................................. 6,705 6,705 6,705
Redeemable convertible preferred stock..................................... 4,288 -- --
Stockholders' equity....................................................... 16,752 26,252 121,610
</TABLE>
The balance sheet data table set forth above summarizes:
- actual balance sheet data;
- pro forma balance sheet data giving effect to the sale of 2,030,000 shares
of Series E preferred stock in August 1999, with net proceeds of
approximately $9.5 million; and
- pro forma as adjusted balance sheet data, adjusted to give effect to the
sale by ZapMe! of 9,000,000 shares of common stock offered through this
prospectus, at an assumed initial public offering price of $11.00 per
share, and after deducting the estimated underwriting discount and
estimated offering expenses payable by us and the conversion of all
outstanding shares of preferred stock, including the shares of Series E
preferred stock, into shares of common stock, which was computed using an
assumed initial public offering price of $11.00 per share and an assumed
closing date of September 30, 1999.
4
<PAGE>
RISK FACTORS
THIS OFFERING AND AN INVESTMENT IN OUR COMMON STOCK INVOLVE A HIGH DEGREE OF
RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND THE OTHER
INFORMATION IN THIS PROSPECTUS BEFORE INVESTING IN OUR COMMON STOCK. OUR
BUSINESS AND RESULTS OF OPERATIONS COULD BE SERIOUSLY HARMED BY ANY OF THE
FOLLOWING RISKS. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY
OF THESE RISKS, AND YOU MAY LOSE PART OR ALL OF YOUR INVESTMENT.
WE HAVE AN UNPROVEN BUSINESS MODEL AND A LIMITED OPERATING HISTORY WHICH MAKES
AN EVALUATION OF OUR BUSINESS DIFFICULT
Because we were incorporated in June 1997 and only launched our network in
June 1998, we have a limited operating history on which investors can base an
evaluation of our business and prospects. Our revenue and income potential are
unproven and our business model is unique, constantly evolves and will continue
to evolve. We only recently began generating revenue from sponsorships and to
date we have not generated any revenue from e-commerce or network services. We
have limited insight into trends that may emerge and affect our business.
An investor in our common stock must carefully consider the risks and
difficulties frequently encountered by companies in an early stage of
development, as well as the risks we face due to our participation in a new and
rapidly evolving market. To address the risks we face, we must:
- expand our network through deployment into additional schools and other
steps to attract additional users to the ZapMe! network;
- ensure that our users use our network frequently;
- attract a large number of sponsors from a variety of industries;
- rapidly deploy our two-way broadband satellite technology;
- translate our installed base of schools and associated users into demand
for ZapMe! at home;
- adapt to changing government regulations and political processes;
- anticipate changes in and adapt to a new and developing market;
- maintain our current strategic alliances and develop new ones;
- maintain our relationships with key third parties, such as Gilat and
Spacenet, which are instrumental in the expansion of our network;
- build and strengthen user loyalty;
- offer compelling content;
- gain acceptance of interactive online sponsorship by users and sponsors;
and
- respond effectively to competitive pressures.
Our business strategy may not be successful and we may not successfully
overcome these risks. Please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations," beginning on page 29, for more
detailed information on our limited operating history.
WE HAVE A HISTORY OF LOSSES, AND WE EXPECT LOSSES AND SIGNIFICANT INCREASES IN
OUR OPERATING EXPENSES FOR THE FORESEEABLE FUTURE
We incurred net losses of approximately $11.9 million for the period of
inception through June 30, 1999. These losses resulted primarily from costs
related to developing the ZapMe! network, deploying the ZapMe! network to
schools and developing content and features for the ZapMe! network. We have
5
<PAGE>
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. Some of the factors that may affect
our quarterly or annual operating results 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.
In addition, see "We could be required to record a significant accounting
expense upon the vesting
of a warrant," beginning on page 17, for a description of an accounting expense
that could impact our quarterly operating results. To respond to these and other
factors, we may need to make business decisions that could impact our quarterly
operating results. Due to the above factors, 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
6
<PAGE>
multiple new sources of revenue, our future revenue growth will suffer. We
initially expect to receive the majority of our revenue from:
- sponsorships;
- e-commerce; and
- network services, including marketing and profit sharing fees.
From inception through June 30, 1999, we generated approximately 90% of our
revenue from sponsorships. Although we expect to generate a portion of our
future revenue through e-commerce, we have not generated any e-commerce revenue
through June 30, 1999. As a result, our expected primary methods of generating
revenue are relatively new to us and largely untested.
We expect that revenue from sponsorships will make up a significant amount
of our revenue for the foreseeable future, although we may never achieve
significant sponsorship revenue. Since the broadband interactive ZapMe! network
is a new and unproven advertising medium, advertisers that have traditionally
relied on other advertising media may be reluctant to purchase sponsorship on
the ZapMe! network or may face creative challenges in developing media for
sponsorships on the ZapMe! network. Potential sponsors may believe that online
advertising in general, and sponsorship on our network in particular, is less
effective than traditional advertising media for promoting their products and
services. Consequently, they may allocate little or none of their advertising
budget to sponsorships on the ZapMe! network. In addition, competition for
Internet-based advertising revenue is intense and the amount of available
standard banner advertising space on the Internet is increasing at a significant
rate. These factors are causing Internet advertising rates to decline and we
expect that these rates may continue to decline in the future. While we have the
ability to deliver online advertising in a richer format than standard banner
advertising, we may still be subjected to this trend. 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 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
7
<PAGE>
the development and implementation of programs designed to help schools
encourage their students to register.
We must also encourage our users to use our service regularly and for long
periods of time. We have developed programs and features to encourage this type
of use of our network; however, these programs could fail, in whole or in part.
There are also a variety of reasons why our users might not continue to
regularly use our service. Some users may dislike our dynamic billboard, which
is always present. Users may find that our features and content are not
sufficiently compelling to continue regular use, or may turn to other Internet
providers for such services, such as email. A number of our users may not
actively use our service for periods of time. If we are not able to demonstrate
to our sponsors that we have an active and growing user base, sponsors may
choose not to enter into sponsorship agreements with us and our revenue
generated from sponsorships would suffer.
WE RELY HEAVILY ON OUR KEY PARTNERS AND IF THEY TERMINATE THEIR STRATEGIC
ALLIANCES WITH US OR IF THE ARRANGEMENT FAILS TO MEET OUR OBJECTIVES WE MAY
EXPERIENCE DIFFICULTY OR DELAYS IN INSTALLING AND MAINTAINING OUR NETWORK AND
OUR REVENUE GROWTH MAY SUFFER
Our current strategic alliance relationships include: Dell, Gilat and
Spacenet, Microsoft, New Sub Services, School Specialty, Sylvan, Toshiba and
Xerox. We rely heavily on our strategic alliance relationships. These agreements
involve many aspects of our business and in some cases include the sale of
equity securities to these companies. These types of arrangements are complex
and will require a great deal of effort to operate successfully. As a result,
there are many risks related to these arrangements, including some that we may
not have foreseen. It is difficult to assess the likelihood of occurrence of
these risks, including the lack of success of the overall arrangement to meet
the parties' objectives. If we fail to maintain these relationships, or if our
partners do not perform to our expectations, our ability to deploy our network
to additional schools, the performance of our network, and our ability to
generate revenues may all be harmed. Specific examples of these strategic
alliance relationships include: (1) our agreements with Sylvan relating to the
use of our network and labs outside of school hours, (2) our agreement with Dell
relating to the acquisition and integration of our computer lab equipment, and
(3) our agreements with Spacenet relating to the installation of our network and
labs as well as the operation of our network.
WE ARE DEPENDENT ON THIRD PARTIES TO DEPLOY OUR NETWORK TO SCHOOLS AND SUPPORT
IT ONCE INSTALLED
We plan to rapidly deploy our network to additional schools across the
country. We have used, and plan to continue to use, third parties such as Gilat
and Spacenet, and Inacom, to install and support the ZapMe! network in each
school. In the past we have experienced difficulties resulting from the failure
of former third party integrators to manage successfully a wide-scale deployment
into a school environment. Such failures resulted in delays in the scheduled
deployment of our network to additional schools. We have recently entered into
relationships with nationally recognized parties to install software on the
computers, to install the ZapMe! lab in each school site and to serve as the
general contractor to oversee the installation process. However, these parties
may not be able to install schools on a wide scale according to our schedule.
While we do not currently anticipate additional changes of our third party
installers, any further changes would cause delays in the deployment of the
ZapMe! network and any inability to install schools according to our plan could
limit or eliminate revenue generated from sponsorships, e-commerce and network
services. Further, if we do need to hire substitute or additional third party
installers of our network we cannot assure you that we will be able to do so on
terms as favorable as our current arrangements, or at all, which could result in
higher installation costs to us as well as potential delays in our deployment.
We also rely on third parties to provide the majority of support necessary
to maintain the ZapMe! network and labs once installed. Any inability to
maintain or delays to the maintenance of this equipment would lead to lower
revenue generated from sponsorship and network services.
8
<PAGE>
OUR DEPENDENCE ON SHORT-TERM SPONSORSHIP CONTRACTS EXPOSES US TO GREATER
PRESSURE ON OUR SPONSORSHIP PRICES AND ALLOWS SPONSORS TO QUICKLY CEASE THEIR
SPONSORSHIPS
A substantial portion of our sponsorship revenue is and will continue to be
derived from short-term contracts. Consequently, we may not be able to command
higher prices typically associated with more comprehensive arrangements.
Further, many of our sponsors will be able to cease advertising on our network
quickly and without penalty, thereby increasing our exposure to competitive
pressures. Our current sponsors may not continue to purchase advertisements and
we may not be able to secure new contracts from existing or future sponsors at
attractive rates or at all.
WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUE FROM A SMALL NUMBER OF SPONSORS
AND OUR REVENUE MAY DECLINE SIGNIFICANTLY IF ANY MAJOR SPONSOR CANCELS OR DELAYS
A PURCHASE
A small number of sponsors account for a significant portion of our revenue,
and we anticipate that this trend will continue. For example, in the near-term
we expect to derive a substantial portion of our revenue from an agreement with
Sylvan, and anticipate that this agreement will continue to account for a
meaningful percentage of our revenue through December 31, 2003, when it expires.
GE Americom accounted for approximately 87% of our revenue during the six-month
period ended June 30, 1999. Our revenue from sponsorships will not increase if
we are unable to renew our material agreements, replace such agreements with
similar agreements with new sponsors, or sufficiently diversify our sponsor base
so that we do not rely on a small number of sponsors for a significant portion
of our revenue.
OUR VARIED SALES CYCLES COULD HARM OUR RESULTS OF OPERATIONS IF FORCASTED 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, legislation in
9
<PAGE>
California is expected to become law that would impose additional procedural
requirements before local school boards could enter into contracts involving
advertising in schools. Similar or more restrictive legislation is possible in
other states and at the local and federal levels. Anti-school-advertising groups
have had some successes in the past seeking regulation and boycotts of companies
that advertise in schools, such as Channel One, a wholly owned subsidiary of
Primedia, Inc. Moreover, any new restriction, law or regulation pertaining to
online media, sponsorships or e-commerce in schools, or the application or
interpretation of existing laws, could decrease the demand for our service,
increase our cost of doing business or otherwise have a negative impact on our
business.
The Internet is the subject of an increasing number of laws and regulations.
These laws or regulations may relate to liability for information retrieved from
or transmitted over the Internet, online content regulation, user privacy,
taxation and the quality of products and services. In addition, these new laws
have not yet been interpreted by the courts, and consequently their
applicability and reach are not defined. Moreover, the applicability to the
Internet of existing laws governing issues such as intellectual property
ownership, copyright, defamation, obscenity and personal privacy is uncertain
and developing. We may be subject to claims that our services violate such laws.
Any new legislation or regulation in the United States or abroad or the
application of existing laws and regulations to the Internet could impose
significant restrictions, requirements or additional costs on our business,
require us to change our operating methods, or subject us to additional
liabilities and cause the price of our common stock to decline. Please see
"Business--Government Regulation," beginning on page 49, for more detailed
information on regulations that might affect our business.
WE ARE DEPENDENT ON OUR NETWORK INFRASTRUCTURE, AND IN PARTICULAR ON SATELLITES
AND SATELLITE TRANSMISSION TECHNOLOGY, AND ANY FAILURE OF OUR NETWORK WOULD HARM
OUR OPERATIONS
Our business plan calls for rapidly deploying our network to many additional
schools. Our network infrastructure may not be able to support the demands this
growth places on it and its performance and reliability may decline. We have
experienced and may in the future experience interruptions in service as a
result of outages and other delays occurring throughout our network
infrastructure. If these outages or delays occur frequently in the future, use
of our network could grow more slowly or decline.
Our network operations center and our communications and other computer
hardware are also subject to disruptions which are beyond our control and for
which we may not have adequate insurance. Fire, floods, earthquakes, power loss,
telecommunications failures, break-ins and similar events could damage our
communications hardware and other network operations. Our network operations
center is located separate from our principal offices at third party hosting
facilities in California. In addition, each school installed with the ZapMe!
network is connected to our network through a satellite link. We send
information to the satellite through our operator's uplink facilities located in
Georgia and Virginia. Our network currently uses a single satellite. The
complete or partial loss of the satellite used to transmit data to schools could
affect the performance of our network. 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
10
<PAGE>
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.
The future success of our business will also depend on the security of our
network. Computer viruses or problems caused by our users or other third
parties, such as the sending of excessive volumes of unsolicited bulk email or
"spam," could lead to interruptions, delays, or cessation in service to our
users. In addition, the sending of "spam" through our network could result in
third parties asserting claims against us. We may not prevail in such claims and
our failure to do so could result in large judgments which would harm our
business. Users or other third parties could also potentially jeopardize the
security of confidential information stored in our computer systems by their
inappropriate use of the Internet, including "hacking," which could cause losses
to us or our users or deter persons from using our services. Users or third
parties may also potentially expose us to liability by "identity theft," or
posing as another ZapMe! user. Unauthorized access by current and former
employees or others could also potentially jeopardize the security of
confidential information stored in our computer systems and those of our users.
We expect that our users will increasingly use the Internet for commercial
transactions in the future. Any network malfunction or security breach could
cause these transactions to be delayed, not completed at all, or completed with
compromised security. Users or others may assert claims of liability against us
as a result of any failure by us to prevent these network malfunctions and
security breaches, and may deter others from using our services, which could
cause our business prospects to suffer. Although we intend to continue using
industry-standard security measures, such measures have been circumvented in the
past, and we cannot assure you that these measures will not be circumvented in
the future. In addition, to alleviate problems caused by computer viruses or
other inappropriate uses or security breaches, we may have to interrupt, delay,
or cease service to our users, which could severely harm our business.
WE ARE DEPENDENT ON OUR LEASED SATELLITE BANDWIDTH AND IF SUCH LEASES WERE
TERMINATED OR OTHERWISE UNAVAILABLE TO US WE COULD BE SUBJECTED TO SIGNIFICANT
ADDITIONAL COSTS OR RESTRICTIONS ON OUR BUSINESS
We currently lease satellite bandwidth from GE Americom and in the future
expect to sublease satellite bandwidth from Spacenet. If, for any reason, the
leases were to be terminated, we might not be able to renegotiate new leases
with GE Americom or Spacenet or another satellite provider on favorable terms,
if at all.
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
11
<PAGE>
products and services to a similar base of users, or both, and who could in the
future seek to compete more directly with us. In this light, we believe our
current and potential competitors (and potential partners) include America
Online and Channel One, as well as Disney and Hughes Electronics. For more
information on our competitive position and our competitors, please see
"Business-Competition," which begins on page 48.
Many of our existing competitors, as well as potential new competitors, have
longer operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we do.
This may allow them to devote greater resources than we can to the development
and promotion of their products and services. Many of these competitors offer a
wider range of products and services than we do. These products and services may
attract users to our competitors' sites and, consequently, result in lower usage
of our network. These competitors may also engage in more extensive research and
development, adopt more aggressive pricing policies and make more attractive
offers to existing and potential employees, partners, sponsors and e-commerce
merchants. Our competitors may develop services that are equal or superior to
ours or that achieve greater market acceptance. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to better address the needs
of sponsors and businesses engaged in e-commerce. As a result, it is possible
that new competitors may emerge and rapidly acquire significant market share.
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:
E-rate. The Education-rate initiative, commonly referred to as "E-rate," is
a government sponsored program under which schools can qualify for discounts on
a wide variety of networking products, telecommunications services and Internet
access. The discount ranges from 20%-90% depending upon whether the school is in
an urban or rural area and the economic status of the students. Passed as part
of the 1996 Telecommunications Act, the E-rate is an extension of the Universal
Service Fund, originally designed to make telephone service ubiquitous in the
United States. The FCC recently moved to fund the E-rate program at $2.25
billion for the period from July 1, 1999 to June 30, 2000, the maximum level
under its regulations. Schools may choose to utilize the E-rate and purchase
their computer and network equipment and Internet access themselves, rather than
using the ZapMe! network.
Free Computer Equipment and Internet Access Companies and Offerings. Various
companies have recently begun to offer a variety of low cost computer equipment
and Internet access, as well as packages of both. The free equipment and
Internet access has to date largely been tied to the user accepting additional
advertising or network services from the company providing the equipment or
Internet access. In addition, several companies have recently announced that
they will subsidize the cost of computer equipment for purchasers who agree to a
full price multi-year Internet access commitment. We believe that to date none
of these offerings has targeted the school or multiple PC lab markets. New
product offerings occur rapidly in our industry, however, and in the future
schools may choose to receive their computer equipment and Internet access from
these sources rather than use the ZapMe! network.
12
<PAGE>
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FUND OUR OPERATIONS WHEN
NEEDED
We expect to use the net proceeds of this offering primarily for general
corporate purposes, including expanding our sales and marketing activities,
continuing investments in technology and product development and other capital
expenditures, as well as working capital and other corporate expenses, including
the funding of net losses from operations. We believe that such proceeds,
together with our existing capital resources, will be sufficient to meet our
cash requirements for at least the next twelve months. However, our cash
requirements are large, and depend on several factors, including 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.
13
<PAGE>
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.
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.
14
<PAGE>
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 July 13, 1999, DoubleClick, an Internet
advertising provider, and NetGravity announced that they had entered into a
merger agreement pursuant to which DoubleClick will acquire NetGravity in a
stock-for-stock transaction. We cannot predict how this acquisition will affect
our relationship with NetGravity.
In addition we are dependent on various third parties for other software,
systems and related services. Several of the third parties that provide software
and services to us have a limited operating history, have relatively immature
technology and are themselves dependent on reliable delivery of services from
others. As a result, our ability to deliver various services to our users may
suffer due to the failure of these third parties to provide reliable software,
systems and related services to us.
THE INABILITY TO OBTAIN KEY SOFTWARE FROM THIRD PARTIES MAY HARM OUR BUSINESS
We rely on software licensed from third parties, including applications that
are integrated with internally developed software and used in our products. Most
notably, we license remote management software and Windows NT. These third-party
technology licenses may not continue to be available to us on commercially
reasonable terms, or at all, and we may not be able to obtain licenses for other
existing or future technologies that we desire to integrate into our products.
Our business could be seriously harmed if we cannot maintain existing
third-party technology licenses or enter into licenses for other existing or
future technologies needed for our products.
OUR SUCCESS DEPENDS UPON THE SUCCESSFUL DEVELOPMENT OF NEW SERVICES AND FEATURES
IN THE FACE OF RAPIDLY EVOLVING TECHNOLOGY
Our market is characterized by rapidly changing technologies, frequent new
service introductions and evolving industry standards. The recent growth of the
Internet and intense competition in our industry exacerbate these market
characteristics. Our future success will depend on our ability to adapt to
rapidly changing technologies by continually improving the performance, features
and reliability of our network. We may experience difficulties that could delay
or prevent the successful development, introduction or marketing of new
features, content or network services. In addition, our new enhancements must
meet the requirements of our current and prospective users and must achieve
significant market acceptance. We could also incur substantial costs if we need
to modify our service or infrastructures to adapt to these changes.
15
<PAGE>
FAILURE TO MANAGE THE GROWTH OF OUR OPERATIONS COULD HARM OUR BUSINESS AND
STRAIN OUR MANAGERIAL, OPERATIONAL AND FINANCIAL RESOURCES
We have rapidly and significantly expanded our operations. We anticipate
that further significant expansion will be required to grow our user base if we
are to be successful in implementing our business strategy. We may not be able
to implement management information and control systems in an efficient and
timely manner, and our current or planned personnel, systems, procedures and
controls may not be adequate to support our future operations. If we are unable
to manage growth effectively, our business would suffer. During 1998, we
increased the number of employees from 12 to 45, and during the first six months
of 1999, we added 43 additional employees. This expansion is placing a
significant strain on our managerial, operational and financial resources. Most
of our existing senior management personnel, including Don Kingsborough, our
Senior Vice President, Sales and Marketing, and Bob Rudy, our Vice President of
Operations, joined us within the last six months. Some other key managerial,
technical and operations personnel have not yet been fully integrated. To manage
the expected growth of our operations and personnel, we will be required to:
- improve existing and implement new operational, financial and management
controls, reporting systems and procedures;
- install new management information systems; and
- train, motivate and manage our sales and marketing, engineering, technical
and customer support employees.
THE LOSS OF KEY PERSONNEL MAY HURT OUR ABILITY TO OPERATE OUR BUSINESS
EFFECTIVELY
Our success depends to a significant degree upon the continued contributions
of the principal members of our sales, engineering and management departments,
many of whom perform important management functions and would be difficult to
replace. Specifically, we believe that our future success is highly dependent on
our senior management, and in particular on Lance Mortensen, Chairman and Chief
Executive Officer. We do not have employment contracts with our key personnel.
The loss of the services of any key personnel, particularly senior management,
could seriously harm our business.
IF WE ARE UNABLE TO RETAIN AND HIRE ADDITIONAL QUALIFIED PERSONNEL AS NECESSARY,
WE MAY NOT BE ABLE TO SUCCESSFULLY ACHIEVE OUR OBJECTIVES
We have recently hired and anticipate continuing to hire additional
engineering, sales, marketing, e-commerce, customer support and accounting
personnel. We may not be able to attract and retain the necessary personnel to
accomplish our business objectives, and we may experience constraints that will
adversely affect our ability to deploy the ZapMe! network in a timely fashion or
to support our users and operations. We have at times experienced, and continue
to experience, difficulty in recruiting qualified personnel. Recruiting
qualified personnel is an intensely competitive and time-consuming process.
WE ARE CURRENTLY IN ARBITRATION WITH ONE OF OUR FORMER OFFICERS, WHICH IF
RESOLVED AGAINST US COULD RESULT IN OUR OBLIGATION TO PAY LARGE DAMAGES OR
ACCELERATED VESTING OF THE OFFICER'S ZAPME! STOCK
We filed a demand for arbitration with our former President and Director,
Frank J. Vigil, related to his employment at and departure from ZapMe!. We
assert that ZapMe! was induced by Mr. Vigil's fraudulent representations
regarding his work history and managerial experience to enter into an employment
agreement with him. On July 26, 1999, Mr. Vigil filed a response to our demand
and a counterclaim, which alleges breach of contract, breach of implied covenant
of good faith and fair dealing, fraud in the inducement of contract and
intentional misrepresentation, defamation, and
16
<PAGE>
violations of the California Labor Code, all related to the circumstances of his
employment at and departure from ZapMe!.
We cannot assure you that we will prevail in this arbitration, and any
decision against us could result in an obligation to pay some or all of the
damages Mr. Vigil has sought in his counterclaim. These damages could be
substantial. Notably, under the terms of his employment agreement and related
agreements, Mr. Vigil was permitted to purchase 1.35 million shares of common
stock of ZapMe!. Some of those shares were subject to a right of repurchase by
ZapMe! at the time of Mr. Vigil's separation from ZapMe!. Mr. Vigil may claim
that, under the terms of his employment agreement, the closing of this offering
could result in the cancellation of the right of repurchase and the full vesting
of his stock. A decision against us with regard to the validity of the
employment contract and related agreements could therefore result in the
complete vesting of Mr. Vigil's stock. See "Business--Legal Proceedings" on page
50 for more detailed information on this arbitration.
THE PURCHASERS IN THE OFFERING WILL EXPERIENCE DILUTION DUE TO OUR OBLIGATION TO
ISSUE ADDITIONAL SHARES TO VARIOUS PREFERRED STOCKHOLDERS IN CONNECTION WITH THE
OFFERING
On August 27, 1998 we sold 600,000 shares of Series C preferred stock. On
December 3, 1998, February 1, 1999, March 31, 1999 and May 28, 1999, we sold an
aggregate of 5,894,110 shares of Series D preferred stock. On August 4, 1999, we
sold 2,030,000 shares of Series E preferred stock. Generally, the shares of
Series C, Series D and Series E preferred stock will convert to common stock on
a one-to-one basis. However, rights granted to the holders of the Series C,
Series D and Series E preferred stock under our Certificate of Incorporation
will require us to issue additional shares of common stock.
The holders of our Series C preferred stock, Series D preferred stock and
Series E preferred stock are entitled to per annum dividends equal to ten
percent, fifteen percent and seven and one half percent, respectively, of the
liquidation value of their stock, initially set at $5 per share. The dividend
will be payable upon the closing of this offering in shares of additional common
stock in the amount equal to the dividend amount.
The holders of our Series C preferred stock and Series D preferred stock
will also be entitled to receive additional newly issued shares of common stock
upon the closing of this offering if the offering price does not exceed $15 per
share in the case of the Series C preferred stock and $10 per share in the case
of the Series D preferred stock.
By way of example, if the offering price is $11.00 per share and the
offering closes on September 30, 1999, the Series C stockholders, Series D
stockholders and Series E stockholders would be entitled to receive
approximately 303,125 shares, 437,216 shares and 24,787 shares, respectively.
When such issuance of additional shares of common stock occurs, current and
prospective stockholders will suffer additional dilution with a resulting
increase in net loss applicable to common stockholders of $8,416,000 which will
also result in an increase in net loss per share applicable to common
stockholders. Depending on the timing of our offering, and in particular, on the
offering price, this dilution could be substantial. Please see "Description of
Capital Stock--Preferred Stock," beginning on page 67, for more information
about our preferred stock.
WE COULD BE REQUIRED TO RECORD A SIGNIFICANT ACCOUNTING EXPENSE UPON THE VESTING
OF A WARRANT
As part of our agreement with Sylvan, we issued a warrant to purchase
150,000 shares of our common stock at $5.00 per share. This warrant becomes
exercisable if Sylvan meets specified milestones by December 31, 2003. If the
warrant becomes exercisable, we could be required to record a significant
non-cash accounting expense based on the value of the warrant in the period in
which the warrant becomes exercisable. The value of the warrant at that time
will depend on the value of our common stock at the time.
17
<PAGE>
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.
CONTROL BY EXISTING STOCKHOLDERS MAY LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME
OF DIRECTOR ELECTIONS AND OTHER MATTERS REQUIRING STOCKHOLDER APPROVAL
Upon completion of this offering, our executive officers, directors and
principal stockholders and their affiliates will own 24,803,055 shares or
approximately 59.2% of the outstanding shares of common stock (58.4% if the
underwriters' over-allotment option is exercised in full), assuming that the
preferred stock converts to common stock at a ratio of one-to-one. These
stockholders, if acting together, would be able to significantly influence all
matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combination
transactions. This concentration of ownership could have the effect of delaying
or preventing a change in our control or otherwise discouraging a potential
acquirer from attempting to obtain control of us. These results could in turn
have a negative effect on the market price of the common stock or prevent our
stockholders from realizing a premium over the market prices for their shares of
common stock. For information about the ownership of common stock by our
executive officers, directors and principal stockholders please refer to
"Principal Stockholders," which begins on page 65.
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL SHARES AT OR
ABOVE THE OFFERING PRICE
A public market for our common stock has not previously existed. We cannot
predict the extent to which investor interest in ZapMe! will lead to the
development of a trading market or how liquid that market might become. The
initial public offering price for the shares will be determined by negotiations
between us and the representatives of the Underwriters and may not be indicative
of prices that will
18
<PAGE>
prevail in the trading market. The trading price of our common stock could be
subject to wide fluctuations in response to factors unrelated to our operating
results such as:
- announcements of technological innovations, significant acquisitions,
strategic alliance relationships, joint ventures or capital commitments by
us or our competitors;
- new products or services offered by us or our competitors;
- changes in financial estimates by securities analysts;
- additions or departures of key personnel; and
- sales of common stock.
In addition, the stock market in general and the Nasdaq National Market and
technology companies in particular have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of such companies. Some of these fluctuations may be due to
speculative trading by individual investors, including investors commonly
referred to as "day traders." The trading prices of many technology companies'
stocks are at or near historical highs and these trading prices and multiples
are substantially above historical levels. These trading prices and multiples
may not be sustained. These broad market and industry factors may materially
adversely affect the market price of our common stock, regardless of our actual
operating performance. In the past, following periods of volatility in the
market price of a company's securities, securities class-action litigation has
often been instituted against such companies. Such litigation, if instituted,
could result in substantial costs and a diversion of management's attention and
resources.
POSSIBLE INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR BUSINESS
We seek to protect our intellectual property and to respect the intellectual
property rights of others. To protect our own intellectual property, we rely on
U.S. and international law regarding copyright, patents, trademarks and trade
secrets as well as confidentiality agreements with employees, consultants,
contractors and business partners. We cannot guarantee that we will succeed in
obtaining, registering, policing or defeating challenges to our intellectual
property rights, or that we will avoid claims that we are infringing the rights
of others. Please refer to "Business--Intellectual Property," beginning on page
49, for information on steps we have taken to protect our intellectual property.
Despite our efforts to protect our intellectual property, we may be
unsuccessful in doing so. We may be unable to obtain patents or register
trademarks for a variety of reasons, including a mistaken belief that these
items are eligible for intellectual property protection or that we are the
entity entitled to this protection, if any. Our copyrights and trade secrets may
similarly turn out to be ineligible for legal protection. In addition, parties
may attempt to disclose, obtain or use its proprietary information despite, or
in the absence of, a confidentiality agreement. Some foreign countries do not
protect intellectual property rights to the same extent as the United States,
and intellectual property law in the United States is still uncertain and
evolving as applied to Internet-related industries. The status of domain names
and the regulatory bodies in charge of them is also unsettled. Any inability to
register or otherwise protect our intellectual property rights could seriously
harm our business since it could enable competitors to copy important features
on our network and Netspace.
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.
19
<PAGE>
FAILURE OF COMPUTER SYSTEMS AND SOFTWARE PRODUCTS TO BE YEAR 2000 COMPLIANT
COULD NEGATIVELY IMPACT OUR BUSINESS
Many currently installed computer systems and software products only accept
two digits to identify the year in any date. Thus, the year 2000 will appear as
"00," which the system might consider to be the year 1900 rather than the year
2000. This could result in system failures, delays or miscalculations causing
disruptions to our operations. The failure of systems maintained by third
parties to be Year 2000 compliant could cause us to incur significant expense to
remedy any problems, reduce our revenues from such third parties or otherwise
seriously damage our business. A significant Year 2000-related disruption of the
network services or equipment that third-party vendors provide to us could also
cause our members or visitors to consider seeking alternate providers or cause
an unmanageable burden on our technical support.
Our failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, some of our normal business activities or
operations. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Readiness Disclosure," beginning
on page 34, for a detailed description of our state of year 2000 readiness.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE
OUR STOCK PRICE TO FALL
Sales of a large number of shares of our common stock in the public market
after this offering or the perception that such sales could occur could cause
the market price of our common stock to drop. Upon completion of this offering,
assuming an initial public offering price of $11.00 and that the closing of the
offering occurs on September 30, 1999, we will have approximately 41,906,289
shares of common stock outstanding, of which approximately 9,000,000 shares
(approximately 10,350,000 shares if the underwriters' over-allotment option is
exercised in full) will be freely transferable without restriction or
registration under the Securities Act of 1933, unless such shares are held by
our affiliates, as that term is defined in Rule 144 under the Securities Act.
The officers and directors and all of our existing stockholders have agreed with
Merrill Lynch or have otherwise agreed with us not to sell or otherwise dispose
of any of their shares for 180 days after the date of this prospectus. However,
Merrill Lynch may, in its sole discretion, at any time without notice, release
all or any portion of the shares subject to lock-up agreements. Sales of common
stock by existing stockholders in the public market, or the availability of such
shares for sale, could adversely affect the market price of the common stock.
In addition, as soon as practicable after the date of this prospectus, we
intend to file a registration statement on Form S-8 with the Securities and
Exchange Commission covering the 4,899,350 shares of common stock reserved for
issuance under our 1997 Stock Option Plan, 1998 Stock Plan and 1999 Employee
Stock Purchase Plan and for options issued outside such plans. On the date 180
days after the effective date of this offering, at least 670,382 shares will be
subject to immediately exercisable options (based on an assumed effective date
of September 30, 1999 and options outstanding on June 30, 1999. Sales of a large
number of shares could have an adverse effect on the market price for our common
stock.
After this offering, the holders of 9,449,238 shares of common stock (not
including shares issuable upon exercise of warrants) will have rights with
respect to registration of such shares for sale to the public. If such holders,
by exercising their registration rights, cause a large number of securities to
be registered and sold in the public market, such sales could have an adverse
effect on the market price for our common stock. If we were to include in a
company-initiated registration shares held by such holders pursuant to the
exercise of their registration rights, such sales may have an adverse effect on
our ability to raise needed capital.
20
<PAGE>
OUR CHARTER DOCUMENTS WILL MAKE IT MORE DIFFICULT TO ACQUIRE US AND MAY
DISCOURAGE TAKE-OVER ATTEMPTS AND THUS DEPRESS THE MARKET PRICE OF OUR STOCK
Provisions of our Certificate of Incorporation and Bylaws could make it more
difficult for a third party to acquire us, even if doing so would be beneficial
to our stockholders. For example, stockholder meetings may be called only by our
board of directors, the chairman of the board and the president, advanced notice
is required prior to stockholder proposals, and stockholders may not act by
written consent. Further, we have authorized preferred stock that is
undesignated, making it possible for the board of directors to issue preferred
stock with voting or other rights or preferences that could impede the success
of any attempt to change control of ZapMe!.
Delaware law also could make it more difficult for a third party to acquire
us. Specifically, Section 203 of the Delaware General Corporation Law may have
an anti-takeover effect with respect to transactions not approved in advance by
the board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by our
stockholders.
THE PURCHASERS IN THE OFFERING WILL IMMEDIATELY EXPERIENCE SUBSTANTIAL DILUTION
IN NET TANGIBLE BOOK VALUE
Because our common stock has been sold previously at prices substantially
less than the initial public offering price that you will pay, you will suffer
immediate and substantial dilution in pro forma net tangible book value. The
exercise of outstanding options and warrants, or the issuance of additional
shares of preferred stock, may result in further dilution. See "Dilution,"
beginning on page 26, for further information regarding the dilution in the net
tangible book value of the shares purchased in this offering, and "Description
of Capital Stock," beginning on page 67, for information regarding potential
additional dilution to the value of our common stock.
21
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements in "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks outlined
under "Risk Factors," that may cause our or our industry's actual results,
levels of activity, performance or achievements to be materially different from
any future results, levels or activity, performance or achievements expressed or
implied by such forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of such statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus to conform such statements to actual results.
22
<PAGE>
USE OF PROCEEDS
The net proceeds to ZapMe! from the sale of the 9,000,000 shares of common
stock sold by us in the offering are estimated to be approximately $91,070,000
(approximately $104,881,000 if the underwriters' over-allotment option is
exercised in full) assuming an initial public offering price of $11.00 per share
and after deducting the estimated underwriting discount and estimated offering
expenses.
We expect to use the net proceeds 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. The amounts we actually expend for such working capital
and other purposes may vary significantly and will depend on a number of
factors, including the amount of our future revenues and the other factors
described under "Risk Factors." In addition, while we intend to finance
substantially all the cost of deploying our network into schools through third
party or OEM lease finance programs, not all the costs of network equipment may
be covered by such finance programs. To this extent we intend to utilize
proceeds from the offering for such purpose. Our management will retain broad
discretion in the allocation of the net proceeds of this offering. A portion of
the net proceeds may also be used to acquire or invest in complementary
businesses, technologies, product lines or products. However, we have no current
plans, agreements or commitments with respect to any such acquisition, and we
are not currently engaged in any negotiations with respect to any such
transaction. Pending such uses, the net proceeds of this offering will be
invested in short term, interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared nor paid cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of the board of directors and will be
dependent upon our financial condition, results of operations, capital
requirements, general business condition and such other factors as the board of
directors may deem relevant.
23
<PAGE>
CAPITALIZATION
The table below sets forth the following information:
- our actual capitalization as of June 30, 1999;
- our pro forma capitalization after giving effect to our sale of 2,030,000
shares of Series E preferred stock in August 1999, with net proceeds of
approximately $9.5 million; and
- our pro forma as adjusted capitalization to give effect to the sale by
ZapMe! of 9,000,000 shares of common stock offered through this
prospectus, assuming an initial public offering price of $11.00 per share,
and after deducting the estimated underwriting discount and estimated
offering expenses payable by us and the conversion of all outstanding
shares of preferred stock into shares of common stock which was computed
using an assumed initial public offering price of $11.00 per share and an
assumed closing date of September 30, 1999
This information should be read in conjunction with our financial statements
and related notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
Capital lease obligations, net of current portion........................... $ 4,613 $ 4,613 $ 4,613
Redeemable convertible preferred stock, $0.01 par value, issuable in series;
600,000 shares authorized, issued and outstanding, actual; no shares
authorized, issued or outstanding pro forma and pro forma as adjusted..... 4,288 4,288 --
Stockholders' equity:
Convertible preferred stock, $0.01 par value; 16,357,671 shares authorized
(including 600,000 shares designated as redeemable convertible preferred
stock), 15,151,781 shares issued and outstanding, actual; 5,000,000
shares authorized, 17,181,781 shares issued and outstanding pro forma
and no shares issued and outstanding, pro forma as adjusted............. 29,112 38,612 --
Common stock, $0.01 par value; 50,000,000 shares authorized, 14,359,380
shares issued and outstanding, actual; 200,000,000 shares authorized,
14,359,380 shares outstanding, pro forma; 200,000,000 shares authorized,
41,306,289 shares issued and outstanding, pro forma as adjusted......... 2,364 2,364 144,750
Deferred stock compensation................................................. (1,291) (1,291) (1,291)
Accumulated deficit during the development stage............................ (13,433) (13,433) (21,849)
---------- ----------- -----------
Total stockholders' equity.................................................. 16,752 26,752 121,610
---------- ----------- -----------
Total capitalization........................................................ $ 25,653 $ 35,153 $ 126,223
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
The above table is based on shares outstanding as of June 30, 1999. This
table excludes, as of June 30, 1999:
- 2,512,857 shares of common stock issuable upon exercise of options
outstanding under our 1997 Stock Option Plan and 1998 Stock Option Plan at
a weighted average exercise price of $1.87 per share and 386,493 shares
reserved for future issuance under the plans; and
24
<PAGE>
- 895,890 shares of common stock issuable upon exercise of outstanding
warrants, of which 655,890 shares at a weighted average exercise price of
$3.67 per share were outstanding at June 30, 1999.
The pro forma as adjusted column in the above table also includes:
- 303,125 additional shares issuable to holders of the Series C preferred
stock on closing of this offering assuming an initial public offering
price of $11.00 per share and that the closing of the offering occurs on
September 30, 1999;
- 437,216 additional shares issuable to holders of the Series D preferred
stock on closing of this offering assuming an initial public offering
price of $11.00 per share and that the closing of the offering occurs on
September 30, 1999; and
- 24,787 additional shares issuable to holders of the Series E preferred
stock on closing of this offering assuming an initial public offering
price of $11.00 per share and that the closing of the offering occurs on
September 30, 1999.
- A dividend of $8,416,000 attributable to the issuance of additional
preferred stock noted above assuming an initial public offering price of
$11.00 per share and that the closing of the offering occurs on September
30, 1999.
See "Management--Incentive Stock Plans," beginning on page 57, for a
detailed description of our incentive stock plans; "Description of Capital
Stock," beginning on page 67, for a detailed description of our capital stock;
and note 3 of "Notes to Financial Statements," beginning on page F-11, for a
detailed description of our stockholders' equity.
25
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock after giving
effect to our sale of 2,030,000 shares of Series E preferred stock in August
1999 with net proceeds of approximately $9.5 million, on June 30, 1999 was
approximately $30.5 million or $0.95 per share. Pro forma net tangible book
value per share represents the amount of our total tangible assets less our
total liabilities, divided by the number of outstanding shares of our common
stock on a pro forma basis after giving effect to the conversion of all
outstanding shares of our preferred stock into 23,181,781 shares of common stock
upon the closing of the offering. Assuming our sale of 9,000,000 shares of
common stock in this offering at an assumed initial public offering price of
$11.00 per share and our receipt of the estimated net proceeds from the
offering, after deducting the estimated underwriting discount and our estimated
offering expenses, our pro forma net tangible book value at June 30, 1999 would
have been $121.6 million or $2.90 per share of common stock. This represents an
immediate increase of pro forma net tangible book value of $1.95 per share to
existing stockholders and an immediate dilution in pro forma net tangible book
value of $8.10 per share to new investors. In other words, we currently expect
that new investors will pay $11.00 per share for our common stock in the
offering, which is substantially greater than the $2.90 per share value, after
the offering, of our tangible assets after subtracting our liabilities. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............................. $ 11.00
Pro forma net tangible book value per share as of June 30, 1999............ $ 0.95
Increase in pro forma net tangible book value per share attributable to new
investors................................................................ 1.95
---------
Pro forma net tangible book value per share after offering................... 2.90
---------
Dilution per share to new public investors................................... $ 8.10
---------
---------
</TABLE>
The following table sets forth, as of June 30, 1999, on the pro forma basis
described above, the differences between the number of shares of common stock
purchased from us, the total price paid and the average price per share paid by
existing stockholders and by the new investors in this offering at an assumed
initial public offering price of $11.00 per share (before deducting the
estimated underwriting discounts and commissions and estimated offering expenses
payable). The table below indicates that while investors in the offering will
contribute 67.1% of the total amount provided by investors to fund ZapMe! to
date, they will own 21.5% of ZapMe!.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- --------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................. 32,906,289 78.5% $ 48,563,000 32.9% $ 1.48
New investors..................................... 9,000,000 21.5% 99,000,000 67.1% 11.00
------------ ----- -------------- ----- ------
Total......................................... 41,906,289 100.0% $ 147,563,000 100.0%
------------ ----- -------------- -----
------------ ----- -------------- -----
</TABLE>
If the underwriters exercise their over-allotment in full, the following
will occur:
- the percentage of shares of common stock held by existing stockholders
will decrease to approximately 76.1% of the total number of shares of our
common stock outstanding; and
- the number of shares held by new public investors will increase to
10,350,000, or approximately 23.9% of the total number of shares of our
common stock outstanding after this offering.
26
<PAGE>
The above computations are based on shares outstanding as of June 30, 1999.
They exclude, as of June 30, 1999:
- 2,512,857 shares of common stock issuable upon exercise of options
outstanding under our 1997 Stock Option Plan and 1998 Stock Option Plan at
a weighted average exercise price of $1.87 per share and 386,493 shares
reserved for future issuance under the plans; and
- 895,890 shares of common stock issuable upon exercise of outstanding
warrants, of which 655,890 shares at a weighted average exercise price of
$3.67 per share were outstanding at June 30, 1999.
The above computations include:
- 303,125 additional shares issuable to holders of the Series C preferred
stock on closing of this offering assuming an initial public offering
price of $11.00 per share and that the closing of the offering occurs on
September 30, 1999;
- 437,216 additional shares issuable to holders of the Series D preferred
stock on closing of this offering assuming an initial public offering
price of $11.00 per share and that the closing of this offering occurs on
September 30, 1999; and
- 24,787 additional shares issuable to holders of the Series E preferred
stock on closing of this offering assuming an initial public offering
price of $11.00 per share and that the closing of the offering occurs on
September 30, 1999.
27
<PAGE>
SELECTED FINANCIAL DATA
The statements of operations data for the period from June 25, 1997
(inception) through December 31, 1997 and for the year ended December 31, 1998,
and the balance sheet data at December 31, 1997 and December 31, 1998, are
derived from our financial statements which have been audited by Ernst & Young
LLP, independent auditors, and are included elsewhere in this prospectus. The
statement of operations data for the six month periods ended June 30, 1998 and
1999 and the balance sheet data at June 30, 1999, are derived from unaudited
financial statements included elsewhere in this prospectus. We have prepared
this unaudited information on the same basis as the audited financial statements
and have included all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of our financial
position and operating results for such periods. Historical results are not
necessarily indicative of future results and the results for interim periods are
not necessarily indicative of results to be expected for the entire year or for
any future period. When you read this selected financial data, it is important
that you also read the financial statements and related notes included in this
prospectus, as well as the section of this prospectus related to "Management's
Discussion and Analysis of Financial Condition and Results of Operations,
beginning on page 29."
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 25,
1997
(INCEPTION)
THROUGH YEAR ENDED SIX MONTHS ENDED
DECEMBER DECEMBER JUNE 30,
31, 31, --------------------
1997 1998 1998 1999
----------- ----------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................................... $ -- $ -- $ -- $ 147
Costs and expenses:
Cost of services................................ -- 135 8 1,247
Research and development........................ 231 1,140 429 1,034
Sales and marketing............................. 40 1,197 176 2,456
General and administrative...................... 299 1,458 415 1,975
Amortization of deferred stock compensation..... -- 152 -- 656
----------- ----------- --------- ---------
Total costs and expenses...................... 570 4,082 1,028 7,368
----------- ----------- --------- ---------
Loss from operations.............................. (570) (4,082) (1,028) (7,221)
Interest income (expense), net.................... (11) (36) (35) 29
----------- ----------- --------- ---------
Net loss.......................................... (581) (4,118) (1,063) (7,192)
Accretion and dividend on redeemable convertible
preferred stock................................. -- (606) -- (936)
----------- ----------- --------- ---------
Net loss applicable to common stockholders........ $ (581) $ (4,724) $ (1,063) $ (8,128)
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Net loss per share:
Basic and diluted............................... $ (0.05) $ (0.40) $ (0.09) $ (0.60)
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Pro forma basic and diluted (unaudited)......... $ (0.26) $ (0.29)
----------- ---------
----------- ---------
Shares used in calculation of net loss per share:
Basic and diluted............................... 11,183 11,685 11,859 13,517
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Pro forma basic and diluted (unaudited)......... 15,993 25,462
----------- ---------
----------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
JUNE 30,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................... $ 275 $ 815 $ 19,855
Working capital (deficit)....................................... (111) (1,013) 15,597
Total assets.................................................... 349 3,603 32,146
Capital lease obligations....................................... -- 387 6,705
Redeemable convertible preferred stock.......................... -- 3,352 4,288
Stockholders' equity (deficit).................................. (512) (2,123) 16,752
</TABLE>
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND RELATED NOTES AS WELL AS THE OTHER FINANCIAL INFORMATION IN THIS
PROSPECTUS. IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS OR OUR FUTURE
FINANCIAL PERFORMANCE, WHICH INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD LOOKING
STATEMENTS AS A RESULT OF FACTORS SET FORTH UNDER "RISK FACTORS," "BUSINESS" AND
ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
ZapMe! is building a broadband interactive network that brings the latest
technology tools and educational resources to schools for free. For each school
participating in the ZapMe! network, we provide free PCs, software, installation
and support, as well as a free, "always on" connection to the Internet using a
two-way satellite system. The ZapMe! network, which is designed primarily for
students aged 13-19, makes education more engaging and entertaining by providing
a rich media computer experience that is free and easy to use. We plan to extend
the ZapMe! network into the home in order to enhance a student's educational
experience and promote better communication among students, teachers and
parents.
We commenced operations in June 1997 and began offering sponsorships through
our proprietary network in December 1998. From inception through June 30, 1999,
we were in the development stage, and our activities primarily consisted of:
- marketing the ZapMe! network to school districts;
- entering into agreements with school districts for the placement of the
ZapMe! network in schools;
- developing our proprietary user interface and satellite multicasting
capabilities;
- raising capital;
- recruiting personnel;
- conducting research and development activities; and
- purchasing assets to support our operations.
Since December 1998, we have been:
- deploying our network in schools;
- developing our operations, technology and support capabilities;
- forming strategic alliance relationships; and
- continuing to invest in research and development.
In order to achieve our strategic plan, we intend to continue to invest
heavily in deploying our network, marketing and promotion, technology and
operations. We purchase the computer equipment we install in schools--including
PCs, monitors, servers and printers--on customary terms for sales made for
educational purposes from our partners, some of which are also sponsors.
As of July 31, 1999, there were more than 250 school districts, representing
over 6,000 K-12 schools, including more than 2,000 middle and high schools, that
have approved and signed a three-year contract with us that permits us to
install a ZapMe! lab at those districts' schools. As of
29
<PAGE>
July 31, 1999, we had installed ZapMe! labs in over 220 schools, which had an
average of more than 1,000 students, representing over 220,000 students, each of
whom has access to a free ZapMe! account upon request. In the Fall of the
1999-2000 school year, ZapMe! will expand current programs and incentives to
encourage network usage.
We have incurred net losses of approximately $11.9 million for the period of
inception through June 30, 1999. We expect to incur additional losses for the
foreseeable future due to the increased cost of sales and marketing, advertising
and promotion, expanded network features and research and development. We expect
that the size of these losses will fluctuate from quarter to quarter and that
these fluctuations may be substantial. In view of the rapidly evolving nature of
our business and our limited operating history, we believe that period-to-period
comparisons of our operating results are not necessarily meaningful and should
not be relied upon as an indication of future performance.
REVENUE. To date, ZapMe! has generated revenue primarily from content
sponsorship fees paid by strategic partners. Two sponsors, Toshiba and General
Electric, accounted for approximately 90% of our revenue in the six months ended
June 30, 1999. We intend to derive revenue from three primary activities:
sponsorship, e-commerce and network services and other. Sponsorship revenue,
which is expected to account for between 90-95% of revenues when we are fully
operational, includes content and public service announcement sponsorships,
banner advertising and full screen interactive ads, consists of fees charged for
messages delivered over our network. Revenue related to sponsorship of content
on our network is generally recognized ratably over the time periods that the
sponsorship is acknowledged unless such sponsorship is based on delivery of a
minimum number of impressions, in which case revenue is recognized as the
impressions are delivered. We expect to generate sponsorship revenue both at
school and at home. Advertising revenue is recognized in the period in which the
advertisement message is displayed on the network, provided that no material
obligations remain and collection of the related account receivable is
reasonably certain. E-commerce revenue, which is expected to account for between
3-6% of revenues when we are fully operational, consists of referral fees and
commissions on transactions facilitated through our network as well as referred
transactions. Revenue from e-commerce is recognized upon notification from the
contracting partner of the fact of the referral or sale upon which referral fees
or commissions is due. Network services and other revenue consist of revenue
from the distribution of content and products which is delivered through our
network, and from educational services delivered in the ZapMe! labs such as
teacher training, tutoring and other educational programs offered through a
strategic alliance with Sylvan Learning Systems. Network services and other
revenue is expected to account for between 2-4% of revenues when we are fully
operational and is recognized in the time period in which the underlying service
is delivered. Network services and other revenue also include revenue from our
five-year agreement with Sylvan which provides for a sharing of revenue derived
from the delivery of Sylvan programs in ZapMe! computer labs. This agreement
allows Sylvan to offer student tutoring, teacher training, and other programs in
the ZapMe! computer labs. For the calendar year 1999, Sylvan is committed to pay
ZapMe! minimum fees. Thereafter, fees will be based on a rate for installed
schools available for use by Sylvan. To date, no programs have been offered
under this arrangement, and additionally no material e-commerce or network
services have been delivered and no significant revenue has been recognized by
ZapMe!.
COST OF SERVICES. Cost of services consist primarily of depreciation on
network equipment, including computers placed in schools, allowances for the
cost of equipment replacement not covered by manufacturers' warranties, and the
cost of operating our satellite communications network. The costs associated
with this form of telecommunication include (1) the cost of land-based
equipment, or "earth segment," such as the satellite dish, hubs, send and
receive cards located inside the network servers and land-based phone service
and (2) the cost of the link to and from the satellite, or "space segment."
ZapMe! provides much of its earth segment to schools by purchasing satellite
dishes, hubs and send/receive cards for its network servers. ZapMe! purchases
space segment from GE Americom, a
30
<PAGE>
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 $891,000 during the year ended December 31, 1998,
and approximately $916,000 during the six months ended June 30, 1999 as a result
of stock options granted during 1998 and 1999 and shares of common stock granted
to an officer of ZapMe! at a price below the deemed fair market value at the
date of grant. Amortization of deferred stock compensation of approximately
$152,000 was recognized in 1998 and approximately $656,000 for the six months
ending June 30, 1999. Deferred stock compensation is amortized over the vesting
period of the options, generally three to four years, or the performance period
for various warrants we granted. As a result, amortization of deferred stock
compensation will adversely impact our operating results for the next four
years.
INCOME TAXES. There was no provision for federal or state income taxes for
any period since inception due to our operating losses. At December 31, 1998, we
had net operating loss carryforwards for federal income tax purposes of
approximately $4.1 million which will expire beginning in fiscal year 2012 if
not utilized. Utilization of our net operating loss carryforwards may be subject
to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code and similar state provisions. Such an
annual limitation could result in the expiration of the net operating loss
carryforwards before utilization. A valuation allowance has been established
and, accordingly, no benefit has been recognized for our net operating losses
and other deferred tax assets. The net valuation allowance increased by
approximately $1.6 million during the year ended December 31, 1998. We believe
that, based on a number of factors, the available objective evidence creates
sufficient uncertainty regarding the realizability of the deferred tax assets
such that a full valuation allowance has been recorded. These factors include
our history of net losses since inception and expected near-term future losses.
We will continue to assess the realizability of the deferred tax assets based on
actual and forecasted operating results. See note 4 of notes to financial
statements, beginning on page F-17.
RESULTS OF OPERATIONS
Because (1) we were a development stage company through June 30, 1999, (2)
first earned revenue in the quarter ended March 31, 1999 and (3) have a short
operating history, we believe that year-over-year comparisons are less
meaningful than an analysis of recent quarterly operating results. Accordingly,
we are providing a discussion and analysis of our results of operations that is
focused on the year ended December 31, 1998 and the quarters ended March 31,
1999 and June 30, 1999.
REVENUE. Total revenue for the quarters ending March 31 and June 30, 1999
were $5,000 and $142,000, respectively. We began earning revenue in the quarter
ending March 31, 1999. Revenue is
31
<PAGE>
primarily attributed to content sponsorship of our network. One sponsor, General
Electric, accounted for substantially all of our revenue in the quarter ended
June 30, 1999.
COST OF SERVICES. Cost of services were $135,000, $212,000 and
approximately $1.0 million for the year ending December 31, 1998 and for the
quarters ending March 31 and June 30, 1999, respectively. The increase in the
level of expense was due primarily to depreciation associated with increased
levels of school network equipment which were placed in service. We expect cost
of services to increase in absolute dollars in future periods due to increasing
depreciation on network equipment and to additional costs for space segment
associated with the deployment of the ZapMe! network in additional schools.
RESEARCH AND DEVELOPMENT. Research and development expenses were
approximately $1.1 million, $472,000 and $562,000 for the year ending December
31, 1998 and for the quarters ending March 31 and June 30, 1999, respectively.
Approximately $75,000 of the $90,000 increase in the quarter ending June 30,
1999 over the quarter ending March 31, 1999 is attributable to labor and
temporary help. We believe that continued investment in research and development
will contribute to attaining our strategic objectives and, as a result, expect
research and development expenses to increase in absolute dollars in future
periods.
SALES AND MARKETING. Sales and marketing expenses were approximately $1.2
million, $864,000 and approximately $1.6 million for the year ending December
31, 1998 and for the quarters ending March 31 and June 30, 1999, respectively.
The increase in the level of expense was due primarily to compensation
associated with the increased number of sales and marketing personnel and
related overhead, and increased travel costs associated with our direct selling
efforts. We expect selling and marketing expenses to increase in absolute
dollars in future periods as we hire additional personnel, promote our home
client, and develop incentive programs to increase in-school and at home usage
of the ZapMe! network.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
approximately $1.5 million, $885,000 and approximately $1.1 million for the year
ending December 31, 1998 and for the quarters ending March 31 and June 30, 1999,
respectively. The increase in the level of expenses is due primarily to
increased personnel and related overhead necessary to support our increased
scale of operations. We expect general and administrative expenses to increase
in absolute dollars in future periods as we expand our management and staff,
incur additional costs related to expansion of our operations and continue to
incur the additional costs associated with being a publicly-traded company.
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.
32
<PAGE>
Due to all of the foregoing factors, our quarterly revenue and operating
results are difficult to forecast, and we believe that period-to-period
comparisons of our operating results will not necessarily be meaningful and
should not be relied upon as an indication of future performance.
INCEPTION TO DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
Because we were a development stage company during 1997 and the year ended
December 31, 1998, we generated no revenue for these periods. Costs and
operating expenses increased to approximately $4.1 million in 1998 from $570,000
in the period from June 25, 1997 through December 31, 1997 ("inception period").
During our inception period, we incurred primarily general and administrative
and development expenses as our primary focus was on developing the ZapMe!
network. Research and development expenses in 1998 totaled approximately $1.1
million, an increase of $909,000 from $231,000 in fiscal 1997, of which $820,000
was attributable to increased product development, network engineering,
satellite engineering and content department labor costs. In the year ended
December 31, 1998, sales and marketing expenses totaled approximately $1.2
million, compared to $40,000 for fiscal 1997. Approximately $511,000 of this
increase was due primarily to increased labor and temporary help. Additionally,
in 1998 we began to build our infrastructure and added finance, legal, business
development, information technology, executive management and administrative
personnel and related costs, which amounted to approximately $1.5 million for
fiscal 1998 compared to $299,000 for fiscal 1997. Sales and marketing expenses
were not significant in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception through June 30, 1999, we used approximately $7.9 million of
cash for operating activities, resulting primarily from operating losses of
approximately $11.9 million. During this same period, we used approximately $3.7
million of cash for investing activities, consisting primarily of the purchase
of equipment.
We have financed our cash needs primarily through the private placement of
preferred stock and lease financings. Placements of preferred stock through June
30, 1999 provided net proceeds totaling approximately $30.2 million. At June 30,
1999, we had approximately $20.4 million in cash and cash equivalents and
short-term investments, including restricted cash of $560,000, which represents
an increase of approximately $19.6 million as compared to $815,000 at December
31, 1998. We currently have no significant capital commitments other than
obligations under capital equipment and facilities leases as well as commitments
under cancelable outstanding purchase orders.
Net cash used in operating activities was approximately $2.3 million and
$5.4 million in fiscal 1998 and for the six-month period ending June 30, 1999,
respectively. In each period, cash used by operating activities was primarily a
result of the net losses for such period.
Net cash used in investing activities was approximately $2.4 million and
$1.3 million in fiscal 1998 and for the six-month period ending June 30, 1999,
respectively. In each period, cash used by investing activities was primarily
for the acquisition of property and equipment.
Cash provided by financing activities was approximately $5.2 million and
$25.8 million in fiscal 1998 and for the six-month period ending June 30, 1999,
respectively. The primary source of cash provided by financing activities was
proceeds from the issuance of preferred stock and, to a lesser extent,
borrowings. In addition, in August 1999 we received net proceeds of
approximately $9.5 million from the issuance of preferred stock.
Capital leases incurred were approximately $390,000 and $6.8 million in
fiscal 1998 and for the six-month period ending June 30, 1999, respectively.
Lease financing was used primarily to acquire and install computer equipment in
schools.
33
<PAGE>
Our deferred revenue balance includes deferred revenue attributable to
billings in advance of earnings on content sponsorship activities. We record an
account receivable and deferred revenue upon billing for sponsorships. We
recognize revenue ratably over the period the sponsorship is acknowledged on the
network.
Our agreements with school districts do not require that we incur capital
expenditures. However, we anticipate incurring substantial capital expenditures
in connection with our expansion of our school network. Subject to the
availability of cash or other capital financing arrangements, we expect that
capital expenditures for 1999 for school network equipment will be approximately
$50.0 million. Such expenditures are expected to be made pursuant to cancelable
purchase orders when made. Although we have no other material commitments other
than our capital equipment and facilities leases and cancelable commitments to
purchase school network equipment in the ordinary course which aggregate
approximately $3.8 million, we anticipate that we will experience an increase in
our capital expenditures and lease commitments consistent with our anticipated
growth in operations, infrastructure and personnel. For more information on
these commitments, please see note 5 of notes to financial statements starting
on page F-17. 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 full operating cycle.
We may need to raise additional funds in order to support more rapid
expansion, develop new vertical markets, respond to competitive pressures,
acquire complementary businesses or technologies, or respond to unanticipated
developments. We may seek to raise additional funds through private or public
sales of securities, strategic financial and business relationships, bank debt,
lease financing, or otherwise. If additional funds are raised through the
issuance of equity securities, the percentage of ZapMe! owned by existing
stockholders will be reduced, stockholders may experience additional dilution,
and these equity securities may have rights, preferences, or privileges senior
to those of the holders of ZapMe!'s common stock. Additional financing may not
be available on acceptable terms, if at all. If adequate funds are not available
or are not available on acceptable terms, we may be unable to deploy or enhance
our network and Netspace, take advantage of future opportunities, or respond to
competitive pressures or unanticipated developments, which could severely harm
our business.
YEAR 2000 READINESS DISCLOSURE
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These systems
and software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, computer systems and
software used by many companies and governmental agencies may need to be
upgraded to comply with such Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
OUR STATE OF READINESS
We are engaged in an ongoing assessment of the Year 2000 readiness of all
our relevant operating, financial and administrative systems, including the
hardware and software that support our information technology ("IT") and non-IT
systems. Our assessment plan consists of:
- quality assurance testing of our internally developed proprietary
software;
34
<PAGE>
- contacting third-party vendors and licensors of material hardware,
software and services that are both directly and indirectly related to the
delivery of our network services to our users;
- contacting vendors of third-party systems;
- assessing repair and replacement requirements and implementing appropriate
procedures; and
- creating contingency plans in the event of Year 2000 failures.
We are currently reviewing our Year 2000 readiness and developing a plan for
verifying the proper operation of our internally developed software. We expect
to complete and execute our verification plan by October 1999. Although our Year
2000 readiness assessment will not be totally complete until October 1999, we
have by now received readiness assurances from nearly all of our vendors. Most
of the vendors have indicated that they are Year 2000 compliant. In the few
cases where a vendor has indicated that it is not Year 2000 compliant, we have
determined that any possible resulting problems are small and the costs of
remediation, if any, are small. In addition, the transition from year 1999 to
year 2000 was simulated for our material IT and non-IT systems to test our
system readiness. These simulations revealed no notable Year 2000 issues.
All of our third party hardware and software vendors for critical systems
have provided written statements to us or have posted them to their public web
sites, indicating that they are Year 2000 compliant. We read the assurances and
the documentation backing up those assurances that third parties have provided
regarding their Year 2000 compliance. We then evaluated the assurances and
documentation against our experience and knowledge to determine the credibility
of the third party's assurances that it is Year 2000 compliant. If we determined
that the third party assurances were not adequate, which has to date not
occurred, then we would make additional requests for assurances and
documentation and do our own testing of the third party's product. Our review of
the internal systems of third parties with whom we have material relationships
is ongoing.
COSTS TO ADDRESS YEAR 2000 ISSUES
We do not separately account for Year 2000 related expenses but estimate
that our expenses incurred to date to address Year 2000 issues have not been
material and, although we have not completed our assessment of our Year 2000
readiness, we do not expect to incur expenses in excess of $100,000 in
connection with any required future remediation efforts. Such costs, if higher
than anticipated, could adversely impact our operating results.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES
We are not currently aware of any Year 2000 compliance problems relating to
our network applications or our IT or non-IT systems that would have a material
adverse effect on our business, results of operations and financial condition,
notwithstanding efforts to detect and correct such problems. However:
- we may discover Year 2000 compliance problems in our network and other
software that will require substantial revisions or replacements;
- there can be no assurance that third-party hardware or software
incorporated into our material IT and material non-IT systems will not
need to be revised or replaced, which could be time consuming and
expensive; and
- the failure to adequately address Year 2000 compliance issues in our IT
and non-IT systems could result in claims of mismanagement,
misrepresentation or breach of contract and bring about litigation, which
could be costly to defend.
35
<PAGE>
Any such worst-case scenario, if not quickly remedied, could result in lost
revenues, increased expenses and business interruptions, which could have a
material adverse effect on our business, results of operations and financial
condition.
In addition, we cannot guarantee that Internet access companies,
governmental agencies, utility companies, third-party service providers and
others not within our control will be Year 2000 compliant. The failure of such
entities to be Year 2000 compliant could result in a failure beyond our control,
such as a prolonged Internet, telecommunications or electrical failure, which
could prevent us from operating our network.
CONTINGENCY PLAN
Because our needs for hardware and software continually change, we are
engaged in an ongoing Year 2000 compliance assessment. We have not identified
any significant non-compliance issues with our products that have not already
been corrected. However, the results obtained from our ongoing effort will be
considered in determining the need for and the extent of any contingency plan
which, if required, will be implemented by October 31, 1999. The cost of
developing and implementing such a plan could be material.
The information set forth above and elsewhere in this prospectus relating to
Year 2000 issues constitute "Year 2000 Readiness Disclosures," as such term is
defined by the Year 2000 Information and Readiness Disclosure Act of 1998,
enacted October 19, 1998 (Public Law 105-271, 112 Stat. 2386).
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
The risk associated with fluctuating interest expense is limited, however, to
the expense related to those debt instruments and credit facilities which are
tied to market rates. We do not use derivative financial instruments in our
investment portfolio. We ensure the safety and preservation of our invested
principal funds by limiting default risks, market risk and reinvestment risk. We
mitigate default risk by investing in safe and high-credit quality securities. A
hypothetical increase or decrease in market interest rates by 10% from the
market interest rates at June 30, 1999 would not cause the fair value of our
cash and cash equivalents or the interest expense paid with respect to our
outstanding debt instruments to change by a material amount. Declines in
interest rates over time will, however, reduce our interest income while
increases in interest rates over time will increase our interest expense.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB issued Statement No. 131 ("SFAS 131"), "Disclosure about Segments
of an Enterprise and Related Information," which establishes standards for the
way public business enterprises report information in annual statements and
interim financial reports regarding operating segments, products and services,
geographic areas, and major customers. This statement is effective for financial
statements for periods beginning after December 15, 1997. We adopted SFAS 131 in
the year ended December 31, 1998, and operate in one business segment which is
building a broadband interactive network that brings technology tools and
educational resources to schools at no cost.
36
<PAGE>
BUSINESS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE DISCUSSED IN
THIS PROSPECTUS. FACTORS THAT MAY CAUSE OR CONTRIBUTE TO SUCH A DIFFERENCE
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," AS WELL AS
THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
ZapMe! is 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
two-way satellite system. The ZapMe! network, which is designed primarily for
students aged 13-19, makes education more engaging and entertaining by providing
a rich media computer experience that is free and easy to use. We plan to extend
the ZapMe! network into the home in order to enhance a student's educational
experience and promote better communication among students, teachers and
parents.
Each school participating in the ZapMe! network typically receives 15
high-end, multimedia PCs with 17-inch monitors, a computer server that is
equipped to send and receive satellite transmissions, and a laser printer, as
well as broadband access to the ZapMe! Netspace and the Internet. The ZapMe!
Netspace is our proprietary, easy-to-use interface that provides access to over
10,000 Internet sites that we identify, review and index for easy reference and
other aggregated content, applications, and services, including Microsoft Word,
Excel and PowerPoint. In addition, we provide a range of educational and
communication tools, including ZapMail, our network email program, and
ZapPoints, a membership program that rewards students for using the ZapMe!
network. Because ZapMe!'s network employs a bi-directional satellite system, a
ZapMe! lab does not require extensive rewiring or phone access to connect to the
Internet.
We believe that by providing schools with free PCs and broadband
connectivity to the Internet, we will help to alleviate the significant
technology funding gap in schools, and provide greater educational and economic
opportunity to students of all demographic backgrounds by giving them access to
the digital tools and electronic information that are critical in today's
knowledge-based economy. Moreover, the ZapMe! network will provide a platform
for the school community to engage in many important activities, including
providing teachers and administrators with access to Internet-based educational
content, cost-effective school e-commerce solutions, and school fundraising
opportunities. In connection with many of these core activities, the ZapMe!
network has established strategic alliances with a wide range of companies,
including Dell, Gilat Satellite Networks and its subsidiary, Spacenet,
Microsoft, New Sub Services, School Specialty, Sylvan Learning Systems and Xerox
to further enhance the educational experience. In addition, we plan to enter
into additional new strategic alliances to enhance our technology, gain access
to compelling educational content, add new features and functionality, or
generate sponsorship and e-commerce revenues.
Funding for the development, installation and maintenance of the ZapMe!
network is provided by a combination of corporate sponsorships and e-commerce
relationships. We expect to derive additional revenue from partners and other
sources from after-school use of ZapMe! labs and participation in fundraising
activities. In particular, we will receive additional revenues from Sylvan,
which has committed to sharing a percentage of its profits resulting from joint
activities on the ZapMe! network. Participating sponsors have the opportunity to
underwrite public service messages, as well as corporate sponsorships
appropriate for ZapMe! network users, including students aged 13-19, teachers
and administrators.
As of July 31, 1999, there were more than 250 school districts, representing
over 6,000 K-12 schools, including more than 2,000 middle and high schools, that
have approved and signed a
37
<PAGE>
three-year contract with us that permits us to install a ZapMe! lab at that
school. These districts are located in over 40 states. As of July 31, 1999, we
had installed ZapMe! labs in over 220 schools, which had an average of more than
1,000 students, representing over 220,000 students, each of whom has access to a
free ZapMe! account upon request. These schools are located in over 33 states.
In the Fall of the 1999-2000 school year, ZapMe! will expand current programs
and incentives to encourage network usage.
MARKET OPPORTUNITY
NEED FOR TECHNOLOGY IN K-12 SCHOOLS
INCREASED IMPORTANCE OF TECHNOLOGY. Throughout the last decade, the U.S.
economy has undergone a fundamental shift, moving from a resource-based economy
to a knowledge-based economy. Despite the fact that over $650 billion is
currently spent each year on education and training in the U.S., we believe that
this spending falls short of what is necessary. We believe that education and
training are becoming more important, and that knowledge is increasingly making
the difference in how individuals and companies perform economically. In
addition, an understanding of the uses of technology is now essential to achieve
superior performance in a knowledge-based economy. In order to respond to these
demands, educators, parents and opinion leaders in the U.S. are increasingly
looking to technology, not only as a means of improving the essential academic
skills of students, but also as the basis for a set of tools students must have
to compete effectively. This has created an increased demand for technology in
schools.
TECHNOLOGY FUNDING GAP IN K-12 SCHOOLS. According to the National Center
for Education Statistics, during the 1998-1999 school year, there were over
110,000 K-12 schools in the U.S. These schools face inherent resource
constraints, including limited budgets and annual budget cycles which limit long
term investments. These constraints have, to date, prohibited adequate
investment in technology. According to a study by McKinsey & Co., the cost to
achieve the five-to-one ratio of students-to-computers mandated by the President
of the United States and the U.S. Department of Education in their national
technology plan is estimated to be $110 billion over 10 years, including initial
investments and ongoing costs of implementation. A RAND Corporation study for
the federal government estimates that to wire and equip 88,000 public schools
with computers will cost from $40 billion to $100 billion over the next five
years, assuming $180 to $450 is spent per student, over 44 million public school
students and per student expenditures by schools which have made effective use
of technology. Despite the significant expenditures necessary to improve
technology available in schools, Quality Education Data estimates that only $5.4
billion was spent on technology, defined as hardware, software and services, in
public K-12 schools during the 1998-99 school year. Furthermore, Quality
Education Data lists lack of technology funding as the number one barrier to
increased Internet usage in school. Based on these statistics, we believe
schools in the U.S. suffer a multi-billion dollar funding gap for technology.
NEED FOR EDUCATION NETWORK. Most schools lack the infrastructure to allow
students, teachers and parents to communicate electronically. According to the
National Center for Education Statistics, there are approximately 53.1 million
students in grades K-12 and 3.2 million teachers who teach grades K-12.
According to Quality Education Data, only 22.5% of schools have a network
capable of connecting the school to the home. We believe that a broadband
educational network focused on students aged 13-19 will facilitate the
integration of computers into the school's curriculum, improve academic
performance, and enhance the student-teacher-parent connection. Stand-alone PCs
are useful for preparing a document or doing individual research, but networked
PCs provide numerous advantages to students, teachers and parents, enabling
timely, effective communication, as well as helping students to collaborate on
group projects. Information and ideas can be shared with anyone connected to the
network.
38
<PAGE>
THE INTERNET
GROWTH OF THE INTERNET. The Internet has emerged as a significant global
communications medium, enabling millions of people to share information and
conduct business electronically and providing advertisers and businesses with an
attractive means of marketing and selling their products and services. The
growth in the number of web users is expected to continue as Internet access
becomes more widely available, bandwidth increases and Internet content improves
and incorporates more multimedia capabilities. International Data Corporation,
or IDC, has estimated that the number of web users worldwide will increase from
approximately 142.2 million at the end of 1998 to approximately 502.4 million by
the end of 2002, representing a compound annual growth rate of 37%. IDC
estimates that worldwide e-commerce revenue on the Internet will increase from
approximately $50.4 billion at the end of 1998 to more than $1.3 trillion in
2003, based on a projected 183 million buyers on the web and an average
transaction size of $7,216.
GROWTH OF ONLINE SPONSORSHIP. The Internet has become an attractive medium
for corporate sponsors, offering a level of flexibility, interactivity and
measurability not available in traditional media. The Internet enables corporate
sponsors to use demographics in delivering their messages to specific groups, as
well as to change their messages frequently in response to market factors,
current events and consumer feedback. Moreover, the Internet allows corporate
sponsors to specify an offering to each user in real-time and receive valuable
data on customer tastes, preferences and shopping and buying patterns. Jupiter
Communications, Inc. estimates that the amount of Internet advertising in the
U.S. will grow from approximately $2.1 billion in 1998 to $9.0 billion by 2002,
a compound annual growth rate of 45%.
INCREASING VALUE OF DEFINED DEMOGRAPHIC AUDIENCE. Early Internet
sponsorship efforts were directed primarily at a broad audience by placing
corporate messages on the most frequently visited web sites. As the Internet has
matured, businesses have sought to improve the effectiveness of their corporate
sponsorship by directing their messages toward the Internet users they most want
to reach. By offering corporate sponsorship efforts to the most relevant users,
Internet-based corporate sponsors seek to improve their brand awareness and
response rates and reduce costs by eliminating spending that is not directed at
their intended audience.
STUDENTS' IMPORTANCE TO THE INTERNET AND IN THE ECONOMY. Extrapolating from
United States Census Bureau data, we estimate that there are more than 25
million individuals aged 13-19. Individuals in this age group are becoming
increasingly involved in the Internet. According to Jupiter Communications, the
number of people aged 13-19 who regularly access the Internet will rise from 8.4
million in 1998 to 16.6 million by 2002. Their increased Internet activity
creates a significant opportunity for underwriting corporate sponsorships and
offering products and services online to students aged 13-19. Based upon data
from Teens Research Unlimited, we estimate that this audience spent in excess of
$100 billion in 1998, based on over 25 million teens spending, on average, $84
per week. According to Jupiter Communications, teens will spend $1.2 billion on
e-commerce alone by 2002.
THE ZAPME! SOLUTION
ZapMe! has designed a broadband interactive network, using "always on,"
bi-directional satellite technology, which brings the latest technology tools
and educational resources to schools. We believe that by providing free PCs and
broadband connectivity to the Internet, we will help to ease the technology
funding gap in schools, and provide students of all social and economic
backgrounds access to the technology and information that are critical in
today's knowledge-based economy. In addition, the ZapMe! network facilitates
greater parental involvement in schools by enabling electronic communication
among parents and teachers. Moreover, the ZapMe! network provides students,
teachers and administrators access to Internet-based educational content,
cost-effective school e-commerce solutions and school fundraising opportunities.
The ZapMe! network also provides
39
<PAGE>
corporate sponsors the opportunity to underwrite public service messages and
education content areas and services appropriate for ZapMe! network users. Key
elements of our approach are:
FREE BROADBAND INTERACTIVE NETWORK FOR SCHOOLS. We offer a turnkey
technology solution for schools by providing each participating school with
access to the ZapMe! network, including PCs and broadband connectivity to the
Internet, all at no cost to the school. A participating school typically
receives 15 high-end, multimedia PCs with 17-inch monitors, satellite
communications hardware, and a laser printer, as well as broadband access to the
Internet and the ZapMe! Netspace, our proprietary, easy-to-use interface that
provides access to over 10,000 pre-selected, indexed educational sites and other
aggregated content and services. We also offer schools a single point of contact
for free service, including network implementation, maintenance, training and
system upgrading.
HIGH-SPEED, "ALWAYS ON," BI-DIRECTIONAL SATELLITE DELIVERY. Our "always on"
network provides schools with a free broadband connection to the Internet using
a two-way satellite system. In addition to providing high-speed Internet access,
our design enables us to download and store full motion video, other rich media
files, system upgrades and other data directly, quickly and efficiently onto
local school servers, where they can be accessed immediately and without the
delays typically associated with downloading large media and application files.
The "multicasting" capabilities inherent in satellite technology enable us to
simultaneously deliver these types of files to many different locations. As a
result, our costs of delivery are extremely low even while the speed at which we
can transmit these files is extremely high (more than 10 times the rates of the
fastest current forms of Internet access such as DSL and T-1 and T-3 access).
Because these files are accessed locally, and not over the Internet, we also
avoid delays associated with delivering media files using streaming network
architectures. We therefore can provide our users with high-speed access to
Internet content and new multimedia applications (such as video and high-quality
audio) and e-commerce applications.
ALTERNATIVE SOURCES OF SCHOOL FUNDING. The ZapMe! network provides schools
with a wide range of alternative sources for funding the acquisition of
technology and related equipment and services. In addition to providing schools
with free computing equipment and broadband Internet access, we offer or plan to
offer schools the following funding opportunities:
- Programs which enable safe, effective deployment of school fundraising
activities, such as magazine drives. For example, we are currently
planning to launch a network-based, Internet-delivered program for
fundraising activities with New Sub Services, the world's largest provider
of magazine subscriptions.
- Our ZapPoints program, which provides opportunities for schools to upgrade
technology, including PCs and document processing equipment, through the
accumulation of ZapPoints. Schools have the opportunity to purchase
products and equipment based upon ZapPoints, which measure a school's
cumulative usage and participation in ZapMe! programs. Xerox intends to
participate in the ZapPoints program.
We believe there are a wide variety of technology providers and educational
organizations which are interested in participating in these programs.
OPPORTUNITY FOR ONLINE SPONSORSHIP. We believe that ZapMe! appeals to
potential sponsors because it combines the following attributes:
- access to students aged 13-19 who, prior to the ZapMe! network, have been
difficult to reach during school hours or who may not otherwise have had
access to the Internet;
- "always on," rich-media, full-screen, full-motion, interactive display
that can be used to create more entertaining and engaging messages;
- delivery of messages that meet the individual preferences of users;
40
<PAGE>
- ability to engage users, conduct online surveys, test product trials,
provide product feedback, and support product launches;
- access to a quarterly take-home CD-ROM that sponsors can use to explain
their programs or services; and
- the opportunity to underwrite public service messages and education
content areas and services that serve the local community.
ATTRACTIVE FEATURES DRIVE NETWORK USAGE. We have designed the ZapMe!
Netspace to have attractive features, content and functionality, in order to
maintain and increase usage of the ZapMe! network. Features incorporated on the
ZapMe! Netspace include ZapMail, ZapPoints affinity marketing programs,
discussion boards, and a full suite of Microsoft software, including Word, Excel
and PowerPoint.
ZapMe! believes that this combination will lead to above industry average
sponsorship rates and more effective and engaging sponsorship models.
OUR STRATEGY
Our goal is to create the premier broadband educational network for students
aged 13-19, as well as for teachers, administrators and parents. We plan to
continue installing our network in schools, building brand recognition among
students, teachers and parents, and promoting increased use of our network both
in school and at home. Key elements of our strategy are as follows:
ACTIVELY DEPLOY OUR NETWORK AND GROW OUR INSTALLED BASE OF SCHOOLS AND
NUMBER OF USERS. We intend to capitalize on our early market entrance to deploy
our network, grow our installed base of schools and increase our number of
users. As of July 31, 1999, we had installed ZapMe! labs in over 220 schools.
Installation on this scale requires significant time and resources; therefore,
we believe our progress to date provides us a time-to-market advantage over
potential competitors. We have gained experience as we have deployed our
network, which we believe will streamline our further expansion. In addition, as
of July 31, 1999, there are more than 250 school districts, representing over
6,000 K-12 schools, including more than 2,000 middle and high schools, that have
approved and signed a three-year contract with us. We intend to capitalize on
our early mover advantage to gain significant market share.
PROMOTE REPEAT USAGE AND LOYALTY OF USERS. We believe that
broadband-delivered rich media networks, such as the ZapMe! network, have an
inherent potential for creating loyal users, particularly when combined with
free service offerings such as those we provide. As users invest time and energy
in ZapMe!'s services, they may become less inclined to switch to alternative
services. In particular, we believe that our ZapPoints affinity marketing
program will promote user loyalty by providing students incentives to
participate, as well as incentives for schools to encourage their students to
participate. We intend to promote repeat usage and user loyalty by maintaining
and improving our range of no cost services, expanding the breadth and depth of
our product offerings and remaining responsive to user trends and suggestions.
INCREASE FUNDING FROM SPONSORS. We believe that the ZapMe! network will
provide sponsors with an attractive means of offering their products and
services to schools, students, teachers, administrators and parents. We intend
to develop innovative sponsorship relationships with leading brand marketers
which support broad marketing objectives, including brand promotion, awareness,
product introductions and online research. We expect many of these sponsorship
arrangements will involve longer-term contracts and higher dollar values than
typical banner deals. We also intend to offer traditional banner advertising
options for sponsors.
41
<PAGE>
BUILD STRONG BRAND RECOGNITION. We believe that establishing and leveraging
the ZapMe! brand is important to our success. We have already benefited from
positive news stories and from word-of-mouth marketing. We intend to increase
our brand equity through the rapid introduction of the ZapMe! network into
schools throughout the country. We believe that the attractive features, content
and functionality of the ZapMe! Netspace will strengthen our brand and attract
new students, teachers and parents to become users.
LEVERAGE INSTALLED BASE OF SCHOOLS AND NUMBER OF USERS TO DRIVE USE AT
HOME. As our installed base of schools and number of users grow, we intend to
stimulate demand for, and use of, ZapMe! at home. As part of its agreement with
participating schools, ZapMe! intends to send home to each student a quarterly
CD-ROM that includes a home version of the ZapMe! Netspace. In order to
stimulate home use of ZapMe!, we also intend to offer communication and
entertainment features unique to the home version of the ZapMe! Netspace, as
well as our ZapPoints program.
PURSUE STRATEGIC ALLIANCES. We plan to increase usage of the network and
grow our revenues through strategic alliances that offer opportunities to
improve our technology, gain access to compelling content, add new features and
functionality or generate sponsorship or e-commerce revenues. ZapMe! also
intends to form alliances with other companies to leverage their brands, while
incorporating content that is consistent with our educational mission. We may
also expand our revenue opportunities through alliances with technology
providers, providers of educational goods and services, online service and
content providers, commerce providers and advertisers.
LEVERAGE OUR NETWORK TO CREATE ADDITIONAL REVENUE STREAMS. Our ZapMe!
network will enable us to create additional revenue streams through appropriate
after-school use of the labs and e-commerce. For example, our agreement with
Sylvan provides for Sylvan to use the ZapMe! labs outside of school hours for
educational programs and services and we share in the revenue generated from
those programs and services. Other opportunities to leverage our network include
an alliance to establish computer summer camps utilizing ZapMe! labs and
corporations using the labs after hours for training purposes. In addition, we
believe that by building a large base of users, we will be able to enter into
revenue sharing or other agreements with appropriate e-commerce partners
interested in serving students, teachers and parents in both the school market
and the home market.
THE ZAPME! NETWORK
The ZapMe! network offers significant benefits not only to schools, but also
to students, teachers, administrators, parents and sponsors.
WHAT ZAPME! OFFERS TO SCHOOLS. We offer a free turnkey technology solution
for schools by providing each school with a complete broadband interactive
network with the following components. We will offer the following in the Fall
of the 1999-2000 school year:
- Hardware. An eligible school typically receives 15 high-end, multimedia
PCs with 17-inch monitors, satellite communications hardware, and a laser
printer, as well as access to broadband Internet connectivity through the
ZapMe! Netspace, our proprietary, easy-to-use interface that provides
access to over 10,000 Internet sites that we identify, review and index
for easy reference and other aggregated content and services;
- Broadband Connectivity. Our network incorporates broadband Internet
connectivity over a bi-directional satellite delivery system. This design
permits us to simultaneously multicast data, including full motion video
files, to schools. The speed afforded by broadband satellite-delivered
multicast data allows ZapMe! to provide our users fast access to
graphic-oriented Internet content and new bandwidth-intensive multimedia
applications;
42
<PAGE>
- Software. The ZapMe! school network incorporates two categories of
software: the ZapMe! Netspace and third-party software that is accessed
directly through the ZapMe! Netspace. The ZapMe! Netspace is a
proprietary, easy-to-use interface that uses standard Web browser commands
and runs on top of Internet Explorer 4.0 and Windows NT. Microsoft Office
applications such as Word, Excel and PowerPoint are also accessed directly
through the ZapMe! Netspace; and
- Services. An eligible school typically also receives installation,
customer service and technical support, as well as teacher training.
- Installation. To enable rapid and reliable deployment, we have
agreements with third-parties to provide complete network installation
services. These agreements provide for site inspection, installation
and testing of both the satellite dish, which is typically installed on
the roof of the school, and the balance of the computer lab, which is
typically installed in a library or dedicated computer room. We believe
that these relationships with third-parties enable us to provide
high-quality, nationwide service, and to reach and sustain a much
higher deployment scale than if we were to undertake all installation
services ourselves. We currently rely on Gilat and Spacenet, and
Inacom, for the majority of our installation needs.
- Customer Service and Technical Support. We have developed a
comprehensive approach for managing all customer service and technical
support issues, intended to ensure that every interaction a user has
with ZapMe! is a positive experience. Participating schools, therefore,
are not required to have a dedicated network administrator.
Specifically, we have established a four-level escalation process,
which is balanced between a national call center partner and internal
ZapMe! technical support representatives. Level 1 and 2 are handled
through our national call center partner, while more complex problems
are routed to our own technical personnel. We believe that we have
developed customer support metrics which are directly correlated to the
customer satisfaction experience. We intend to manage both our national
call center partner and ourselves to achieve high standards for
customer support.
- Teacher Training. We intend to provide enabling training designed for
both teachers and administrators, including systems administration,
Internet fundamentals, and applications. This training will be
delivered through a variety of media, including broadcast, computer-
based, online and face-to-face channels.
WHAT ZAPME! RECEIVES FROM K-12 SCHOOLS. According to the National Center
for Education Statistics, during the 1998-1999 school year, there were over
110,000 K-12 schools in the U.S. Our initial focus is on middle and high
schools. In order to have a ZapMe! lab installed at a school, a school board
must approve and sign a standard three-year contract with us. This contract
commits each school that receives a ZapMe! lab to use each PC an average of four
hours per school day. Each school must also provide related items such as power,
a dedicated phone line, lab space and insurance for the equipment. The standard
contract also stipulates that each participating school provides us and our
partners with access to the ZapMe! lab during non-school hours. As part of its
agreement with participating schools, ZapMe! intends to send home to each
student a quarterly CD-ROM that includes a home version of the ZapMe! Netspace.
WHAT ZAPME! OFFERS TO USERS. The ZapMe! network provides our users a rich
media computer experience that is easy to use and makes education more engaging
and entertaining. We believe that we have designed the ZapMe! Netspace with
attractive features, content and functionality, and that students and teachers
will use the ZapMe! network in school and at home. We expect the following
software features to be available by Fall of the 1999-2000 school year:
- ZapMail. All ZapMe! users can email students, friends, teachers, and
others with this standard feature. ZapMail is accessible through the
Internet, so students can also use ZapMail to take
43
<PAGE>
their schoolwork home with them. Students can create documents at school
and have access to them at home, on vacation or wherever they can connect
to the Internet.
- Message Boards. These message centers, which can be customized by class
or topic, allow students to collaborate with peers and teachers,
regardless of geographic location. Message boards are valuable tools for
asynchronous discussions and collaboration between students. Message
boards also enable teachers to build a stronger community, and are
vehicles for students to become more involved in extracurricular
activities.
- ZapSearch. This feature allows students to find what they want on the
ZapMe! network or the full Internet.
- Microsoft Office. Microsoft Office applications such as Word, Excel and
PowerPoint may be accessed directly through the ZapMe! Netspace.
- ZapPoints. ZapPoints is an incentive-based program much like a frequent
flyer program that rewards students for using the ZapMe! network. Students
that log in and use the ZapMe! network will earn ZapPoints that can be
redeemed for merchandise with our e-commerce partners. This "earn while
you learn" program of rewards can also be extended to academic and
athletic achievement, extracurricular activities, community fund raising
efforts, ZapMe! network administration, and for purchasing sponsor's
products and services. Schools receive matching ZapPoints for each of
their students, which are redeemable through ZapMe!'s e-commerce programs.
Dependent upon the underlying arrangement, we will record a charge to
revenue or to cost of services expense for ZapPoints awards based upon the
full dollar equivalent of points which have been awarded and which are
expected to be redeemed.
- My Bookmarks. Bookmarks are an option supplied with most browsers, but
the ZapMe! network allows the students' bookmarks to travel with them to
any computer on which the ZapMe! Netspace can be accessed. For example,
students may work at a different computer each time they enter the lab.
The bookmarks are delivered upon log in, and are stored on the ZapMe!
network, so no matter where the students log in, their favorite web sites
are easily accessible.
- My Tools. The ZapMe! network allows students to launch their favorite
software applications directly through the browser, not separately.
Students can toggle back and forth between a web site, a Word document and
their email. This allows for easier, quicker work and again provides them
the security of knowing that all of their stuff, including homework, is
just one click away.
WHAT ZAPME! OFFERS TO SPONSORS. We believe that ZapMe! offers an appealing
opportunity for sponsors because it provides the following:
- access to students aged 13-19 who, prior to the ZapMe! network, have been
difficult to reach during school hours or who may not otherwise have had
access to the Internet;
- our dynamic billboard is a fixed space on the PC screen that displays
sponsorship messages. The dynamic billboard is larger than typical banner
ads and is always on the left-hand side of the PC screen, regardless of
which applications are used or where a user navigates. The dynamic
billboard displays new sponsorship messages periodically, for example,
every 15 seconds. The ZapMe! network is designed to allow users to click
on the dynamic billboard and view the sponsor's message on a full-screen,
rich media interactive display, with full motion video and high quality
audio.
- ability to deliver messages that meet the individual preferences of users;
- ability to interact with users, conduct online surveys, product trials,
online recruiting, provide product feedback and support product launches;
44
<PAGE>
- access to a quarterly take-home CD-ROM that sponsors can use to explain
their programs or services; and
- opportunity to underwrite public service messages that serve the local
community.
STRATEGIC ALLIANCES
We plan to enter into strategic alliances in order to capitalize on our
infrastructure, improve our technology, gain access to compelling content, add
new features and functionality, and generate sponsorship and e-commerce
revenues. We may also expand our revenue opportunities through alliances with
technology providers, providers of educational goods and services, online
service and content providers, commerce providers and advertisers. ZapMe!'s
current strategic alliances include:
DELL COMPUTER CORPORATION. Dell has agreed to be a principal supplier of
hardware for our labs. ZapMe! is installing Dell equipment, including PCs,
monitors, and high-end servers in schools across the country. Dell has indicated
that it plans to participate in our e-commerce and ZapPoints programs. Dell has
also made an equity investment in ZapMe!.
GILAT SATELLITE NETWORKS. Gilat supplies our satellite uplink equipment and
two-way satellite receiver cards for each school installation. Gilat's
wholly-owned subsidiary, Spacenet, provides us with our satellite space segment.
Spacenet is also our primary contractor for the network installation process.
Gilat has also made an equity investment in ZapMe!.
MICROSOFT. Through an agreement with Microsoft, ZapMe! will provide
Microsoft's Word, Excel and PowerPoint programs to the in-school users of our
network. Microsoft's operating system products are the backbone of our network.
NEW SUB SERVICES. We are currently planning to launch a network-based,
Internet-delivered program for safe, effective deployment of school fundraising
activities with New Sub Services, the world's largest provider of magazine
subscriptions.
SCHOOL SPECIALTY. ZapMe! and School Specialty, the largest supplier of
non-textbook education products to educators in the U.S., have teamed up to
offer e-commerce opportunities to schools, teachers and administrators. School
Specialty intends to offer a range of school supplies over the ZapMe! Netspace
for convenient ordering through the network.
SYLVAN LEARNING SYSTEMS. We have entered into an agreement with Sylvan
which permits Sylvan to offer educational programs and services in ZapMe! labs
when not in use. In exchange, Sylvan pays us a percentage of the net profit it
generates from those programs and services. Sylvan has also made an equity
investment in ZapMe!.
TOSHIBA. Toshiba is a sponsor of the ZapMe! network and a supplier of
hardware for our labs.
XEROX. Xerox has agreed to be a sponsor of our network and a principal
supplier of state-of-the-art printers for our labs. Xerox participates in our
ZapPoints program.
SPONSORSHIP
We intend to fund the ZapMe! network through a combination of corporate
sponsorships and e-commerce relationships. Participating sponsors have the
opportunity to underwrite public service messages, as well as corporate
sponsorship appropriate for ZapMe! network users, including students aged 13-19,
teachers and administrators. The U.S. Army, for example, plans to use the ZapMe!
network to communicate recruiting opportunities to graduating high school
seniors. Other corporate sponsors scheduled for the Fall of the 1999-2000 school
year include: Dell, General Electric, Johnson &
45
<PAGE>
Johnson, Labtech, Mercury Records, New Sub Services, Proctor & Gamble, Sylvan,
Toshiba, the U.S. Navy and Xerox.
Our sponsorship arrangements often differ from traditional banner
advertising in that they are designed to achieve broad marketing objectives such
as brand promotion. We believe the dynamic nature of our network will allow us
to design sponsorships programs that cater to the specific goals of sponsors.
These goals include delivery of a rich, interactive media experience (including
full motion video with audio), impression frequency, ability to conduct online
market research, supporting new product launches, product feedback information,
online recruiting, new account openings, and fulfilling e-commerce transactions.
In addition, we intend to develop educationally-appropriate content to support
the marketing and e-commerce initiatives of sponsors. We believe that we will,
in a limited number of cases, enter into exclusive sponsorship arrangements in
key sponsor categories that may extend for a period of time. As a result of our
sponsorship strategy, we believe that ZapMe! will be able to command effective
sponsorship rates significantly above the industry average.
SALES AND MARKETING
As of July 31, 1999, ZapMe! had a direct sales organization consisting of
six sales professionals with an average of 11 years of experience, all of whom
were hired since February 28, 1999. We intend to hire additional qualified sales
professionals in the future. Our sales organization consults regularly with
sponsors on design and placement of advertising, provides customers with
advertising management analysis and focuses on providing a high level of
customer satisfaction. We generally seek to hire individuals who possess
significant experience in obtaining sponsorships and preexisting relationships
with potential sponsors in a variety of media. In addition to our sponsorship
sales organization, we have six internal and four dedicated external sales
professionals (including four at a telemarketing firm) focused on marketing to
school districts who are candidates for joining the ZapMe! network.
We employ a variety of methods to promote the ZapMe! brand and to increase
network usage by users, including the ZapPoints user rewards program, in-school
promotions such as technology incentive programs co-branded with partners, and
home CD-ROM co-marketing campaigns integrating student recreational interests
such as video games, music videos, movie trailers and fashion. In the Fall of
the 1999-2000 school year, ZapMe! will expand current programs and incentives to
encourage network usage. In addition, ZapMe! engages in an ongoing public
relations campaign which includes speaking engagements, conference participation
and press tour activities. Our marketing department, which consists of seven
professionals, works in conjunction with our creative services department.
INSTALLED SCHOOL BASE AND USERS
ZapMe! believes a large and active user base is critical to its success.
ZapMe! has launched an aggressive user-acquisition campaign, which includes
rapidly growing our installed base of schools and creating free services and
support for our users. Registration is available to all students, teachers and
administrators in participating schools at no cost to the students or school.
Recognizing the importance of student privacy, ZapMe! has designed its
registration process and created a policy to ensure the privacy of its users.
Under our privacy policy, we collect only non-personally identifying
information--including age, gender and location by zip code--from our student
users. We use collected information internally in order to make appropriate
materials available to our student users. Schools are solely responsible for
maintaining any personally identifying information about their student users. We
may in the future collect names and other personal information from users over
13 in conjunction with contests and other promotions, but will not distribute
this information externally. We provide only aggregated versions of
non-personally identifying information--such as what percentage of our users are
a particular age--to third parties.
46
<PAGE>
ZapMe! also promotes the protection of students in their use of the network.
Students sign on and are known to ZapMe! only by the anonymous user names that
they choose. In addition, they pick a password to protect their accounts from
use by others. We also provide schools the ability, at their discretion, to
provide more or less access to the Internet. Schools can choose to allow access
only to our selected 10,000 educational sites, or to sites one or two clicks
from these sites. We plan to offer filtering software as well to help schools
gain even more flexibility and control over the Internet. Finally, ZapMe!
encourages schools to comply with all applicable requirements, including, for
example, the collection of acceptable use policies signed by the students and
their parents.
INFRASTRUCTURE AND TECHNOLOGY
The ZapMe! network incorporates "always on" broadband Internet connectivity
over a bi-directional satellite delivery system, application servers located in
our network operations center, and a desktop interface and related applications.
Our satellite delivery system permits us to simultaneously multicast data,
including full motion video files, from our network operations center to each
school server in the ZapMe! network. We believe that this is an efficient way of
distributing files over a remote network in a school environment.
[DESCRIPTION OF DIAGRAM
Diagram of the ZapMe! network with a satellite, PC computer labs and network
operations center served by video encoder, data push server and audio
encoder/server.]
Our infrastructure is scalable, allowing us to quickly adjust to our rapidly
expanding user base. Currently, we license commercially available technology
whenever possible in lieu of dedicating our financial and human resources to
developing technology solutions. In particular, we purchase PCs, monitors and
servers primarily from Dell and Toshiba and printers primarily through Xerox. We
lease satellite equipment and transmission services from Gilat and Spacenet, its
wholly-owned subsidiary, under an agreement that runs until 2005. We license the
operating system for our web browser, as well as Word, Excel and PowerPoint,
from Microsoft under an agreement with no expiration date. We license the
technology that allows us to multicast content over our network via satellite
from Starburst under a perpetual license agreement. Finally, in order to serve
sponsor messages, we have purchased a
47
<PAGE>
perpetual license for AdServer technology from NetGravity. We are in the process
of implementing fail safe or redundant systems to promote high system
availability and ease of maintenance.
ZapMe! users access the Internet and ZapMe!-provided desktop applications
(which typically has been previously multi-casted to the school server) using
the ZapMe! Netspace. Users have access to the Internet, third-party applications
such as Microsoft Office, and ZapMe! features, including email, search and
bulletin boards. The ZapMe! Netspace also presents rich media sponsor messages
which are generated at the local school server, within the dynamic billboard
portion of the Netspace.
Our public web site, user registration database, email server, and system
backup functions are hosted at Frontier Global Center in California using a set
of NT and Unix software systems. Frontier Global Center is manned 24 hours per
day, seven days per week by systems administrators and network managers to
ensure the highest level of support. Critical data from the servers are
regularly archived off site by a third party service.
COMPETITION
The market for the ZapMe! network is new and rapidly evolving, and we expect
competition in and around our market to intensify in the future. We are not
aware of any competitor that currently offers or is planning to offer a
broadband interactive network for schools at minimal or no cost. However, we
face competition from a number of companies which provide services and
functionality similar to portions of the ZapMe! network, market products and
services to a similar base of users, or both. For example:
- America Online provides both Internet access as well as their own content.
They also market to a user base similar to ours with their Kids Only
section that derives most of its revenue from advertising. America Online
has a large amount of high quality content, and a popular user interface.
In addition, America Online can leverage its log-in based network to
address the demographics of its user base.
- Channel One owns and operates an advertising-supported educational
television service for secondary school students in the U.S. It airs 12
minutes of news and current events each school day via satellite,
generating revenues from 2 minutes of advertising included in the program.
We may compete with Channel One for sponsors seeking to reach the same
audience.
- Hughes Electronics currently offers satellite-based broadband Internet
access to consumers, but does not provide their own content, nor do they
market to a user base similar to ours. However, they have recently entered
into a strategic alliance with America Online to promote America Online's
broadband services and content.
- Disney offers a wide variety of Internet content that markets to a user
base similar to ours. They own or have access to high quality content, and
have experience in marketing to a user base similar to ours.
We believe that our greatest potential competitive threat is posed not by a
single company, but a combination of one or more companies which each addresses
different parts of our business model. Many of our competitors have
significantly greater financial, technical, marketing and distribution resources
than we do. Competition could reduce our revenues and otherwise harm our
business. We therefore believe that we must rapidly deploy our network in order
to achieve a leadership position relative to potential competitors or imitators.
In addition, we believe that our success in competing with other potential
competitors or imitators will depend on various factors, many of which are
outside of our control. These factors include:
- The quality of our network content;
- The ease of use of our user interface;
48
<PAGE>
- The timing and market acceptance of new and enhanced services and
features; and
- The sales and marketing efforts by us and our competitors.
We believe that with respect to each of these factors, it competes favorably
to other companies addressing the educational market.
INTELLECTUAL PROPERTY
We seek to protect our intellectual property through a combination of U.S.
and international law regarding copyright, patents, trademarks and trade secrets
as well as confidentiality agreements with employees, consultants, contractors
and business partners. However, we cannot guarantee that we will succeed in
obtaining, registering, policing or defeating challenges to our intellectual
property rights, or that we will avoid claims that we are infringing the rights
of others. In addition, the laws of many 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.
We currently have five patent applications on file with the United States
Patent and Trademark Office and are in the process of preparing four additional
patent applications and two continuations of our existing applications. In
addition, we have applied to register ZapMe! and other trademarks in the United
States and in a number of foreign countries. We have given copyright notice on
our Netspace and many other copyrightable materials by affixing a standard
copyright notice in the appropriate places. ZapMe! controls access to our trade
secrets and proprietary information by entering into confidentiality agreements
with its employees, consultants, contractors and actual and potential business
partners. We currently own the Internet domain name "zapme.com," from which we
run our corporate web site.
GOVERNMENT REGULATION
We expect to generate a significant portion of our revenue from advertising
and e-commerce directed primarily at teens using ZapMe! labs in schools. This
business model may prove controversial and lead to action by the government or
private interests to restrict or stop our network. To date, some third parties
that oppose corporate advertising in schools, including sponsorships on the
ZapMe! network, have sought legislation to curb this practice. In particular,
legislation has been introduced in California that, if it becomes law as
expected, would impose additional procedural requirements before ZapMe! or other
entities may sign contracts with local school boards. Similar or more
restrictive legislation is possible in other states and at the local and federal
levels. Anti-school-advertising groups have had some successes in the past
seeking regulation and boycotts of other companies that advertise in schools,
such as Channel One. Restrictions on our advertising or e-commerce would
seriously harm our business. Moreover, any new law or regulation pertaining to
online media or advertising in schools, or the application or interpretation of
existing laws, could decrease the demand for our service, increase our cost of
doing business or otherwise have a negative effect on our business.
The Internet is also the subject of an increasing number of laws and
regulations. These laws and regulations may relate to liability for information
retrieved from or transmitted over the Internet, online content regulation, user
privacy, taxation and the quality of products and services. In particular,
Congress has recently passed (and the President has signed into law):
- Child Online Protection Act of 1998. The Act makes it unlawful for anyone
to knowingly distribute material for commercial purposes over the Internet
to minors that is harmful to minors. It imposes additional restrictions
and obligations and establishes the Commission on Online Protection to
study and report to Congress on methods to help reduce access to harmful
information by minors.
49
<PAGE>
- Children's Online Privacy Protection Act of 1998. The Act makes it
unlawful for an operator of a web site or online service directed to
children under 13 to collect, use or distribute personal information from
a child under 13 in a manner which violates regulations to be proscribed
by the FTC. The FTC is in the process of issuing final regulations, which
concern the scope of the Act's parental consent requirements.
- Protection of Children from Sexual Predators Act of 1998. This Act
mandates that electronic communication service providers report facts or
circumstances from which a violation of child pornography laws is
apparent.
- Digital Millennium Copyright Act of 1998. This Act establishes limited
liability for online copyright infringement by online service providers
for listing or linking to third-party web sites that include
copyright-infringing materials.
The courts have not yet interpreted these laws so their applicability and
reach, therefore, are not defined. One federal court has, however, upheld a
challenge to the constitutional validity of the Child Online Protection Act and
ordered a preliminary injunction against enforcement or prosecution under the
Act as of February 1, 1999. Nonetheless, these laws may impose significant
additional costs on our business, require us to change our operating methods, or
subject ZapMe! to additional liabilities. Moreover, the applicability to the
Internet of existing laws governing issues such as intellectual property
ownership, copyright, defamation, obscenity and personal privacy is uncertain
and developing. ZapMe! may be subject to claims that our services violate such
laws. Any new legislation or regulation in the United States or abroad or the
application of existing laws and regulations to the Internet could damage our
business and cause the price of our common stock to decline.
The satellite industry is a highly regulated industry. In the United States,
operation and use of satellites requires licenses from the FCC. As a lessee of
satellite space, we could in the future be indirectly subject to new laws,
policies or regulations or changes in the interpretation or application of
existing laws, policies or regulations, any of which may modify the present
regulatory environment in the United States. While we believe that our satellite
access providers will be able to obtain all U.S. licenses and authorizations
necessary to operate effectively, they may not continue to be successful in
doing so. Our failure to indirectly obtain some or all necessary licenses or
approvals could seriously harm our business.
LEGAL PROCEEDINGS
On July 7, 1999, we filed a demand for arbitration with our former President
and Director, Frank J. Vigil, related to his employment at and departure from
ZapMe!. We assert that ZapMe! was induced by Mr. Vigil's fraudulent
representations to enter into an employment agreement with him. We seek the
rescission of the employment agreement, as well as the return of all benefits
received by Mr. Vigil under the agreement, and costs and fees associated with
the arbitration.
On July 26, 1999, Mr. Vigil filed a response to our demand and a
counterclaim. Mr. Vigil denied the allegations contained in our demand. Mr.
Vigil's counterclaim alleges breach of contract, breach of implied covenant of
good faith and fair dealing, fraud in the inducement of contract, intentional
misrepresentation, defamation, and violations of the California Labor Code, all
related to the circumstances of his employment at and departure from ZapMe!. Mr.
Vigil seeks various damages which are set forth in "Risk Factors--We are
currently in arbitration with one of our former officers," beginning on page 16.
Each party to the arbitration has asserted various defenses to the claims
and counterclaims. We cannot assure you that we will prevail in this
arbitration, and any decision against us could result in an obligation to pay
some or all of the damages Mr. Vigil has sought in his counterclaim. These
damages could be substantial. Notably, under the terms of his employment
agreement and related agreements,
50
<PAGE>
Mr. Vigil was permitted to purchase 1.35 million shares of common stock of
ZapMe!. Some of those shares were subject to a right of repurchase by ZapMe! at
the time of Mr. Vigil's separation from ZapMe!. Mr. Vigil may claim that, under
the terms of his employment agreement, the closing of this offering could result
in the cancellation of the right of repurchase and the full vesting of his
stock. A decision against us with regard to the validity of the employment
contract and related agreements could therefore result in the complete vesting
of Mr. Vigil's stock.
EMPLOYEES
As of June 30, 1999, we had 88 employees. None of our employees is
represented by a labor union or is the subject of a collective bargaining
agreement. We have never experienced a work stoppage and believe that employee
relations are good.
ZapMe! believes that its future success will depend in part on its continued
ability to attract, hire and retain qualified personnel. Competition for such
personnel is intense, and we cannot guarantee that we will be able to identify,
attract and retain such personnel in the future.
FACILITIES
Our primary offices are located in approximately 12,000 square feet of
office space in San Ramon, California, under a lease expiring in August 2002. We
believe that our current facilities will not be adequate to sustain the
anticipated increase in headcount during the 1999 fiscal year, and we are
currently negotiating for additional office space in San Ramon.
51
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The executive officers, key employees and directors of the Company, and
their ages as of June 30, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --------- --------------------------------------------------------------
<S> <C> <C>
Lance Mortensen........................... 46 Chairman of the Board and Chief Executive Officer
Robert A. Stoffregen...................... 50 Chief Financial Officer
Don Kingsborough.......................... 52 Senior Vice President, Sales and Marketing
Bruce Bower............................... 37 General Counsel, Vice President of Business Development and
Secretary
Dave Lundberg............................. 40 Chief Technical Officer
Robert Rudy............................... 44 Vice President of Operations
Royce Johnson............................. 50 Vice President of Vertical Markets
Darryl Deaton............................. 51 Vice President and Director
Michael Arnouse(1)(2)..................... 43 Director
Douglas Becker(1)(2)...................... 33 Director
Yoel Gat(1)............................... 47 Director
Tom Hitchner(2)........................... 47 Director
Jack Kemp................................. 64 Director
</TABLE>
- ------------------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
MR. MORTENSEN is a founder of ZapMe! Corporation and has been our Chairman
and Chief Executive Officer since our inception. Mr. Mortensen began the
planning and preliminary organization of ZapMe! in 1996, and incorporated us in
June 1997. Prior to founding ZapMe!, Mr. Mortensen was Chief Executive Officer
of Monterey Pasta Company, a food service company, from January 1993 to October
1995. From 1981 to 1992 he was President of Morweg Construction Company, a
California residential construction company.
MR. STOFFREGEN has been our Chief Financial Officer since January 1999.
Prior to joining us as an employee, Mr. Stoffregen was a consultant to the
company. From January 1998 to October 1998, he served as Vice President and
Chief Financial Officer of Radical Entertainment, a video game development
company. Prior to that, from June 1996 to January 1998, he was Executive Vice
President, Chief Financial Officer and Director of Corporate Development for the
California Culinary Academy, a culinary arts school. From May 1995 to May 1996,
he was providing financial consulting services. Mr. Stoffregen was Executive
Vice President and Chief Financial Officer of YES! Entertainment Corporation, a
children's product and entertainment company, from September 1994 to March 1995.
From August 1991 to September 1994, he was Senior Vice President and Chief
Financial Officer of The Sharper Image, a retailer of upscale gifts. Mr.
Stoffregen was a partner with Deloitte & Touche from 1985 through August 1991.
MR. KINGSBOROUGH joined us in April 1999 as Senior Vice President, Sales and
Marketing. From July 1998 to April 1999, Mr. Kingsborough provided consulting
services. Mr. Kingsborough served as the Chief Executive Officer of YES!
Entertainment Corporation, a children's product and entertainment company, from
December 1992 to July 1998. YES! Entertainment Corporation filed a petition
pursuant to Chapter 11 of the Bankruptcy Code in February 1999. Mr. Kingsborough
serves on the Board of Directors of Game Trader, Inc., a wholesaler of new and
used video games and a publicly traded company.
52
<PAGE>
MR. BOWER has been our General Counsel, Vice President of Business
Development and Secretary since November 1998. Prior to joining us, Mr. Bower
was a founder and principal of i-80 Ventures, an investment and consulting firm,
from November 1997 to November 1998. Mr. Bower was the principal of Bower
Consulting Group from April 1997 to November 1998. From March 1995 to March
1997, he served as Executive Vice President, Business Development and General
Counsel of YES! Entertainment Corporation, a children's product and
entertainment company. From November 1989 to March 1995, Mr. Bower was an
associate with Wilson Sonsini Goodrich & Rosati, a law firm.
MR. LUNDBERG, our Chief Technical Officer, joined us in January 1999. Before
that, he was with Computer Curriculum Corporation, an educational software
development company, from June 1995 to January 1999, initially as Vice President
of Engineering, and then as Vice President of Internet Technology. From December
1992 to June 1995, Mr. Lundberg was Vice President of Engineering for Kalieda
Labs, a software development company.
MR. RUDY has been Vice President of Operations since March 1999. From March
1998 to March 1999, he was Vice President of Corporate Quality and Development
at Credence Systems Corporation, a semiconductor supplier. Mr. Rudy was Director
of Account Management and Technology Transfer at SEMATECH, a nonprofit research
and development consortium of U.S. semiconductor manufacturers, from November
1994 to March 1998.
MR. JOHNSON, our Vice President of Vertical Markets, has been with us since
September 1998. From April 1996 to September 1998, Mr. Johnson was Vice
President, Marketing and a Director of Millennia Software, a software company.
He was the owner and principal of Pioneer Business Consulting, a business and
financial consulting firm from October 1994 to April 1996. Mr. Johnson worked
from June 1976 to October 1994 for Intel Corporation, serving in a number of
positions, including Controller and Assistant General Manager, Microprocessor
Division.
MR. DEATON is a Vice President and has been one of our directors since
November 1997. One of our co-founders, he has been with us since our inception
in June 1997, and has headed various departments, including Content Development,
School Sales and Marketing and School Network Installation. From July 1994 until
June 1997, Mr. Deaton was the owner and principal of Darryl Deaton Real
Estate/Consulting.
MR. ARNOUSE has been one of our directors since October 1998. Mr. Arnouse
has spent the past 10 years as a business consultant and financier for private
and publicly traded companies. During that period, he had financed more than
fifty transactions totaling in excess of five hundred million dollars. Mr.
Arnouse co-founded Sky Trek International Airlines and served as Chairman of the
Board of Directors from January 1996 until June 1998 and continues to serve on
its board. Mr. Arnouse is currently employed as Chairman and President of
Wharton Capital Partners Ltd., a New York based investment banking and financial
consulting firm. Mr. Arnouse also serves as president of State Capital Market
Group Ltd., a privately owned investment and business consulting company.
MR. BECKER has been one of our directors since April 1999. Mr. Becker has
been President and Co-Chief Executive Officer of Sylvan Learning Systems, Inc.,
one of our shareholders, since April 1993. From February 1991 until April 1993,
Mr. Becker was the Chief Executive Officer of the Sylvan Learning Center
Division of Sylvan. He has been a Director of Sylvan since December 1986. Mr.
Becker also serves as a director of Caliber Learning Network, Inc. and
Constellation Energy Group. Mr. Becker was elected to our board pursuant to the
terms of the Series D Preferred Stock Purchase Agreement.
MR. GAT has been one of our directors since June 1999. Mr. Gat is a
co-founder of Gilat Satellite Networks Ltd., a leading supplier of VSAT
satellite earth stations, and one of our shareholders, and has served as Chief
Executive Officer and a director of Gilat since 1987. Mr. Gat is a member of the
Stock Option and Compensation Committees of Gilat Satellite Networks, and has
also been Chairman
53
<PAGE>
of the Board since July 1995. Mr. Gat also serves as Chairman of the Board of
Directors of KSAT, a joint venture with Keppel Communications, which provides
satellite-based telecommunication services in China, as well as serving as a
Director of Gilat Communications Ltd., a provider of satellite-based
communications services. Mr. Gat is also the Chairman of the MOST consortium, an
initiative for research relating to next-generation real-time, multimedia
content delivery tools for the Internet, and a director of ILAN-GAT Engineering
Ltd., a construction engineering company.
MR. HITCHNER has been one of our directors since May 1999. Mr. Hitchner is a
General Partner of QuestMark Partners, L.P., where he has been since January
1999. From 1988 to November 1998, he was with BT Alex. Brown, serving in a
number of positions, including Managing Director and a founder and senior member
of the Private Equity Group. Mr. Hitchner served as the senior private equity
professional on 49 transactions while he was with the Private Equity Group of BT
Alex. Brown, in which $973 million was invested. Mr. Hitchner was elected to the
board pursuant to a voting agreement between QuestMark Partners, L.P., Lance
Mortensen, and ZapMe!, entered into in connection with the Series D preferred
stock financing.
MR. KEMP has been one of our directors since July 1999. Mr. Kemp has been
Co-Director of Empower America, a political policy organization, since 1993. Mr.
Kemp served as the Secretary of Housing and Urban Development from February 1989
until January 1992 and, before that, for 18 years as a member of the United
States House of Representatives. Mr. Kemp is also a director of Oracle
Corporation, American Bankers Insurance Group, Inc., Carson Products, Inc., a
manufacturer and marketer of personal care products, Everen Securities, Inc., a
securities firm, Proxicom, Inc., an internet services provider, Speedway
Motorsports, Inc., a promotor and sponsor of motorsports and The Sports
Authority, Inc., a sporting goods retailer. Mr. Kemp also sits on the
compensation committee of Everen Securities, Inc., and on the advisory board of
Thomas Weisel Partners, LLC, one of the underwriters of this offering.
BOARD COMMITTEES
The board of directors recently reconstituted the compensation and audit
committees. The compensation committee evaluates and approves the compensation
policies for the executive officers and administers our employee benefit plans.
The members of the compensation committee are Michael Arnouse, Douglas Becker
and Yoel Gat. The audit committee reviews the accounting practices and
procedures, the results and scope of the audit and recommends the appointment of
the independent auditors. The members of the audit committee are Michael
Arnouse, Douglas Becker and Tom Hitchner.
DIRECTOR COMPENSATION
We reimburse each member of our board of directors for out-of-pocket
expenses incurred in connection with attending board meetings. No member of our
board of directors currently receives any additional cash compensation.
In June 1999, Mr. Arnouse, Mr. Hitchner, Mr. Becker and Mr. Gat, as outside
directors of ZapMe!, were each granted options to purchase 20,000 shares of
stock at an exercise price of $4.00. These options were immediately
exerciseable. In August 1999, Mr. Kemp, as an outside director of ZapMe!, was
granted an option to purchase 20,000 shares of stock at an exercise price of
$5.00 per share. This option was immediately exerciseable.
Our 1998 Plan provides that options will be granted to non-employee
directors pursuant to an automatic nondiscretionary grant formula. Each
non-employee director will be granted an option to purchase 7,500 shares of
common stock on the date of each annual meeting of the shareholders of ZapMe!.
Each option will be granted at the fair market value of the common stock on the
date of grant. Options granted to non-employee directors under the Director Plan
will be fully vested and
54
<PAGE>
exercisable on the date of grant. The options to be granted under the 1998 Plan
will be nonqualified stock options. Nonqualified stock options are stock options
which do not constitute "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code. Currently, all directors other than Mr.
Mortensen and Mr. Deaton are eligible to participate in the 1998 Plan as
non-employee directors. Mr. Mortensen and Mr. Deaton are eligible to participate
in the 1998 Plan as employees. See "Incentive Stock Plans--1998 Stock Plan,"
beginning on page 58, for more information about director compensation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to June 1999, the compensation committee was composed of Messrs.
Arnouse and Mortensen, our Chairman of the Board and Chief Executive Officer.
The committee is currently composed of Messrs. Arnouse, Becker and Gat. No
interlocking relationship exists between the board of directors or compensation
committee and the board of directors or compensation committee of any other
company, nor has any interlocking relationship existed in the past.
Messrs. Arnouse and Mortensen, the members of the compensation committee
during the previous fiscal year, were involved in the following transactions
with ZapMe!:
On June 25, 1997, we issued and sold 10,000,000 shares of common stock to
Lance Mortensen, our Chief Executive Officer and Chairman of the Board, for an
aggregate purchase price of $50,000.
In August 1998, Mr. Mortensen exercised options to purchase 600,000 shares
of our common stock at an aggregate purchase price of approximately $10,000.
On August 1, 1997, October 17, 1997, December 22, 1997, January 22, 1998,
March 23, 1998, and June 9, 1998, we issued convertible promissory notes for an
aggregate amount of $900,000. All of the notes contained the same rights and
privileges. On August 5, 1998, the principal of the notes and interest which had
accrued converted into 9,097,671 shares of our Series A preferred stock. Michael
Arnouse, one of our directors, and his affiliates were holders of $800,000 of
these promissory notes, which, at a rate of 6.50% per annum, had accrued
approximately $23,000 in interest. This principal and accrued interest was
converted into 7,986,560 shares of Series A preferred stock. All of the Series A
preferred stock will convert into 9,097,671 shares of common stock upon the
consummation of this offering.
On May 7, 1998, we issued a convertible promissory note to Wharton Capital
Partners, L.P., an entity with which Mr. Arnouse, one of our directors, is
affiliated. The note's original amount of principal was $400,000, and the note
carried an 8.5% interest rate. In August 1998, the promissory note was converted
into 160,000 shares of Series B preferred stock and we paid approximately $8,000
in accrued interest. In February 1999, the shares were transferred to another
private investor.
In October 1997 and September 1998, Mr. Mortensen was granted options to
purchase 600,000 and 300,000 shares, respectively, at an exercise price of
$0.0165 per share and $1.10 per share, respectively, of our common stock. The
options vest at a rate of one-twelfth each month and one-third per year,
respectively; however, on June 2, 1998, the vesting of Mr. Mortensen's option to
purchase 600,000 shares was accelerated, and these shares are now fully vested.
On August 2, 1999, a majority of ZapMe!'s directors, excluding Lance
Mortensen, approved the issuance of an immediately exercisable non-statutory
option to purchase 300,000 shares of our common stock to Mr. Mortensen at an
exercise price of $5.00 per share. The shares are subject to a right of
repurchase in favor of ZapMe!, which will expire at a rate of one third on each
anniversary of the date of grant. ZapMe! has agreed to loan Mr. Mortensen, at
his request, the amount necessary to pay for the aggregate exercise price of the
option, which loan will be secured by the shares purchased on exercise of the
option.
55
<PAGE>
Between June 1997 and October 1997, we issued promissory notes to Mr.
Mortensen aggregating approximately $156,000 bearing an interest rate of 12.0%
per annum. In September 1998, the principal and approximately $11,000 in accrued
interest was paid.
We have paid Aquatic Innovations, Inc. approximately $10,000 and $130,000
for office equipment rental and other expenses incurred on behalf of ZapMe! in
1997 and 1998, respectively. Mr. Mortensen is the owner of Aquatic Innovations,
Inc.
In September 1998, we paid Wharton Capital Partners, L.P. $180,000 in
consulting fees in connection with the issuance of ZapMe!'s Series C preferred
stock. Mr. Arnouse is an affiliate of Wharton.
In January 1999, we issued a promissory note in the amount of $500,000 to
Mr. Arnouse bearing an interest rate of 12.0% per annum. The note and
approximately $12,000 of interest was paid in April 1999.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation we paid for services rendered to us during 1998 by our chief
executive officer and our two most highly compensated executive officers who
were serving as executive officers at the end of 1998 and whose salaries were
more than $100,000 in 1998 and one individual who was not serving as an
executive officer at the end of 1998, but who was otherwise qualified to be
named in this table (the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS (#)
- --------------------------------------------------------------------------- ---------- ----------- -------------
<S> <C> <C> <C>
Lance Mortensen, Chairman and Chief Executive Officer...................... 273,052 -- 300,000
Darryl Deaton, Vice President and Director................................. 145,013 -- 50,000
John Evleth, former Chief Financial Officer and Director(1)................ 137,607 -- 50,000
Joshua Marks, former Chief Operating Officer/Executive Producer(2)......... 120,000 -- 158,73
</TABLE>
- ------------------------
(1) Mr. Evleth resigned as Chief Financial Officer and Director in November
1998.
(2) Mr. Marks resigned as Chief Operating Officer/Executive Producer in January
1999.
OPTION GRANTS IN FISCAL YEAR 1998
The following table provides information relating to stock options awarded
to each of the executive officers named in the summary compensation table during
the fiscal year ended December 31, 1998, including the potential realizable
value over the 10 year term of the options based on assumed rates of stock
appreciation of 5% and 10%, beginning with a base value equal to the fair market
value at the time of grant, which is equal to the exercise price, compounded
annually. These assumed rates of appreciation comply with the rules of the SEC
and do not represent our estimate of future stock prices. Actual gains, if any,
on stock option exercises will be dependent on the future performance of our
common stock. In 1998, we granted options and rights to acquire up to an
aggregate of 3,070,230 shares to employees, consultants, directors and other
persons having a business relationship with us under the 1997 and 1998 Stock
Option Plans and all at an exercise price equal to not less than the fair market
value of our common stock on the date of grant as determined in good faith by
the board of
56
<PAGE>
directors. Optionees may pay the exercise price by check, note, delivery of
already-owned shares of our common stock or any other instrument the board will
accept. Options granted under the 1997 and 1998 Stock Option Plans generally
vest at a rate of one-third per year. No stock appreciation rights were granted
to these individuals during such year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------
PERCENT OF POTENTIAL REALIZED
TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES PRICE PER OPTIONS TERM
OPTIONS IN FISCAL SHARE EXPIRATION ----------------------
NAME GRANTED YEAR (%) ($) DATE 5% 10%
- ---------------------------------------- ----------- ------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Lance Mortensen......................... 300,000 9.8 1.10 9/8/08 $ 207,535 $ 525,935
Darryl Deaton........................... 50,000 1.6 1.00 9/8/08 31,445 79,687
John Evleth............................. 50,000(1) 1.6 1.00 9/8/08 31,445 79,687
Joshua Marks............................ 158,730(2) 5.2 0.09 1/6/08 8,984 22,768
</TABLE>
- ------------------------
(1) 50,000 shares returned to 1998 Stock Plan on November 23, 1998.
(2) 97,002 shares returned to 1997 Stock Plan on January 8, 1999.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information about the number and year-end
value of exercisable and unexercisable options held by the executive officers
named in the summary compensation table for the year ended December 31, 1998.
The "Value Realized" on shares acquired on exercise in the year ended December
31, 1998 is based on the difference between the deemed fair market value of the
common stock at December 31, 1998 ($2.00 per share) and the exercise price,
while the "Value of Unexercised In-the-Money Options at December 31, 1998" is
based on the difference between the initial public offering price and the
exercise price.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1998 DECEMBER 31, 1998
SHARES ACQUIRED VALUE -------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- --------------- ------------ ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Lance Mortensen.......... 600,000 $ 1,190,100 -- 300,000 -- $ 2,970,000
Darryl Deaton............ 200,000 396,700 -- 50,000 -- 550,000
John Evleth.............. 200,000 396,000 -- -- -- --
Joshua Marks............. -- 57,319 101,411 $ 630,509 1,115,521
</TABLE>
INCENTIVE STOCK PLANS
1997 EMPLOYEE STOCK OPTION PLAN.
Our 1997 Employee Stock Option Plan was adopted by our board of directors
and approved by our stockholders in October 1997. The 1997 Employee Stock Option
Plan provides for the granting to our employees of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, and for the granting to employees, directors and independent
contractors of nonstatutory stock options. Our board of directors and our
stockholders have authorized a total of 1,363,730 shares of common stock for
issuance pursuant to the 1997 Employee Stock Option Plan. As of June 30, 1999,
there were options to purchase 129,410 shares outstanding. No grants were made
under this plan after the adoption of the 1998 Stock Plan.
57
<PAGE>
1998 STOCK PLAN.
The board of directors adopted the 1998 Plan and the stockholders initially
approved the 1998 Plan in June 1998. In connection with this offering, the board
of directors approved the amendment and restatement of the 1998 Plan in August
1999 and the stockholders approved the amendment and restatement in September
1999. The 1998 Plan provides for the grant of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code to employees, and for the
grant of nonstatutory stock options and stock purchase rights to employees,
directors and consultants.
NUMBER OF SHARES OF COMMON STOCK AVAILABLE UNDER THE 1998 PLAN
As of June 30, 1999, a total of 4,036,270 shares of common stock were
reserved for issuance pursuant to the 1998 Plan, of which options to acquire
2,383,447 shares were issued and outstanding as of that date. As part of the
1999 amendment and restatement of the 1998 Plan, the board of directors approved
an increase of 1,500,000 shares reserved for issuance under the 1998 Plan. The
1998 Plan provides for annual increases in the number of shares available for
issuance thereunder, on the first day of each new fiscal year of the Company,
effective beginning with the Company's fiscal year 2000, equal to the lowest of
5% of the outstanding shares of common stock on the first day of the fiscal
year, 2 million shares or such amount as the board may determine.
ADMINISTRATION OF THE 1998 PLAN
The board of directors or a committee of the board (as applicable, the
administrator) administers the 1998 Plan. In the case of options intended to
qualify as "performance-based compensation" within the meaning of Section 162(m)
of the Code, the committee will consist of two or more "outside directors"
within the meaning of Section 162(m) of the Code. The administrator has the
power to determine the terms of the options or SPRs granted, including the
exercise price, the number of shares subject to each option or SPR, the
exercisability of the options and the form of consideration payable upon
exercise.
OPTIONS
The administrator determines the exercise price of nonstatutory stock
options granted under the 1998 Plan, but with respect to nonstatutory stock
options intended to qualify as "performance-based compensation" within the
meaning of Section 162(m) of the Code, the exercise price must at least be equal
to the fair market value of the common stock on the date of grant. The exercise
price of all incentive stock options granted under the 1998 Plan must be at
least equal to the fair market value of the common stock on the date of grant.
With respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of ZapMe!'s outstanding capital stock, the exercise
price of any incentive stock option granted must equal at least 110% of the fair
market value on the grant date and the term of such incentive stock option must
not exceed five years. The term of all other options is determined by the
administrator.
An optionee generally must exercise an option granted under the 1998 Plan at
the time set forth in the optionee's option agreement after termination of the
optionee's status as an employee, director or consultant of ZapMe!, or within 12
months after the optionee's termination by death or disability, but in no event
later than the expiration of the option's ten year term.
STOCK PURCHASE RIGHTS
The administrator determines the exercise price of SPRs granted under the
1998 Plan. In the case of SPRs, unless the administrator determines otherwise,
the restricted stock purchase agreement entered into in connection with the
exercise of the SPR shall grant ZapMe! a repurchase option that ZapMe! may
exercise upon the voluntary or involuntary termination of the purchaser's
service with ZapMe! for any reason (including death or disability). The purchase
price for shares ZapMe!
58
<PAGE>
repurchases pursuant to restricted stock purchase agreements shall generally be
the original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to ZapMe!. The repurchase option shall lapse at a
rate that the administrator determines.
OUTSIDE DIRECTOR OPTIONS
The 1998 Plan also provides for the automatic grant to each nonemployee
director of a nonstatutory stock option for 7,500 shares of common stock on the
date of each annual stockholder's meeting of ZapMe!. Each option shall have a
term of 10 years and the shares subject to these options shall be fully vested
and exercisable on the date of grant. The exercise price of each option shall be
100% of the fair market value per share of common stock on the date of grant.
TRANSFERABILITY OF OPTIONS AND SPRS
An optionee generally may not transfer options and SPRs granted under the
1998 Plan and only the optionee may exercise an option and SPR during his or her
lifetime.
ADJUSTMENTS UPON MERGER OR ASSET SALE
The 1998 Plan provides that in the event of a merger of ZapMe! with or into
another corporation or a sale of substantially all of ZapMe!'s assets, the
successor corporation shall assume or substitute each option or SPR. If the
outstanding options or SPRs are not assumed or substituted, the administrator
shall provide notice to the optionee that he or she has the right to exercise
the option or SPR as to all of the shares subject to the option or SPR,
including shares which would not otherwise be exercisable, for a period of
fifteen days from the date of the notice. The option or SPR will terminate upon
the expiration of the fifteen-day period.
AMENDMENT AND TERMINATION OF THE 1998 PLAN
Unless terminated sooner, the 1998 Plan will terminate automatically in
2008. In addition, the administrator has the authority to amend, suspend or
terminate the 1998 Plan, provided that no such action may affect any share of
common stock previously issued and sold or any option previously granted under
the 1998 Plan.
1999 EMPLOYEE STOCK PURCHASE PLAN
The board of directors adopted ZapMe!'s Purchase Plan in August 1999.
ZapMe!'s stockholders approved the Purchase Plan in September 1999.
NUMBER OF SHARES OF COMMON STOCK AVAILABLE UNDER THE PURCHASE PLAN
A total of 500,000 shares of common stock has been reserved for issuance
under the Purchase Plan. In addition, the Purchase Plan provides for automatic
annual increases in the number of shares available for issuance under the
Purchase Plan on the first day of each fiscal year, beginning with the Company's
fiscal year 2000, equal to the lowest of 2% of the outstanding shares of common
stock on the first day of the fiscal year, one million shares or such other
amount as may be determined by the board.
ADMINISTRATION OF THE PURCHASE PLAN
The board of directors or a committee appointed by the board administers the
Purchase Plan. The board of directors or its committee has full and exclusive
authority to interpret the terms of the Purchase Plan and determine eligibility.
59
<PAGE>
ELIGIBILITY TO PARTICIPATE
Employees are eligible to participate if they are customarily employed by
ZapMe! or any participating subsidiary for at least 20 hours per week and more
than five months in any calendar year. However, an employee may not be granted
an option to purchase stock under the Purchase Plan if such employee:
- immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of the capital stock of
ZapMe!; or
- whose rights to purchase stock under all employee stock purchase plans of
ZapMe! accrues at a rate that exceeds $25,000 worth of stock for each
calendar year.
OFFERING PERIODS AND CONTRIBUTIONS
The Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, contains consecutive, 6-month offering periods. The
offering periods generally start on the first trading day on or after May 1 and
November 1 of each year, except for the first such offering period which will
commence on the first trading day on or after the effective date of this
offering and will end on the last trading day on or before .
The Purchase Plan permits participants to purchase common stock through
payroll deductions of up to 10% of the participant's "compensation."
Compensation is defined as the participant's base straight time gross earnings
and commissions but excludes payments for overtime, shift premium payments,
incentive compensation, incentive payments, bonuses and other compensation. The
maximum number of shares a participant may purchase during a single offering
period is 5,000 shares.
PURCHASE OF SHARES
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the Purchase Plan is 85% of the lower of the fair market value
of the common stock at the beginning or end of the offering period. Participants
may end their participation at any time during an offering period, and they will
be paid their payroll deductions to date. Participation ends automatically upon
termination of employment with ZapMe!.
TRANSFERABILITY OF RIGHTS
A participant may not transfer rights granted under the Purchase Plan other
than by will, the laws of descent and distribution or as otherwise provided
under the Purchase Plan.
ADJUSTMENTS UPON MERGER OR ASSET SALE
The Purchase Plan provides that, in the event of a merger of ZapMe! with or
into another corporation or a sale of substantially all of ZapMe!'s assets, a
successor corporation may assume or substitute for each outstanding option. If
the successor corporation refuses to assume or substitute for the outstanding
options, the offering period then in progress will be shortened, and a new
exercise date will be set.
AMENDMENT AND TERMINATION OF THE PURCHASE PLAN
The 1999 Purchase Plan will terminate in 2009. However, the board of
directors has the authority to amend or terminate the Purchase Plan, except
that, other than in connection with a dissolution, liquidation, merger or sale
of substantially all ZapMe!'s assets, no such action may adversely affect any
outstanding rights to purchase stock under the Purchase Plan.
60
<PAGE>
401(k) PLAN
ZapMe! recently adopted a 401(k) plan which is scheduled to go into effect
in September 1999. ZapMe!'s 401(k) plan covers its eligible employees located in
the United States. The 401(k) plan is intended to qualify under Sections 401(a)
and 401(k) of the Internal Revenue Code. Consequently, contributions to the
401(k) plan by employees or by ZapMe!, and the investment earnings thereon, will
not be taxable to employees until withdrawn from the 401(k) plan. Further,
contributions by ZapMe!, if any, will be deductible by ZapMe! when made.
Employees may elect to contribute up to 15% of their current compensation to the
401(k) plan up to the statutorily prescribed annual limit, which was $10,000 in
1999.
ZapMe! does not currently intend to make any contributions to the 401(k)
plan. However, since this is a new plan participation in the plan by non-highly
compensated employees may be insufficient to meet statutory minimums. In such a
case, ZapMe! may be required to make contributions, and the ability of highly
compensated employees to participate may be limited.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
We have entered into agreements with some of our officers providing for
payments upon termination of their employment. Our agreement with Mr. Deaton
provides that he will receive a minimum compensation level of $10,000 per month,
paid through December 31, 1999 regardless of whether either he or ZapMe!
terminates his employment voluntarily or with cause. Our agreement with Mr.
Kingsborough provides that in the event that he terminates his employment for
good reason, or if ZapMe! terminates his employment without cause, he will
receive nine months of base salary, if the termination occurs prior to the first
anniversary of his employment at ZapMe!, or six months of base salary, if the
termination occurs prior to the third anniversary of his employment. Mr.
Kingsborough is also entitled to a pro rata portion of the cash bonus otherwise
payable to him under these circumstances. Our agreement with Mr. Rudy provides
that, in the event he terminates his employment for good reason, or if ZapMe!
terminates his employment without cause, he will receive six months of base
salary, six months of non-cash benefits, a pro rata share of the cash bonus
otherwise payable to him, and accelerated vesting of his options, to the lesser
of 30,000 shares or the balance of the unvested shares under Mr. Rudy's initial
grant of options.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
Our bylaws provide that we will indemnify our directors and executive
officers and may indemnify our other officers, employees and other agents to the
fullest extent permitted by the General Corporations Law of the State of
Delaware, as amended. We are also empowered under our bylaws to enter into
indemnification agreements with our directors and officers and to purchase
insurance on behalf of any person whom we are required or permitted to
indemnify. We have entered into indemnification agreements with each of our
directors and executive officers and intend to obtain a policy of directors' and
officers' liability insurance that insures such persons against the cost of
defense, settlement or payment of a judgment in the absence of an intent to
deceive or defraud.
We have entered into agreements with our directors and executive officers
regarding indemnification. Under these agreements we are required to indemnify
them against expenses, judgments, fines, settlements and other amounts actually
and reasonably incurred (including expenses of a derivative action) in
connection with an actual, or a threatened, proceeding if any of them may be
made a party because he or she is or was one of our directors or officers. We
are obligated to pay these amounts only if the officer or director acted in good
faith and in a manner that he or she reasonably believed to be in (or not
opposed to) our best interests. With respect to any criminal proceeding, we are
obligated to pay these amounts only if the officer or director had no reasonable
cause to believe his or her conduct was unlawful. The indemnification agreements
also set forth procedures that will apply in the event of a claim for
indemnification thereunder.
61
<PAGE>
In addition, our amended and restated certificate of incorporation filed in
connection with this offering provides that the liability of our directors for
monetary damages shall be eliminated to the fullest extent permissible under the
General Corporation Law of the State of Delaware, as amended. This provision in
our amended and restated certificate of incorporation does not eliminate a
director's duty of care, and, in appropriate circumstances, equitable remedies
such as an injunction or other forms of non-monetary relief would remain
available. Each director will continue to be subject to liability for breach of
the director's duty of loyalty to us, for acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law, for acts or
omissions that the director believes to be contrary to our best interests or our
stockholders, for any transaction from which the director derived an improper
personal benefit, for improper transactions between the director and us and for
improper distributions to stockholders and loans to directors and officers. This
provision also does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
There is no pending litigation or proceeding involving any of our directors
or officers as to which indemnification is being sought, nor are we aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.
62
<PAGE>
CERTAIN TRANSACTIONS
EQUITY TRANSACTIONS
On September 3, 1997, we issued 1,486,984 shares of common stock to Darryl
Deaton, one of our directors and officers, and 371,746 shares of common stock to
John Evleth, a former officer and director, in lieu of wages owed.
In August 1998, Mr. Deaton and Mr. Evleth exercised options to purchase
200,000 and 200,000 shares of our common stock, respectively, at an aggregate
purchase price of approximately $3,000 and $3,000, respectively.
In January 1999, Joshua Marks, a former officer, exercised options to
purchase 57,319 shares of our common stock, for an aggregate purchase price of
approximately $5,000.
On December 3, 1998, March 31, 1999 and May 28, 1999, we issued and sold an
aggregate of 5,894,110 shares of our Series D preferred stock at a purchase
price of $5.00 per share, including:
- 2,026,070 shares to QuestMark Partners, L.P., a major shareholder and an
entity with which Thomas Hitchner, one of our directors, is affiliated;
- 600,000 shares to Sylvan Learning Systems, Inc., an entity with which
Douglas Becker, one of our directors, is affiliated;
- 600,000 shares to Gilat Satellite Networks, Ltd. and Phoenix Worldwide
Limited, a related party, entities with which Yoel Gat, one of our
directors, is affiliated; and
- other private investors.
On August 4, 1999, we issued and sold an aggregate of 2,030,000 shares of
our Series E preferred stock at a purchase price of $5.00 per share, including:
- 2,000,000 shares to Dell Computer Corporation, a major shareholder; and
- 30,000 shares to another private investor.
Since inception, as part of the Company's normal review and determination of
compensation, we have granted the following options to officers:
- In October 1997 and September 1998, Mr. Evleth was granted options to
purchase 200,000 and 50,000 shares, respectively, at an exercise price of
$0.015 and $1.00 per share, respectively, of our common stock. Mr. Evleth
has exercised the option to purchase 200,000 shares, and the option to
purchase 50,000 shares has expired.
- In October 1997 and September 1998, Mr. Deaton was granted options to
purchase 200,000 and 50,000 shares, respectively, at an exercise price of
$0.0165 and $1.00 per share, respectively, of our common stock. Mr. Deaton
has exercised the option to purchase 200,000 shares, and the option to
purchase 50,000 shares vests at the rate of one-third per year.
- In January 1998, Mr. Marks was granted options to purchase 158,730 shares
of ZapMe!'s common stock at an exercise price of $0.09 per share. These
shares vested over 3 years, with one third vesting after one year and the
balance vesting monthly thereafter;
- In December 1998 and June 1999, Robert A. Stoffregen, one of our officers,
was granted options to purchase 110,000 and 40,000 shares, respectively,
at an exercise price of $1.50 and $4.00 per share, respectively, of our
common stock. These options vest at a rate of one-third per year;
- In January 1999, April 1999 and April 1999, Don Kingsborough, one of our
officers, was granted options to purchase 30,000, 120,000 and 180,000
shares, respectively, at an exercise price of $2.00, $2.50 and $2.50 per
share, respectively, of our common stock. These options vest at a rate of
1/3 per year. The options to purchase 30,000 shares has expired;
63
<PAGE>
- In November 1998 and June 1999, Bruce Bower, one of our officers, was
granted options to purchase 150,000 and 30,000 shares, respectively, at an
exercise price of $1.00 and $4.00 per share, respectively, of our common
stock. These options vest at a rate of one-third per year;
- In December 1998, April 1999 and June 1999, Dave Lundberg, one of our
officers, was granted options to purchase 40,000, 25,000 and 85,000
shares, respectively, at an exercise price of $1.50, $2.50 and $4.00 per
share, respectively, of our common stock. These options vest at a rate of
one-third per year;
- In April 1999, Robert Rudy, one of our officers, was granted options to
purchase 180,000 shares of our common stock at an exercise price of $2.50
per share. These options vest at a rate of one-third per year; and
- In October 1998 and December 1998, Royce Johnson, one of our officers, was
granted options to purchase 60,000 and 20,000 shares, respectively, at an
exercise price of $1.00 and $1.50 per share, respectively, of our common
stock. The option for 60,000 shares vests one year after grant. The option
for 20,000 shares vests only if certain performance criteria are met.
We believe that the shares issued in the above described transactions were
sold at the then fair market value and that the terms of all the above described
transactions were no less favorable than we could have obtained from
unaffiliated third parties.
OTHER TRANSACTIONS
In March 1999, ZapMe! entered into a "Products and Services Agreement" with
Sylvan Learning Systems, Inc. The Agreement grants Sylvan an exclusive right to
deliver products and services on the ZapMe! systems in schools. The products and
services include student tutoring, information training services, test
preparation programs and other computer based tests. We will earn fees based
upon the number of eligible schools and the length of time eligible schools have
been operational. The initial term of the agreement will expire on December 31,
2003 with a five year renewal option subject to our earning minimum fees from
the agreement. Mr. Becker is an affiliate of Sylvan.
As consideration to enter into the agreement, Sylvan was issued a warrant
for 150,000 shares of ZapMe!'s common stock at $5.00 per share. The warrant is
exercisable in whole after Sylvan issues its release of audited financial
statements for the year ended December 31, 2003 and subject to ZapMe! earning a
minimum fee per eligible school during the year ended December 31, 2003.
We purchase VSAT data communications equipment from Gilat Satellite
Networks, Ltd. Through June 1999, ZapMe! has paid approximately $1.8 million to
Gilat and its subsidiary, Spacenet, for equipment, consulting services and
software license fees. In June 1999, ZapMe! and Spacenet, entered into an
agreement whereby Spacenet will provide us with equipment, installation and
space segment for a fixed fee per school installation. Mr. Gat is an affiliate
of Gilat.
For additional information, please see the sections entitled
"Management--Directors Compensation," beginning on page 54, and
"Management--Compensation Committee Interlocks and Insider Participation,"
beginning on page 55.
------------------------
ZapMe! believes that all of the transactions set forth above were made on
terms no less favorable to ZapMe! than could have been otherwise obtained from
unaffiliated third parties. All future transactions, including loans, if any,
between ZapMe! and its officers, directors and principal stockholders and their
affiliates and any transactions between ZapMe! and any entity with which its
officers, directors or 5% shareholders are affiliated will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested outside directors of the board of directors and will be on terms
no less favorable to ZapMe! than could be obtained from unaffiliated third
parties.
64
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding to the beneficial
ownership of our common stock as of August 31, 1999, and as adjusted to reflect
the sale of the shares of common stock offered in this offering, by each person
or entity who is known by ZapMe! to own beneficially 5% or more of ZapMe!'s
outstanding common stock, each director of ZapMe!, each of the executive
officers and all directors and executive officers of ZapMe! as a group. The
address of all the beneficial owners, unless otherwise noted, is 3000 Executive
Parkway, San Ramon CA 94583. Except as otherwise indicated, and subject to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock held by
them.
The percentage ownership in the table below is based on 32,155,660 shares of
common stock outstanding as of August 31, 1999 and 41,155,660 shares immediately
following the completion of this offering (assuming no exercise of the
Underwriters' over-allotment option), together with applicable options and/or
warrants for such shareholder. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities, subject to community
property laws, where applicable. Shares of common stock subject to options or
warrants that are presently exercisable or exercisable within 60 days of the
date of this prospectus are deemed to be beneficially owned by the person
holding such options for the purpose of computing the percentage of ownership of
such person but are not treated as outstanding for the purpose of computing the
percentage of any other person. To the extent that any shares are issued upon
exercise of options, warrants or other rights to acquire our capital stock that
are presently outstanding or granted in the future or reserved for future
issuance under our stock plans, there will be further dilution to new public
investors.
The number of shares includes 17,781,781 shares of common stock issuable
upon conversion of our convertible preferred stock upon consummation of this
offering. For purposes of this table, we have assumed that the preferred stock
converts to common stock at a ratio of one-to-one. The percentage of shares
outstanding after the offering assumes the underwriter's over-allotment is not
exercised.
65
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY
OWNED AS A RESULT OF
OPTIONS PERCENTAGE OF SHARES
AND WARRANTS OUTSTANDING
NUMBER OF EXERCISABLE --------------------
SHARES WITHIN 60 DAYS OF THE BEFORE
BENEFICIALLY DATE OF THE AFTER THE
NAME OF BENEFICIAL OWNER OWNED THIS PROSPECTUS OFFERING OFFERING
- ------------------------------------ --------- ---------------------- --------- ---------
<S> <C> <C> <C> <C>
QuestMark Partners, L.P.(1)......... 2,026,070 20,000 6.4% 5.0%
Dell Computer Corporation(2)........ 2,000,000 -- 6.2 4.9
Mortensen Irrevocable Family
Trust(3).......................... 2,000,000 -- 6.2 4.9
MCA Irrevocable Family Trust(4)..... 2,000,000 -- 6.2 4.9
Marianne Schmitt Hellauer(5)........ 4,000,000 -- 12.4 9.7
Lance Mortensen(6).................. 10,600,000 400,000 33.8 26.5
Michael Arnouse(7).................. 7,976,560 20,000 24.9 19.4
Robert A. Stoffregen................ -- -- * *
Don Kingsborough.................... -- -- * *
Bruce Bower......................... -- 50,000 * *
Dave Lundberg....................... -- -- * *
Bob Rudy............................ -- -- * *
John Evleth......................... 541,046 -- 1.7 1.3
Joshua Marks........................ 57,319 4,409 * *
Royce Johnson....................... -- 64,000 * *
Darryl Deaton....................... 1,636,984 16,667 5.1 4.0
Douglas Becker(8)................... 600,000 170,000 2.4 1.9
Yoel Gat(9)......................... 600,000 20,000 1.9 1.5
Thomas Hitchner(10)................. 2,026,070 20,000 6.4 5.0
Jack Kemp........................... -- 20,000 * *
All executive officers and directors
as a group (15 persons)........... 24,037,979 765,076 75.3 59.2
</TABLE>
- ------------------------
* Less than 1%.
(1) One South Street, Suite 800, Baltimore, MD 21202.
(2) Dell Computer Corporation purchased 2,000,000 shares of Series E preferred
stock on August 4, 1999. Dell Computer Corporation owns these shares through
Dell USA L.P., an indirect wholly-owned subsidiary. One Dell Way, Round
Rock, TX 78682.
(3) Trust established for the benefit of Lance Mortensen, Marianne Schmitt
Hellauer, Trustee, 3712 Valerie Carol Ct., Ellicott City, MD 21042.
(4) Trust established for the benefit of Michael Arnouse, Marianne Schmitt
Hellauer, Trustee, 3712 Valerie Carol Ct., Ellicott City, MD 21042.
(5) Includes 2,000,000 shares held by Ms. Hellauer as trustee of the MCA
Irrevocable Family Trust and 2,000,000 shares held by Ms. Hellauer as
trustee of the Mortensen Family Trust. Ms. Hellauer disclaims beneficial
ownership of these shares.
(6) Includes 2,000,000 shares held by the Mortensen Irrevocable Family Trust, a
trust established for the benefit of Mr. Mortensen.
(7) Includes 2,000,000 shares held by the MCA Irrevocable Family Trust, a trust
established for the benefit of Mr. Arnouse, and 700,000 shares held by the
MC Investment Trust, a trust established for the benefit of Mr. Arnouse.
(8) Includes 600,000 shares and a warrant for 150,000 shares held by Sylvan
Learning Systems, Inc. Mr. Becker is the President and Co-Chief Executive
Officer of Sylvan Learning System, Inc., and disclaims beneficial ownership
of the shares and warrant held by Sylvan, except to the extent of his
pecuniary interest therein.
(9) Includes 500,000 shares held by Gilat Satellite Networks, Ltd., a company of
which Mr. Gat is Chief Executive Officer. Mr. Gat disclaims beneficial
ownership of the shares held by Gilat Satellite Networks, Ltd., except to
the extent of his pecuniary interest therein. Also includes 100,000 shares
held by Phoenix Worldwide Limited, an entity associated with Gilat Satellite
Networks, Ltd. Mr. Gat disclaims beneficial ownership of the shares held by
Phoenix Worldwide Limited.
(10) Includes 2,026,070 shares and options for 20,000 shares held by QuestMark
Partners, L.P., an entity with which Mr. Hitchner is affiliated. Mr.
Hitchner disclaims beneficial ownership of the shares held by QuestMark
Partners, L.P., except to the extent of his general partnership interest
therein.
66
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and the provisions of our
articles of incorporation and bylaws are only summaries and are qualified by
reference to our articles of incorporation and bylaws filed as exhibits to the
registration statement of which this prospectus is a part. Our authorized
capital stock consists of 50,000,000 shares of common stock, $.01 par value per
share, and 17,781,781 shares of preferred stock, $.01 par value per share. As of
August 31, 1999, the outstanding shares are set forth in the table below:
<TABLE>
<CAPTION>
NUMBER OF SHAREHOLDERS OF
OUTSTANDING SHARES RECORD
------------------ ---------------------------
<S> <C> <C>
Common Stock..................................... 14,373,879 35
Total Preferred Stock............................ 17,781,781 59
Series A....................................... 9,097,671 4
Series B....................................... 160,000 1
Series C....................................... 600,000 5
Series D....................................... 5,894,110 47
Series E....................................... 2,030,000 2
</TABLE>
Each of the shares of preferred stock outstanding prior to this offering
will automatically convert into common stock upon consummation of this offering.
COMMON STOCK
Holders of the common stock are entitled to receive, when and if declared by
the board of directors, dividends and other distributions in cash, stock or
property from our assets or funds legally available for those purposes subject
to any dividend preferences that may be attributable to preferred stock. Holders
of common stock are entitled to one vote for each share held of record on all
matters on which shareholders may vote. Holders of common stock are not entitled
to cumulative voting for the election of directors.
There are no preemptive, conversion, redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and non-assessable. In the event of our liquidation, dissolution or winding
up, holders of common stock are entitled to share ratably in the assets
available for distribution.
After this offering there will be 41,920,788 shares of common stock
outstanding. This number consists of 14,373,879 shares of common stock currently
outstanding, 9,000,000 shares to be issued in this offering and 18,546,909
shares issuable upon conversion of our preferred stock, assuming an initial
public offering price of $11.00 per share and that the closing of the offering
occurs on September 30, 1999.
PREFERRED STOCK
Before this offering, there were 17,781,781 shares of preferred stock
outstanding. Each of these shares will be converted into common stock upon
consummation of the offering. After this conversion, our board of directors,
without further action by the shareholders, is authorized to issue an aggregate
of 5,000,000 shares of preferred stock. Currently, we have no plans to issue a
new series of preferred stock. Our board of directors may, without shareholder
approval, issue preferred stock with dividend rates, redemption prices,
preferences on liquidation or dissolution, conversion rights, voting rights and
any other preferences, which rights and preferences could adversely affect the
voting power of the holders of common stock. Issuance of preferred stock could
make it harder for a third party to acquire, or could discourage or delay a
third party from acquiring, a majority of our outstanding stock.
The 17,781,781 shares of preferred stock currently outstanding have
preemptive rights.
67
<PAGE>
RIGHTS OF PREFERRED STOCK HOLDERS
On August 27, 1998, we sold 600,000 shares of Series C preferred stock. On
December 3, 1998, February 1, 1999, March 31, 1999 and May 28, 1999 we sold an
aggregate of 5,894,110 shares of Series D preferred stock. On August 4, 1999 we
sold 2,030,000 shares of Series E preferred stock. Generally, the shares of
Series C, Series D and Series E preferred stock will convert to common stock on
a greater than one-to-one basis. In addition, rights granted to the holders of
the Series C and Series D preferred stock under our Certificate of Incorporation
may require us to issue additional shares of common stock.
STOCK DIVIDEND
The holders of our Series C, Series D and Series E preferred stock are
entitled to a per annum dividend equal to ten percent, fifteen percent and seven
and one-half percent, respectively, of the liquidation value of the preferred
stock, which value is initially set at $5 per share, the purchase price of the
stock. The dividend will be paid by increasing the liquidation value of the
preferred stock by the amount equal to the dividend obligation. Upon the closing
of the offering, the number of shares of common stock that the preferred stock
converts into equals the quotient obtained by dividing (1) the liquidation value
of the preferred stock then in effect by (2) the purchase price of the preferred
stock.
Assuming that the closing of the offering occurs on September 30, 1999, the
600,000 shares of Series C preferred stock outstanding will convert into 903,125
shares of our common stock, the 5,894,110 shares of Series D preferred stock
outstanding will convert into 6,331,326 shares of our common stock and the
2,030,000 shares of Series E preferred stock outstanding will convert into
2,054,787 shares of our common stock.
ADDITIONAL SHARES OF COMMON WHICH MUST BE ISSUED UPON CONVERSION
The holders of our Series C preferred stock and Series D preferred stock
will also be entitled to receive additional newly issued shares of common stock
upon the closing of this offering if the offering price does not exceed $15 per
share in the case of the Series C preferred stock and $10 per share in the case
of the Series D preferred stock.
The following table sets forth at several example offering prices, and
because the shares received as a stock dividend also have the right to receive
the additional shares, assuming that the closing of the offering occurs on
September 30, 1999, the approximate number of additional shares of common stock
that we will be obligated to issue to the holders of Series C or Series D
preferred stock:
<TABLE>
<CAPTION>
ADDITIONAL SHARES ADDITIONAL SHARES
TO SERIES C TO SERIES D
ASSUMED OFFERING PRICE PER SHARE HOLDERS HOLDERS
- ------------------------------------------------------ ----------------- ------------------
<S> <C> <C>
$10.00...................................... 393,348 437,216
11.00...................................... 303,125 437,216
12.00...................................... 277,865 437,216
13.00...................................... 164,183 437,216
14.00...................................... 109,578 437,216
15.00...................................... 62,292 437,216
</TABLE>
If such issuance of additional shares were to occur, current and prospective
stockholders would suffer additional dilution with a resulting proportionate
decrease in our earnings per share. This dilution could be substantial.
WARRANTS
As of August 31, 1999, giving effect to the conversion of all preferred
stock into common stock, we had outstanding warrants to purchase an aggregate of
855,890 shares of common stock, 705,890 of
68
<PAGE>
which are immediately exercisable and 150,000 of which are exercisable for 30
days after Sylvan releases its audited financial statements for the year ended
December 31, 2003, if Sylvan achieves specified milestones. Of these, warrants
to purchase 5,890 shares of preferred stock expire immediately prior to the
closing of this offering. The remaining warrants expire at various dates through
June 2004.
The following table sets forth warrants outstanding as of August 31, 1999:
<TABLE>
<CAPTION>
AVERAGE
NUMBER OF EXERCISE
DATE OF ISSUANCE TYPE WARRANTS PRICE EXPIRES
- ---------------------------- --------------------- ----------- ----------- ------------------
<S> <C> <C> <C> <C>
May 1998.................... Series B preferred 500,000 $ 3.25 May 2003
November 1998............... Series D preferred 5,500 $ 5.00 November 2005
February 1999............... Series D preferred 390 $ 5.00 February 2006
March 1999.................. Common 150,000 $ 5.00 April 2004
June 1999................... Series D preferred 100,000 $ 5.00 June 2004
July 1999................... Common 100,000 $ 5.00 September 1999
</TABLE>
We have agreed to issue warrants to a number of lease financing companies.
As of August 31, 1999, we are obligated to issue warrants for 80,000 shares of
Series D preferred stock and 140,000 shares of common stock.
Some of the warrants have a net exercise provision under which the holder
may, in lieu of payment of the exercise price in cash, surrender the warrant and
receive a net amount of shares, based on the fair market value of our stock at
the time of the exercise of the warrant, after deducting the aggregate exercise
price.
The holders of warrants for Series B and Series D preferred shares have the
right to require us to include their securities in some future registration
statements we file under the Securities Act of 1933.
REGISTRATION RIGHTS
After the consummation of the offering, the holders of 9,449,238 shares of
common stock issuable upon conversion of the preferred stock will have
registration rights with respect to those securities, assuming an initial public
offering price of $11.00 per share and that the closing of the offering occurs
on September 30, 1999 (not including shares issuable upon exercise of warrants).
These rights are described in a shareholders agreement between us and the
holders of those securities. The agreement provides for registration upon the
demand of the holders of not less than 25% of the outstanding shares of Series C
and Series D preferred stock, upon the demand of the holders of not less than
50% of the outstanding Series C preferred stock, and upon the demand of
specified holders of Series D preferred stock. In addition, pursuant to that
agreement, the holders of our preferred stock and warrants for our preferred
stock are entitled to require us to include their securities in some future
registration statements we file under the Securities Act of 1933, referred to as
piggyback registration rights. The holders of those securities also are entitled
to require us to register their securities on a registration statement on Form
S-3 once we are eligible to use a Form S-3 in connection with registrations.
However, holders of these shares will be restricted from exercising these rights
until 180 days after the date of this prospectus. Registration of shares of
common stock by the exercise of these demand registration rights, piggyback
registration rights or S-3 registration rights under the Securities Act of 1933
would result in these shares becoming freely tradable without restriction under
the Securities Act of 1933 immediately upon the effectiveness of such
registration. Please see "Risk Factors--Substantial future sales of our common
stock in the public market could cause our stock price to fall," beginning on
page 20, and "Shares Eligible for Future Sale," beginning on page 72.
69
<PAGE>
SHAREHOLDER ACTION; SPECIAL MEETING OF SHAREHOLDERS
The Delaware Certificate of Incorporation that will become effective
immediately prior to the effectiveness of this offering states that shareholders
may not take action by written consent, but only at duly called annual or
special meetings of shareholders. The Delaware Certificate of Incorporation also
provide that special meetings of shareholders may be called only by the
president, the chairman of the board of directors or by a majority of the board
of directors.
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
The bylaws provide that shareholders must provide timely notice in writing
to bring business before an annual meeting of shareholders or to nominate
candidates for election as directors at an annual meeting of shareholders. To be
timely notice for an annual meeting, a shareholder's notice must be delivered to
or mailed and received at our principal executive offices at least 120 days
before the first anniversary of the date our notice of annual meeting was
provided for the previous year's annual meeting of shareholders. If no annual
meeting of shareholders was held in the previous year or the date of the annual
meeting of shareholders has been changed to be more than 30 calendar days
earlier than or 30 calendar days after that anniversary, notice by the
shareholder, to be timely, must be received at least 90 days but no more than
120 days before the annual meeting of shareholders or the close of business on
the 10th day following the date on which notice of the date of the meeting is
given to shareholders or made public, whichever first occurs. To be timely
notice for a special meeting, a shareholder's notice must be delivered to us by
the close of business 10 days after notice of the meeting is given to
shareholders. The bylaws also specify requirements as to the form and content of
a shareholders' notice. These provisions may keep shareholders from bringing
matters before an annual meeting of shareholders or from making nominations for
directors at an annual meeting of shareholders.
AUTHORIZED BUT UNISSUED SHARES
The authorized but unissued shares of common stock and preferred stock are
available for future issuances without shareholder approval. These additional
shares may be used for a variety of corporate purposes, including future public
offerings to raise additional capital, corporate acquisitions and employee
benefit plans. The existence of authorized but unissued shares of common stock
and preferred stock could make it harder or discourage an attempt to obtain
control of us by a proxy contest, tender offer, merger or otherwise.
CHANGE OF CONTROL PROVISIONS IN EMPLOYEE BENEFIT PLANS
The 1998 Plan provides that in the event of a merger of ZapMe! with or into
another corporation or a sale of substantially all of ZapMe!'s assets, the
successor corporation shall assume or substitute each option or SPR. If the
outstanding options or SPRs are not assumed or substituted, the administrator
shall provide notice to the optionee that he or she has the right to exercise
the option or SPR as to all of the shares subject to the option or SPR,
including shares which would not otherwise be exercisable, for a period of
fifteen days from the date of the notice. The option or SPR will terminate upon
the expiration of the fifteen-day period.
DELAWARE ANTI-TAKEOVER LAW AND CHARTER PROVISIONS
After our reincorporation in Delaware, we will be subject to Section 203 of
the Delaware General Corporation Law which generally prohibits a Delaware
corporation from engaging in any business
70
<PAGE>
combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder.
Section 203 applies unless:
- prior to the date such stockholder became an interested stockholder, the
board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming
an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or
- on or after such date the stockholder became an interested stockholder,
the business combination is approved by the board of directors and
authorized at a meeting of stockholders by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
Provisions of our certificate of incorporation and Delaware law may delay,
defer or prevent a change in our control and may adversely affect the voting and
other rights of holders of common stock. In particular, our certificate of
incorporation provides for a classified board of directors and the inability of
stockholders to vote cumulatively for directors.
LIMITATION ON DIRECTORS' LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation provides that, except to the extent
provided by Delaware law, our directors will not be personally liable to us or
our stockholders for monetary damages for any breach of fiduciary duty while
serving as directors. This provision also does not affect the directors'
responsibilities under Delaware corporate law or any other laws, such as the
Federal securities laws or state or Federal environmental laws. Insofar as the
indemnification for liabilities arising under the Securities Act may be
permitted to our directors or officers, we have been informed that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
We have entered into indemnity agreements to indemnify our executive
officers and directors in addition to the indemnification provided for in our
certificate of incorporation and bylaws. These agreements indemnify our
directors and executive officers for expenses, judgments and fines and amounts
paid in settlement, actually and reasonably incurred by any such person in any
action, suit or proceeding arising out of such person's services as a director
or executive officer on our behalf. We believe that these provisions and
agreements are necessary to attract and retain qualified directors and officers.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is BankBoston N.A.
71
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market after
the offering could adversely affect the market price of our common stock and our
ability to raise equity capital in the future on terms favorable to us.
After the offering, 41,906,289 shares of our common stock will be
outstanding, assuming an initial public offering price of $11.00 per share and
that the closing of the offering occurs on September 30, 1999 and that the
underwriters do not exercise the over-allotment option. Of these shares, all of
the 9,000,000 shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act, unless these
shares are purchased by "affiliates" as that term is defined in Rule 144 under
the Securities Act. The remaining shares of common stock held by existing
shareholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act. Restricted securities may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rules 144 or 701 under the Securities Act, which rules are summarized below.
The following table shows approximately when the 32,906,289 shares of our
common stock that are not being sold in this offering but which will be
outstanding when this offering is complete will be eligible for sale in the
public market:
ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN THE PUBLIC MARKET
<TABLE>
<CAPTION>
<S> <C>
180 days after the effective date................................................ 25,071,764
----------
</TABLE>
Resale of most of the restricted shares that will become available for sale
in the public market starting 180 days after the effective date will be limited
by volume and other resale restrictions under Rule 144 because the holders are
our affiliates.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year is entitled to sell, within any three-month
period, a number of shares that is not more than the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks before a notice of the sale
on Form 144 is filed.
Sales under Rule 144 must also comply with manner of sale provisions and
notice requirements and to the availability of current public information about
us.
RULE 144(k)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days before a sale, and who has beneficially owned the
restricted shares for at least two years, is entitled to sell the shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors who purchase shares from us under a
stock option plan or other written
72
<PAGE>
agreement can resell those shares 90 days after the effective date of this
offering in reliance on Rule 144, but without complying with some of the
restrictions, including the holding period, contained in Rule 144.
LOCK-UP AGREEMENTS
Executive officers, directors and shareholders who will hold an aggregate of
32,721,088 shares of our common stock after this offering, assuming an initial
public offering price of $11.00 per share and that the closing of the offering
occurs on September 30, 1999, will sign or are subject to existing lock-up
agreements under which they will agree not to transfer or dispose of, directly
or indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for shares of common stock, for a period of 180 days
after the date of this prospectus. Transfers or dispositions can be made sooner
with the prior written consent of Merrill Lynch & Co.
REGISTRATION RIGHTS
Upon completion of this offering, assuming an initial public offering price
of $11.00 per share and that the closing of the offering occurs on September 30,
1999, the holders of 9,449,238 shares of our common stock will be entitled to
rights with respect to the registration of their shares under the Securities
Act. Please see "Description of Capital Stock--Registration Rights," beginning
on page 69, for a more detailed description of these registration rights. After
registration, these shares will become freely tradable without restriction under
the Securities Act. Any sales of securities by these shareholders could have a
material adverse effect on the trading price of our common stock.
STOCK OPTIONS
Immediately after this offering we intend to file a registration statement
under the Securities Act covering 4,899,350 shares of common stock reserved for
issuance under our stock option plans. Each year as the number of shares
reserved for issuance under our 1998 Stock Plan increases, we will file an
amendment to the registration statement covering the additional shares. As of
June 30, 1999, options to purchase 2,512,857 shares of common stock were issued
and outstanding. Of these options to purchase shares of common stock, 670,382
will be vested and exercisable within 60 days of the date of this offering. When
the lock-up agreements described above expire, these vested options will become
freely tradable. This registration statement is expected to be filed and become
effective as soon as practicable after the effective date of this offering.
Accordingly, shares registered under that registration statement will, subject
to vesting provisions and Rule 144 volume limitations applicable to our
affiliates, be available for sale in the open market immediately after the 180
day lock-up agreements expire.
73
<PAGE>
UNDERWRITING
GENERAL
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Bank Securities
Inc., Thomas Weisel Partners LLC, and Wit Capital Corporation are acting as
representatives of each of the underwriters named below. Subject to the terms
and conditions stated in the Purchase Agreement among us and the underwriters,
we have agreed to sell to each of underwriters, and each of the underwriters,
severally and not jointly, has agreed to purchase from us the number of shares
of common stock stated opposite its name below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...........................................
Deutsche Bank Securities Inc.....................................
Thomas Weisel Partners LLC.......................................
Wit Capital Corporation..........................................
---------
Total.................................................. 9,000,000
---------
---------
</TABLE>
Subject to the terms and conditions stated in the Purchase Agreement, the
several underwriters have agreed to purchase all of the shares of common stock
being sold pursuant to the Purchase Agreement if any shares of common stock are
purchased. Under the terms of the Purchase Agreement, the commitments of the
non-defaulting Underwriters may in some circumstances be increased or the
Purchase Agreement may be terminated.
We have agreed to indemnify the several underwriters against some
liabilities, including some liabilities under the Securities Act, or to
contribute to payments the underwriters may be required to make in respect
thereof.
The underwriters offer the shares of common stock, subject to prior sale,
when as and if issued to and accepted by them, subject to approval of some legal
matters by counsel for the underwriters and some other conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject order in whole or in part.
A prospectus in electronic format is being made available on a web site
maintained by Wit Capital. In addition, all dealers purchasing shares from Wit
Capital in this offering have agreed to make a prospectus in electronic format
available on web sites maintained by each of these dealers.
COMMISSIONS AND DISCOUNTS
The representatives have advised us that they propose initially to offer the
shares of common stock to the public at the public offering price stated on the
cover page of this prospectus, and to some dealers at such price less a
concession not in excess of $ per share. The underwriters may allow, and
such dealers may reallow, a discount not in excess of $ per share on sales
to some other dealers. After the initial public offering, the public offering
price, concession and discount may be changed.
The following table shows the per share and total underwriting discounts
that we will pay to the underwriters. This information is presented assuming
either no exercise or full exercise by the underwriters of their over-allotment
options.
<TABLE>
<CAPTION>
WITHOUT
PER SHARE OPTION WITH OPTION
----------- --------- -----------
<S> <C> <C> <C>
Public offering price............................................. $ $ $
Underwriting discount............................................. $ $ $
Proceeds, before expenses, to ZapMe!.............................. $ $ $
</TABLE>
74
<PAGE>
We will pay the expenses of the offering, estimated at $ .
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to percent of the shares offered hereby to be sold
to people associated with us or our directors, officers or employees, such as
vendors, suppliers, existing stockholders and other persons that have
relationships with or are interested in us. Shares may also be reserved for our
directors, officers or employees. The number of shares of our common stock
available for sale to the general public will be reduced to the extent that
those persons purchase the reserved shares. Any reserved shares which are not
orally confirmed for purchase within one day of the pricing of this offering
will be offered by the underwriters to the general public on the same terms as
the other shares offered by this prospectus.
OVER-ALLOTMENT OPTION
We have granted to the underwriters an option exercisable for 30 days after
the date of this prospectus, to purchase up to an aggregate of an additional
1,350,000 shares of common stock at the public offering price stated on the
cover of this prospectus, less the underwriting discount. The underwriters may
exercise this option solely to cover over-allotments, if any, made on the sale
of the common stock offered hereby. To the extent that the underwriters exercise
this option, each underwriter will generally be obligated to purchase a number
of additional shares of common stock proportionate to such underwriter's initial
amount reflected to the table above.
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors have agreed, for a period of 180
days after the date of this prospectus not to directly or indirectly issue,
sell, or otherwise dispose of or transfer any shares of common stock or
securities convertible into or exchangeable or exercisable for common stock,
without the prior written consent of Merrill Lynch on behalf of the
underwriters, except for purchases and sales of stock in the open market, shares
purchased in our directed share program, or transfers to a family member or a
family trust, transfers of shares as a gift, or transfers to limited partners of
a partnership or shareholders of a corporation if such transferee agrees in
writing to be similarly restricted. See "Shares Eligible for Future Sale,"
beginning on page 72, for detailed information about our shares of common stock
that will be eligible for future sale.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
some selling group members to bid for and purchase the common stock. As an
exception to these rules, the representatives are permitted to engage in some
transactions that stabilize the price of the common stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the common stock.
If the underwriters create a short position in the common stock in
connection with this offering, i.e., if they sell more shares of common stock
than are stated on the cover page of this prospectus, the representatives may
reduce that short position by purchasing common stock in the open market. The
representatives may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the representation that the representatives will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
75
<PAGE>
NEW UNDERWRITERS
Wit Capital, a member of the National Association of Securities Dealers,
Inc., will participate in this offering as one of the underwriters. The National
Association of Securities Dealers, Inc. approved the membership of Wit Capital
on September 4, 1997. Since that time, Wit Capital has acted as an underwriter
or co-manager in over 75 public offerings.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners has been named as a lead or co-manager on 63 filed
public offerings of equity securities, of which 33 have been completed, and has
acted as a syndicate member in an additional 32 public offerings of equity
securities. Jack Kemp, one of our directors, sits on the Advisory Board of
Thomas Weisel Partners. Other than Mr. Kemp's affiliation, Thomas Weisel
Partners does not have any material relationship with us or any of our officers,
directors or other controlling persons, except with respect to its contractual
relationship with us pursuant to the underwriting agreement entered into in
connection with this offering.
OTHER RELATIONSHIPS
Some of the underwriters and their affiliates engage in transactions with,
and perform services for, our company in the ordinary course of business and
have engaged, and may in the future engage, in commercial banking and investment
banking transactions with our company, for which they have received or may
receive customary compensation.
LEGAL MATTERS
The validity of the common stock offered hereby is being passed upon by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, San
Francisco, California. As of the date of this prospectus, an investment
partnership composed of certain current and former members of and persons
associated with Wilson Sonsini Goodrich & Rosati, Professional Corporation, as
well as certain individual attorneys of this firm, beneficially own an aggregate
of 21,400 shares of ZapMe!'s Series D preferred stock, which, assuming an
initial public offering price of $11.00 per share and that the closing of the
offering occurs on September 30, 1999, will convert into approximately 22,987
shares of common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements as of December 31, 1997 and 1998, and for the period June 25, 1997
(inception) through December 31, 1997 and for the year ended December 31, 1998,
as set forth in their report. We have included our financial statements in the
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement or the exhibits and schedules which are part of the registration
statement. For further information with respect to ZapMe! and its common stock,
see the registration statement and the exhibits and schedules thereto. Any
document ZapMe! files may be read and copied at the Commission's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the Commission at 1-800-SEC-0330 for further information about the
public reference
76
<PAGE>
rooms. Our filings with the Commission are also available to the public from the
Commission's Web site at http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and,
accordingly, will file periodic reports, proxy statements and other information
with the Commission. Such periodic reports, proxy statements and other
information will be available for inspection and copying at the Commission's
public reference rooms, and the Web site of the Commission referred to above.
77
<PAGE>
ZAPME! CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Balance Sheets........................................................................ F-3
Statements of Operations.............................................................. F-4
Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity
(Deficit)........................................................................... F-5
Statements of Cash Flows.............................................................. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
ZapMe! Corporation
We have audited the accompanying balance sheets of ZapMe! Corporation (a
development stage company) as of December 31, 1997 and 1998, and the related
statements of operations, redeemable convertible preferred stock and
stockholders' equity (deficit) and cash flows for the period June 25, 1997
(inception) through December 31, 1997 and for the year ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ZapMe! Corporation (a
development stage company) at December 31, 1997 and 1998, and the results of its
operations and its cash flows for the period June 25, 1997 (inception) through
December 31, 1997 and for the year ended December 31, 1998 in conformity with
generally accepted accounting principles.
Walnut Creek, California
April 2, 1999,
except for Note 8, as to which the date is
September , 1999
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon final computation
of the number of common shares which may be received by holders of Series C and
D preferred stock and computation of an additional dividend amount, if any, as
described in Note 3 to the financial statements, the effect on pro forma
weighted average shares as described in Note 1 to the financial statements, and
approval of the certificate of incorporation in the state of Delaware as
described in Note 8 to the financial statements.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
September 9, 1999
F-2
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY
DECEMBER 31, JUNE 30, JUNE 30,
1997 1998 1999 1999
--------- --------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 275 $ 815 $ 19,855
Restricted cash........................................................... -- -- 560
Accounts receivable....................................................... -- -- 14
Other receivables......................................................... -- 105 1,168
Notes receivable from stockholder......................................... -- 127 131
Prepaid expenses and other current assets................................. 13 45 362
--------- --------- -----------
Total current assets........................................................ 288 1,092 22,090
Equipment, net.............................................................. 43 2,471 9,781
Other assets................................................................ 18 40 275
--------- --------- -----------
Total assets................................................................ $ 349 $ 3,603 $ 32,146
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses..................................... $ 157 $ 1,541 $ 3,217
Accrued compensation and related expenses................................. 242 446 882
Deferred revenue.......................................................... -- -- 302
Current portion of capital lease obligations.............................. -- 118 2,092
--------- --------- -----------
Total current liabilities................................................... 399 2,105 6,493
Capital lease obligations................................................... -- 269 4,613
Notes payable to stockholders............................................... 462 -- --
--------- --------- -----------
Total liabilities........................................................... 861 2,374 11,106
Commitments
Redeemable convertible preferred stock, $0.01 par value, issuable in series:
Authorized shares--600,000 (none pro forma)
Issued and outstanding shares--600,000 in 1998, and 1999 and none pro
forma (liquidation preference at June 30, 1999--$4,542)................. -- 3,352 4,288 $ --
Stockholders' equity (deficit):
Convertible preferred stock, $0.01 par value:
Authorized shares--12,857,671 in 1998 and 16,357,671 in 1999 (including
600,000 shares designated as redeemable convertible preferred stock)
(5,000,000 pro forma)
Issued and outstanding shares--9,557,671 in 1998 and 15,151,781 in 1999,
and none pro forma (liquidation preference at June 30,
1999--$30,893)........................................................ -- 2,783 29,112 --
Common stock, $0.01 par value:
Authorized shares--50,000,000 (200,000,000 pro forma)
Issued and outstanding shares--11,858,730 in 1997, 14,208,730 in 1998,
14,359,380 in 1999, and 30,111,161 pro forma.......................... 69 1,138 2,364 35,764
Deferred stock compensation............................................... -- (739) (1,291) (1,291)
Accumulated deficit during the development stage.......................... (581) (5,305) (13,433) (13,433)
--------- --------- ----------- -------------
Total stockholders' equity (deficit)........................................ (512) (2,123) 16,752 $ 21,040
--------- --------- ----------- -------------
-------------
Total liabilities, redeemable convertible preferred stock and stockholders'
equity (deficit).......................................................... $ 349 $ 3,603 $ 32,146
--------- --------- -----------
--------- --------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM JUNE PERIOD FROM JUNE
25, 1997 SIX MONTHS ENDED JUNE 25, 1997
(INCEPTION) YEAR ENDED 30, (INCEPTION)
THROUGH DECEMBER DECEMBER 31, ------------------------ THROUGH JUNE 30,
31, 1997 1998 1998 1999 1999
------------------ ------------ ----------- ----------- ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue................................. $ -- $ -- $ -- $ 147 $ 147
Costs and expenses:
Cost of services...................... -- 135 8 1,247 1,382
Research and development.............. 231 1,140 429 1,034 2,405
Sales and marketing................... 40 1,197 176 2,456 3,693
General and administrative............ 299 1,458 415 1,975 3,732
Amortization of deferred stock
compensation........................ -- 152 -- 656 808
------- ------------ ----------- ----------- --------
Total costs and expenses................ 570 4,082 1,028 7,368 12,020
------- ------------ ----------- ----------- --------
Loss from operations.................... (570) (4,082) (1,028) (7,221) (11,873)
Interest income (expense), net.......... (11) (36) (35) 29 (18)
------- ------------ ----------- ----------- --------
Net loss................................ (581) (4,118) (1,063) (7,192) (11,891)
Accretion and dividend on redeemable
convertible preferred stock........... -- (606) -- (936) (1,542)
------- ------------ ----------- ----------- --------
Net loss applicable to common
stockholders.......................... $ (581) $ (4,724) $ (1,063) $ (8,128) $ (13,433)
------- ------------ ----------- ----------- --------
------- ------------ ----------- ----------- --------
Net loss per share:
Basic and diluted..................... $ (0.05) $ (0.40) $ (0.09) $ (0.60)
------- ------------ ----------- -----------
------- ------------ ----------- -----------
Pro forma basic and diluted
(unaudited)......................... $ (0.26) $ (0.29)
------------ -----------
------------ -----------
Shares used in calculation of net loss
per share:
Basic and diluted..................... 11,183 11,685 11,859 13,517
------- ------------ ----------- -----------
------- ------------ ----------- -----------
Pro forma basic and diluted
(unaudited)......................... 15,993 25,462
------------ -----------
------------ -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------
REDEEMABLE
CONVERTIBLE CONVERTIBLE COMMON
PREFERRED STOCK PREFERRED STOCK STOCK
---------------------- ---------------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES
--------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Issuance of common stock to founders at $0.005 per share in June
1997........................................................... -- $ -- -- $ -- 10,000,000
Issuance of common stock for services at $0.10 per share in
September 1997................................................. -- -- -- -- 1,858,730
Net loss and comprehensive loss.................................. -- -- -- -- --
--------- ----------- --------- ----------- ---------
Balances at December 31, 1997...................................... -- -- -- -- 11,858,730
Issuance of Series A preferred stock at $0.10 per share for
conversion of notes payable, net of issuance cost of $11 in
August 1998.................................................... -- -- 9,097,671 899 --
Issuance of Series B preferred stock at $2.50 per share for
conversion of notes payable, net of issuance costs of $4 in
August 1998.................................................... -- -- 160,000 396 --
Issuance of Series C redeemable convertible preferred stock at
$5.00 per share, net of issuance costs of $254 in August
1998........................................................... 600,000 2,746 -- -- --
Issuance of Series D preferred stock at $5.00 per share, net of
issuance costs of $12 in December 1998......................... -- -- 300,000 1,488 --
Issuance of common stock upon exercise of stock options at prices
ranging from $0.015 to $0.0165 per share....................... -- -- -- -- 1,000,000
Issuance of common stock at $0.25 per share for services for note
receivable in August 1998...................................... -- -- -- -- 1,350,000
Deferred stock compensation...................................... -- -- -- -- --
Amortization of deferred stock compensation...................... -- -- -- -- --
Accretion of redeemable convertible preferred stock.............. -- 531 -- -- --
Accrued Series C dividends....................................... -- 75 -- -- --
Net loss and comprehensive loss.................................. -- -- -- -- --
--------- ----------- --------- ----------- ---------
Balances at December 31, 1998...................................... 600,000 3,352 9,557,671 2,783 14,208,730
Issuance of common stock at prices ranging from $0.02 to $0.25
per share upon exercise of stock options (unaudited)........... -- -- -- -- 150,650
Issuance of Series D preferred stock at $5.00 per share, net of
issuance costs of $1,811 in March 1999. (unaudited)............ -- -- 5,554,110 25,960 --
Issuance of Series D preferred stock at $5.00 per share for
conversion of note payable in February 1999. (unaudited)....... -- -- 40,000 200 --
Issuance of common stock options to non-employees in
consideration for services rendered (unaudited)................ -- -- -- -- --
Warrants issued in connection with lease financing in March 1999.
(unaudited).................................................... -- -- -- 169 --
Deferred stock compensation (unaudited).......................... -- -- -- -- --
Amortization of deferred stock compensation (unaudited).......... -- -- -- -- --
Accretion of redeemable convertible preferred stock
(unaudited).................................................... -- 780 -- -- --
Accrued Series C dividends (unaudited)........................... -- 156 -- -- --
Net loss and comprehensive loss (unaudited)...................... -- -- -- -- --
--------- ----------- --------- ----------- ---------
Balances at June 30, 1999 (unaudited).............................. 600,000 $ 4,288 15,151,781 $ 29,112 14,359,380
--------- ----------- --------- ----------- ---------
--------- ----------- --------- ----------- ---------
<CAPTION>
STOCKHOLDERS' EQUITY
(DEFICIT)
---------------------------
ACCUMULATED
DEFICIT TOTAL
DEFERRED DURING THE STOCKHOLDERS'
STOCK DEVELOPMENT EQUITY
AMOUNT COMPENSATION STAGE (DEFICIT)
----------- --------------- ------------ -------------
<S> <C> <C> <C> <C>
Issuance of common stock to founders at $0.005 per share in June
1997........................................................... $ 50 $ -- $ -- $ 50
Issuance of common stock for services at $0.10 per share in
September 1997................................................. 19 -- -- 19
Net loss and comprehensive loss.................................. -- -- (581) (581)
----------- ------- ------------ -------------
Balances at December 31, 1997...................................... 69 -- (581) (512)
Issuance of Series A preferred stock at $0.10 per share for
conversion of notes payable, net of issuance cost of $11 in
August 1998.................................................... -- -- -- 899
Issuance of Series B preferred stock at $2.50 per share for
conversion of notes payable, net of issuance costs of $4 in
August 1998.................................................... -- -- -- 396
Issuance of Series C redeemable convertible preferred stock at
$5.00 per share, net of issuance costs of $254 in August
1998........................................................... -- -- -- --
Issuance of Series D preferred stock at $5.00 per share, net of
issuance costs of $12 in December 1998......................... -- -- -- 1,488
Issuance of common stock upon exercise of stock options at prices
ranging from $0.015 to $0.0165 per share....................... 16 -- -- 16
Issuance of common stock at $0.25 per share for services for note
receivable in August 1998...................................... 672 (510) -- 162
Deferred stock compensation...................................... 381 (381) -- --
Amortization of deferred stock compensation...................... -- 152 -- 152
Accretion of redeemable convertible preferred stock.............. -- -- (531) (531)
Accrued Series C dividends....................................... -- -- (75) (75)
Net loss and comprehensive loss.................................. -- -- (4,118) (4,118)
----------- ------- ------------ -------------
Balances at December 31, 1998...................................... 1,138 (739) (5,305) (2,123)
Issuance of common stock at prices ranging from $0.02 to $0.25
per share upon exercise of stock options (unaudited)........... 18 -- -- 18
Issuance of Series D preferred stock at $5.00 per share, net of
issuance costs of $1,811 in March 1999. (unaudited)............ -- -- -- 25,960
Issuance of Series D preferred stock at $5.00 per share for
conversion of note payable in February 1999. (unaudited)....... -- -- -- 200
Issuance of common stock options to non-employees in
consideration for services rendered (unaudited)................ 362 (362) -- --
Warrants issued in connection with lease financing in March 1999.
(unaudited).................................................... -- -- -- 169
Deferred stock compensation (unaudited).......................... 846 (846) -- --
Amortization of deferred stock compensation (unaudited).......... -- 656 -- 656
Accretion of redeemable convertible preferred stock
(unaudited).................................................... -- -- (780) (780)
Accrued Series C dividends (unaudited)........................... -- -- (156) (156)
Net loss and comprehensive loss (unaudited)...................... -- -- (7,192) (7,192)
----------- ------- ------------ -------------
Balances at June 30, 1999 (unaudited).............................. $ 2,364 $ (1,291) $ (13,433) $ 16,752
----------- ------- ------------ -------------
----------- ------- ------------ -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 25, 1997 PERIOD FROM
(INCEPTION) SIX MONTHS ENDED JUNE JUNE 25, 1997
THROUGH YEAR ENDED 30, (INCEPTION)
DECEMBER 31, DECEMBER 31, ------------------------ THROUGH JUNE
1997 1998 1998 1999 30, 1999
--------------- ------------- ----------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................... $ (581) $ (4,118) $ (1,063) $ (7,192) $ (11,891)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred stock compensation.......... -- 152 -- 364 516
Depreciation and amortization........................ 10 205 27 770 985
Common stock issued for services..................... 19 -- -- 292 311
Changes in operating assets and liabilities:
Restricted cash.................................... -- -- -- (560) (560)
Accounts receivable................................ -- -- -- (14) (14)
Other receivables.................................. -- (105) -- (1,063) (1,168)
Prepaid expenses and other current assets.......... (13) (32) (36) (317) (362)
Other assets....................................... (18) (22) -- (75) (115)
Accounts payable and accrued expenses.............. 157 1,384 155 1,676 3,217
Accrued compensation and related expenses.......... 242 204 256 436 882
Deferred revenue................................... -- -- -- 302 302
----- ------------- ----------- ----------- -------------
Net cash used in operating activities.................. (184) (2,332) (661) (5,381) (7,897)
INVESTING ACTIVITIES
Purchase of equipment, net............................. (53) (2,243) (378) (1,303) (3,599)
Notes receivable from stockholder...................... -- (127) -- (4) (131)
----- ------------- ----------- ----------- -------------
Net cash used in investing activities.................. (53) (2,370) (378) (1,307) (3,730)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock, net......... -- 4,229 -- 25,960 30,189
Proceeds from issuance of common stock................. 50 178 -- 18 246
Proceeds from borrowings on notes payable.............. 462 1,000 1,026 700 2,162
Payments on notes payable.............................. -- (162) -- (500) (662)
Payments on lease obligations.......................... -- (3) -- (450) (453)
----- ------------- ----------- ----------- -------------
Net cash provided by financing activities.............. 512 5,242 1,026 25,728 31,482
----- ------------- ----------- ----------- -------------
Increase (decrease) in cash and cash equivalents....... 275 540 (13) 19,040 19,855
Cash and cash equivalents at beginning of period....... -- 275 275 815 --
----- ------------- ----------- ----------- -------------
Cash and cash equivalents at end of period............. $ 275 $ 815 $ 262 $ 19,855 $ 19,855
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
SUPPLEMENTAL DISCLOSURES:
Conversion of notes payable to stockholders to
preferred stock...................................... $ -- $ 1,300 $ -- $ 200 $ 1,500
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
Issuance of common stock for notes receivable.......... $ -- $ 162 $ -- $ -- $ 162
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
Accretion and dividends of redeemable preferred stock.. $ -- $ 606 $ -- $ 936 $ 1,542
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
Capital lease obligations incurred..................... $ -- $ 390 $ -- $ 6,768 $ 7,158
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
Warrants issued in connection with lease financing..... $ -- $ -- $ -- $ 169 $ 169
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
Cash paid for interest................................. $ -- $ 26 $ 10 $ 110 $ 136
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
ZapMe! Corporation (the "Company") was incorporated, under the name
Satellite Online Solutions Corporation, on June 25, 1997 in California for the
purpose of building a broadband interactive network that brings technology tools
and educational resources to schools at no cost. The Company changed its name to
ZapMe! Corporation in October 1998. The Company is planning to generate revenue
from corporate sponsorships on its network. The Company is in the development
stage, devoting its efforts to developing products and raising capital.
The Company has incurred operating losses since inception during the
development stage. Its activities to date have been financed primarily through
private placements of equity securities, including preferred stock issuances of
$10 million in March 1999 and $16 million in May 1999. The Company may seek to
raise additional capital through the issuance of debt or equity securities.
However, there can be no assurance that additional funding will be available to
the Company on acceptable terms, if at all.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The interim financial information as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999 is unaudited, but includes all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of its financial position at such date and its
results of operations and cash flows for those periods. Operating results for
the six months ended June 30, 1999 are not necessarily indicative of results
that may be expected for any future periods.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposits and money market
accounts held with two financial institutions with insignificant interest rate
risk and original maturities of three months or less from the date of purchase.
EQUIPMENT
Equipment is stated at cost and depreciated using the straight-line method
over estimated useful lives of three to seven years.
DEPENDENCE ON THIRD PARTIES
The Company has relationships with three parties, one which installs the
Company's software on the computers, one which installs the Company's lab in
each school site and one which serves as the general contractor to oversee the
installation process. In addition, the Company relies on third parties to
provide the majority of support necessary to maintain the network and labs once
installed and are also dependent on transmissions from the satellite to customer
sites. The inability of any of these
F-7
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
parties to fulfill their obligations with the Company could negatively impact
the Company's future results.
SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards Board ("SFAS") No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,"
under which certain software development costs incurred subsequent to the
establishment of technological feasibility are capitalized and amortized over
the estimated lives of the related products. Technological feasibility is
established upon completion of a working model. To date, costs incurred
subsequent to the establishment of technological feasibility have not been
significant, and all software development costs have been charged to research
and development expense in the accompanying statements of operations.
REVENUE RECOGNITION
The Company earns revenue from sponsorship agreements, which include content
and public service announcement sponsorships, banner advertising and full screen
interactive ads, upon delivery of messages over the Company's network. Provided
that collectibility is probable, revenue is recognized ratably over the time
periods that the advertisement is delivered or sponsorship is acknowledged
unless such sponsorship is based on delivery of a minimum number of impressions,
in which case revenue is recognized as the impressions are delivered.
E-commerce revenue consists of referral fees and commissions on transactions
facilitated through the Company's network as well as referred transactions.
Revenue from e-commerce is recognized upon notification from the contracting
partner of the fact of the referral or sale upon which referral fees or
commissions is due. Network services and other revenue consist of revenue from
the distribution of content and products delivered through the Company's
network, and from educational services delivered in the ZapMe! labs such as
teacher training, tutoring and other educational programs offered through a
strategic alliance. Network services and other revenue is recognized in the time
period in which the underlying service is delivered. Network services and other
revenue also include revenue from the Company's five-year agreement with a
strategic partner which provides for a sharing of revenue derived from the
delivery of programs in ZapMe! computer labs. This agreement allows the
strategic partner to offer student tutoring, teacher training, and other
programs in the ZapMe! computer labs. For the calendar year 1999, the strategic
partner is committed to pay ZapMe! minimum fees. Thereafter, fees will be based
on a rate for installed schools available for use by the strategic partner. To
date, no programs have been offered under this arrangement, and additionally, no
e-commerce or network services have been delivered and no revenue has been
recognized by ZapMe!.
Deferred revenue consists of prepaid sponsorship fees.
AFFINITY PROGRAM
The Company has an affinity program designed to encourage ZapMe! users to
log onto the network and utilize various features of the Netspace and rewards
users with points which may be redeemed by connecting to participating
companies' websites through links inserted on the ZapMe! Netspace and selecting
items to purchase. The user will tender points and other consideration if
F-8
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
necessary to the e-commerce partner. For each purchase transacted by a user with
an e-commerce partner, the Company will earn a fee equal to a percentage of the
purchase. When the fee is earned from a transaction where points are tendered,
the Company will record the fee as a reduction to the award expense. To the
extent the fee is earned on a transaction in which points are not tendered, the
fee will be recognized as revenue earned. The effect of fees earned through the
affinity program will be recorded in the statement of operations in the month in
which the purchase transaction occurs between the user and the e-commerce
partner. The Company will record an expense for ZapPoints awards based upon the
full dollar equivalent of points which have been awarded and which are expected
to be redeemed.
STOCK-BASED COMPENSATION
The Company accounts for employee stock options using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25 and has
adopted the disclosure-only alternative of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123").
The value of warrants, options or stock exchanged for services is expensed
over the period benefitted. The warrants and options are valued using the
Black-Scholes option pricing model. To calculate the expense, the Company uses
either the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires the use of the liability method in
accounting for income taxes. Under this method, deferred tax assets and
liabilities are measured using enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
NET LOSS PER SHARE
Basic and diluted net loss per share information for all periods is
presented under the requirement of SFAS No. 128, "Earnings per Share." Basic
loss per share has been computed using net loss applicable to common
stockholders divided by the weighted-average number of common shares outstanding
during the period, less shares subject to repurchase, and excludes stock
options, warrants, and convertible securities. Such securities have also been
excluded from the computation of diluted net loss per share as their inclusion
would be antidilutive.
Pro forma net loss per share has been computed using net loss as adjusted
for accrued redeemable convertible preferred stock dividends divided by the
weighted-average number of shares outstanding and also gives effect, under
Securities and Exchange Commission guidance, to the conversion of preferred
shares not included above that will automatically convert upon completion of the
Company's initial offering, using the if-converted method. The conversion
assumes a one-for-one conversion of the preferred stock into common stock. Such
conversion is subject to adjustment based on the final pricing of the Company's
common stock in an initial public offering. The accretion of the redeemable
convertible preferred stock is excluded from the pro forma net loss per share
calculation as such accretion may also be adjusted based on the final pricing of
the Company's common stock in an initial public offering.
F-9
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The calculation of historical and pro forma basic and diluted net loss per
share is as follows (in thousands, expect per share amounts):
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 25, 1997
(INCEPTION) SIX MONTHS ENDED JUNE
THROUGH YEAR ENDED 30,
DECEMBER 31, DECEMBER 31, ------------------------
1997 1998 1998 1999
------------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Historical:
Net loss................................................. $ (581) $ (4,118) $ (1,063) $ (7,192)
Accretion and dividend on redeemable convertible
preferred stock........................................ -- (606) -- (936)
------------- ------------ ----------- -----------
Net loss applicable to common stockholders............... $ (581) $ (4,724) $ (1,063) $ (8,128)
------------- ------------ ----------- -----------
------------- ------------ ----------- -----------
Weighted average shares of common stock outstanding...... 11,183 12,739 11,859 14,311
Less: weighted average shares subject to repurchase...... -- 1,054 -- 794
------------- ------------ ----------- -----------
Weighted average shares of common stock outstanding used
in computing basic and diluted net loss per share...... 11,183 11,685 11,859 13,517
------------- ------------ ----------- -----------
------------- ------------ ----------- -----------
Basic and diluted net loss per share..................... $ (0.05) $ (0.40) $ (0.09) $ (0.60)
------------- ------------ ----------- -----------
------------- ------------ ----------- -----------
Pro forma (Unaudited):
Net loss applicable to common stockholders (from
above)................................................. $ (4,724) $ (8,128)
Accretion on redeemable convertible preferred stock...... 531 780
------------ -----------
Pro forma net loss....................................... $ (4,193) $ (7,348)
------------ -----------
------------ -----------
Weighted average shares used in computing basic and
diluted net loss per share (from above)................ 11,685 13,517
Adjustment to reflect the effect of the assumed
conversion of preferred stock from the date of
issuance............................................... 4,308 11,945
------------ -----------
Weighted average shares used in computing pro forma basic
and diluted net loss per share......................... 15,993 25,462
------------ -----------
------------ -----------
Pro forma basic and diluted net loss per share........... $ (0.26) $ (0.29)
------------ -----------
------------ -----------
</TABLE>
If the Company had reported net income, the calculation of historical and
pro forma diluted earnings per share would have included approximately an
additional 86,000, 938,000, 979,000 and 1,258,000 common equivalent shares
related to the outstanding stock options and warrants not included above
(determined using the treasury stock method at the estimated fair value) for the
period from June 25, 1997 (inception) through December 31, 1997, the year ended
December 31, 1998, and for the six months ended June 30, 1998 and 1999,
respectively.
F-10
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EFFECT OF NEW ACCOUNTING STANDARDS
The FASB issued Statement No. 131 ("SFAS 131"), "Disclosure about Segments
of an Enterprise and Related Information," which establishes standards for the
way public business enterprises report information in annual statements and
interim financial reports regarding operating segments, products and services,
geographic areas, and major customers. This statement is effective for financial
statements for periods beginning after December 15, 1997. The Company adopted
SFAS 131 in the year ended December 31, 1998, and operates in one business
segment which is building a broadband interactive network that brings technology
tools and educational resources to schools at no cost.
2. EQUIPMENT
Equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------- ---------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Computer and office equipment..................................... $ 43 $ 2,510 $ 10,397
Furniture and fixtures............................................ 10 176 362
--- --------- ---------
53 2,686 10,759
Less accumulated depreciation and amortization.................... (10) (215) (978)
--- --------- ---------
$ 43 $ 2,471 $ 9,781
--- --------- ---------
--- --------- ---------
</TABLE>
3. STOCKHOLDERS' EQUITY
PREFERRED STOCK
Preferred stock consists of the following by series:
<TABLE>
<CAPTION>
SHARES ISSUED AND OUTSTANDING
AUTHORIZED SHARES ---------------------------------
----------------------
DECEMBER DECEMBER 31,
31, JUNE 30, ---------------------- JUNE 30,
SERIES 1998 1999 1997 1998 1999
- ---------------------------------------- ----------- --------- ----- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
A convertible........................... 9,097,671 9,097,671 -- 9,097,671 9,097,671
B convertible........................... 660,000 660,000 -- 160,000 160,000
C redeemable convertible................ 600,000 600,000 -- 600,000 600,000
D convertible........................... 2,500,000 6,000,000 -- 300,000 5,894,110
--
----------- --------- --------- ---------
12,857,671 16,357,671 -- 10,157,671 15,751,781
--
--
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
The holders of Series A, Series B and Series D convertible preferred stock
are entitled to dividends when and if they are declared by the Board of
Directors prior to and in preference to any dividend on common stock. No
dividend or distribution can be declared or paid on any shares of Series A, B or
D convertible preferred stock unless all accrued but unpaid dividends on the
Series C redeemable convertible preferred stock have been paid. The holders of
Series C redeemable convertible preferred stock are entitled to a mandatory
dividend payable quarterly at the rate of 10% per annum
F-11
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
3. STOCKHOLDERS' EQUITY (CONTINUED)
of the liquidation preference. In the event the corporation does not pay a
dividend in cash, the preferred liquidation value of each such share is
automatically increased by an amount equal to the unpaid dividend amount. The
holders of Series D convertible preferred stock are entitled to a mandatory rate
increase of 15% per annum of the liquidation preference, compounded quarterly.
In the event of an initial public offering of the Company's common stock, the
liquidation value per share will be issued in shares of the Company's common
stock at a conversion price of $5.00 per share.
Each share of preferred stock is convertible, at the option of the holder,
into one share of the Company's common stock, subject to certain anti-dilution
provisions. Each share of preferred stock will be automatically converted into
common stock upon completion of an initial public offering of the Company's
common stock with proceeds to the Company of a minimum of $25,000,000 at a
minimum offering price of $8.00 per share of common stock. The holders of
preferred stock are entitled to the number of votes equal to the number of
shares of common stock into which their preferred stock is convertible.
The Series C redeemable convertible preferred stock is redeemable in the
event that the Company has not consummated a public offering or merger event on
or before August 27, 2000. The redemption price per share will equal twice the
preferred liquidation amount for each such share, together with accrued but
unpaid dividends on such shares. The carrying value of Series C redeemable
convertible preferred stock is being accreted to its redemption value by charges
to accumulated deficit during the development stage. In the event of any
liquidation, dissolution, or winding up of the Company, the holders of the
Series A, Series B, Series C and Series D preferred stock have a liquidation
preference of $0.10, $2.50, $5.00 and $5.00 per share, respectively, over
holders of common stock plus any declared but unpaid dividends. If the assets
and funds of the Company are insufficient to pay the aforesaid potential
amounts, the holders of Series C redeemable convertible preferred stock have
preference to the holders of Series A, Series B and Series D convertible
preferred stock.
In the event of an initial public offering of the Company's common stock
with an offering price of less than $15.00 or $10.00 per share, as adjusted for
stock splits or reverse splits, each holder of Series C redeemable convertible
and Series D convertible preferred stock, respectively, will be immediately
issued or deemed to hold additional shares of Series C and Series D preferred
stock which is convertible into shares of common stock at the closing of a
public offering using a conversion price pursuant to a pre-determined formula
which will compensate the holders for the lower offering price.
By way of example, if the offering price is $11.00 per share and the
offering closes on September 30, 1999, the Series C stockholders, Series D
stockholders and Series E stockholders would be entitled to receive
approximately 303,125 shares, 437,216 shares and 24,787 shares, respectively.
When such issuance of additional shares of common stock occurs, current and
prospective stockholders will suffer additional dilution with a resulting
increase in net loss applicable to common stockholders of $8,416,000 which will
also result in an increase in net loss per share applicable to common
stockholders.
F-12
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY (CONTINUED)
BRIDGE FINANCINGS
Between August 1997 and June 1998, the Company issued notes payable with
aggregate principal totaling $900,000 and interest rates of 5.87% to 6.50% per
annum. The principal amount of these notes was converted into 9,097,671 shares
of Series A convertible preferred stock in August 1998.
In May 1998, the Company issued notes payable with aggregate principal
totaling $400,000 and an interest rate of 8.5% per annum together with warrants
to purchase 500,000 shares of Series B convertible preferred stock. The
principal amount of these notes was converted into 160,000 shares of Series B
convertible preferred stock in August 1998.
In February 1999, the Company issued a $200,000 note payable with an
interest rate of 10% per annum. The principal amount was converted into 40,000
shares of Series D preferred stock in April 1999.
STOCK PLANS
The Company has two stock plans which provide for the granting of stock
options or shares of common stock to employees, directors and consultants. Stock
options are exercisable immediately upon issuance (subject to vesting
requirements) and generally have a term of 10 years. The Company typically
reserves the right of first refusal to purchase all shares held by the
participant upon termination of employment. Unvested options are canceled upon
termination of employment. Fully vested shares may be repurchased by the Company
at the higher of the original purchase price or the fair market value of the
shares as determined by the Board of Directors. The vesting schedule is
determined by the Board of Directors at the time of issuance. Stock options
generally vest over a period of between three and four years. The repurchase
right for vested shares expires upon the completion of an initial public
offering of the Company's common stock. The Company has reserved 4,400,000
shares of common stock for issuance under the plans. In January 1999, the
Company reserved an additional 1,000,000 shares of common stock for issuance
under the Plan.
F-13
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of activity under the Company's stock option plans is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Options granted................................................. 1,120,000 $ 0.02
--------- -----
Outstanding at December 31, 1997.................................. 1,120,000 0.02
Options granted................................................. 1,720,230 0.84
Options exercised............................................... (1,000,000) 0.02
Options canceled................................................ (91,000) 0.59
--------- -----
Outstanding at December 31, 1998.................................. 1,749,230 0.80
Options granted (unaudited)..................................... 1,192,946 2.94
Options exercised (unaudited)................................... (150,650) 0.12
Options canceled (unaudited).................................... (278,669) 0.55
--------- -----
Outstanding at June 30, 1999 (unaudited).......................... 2,512,857 $ 1.87
--------- -----
--------- -----
Vested and Exercisable at December 31, 1997....................... 166,666 $ 0.02
--------- -----
--------- -----
Vested and exercisable at December 31, 1998....................... 152,742 $ 0.42
--------- -----
--------- -----
Vested and exercisable at June 30, 1999 (unaudited)............... 167,773 $ 2.34
--------- -----
--------- -----
Outstanding shares of common stock that may be repurchased at
December 31, 1998............................................... 977,684
---------
---------
Outstanding shares of common stock that may be repurchased at June
30, 1999 (unaudited)............................................ 654,215
---------
---------
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS VESTED AND
OPTIONS OUTSTANDING EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE
NUMBER PRICE CONTRACTUAL LIFE NUMBER PRICE
EXERCISE PRICES OF SHARES PER SHARE (YEARS) OF SHARES PER SHARE
- ------------------ --------- ------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$0.02 - $0.275.... 699,730 $ 0.16 9.23 118,742 $ 0.11
$1.00 - $1.10..... 628,500 $ 1.05 9.74 -- --
$1.50............. 421,000 $ 1.50 9.95 34,000 $ 1.50
--------- -----------
1,749,230 152,742
--------- -----------
--------- -----------
</TABLE>
F-14
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options at June 30, 1999:
<TABLE>
<CAPTION>
OPTIONS VESTED AND
OPTIONS OUTSTANDING EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE
NUMBER PRICE CONTRACTUAL LIFE NUMBER PRICE
EXERCISE PRICES OF SHARES PER SHARE (YEARS) OF SHARES PER SHARE
- ------------------ --------- ------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$0.02 - $0.275.... 326,411 $ 0.18 8.77 48,573 $ 0.19
$1.00 - $1.10..... 627,500 $ 1.05 9.28 -- --
$1.50 - $2.50..... 1,182,846 $ 2.14 9.67 39,200 $ 1.63
$3.00 - $4.00..... 376,100 $ 3.89 9.98 80,000 $ 4.00
--------- -----------
2,512,857 167,773
--------- -----------
--------- -----------
</TABLE>
During the year ended December 31, 1998, the Company also granted 1,350,000
shares of common stock to an officer of the Company (Note 6) under the 1998
Stock Plan at a price of $0.12 per share which was below the deemed fair market
value at the date of grant of $0.50 per share. As a result, the Company recorded
deferred compensation of $510,000 during the year ended December 31, 1998
representing the difference between the price paid per share and the deemed fair
value of the Company's common stock. These amounts are being amortized by
charges to operations over the vesting period of the stock of approximately four
years resulting in amortization of approximately $73,000 for the year ended
December 31, 1998 and $143,000 for the six months ended June 30, 1999. The
Company has the right to buy back the unvested portion of this common stock if
certain milestones are not met by the officer. If the Company elects to
repurchase the unvested portion, the Company will retire the stock using the
treasury method.
The Company recorded deferred stock compensation of approximately $381,000
during the year ended December 31, 1998 and $846,000 during the six months ended
June 30, 1999 representing the difference between the exercise price and the
deemed fair value of the Company's common stock on the grant date for certain of
the Company's stock options granted to employees. In the absence of a public
market for the Company's common stock, the deemed fair value was based on the
price per share of recent preferred stock financings, less a discount to give
effect to the superior rights of the preferred stock. These amounts are being
amortized by charges to operations over the vesting periods of the individual
stock options using a graded vesting method. Such amortization amounted to
approximately $39,000 for the year ended December 31, 1998 and approximately
$221,000 for the six months ended June 30, 1999.
In 1997 and 1998, the Company issued 1,858,730 and 1,350,000 shares,
respectively, of common stock to employees in exchange for services. The common
stock issued was recorded at the estimated fair value of the commmon stock at
the time the services were performed and the expense was recorded. The Company's
management believes that the value of the common stock issued approximates the
value of the services received.
F-15
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY (CONTINUED)
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION
Pro forma information regarding results of operations and net loss per share
is required by SFAS 123, which also requires that the information be determined
as if the Company had accounted for its employee stock options under the fair
value method of SFAS 123. The fair value for these options was estimated at the
date of grant using a Black-Scholes option valuation model with the following
weighted average assumptions: a risk-free interest rate of 5.5% for the period
from June 25, 1997 (inception) through December 31, 1997 and the year ended
December 31, 1998, no dividend yield or volatility factors of the expected
market price of the Company's common stock, and a weight-average expected life
of the option of three and one-half years.
The option valuation models were developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock-based compensation plans been
determined using the fair value at the grant dates for awards under those plans
calculated using the minimum value method of SFAS 123, the Company's net loss
(in thousands) and pro forma basic and diluted net loss per share would have
been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 25, 1997
(INCEPTION)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
------------- ------------
<S> <C> <C>
Net loss--pro forma.............................................. $ (584) $ (4,133)
------ ------------
------ ------------
Net loss per share--pro forma.................................... $ (0.05) $ (0.35)
------ ------------
------ ------------
</TABLE>
The weighted-average fair value of options granted for the period from
inception to December 31, 1997, the year ended December 31, 1998, and for the
six months ended June 30, 1999 was $0.01, $0.16, and $0.56, respectively.
The effect on pro forma net loss is not necessarily indicative of the effect
on pro forma net loss in future years, as future years will include the effects
of additional years of stock option grants.
F-16
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY (CONTINUED)
SHARES RESERVED FOR FUTURE ISSUANCE
At December 31, 1998, the Company reserved shares of capital stock for
future issuance as follows:
<TABLE>
<CAPTION>
PREFERRED
COMMON STOCK STOCK
-------------- --------------
<S> <C> <C>
Convertible preferred stock, including effect of preferred
stock warrants............................................. 10,663,171 10,157,671
Warrants to purchase stock................................... -- 505,500
Stock options outstanding.................................... 1,749,230 --
Stock options and shares available for grant................. 300,770 --
-------------- --------------
12,713,171 10,663,171
-------------- --------------
-------------- --------------
</TABLE>
WARRANTS
The Company had the following warrants outstanding at December 31, 1998 to
purchase shares of stock:
<TABLE>
<CAPTION>
PREFERRED EXERCISE PRICE
NUMBER OF SHARES STOCK PER SHARE EXPIRATION OF WARRANTS
- ----------------- ---------- --------------- -------------------------------------------------------------------
<C> <C> <C> <S>
250,000 Series B $ 3.00 May 2003
250,000 Series B 3.50 May 2003
5,500 Series D 5.00 Earlier of November 2005 or close of an initial public offering
-------
505,500
-------
-------
</TABLE>
4. INCOME TAXES
Significant components of the Company's deferred tax assets are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1998
--------- ---------
<S> <C> <C>
Net operating loss carryforwards........................................... $ 138 $ 1,633
Accrued compensation....................................................... 82 101
Other...................................................................... -- 118
--------- ---------
Total deferred tax assets.................................................. 220 1,852
Valuation allowance........................................................ (220) (1,852)
--------- ---------
Net deferred tax assets.................................................... $ -- $ --
--------- ---------
--------- ---------
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net deferred
tax assets have been fully offset by a valuation allowance. The valuation
allowance increased by approximately $220,000 and $1,632,000 in the years ended
December 31, 1997 and 1998, respectively.
F-17
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
At December 31, 1997 and 1998, the Company had net operating loss
carryforwards for federal income tax purposes of approximately $344,000 and
$4,082,000, respectively, which expire in tax years 2012 through 2018.
Utilization of the net operating losses may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986. The annual limitation may result in the expiration of net
operating losses before utilization.
5. COMMITMENTS AND CONTINGENCIES
The Company leases its office facility and certain office equipment under
non-cancelable lease agreements, which require the Company to pay a portion of
operating costs, including property taxes, insurance, and normal maintenance.
Rent expense amounted to approximately $41,000 and $206,000 for the period from
June 25, 1997 (inception) through December 31, 1997 and the year ended December
31, 1998, respectively.
Capital lease obligations represent the present value of future rental
payments under capital lease agreements for equipment. The original cost of the
equipment under capital leases is $390,000 at December 31, 1998 (none in 1997) .
The related amortization is included with depreciation expense. As part of one
of its capital lease agreements, the Company has issued warrants to purchase
5,500 shares of Series D convertible preferred stock which are outstanding at
December 31, 1998.
Future minimum payments under capital and operating leases are as follows
(in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31: LEASES LEASES
- ------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
1999................................................................... $ 142 $ 244
2000................................................................... 149 244
2001................................................................... 146 240
2002................................................................... 1 156
----- -----
Total minimum lease payments............................................. 438 $ 884
-----
-----
Less amount representing interest........................................ (51)
-----
Present value of minimum lease payments.................................. 387
Less current portion of capital lease obligations........................ (118)
-----
$ 269
-----
-----
</TABLE>
As of June 30, 1999, the Company has obtained credit lines from a number of
lease finance companies for the purpose of acquiring computer and network
equipment in schools. In aggregate, the Company has entered into lease finance
agreements which allow for borrowings of up to approximately $20,145,000, bear
per annum interest rates from 10.5% to 18%, and have terms ranging from 24 to 36
months. In addition, the Company has issued a letter of credit to two companies
as security against the leases. As of June 30, 1999, the Company has drawn down
approximately $6,768,000 from these credit lines.
The Company is a party to an arbitration and related counterclaim with a
former officer of the Company relating to this officer's employment with the
Company. Management believes the Company
F-18
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
is adequately covered by insurance, or that the ultimate liability, if any,
would not have a materially adverse effect on the Company's results of
operations or financial position. However, depending on the amount and timing,
an unfavorable resolution of these matters could materially affect the Company's
future results of operations or cash flows in a particular period.
6. NOTES RECEIVABLE FROM STOCKHOLDER
During the year ended December 31, 1998, the Company loaned an officer
$125,000 in exchange for a promissory note. The unsecured note bears interest at
5.35% per annum, with interest and principal due December 31, 1999.
7. RELATED PARTY TRANSACTIONS
An officer of the Company owns other businesses which engage in financing
transactions with the Company. Amounts paid to these related entities were
approximately $12,000 and $163,000 for the period from June 25, 1997 (inception)
through December 31, 1997 and during the year ended December 31, 1998,
respectively.
Between June and October 1997, the Company issued promissory notes to an
officer of the Company aggregating approximately $156,000, which bore interest
at 12.0% per annum and was repaid, along with accrued interest, in September
1998.
In March 1999, the Company entered into an agreement with a stockholder in
which the Company has granted the stockholder an exclusive right to deliver
certain products and services on the Company's systems in schools. The Company
will earn fees based upon the number of eligible schools and the length of time
eligible schools have been operational. The initial term of the agreement will
expire on December 31, 2003 with a five year renewal option subject to the
Company earning certain minimum fees from the agreement. As consideration for
the agreement, the Company issued the stockholder a warrant to purchase 150,000
shares of the Company's common stock at $5.00 per share. The warrant is
exercisable in whole if the Company earns a minimum fee per eligible school
during the year ended December 31, 2003. The Company will recognize a charge to
operations based on the value of the warrant at the time the milestones are
achieved.
The Company purchases certain data communications equipment from one of its
stockholders. Through June 30, 1999, the Company has paid approximately $1.8
million to the stockholder for equipment, consulting services, and software
license fees.
In September 1998, the Company paid a stockholder $180,000 in consulting
fees in connection with the issuance of Series C preferred stock.
In January 1999, the Company issued a promissory note in the amount of
$500,000 to a member of the Company's board of directors, bearing an interest
rate of 12.0% per annum. The note and approximately $12,000 of interest was paid
in April 1999.
In August 1999, a majority of ZapMe!'s directors, approved the issuance of
an immediately exercisable non-statutory option to purchase 300,000 shares of
the Company's common stock to an officer of the Company at an exercise price of
$5.00 per share. The shares are subject to a right of repurchase in favor of
ZapMe!, which will expire at a rate of one third on each anniversary of the date
F-19
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
of grant. ZapMe! has agreed to loan the officer, at his request, the amount
necessary to pay for the aggregate exercise price of the option, which loan will
be secured by the shares purchased on exercise of the option.
8. SUBSEQUENT EVENTS
PROPOSED PUBLIC OFFERING OF COMMON STOCK
In August 1999, the Board of Directors authorized the Company to proceed
with an initial public offering of its common stock. If the offering is
consummated as presently anticipated, all of the outstanding preferred stock
will automatically convert into common stock. The unaudited pro forma
stockholders' equity at June 30, 1999 gives effect to the conversion of all
outstanding shares of convertible preferred stock at that date into shares
of common stock upon the completion of the offering.
REINCORPORATION
In connection with the Company's reincorporation in the state of Delaware,
the Board of Directors authorized an increase in the number of authorized shares
of common stock to 200,000,000 and an increase in the number of authorized
shares of preferred stock to 23,357,671 shares, subject to stockholder approval.
Effective immediately prior to the closing of the initial public offering of its
common stock, the Board of Directors authorized, subject to stockholder
approval, a decrease in the number of authorized shares of preferred stock to
5,000,000.
OPTION PLAN
In August 1999, the Company's Board of Directors approved, subject to
stockholder approval, the amended and restated 1998 Stock Plan. The plan allows
for the addition of 1,500,000 shares of common stock to be offered under the
plan as well as an annual increase commencing January 1, 2000 equal to the
lowest of 2,000,000, 5% of the outstanding shares of the Company's common stock
on the first day of the fiscal year, or such other amount as determined by the
Board of Directors.
1999 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1999 Employee Stock Purchase Plan was adopted by the Board of
Directors in August 1999 to be effective upon the completion of the Company's
initial public offering of its common stock, subject to stockholders' approval.
The Company has reserved a total of 500,000 shares of common stock for issuance
under this plan. Eligible employees may purchase common stock at 15% of the
lesser of the fair market value of the Company's common stock on the first day
of the applicable six-month offering period at the date of purchase. In
addition, the plan provides for automatic annual increases in the number of
shares available for issuance on the first day of each fiscal year equal to the
lowest of 1,000,000, 2% of the outstanding shares of the Company's common stock
on the first day of the fiscal year, or such other amount as determined by the
Board of Directors.
F-20
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SUBSEQUENT EVENTS (CONTINUED)
SERIES E PREFERRED STOCK
In August 1999, the Board of Directors authorized 2,030,000 shares of Series
E preferred stock. The holders of Series E preferred stock are entitled to
dividends when and if they are declared by the Board of Directors prior to and
in preference to any dividend or common stock. In the event of any liquidation,
dissolution, or winding up of the Company, the holders of the Series E preferred
stock have a liquidation preference of $5.00 over holders of common stock plus
any declared but unpaid dividends. The holders of Series E preferred stock are
entitled to a mandatory rate increase of 7.5% per annum of the liquidation
preference, compounded quarterly. In the event of an initial public offering of
the Company's common stock, the liquidation value per share will be issued in
shares of common stock at a conversion price of $5.00. In August 1999, the
Company issued 2,030,000 shares of Series E preferred stock, with gross proceeds
to the Company of approximately $10,150,000.
WARRANTS
The Company has agreed to issue warrants to a number of lease financing
companies. As of June 30, 1999, the Company is obligated to issue warrants for
100,000 shares of Series D convertible preferred stock and 140,000 shares of
common stock, of which 100,000 was issued subsequent to June 30, 1999. The value
of the warrants, if any, will be determined by management at the issuance date.
F-21
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THROUGH AND INCLUDING , 1999, (THE 25(TH) DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
[ ] SHARES
[LOGO]
COMMON STOCK
--------------
P R O S P E C T U S
--------------
MERRILL LYNCH & CO.
DEUTSCHE BANC ALEX. BROWN
THOMAS WEISEL PARTNERS LLC
WIT CAPITAL CORPORATION
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts, commissions and certain accountable expenses, payable by
the Registrant in connection with the sale of Common Stock being registered. All
amounts are estimates except the SEC registration fee, the NASD filing fee and
the Nasdaq National Market Initial Listing Fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 34,528
NASD Filing Fee.................................................... 12,920
Nasdaq National Market Initial Listing Fee......................... 1,000
Printing Fees and Expenses.........................................
Legal Fees and Expenses............................................
Accounting Fees and Expenses.......................................
Blue Sky Fees and Expenses......................................... 3,000
Transfer Agent and Registrar Fees..................................
Miscellaneous......................................................
---------
Total............................................................ $
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our bylaws provide that we will indemnify our directors and executive
officers and may indemnify our other officers, employees and other agents to the
fullest extent permitted by the General Corporations Law of the State of
Delaware, as amended. We are also empowered under our bylaws to enter into
indemnification agreements with our directors and officers and to purchase
insurance on behalf of any person whom we are required or permitted to
indemnify. We have entered into indemnification agreements with each of our
directors and executive officers and intend to obtain a policy of directors' and
officers' liability insurance that insures such persons against the cost of
defense, settlement or payment of a judgment under certain circumstances.
We have entered into agreements with our directors and executive officers
regarding indemnification. Under these agreements we are required to indemnify
them against expenses, judgments, fines, settlements and other amounts actually
and reasonably incurred (including expenses of a derivative action) in
connection with an actual, or a threatened, proceeding if any of them may be
made a party because he or she is or was one of our directors or officers. We
are obligated to pay these amounts only if the officer or director acted in good
faith and in a manner that he or she reasonably believed to be in (or not
opposed to) our best interests. With respect to any criminal proceeding, we are
obligated to pay these amounts only if the officer or director had no reasonable
cause to believe his or her conduct was unlawful. The indemnification agreements
also set forth procedures that will apply in the event of a claim for
indemnification thereunder.
In addition, our amended and restated certificate of incorporation filed in
connection with this offering provides that the liability of our directors for
monetary damages shall be eliminated to the fullest extent permissible under the
General Corporation Law of the State of Delaware, as amended. This provision in
our amended and restated certificate of incorporation does not eliminate a
director's duty of care, and, in appropriate circumstances, equitable remedies
such as an injunction or other forms of non-monetary relief would remain
available. Each director will continue to be subject to liability for breach of
the director's duty of loyalty to us, for acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law, for acts or
omissions that the director believes to be contrary to our best interests or our
stockholders, for any transaction from which the
II-1
<PAGE>
director derived an improper personal benefit, for improper transactions between
the director and us and for improper distributions to stockholders and loans to
directors and officers. This provision also does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
There is no pending litigation or proceeding involving any of our directors
or officers as to which indemnification is being sought, nor are we aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since June 1997 (inception), we issued and sold the following unregistered
securities:
1. On June 25, 1997 we issued and sold an aggregate of 5,000,000
shares of common stock to Lance Mortensen for an aggregate purchase
price of $50,000. On September 3, 1997, we issued 743,492 shares of
common stock to Darryl Deaton and 185,873 shares of common stock to
John Evleth, each in lieu of wages owed. On June 1, 1998 these
shares were split two-for-one pursuant to a stock dividend.
2. On August 1, 1997, October 17, 1997, December 22, 1997, January 22,
1998, March 23, 1998 and June 9, 1998, we issued convertible
promissory notes to certain investors for an aggregate amount of
$900,000. On August 5, 1998, the principal of the notes and the
interest which had accrued converted into 9,097,671 shares of our
Series A preferred stock.
3. On May 7, 1998 we issued a warrant to Wharton Capital Partners,
Ltd. to purchase up to 500,000 shares of our Series B preferred
stock, 250,000 of which at an exercise price of $3.00 per share and
250,000 of which at an exercise price of $3.50 per share.
4. On August 5, 1998, we issued and sold 160,000 shares of our Series
B preferred stock to certain investors for an aggregate purchase
price of $400,000.
5. On August 27, 1998, we issued and sold 600,000 shares of our Series
C preferred stock to certain investors for an aggregate purchase
price of $3,000,000.
6. On December 3, 1998, February 1, 1999, March 31, 1999 and May 28,
1999, we issued and sold an aggregate of 5,894,110 shares of our
Series D preferred stock to certain investors for an aggregate
purchase price of $29,470,550.
7. On November 30, 1998 and March 9, 1999, in connection with the
execution of an equipment financing agreement, we issued warrants
to FirstCorp to purchase up to an aggregate of 5,890 shares of
Series D preferred stock at an exercise price of $5.00 per share.
8. On March 9, 1999, we issued a warrant to Sylvan Learning Systems,
Inc., a corporate partner, to purchase up to 150,000 shares of
common stock at an exercise price of $5.00 per share.
9. On August 4, 1999, we issued and sold an aggregate of 2,030,000
shares of our Series E preferred stock to certain investors for an
aggregate purchase price of $10,150,000.
II-2
<PAGE>
10. From October 15, 1997 to June 30, 1999 we granted options and
rights under our 1997 Stock Option Plan and 1998 Stock Plan to
purchase an aggregate of 5,383,176 shares of our common stock at
exercise prices ranging from $0.015 to $4.00 to employees,
directors and consultants.
11. From August 6, 1998 through June 30, 1999 an aggregate of 2,500,650
shares of common stock were issued pursuant to option and right
exercises at exercise prices ranging from $0.015 to $0.25 to
employees, directors and consultants.
The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b)
of the Securities Act as transactions by an issuer not involving a public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and warrants issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<C> <S>
1.1(**) Form of Underwriting Agreement.
2.1 Agreement and Plan of Merger dated , 1999 of ZapMe! Delaware Corporation,
a Delaware corporation, and ZapMe! Corporation, a California corporation.
3.1(*) Amended and Restated Articles of Incorporation effective prior to
reincorporation of the Company in Delaware.
3.2 Bylaws effective prior to reincorporation of the Company in Delaware.
3.3 Form of Amended and Restated Certificate of Incorporation to be filed and become
effective prior to effectiveness of this Registration Statement.
3.4 Form of Bylaws to become effective prior to effectiveness of this Registration
Statement.
3.5 Form of Second Amended and Restated Certificate of Incorporation to be filed and
become effective upon the closing of this offering.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2(*) Specimen Stock Certificate of Registrant.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, with
respect to the securities being issued.
10.1(*) Fourth Amended and Restated Investors' Rights Agreement.
10.2(*) ZapMe! Corporation f.k.a. Satellite Online Solutions Corporation, 1997 Employee
Stock Option Plan and form of Agreement.
10.3(*) ZapMe! Corporation 1998 Stock Plan, as amended and restated August 2, 1999, and
forms of Agreement.
10.4(*) ZapMe! Corporation 1999 Employee Stock Purchase Plan and form of Agreement.
10.5(*) Common Stock Purchase Agreement dated September 1, 1997 by and between the
Company and John Evleth.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<C> <S>
10.6(*) Common Stock Purchase Agreement dated September 1, 1997 by and between the
Company and Darryl Deaton.
10.7(*) Employment Agreement dated June 1, 1997 by and between the Company and Darryl N.
Deaton.
10.8(*) Employment Offer Letter dated March 24, 1999 between the Company and Robert J.
Rudy.
10.9(*) Employment Offer Letter dated April 7, 1999 between the Company and Donald D.
Kingsborough.
10.10(*) Settlement Agreement and Mutual Release dated January 29, 1999 between the
Company and Joshua K. Marks.
10.11(*) Warrant Agreement between the Company and FirstCorp, dated as of November 30,
1998.
10.12(*) Warrant Agreement between the Company and Sylvan Learning Systems dated as of
March 3, 1999.
10.13(*) Warrant Agreement between the Company and FirstCorp, dated as of February 23,
1999.
10.14(*) Warrant Agreement between the Company and Barry R. Minsky, dated as of May 7,
1998.
10.15(*) Office Lease between the Company and Alexander Properties Company, dated August
6, 1997, and Addendums dated August 7, 1998, September 15, 1998, October 14,
1998, October 22, 1998 and April 16, 1999.
10.16(*) Form of School Subscription Agreement.
10.17(*) Form of Indemnification Agreement entered into between the Registrant and its
directors and officers.
+10.18(*) Letter Services Agreement between the Company and Spacenet, Inc., dated February
10, 1999, Service Agreement dated June 11, 1999 and Amendment No. 1 to
Services Agreement dated July 19, 1999.
+10.19(*) Products and Services Agreement between the Company and Sylvan Learning Systems,
Inc., dated March 3, 1999.
+10.20(*) Letter of Understanding between the Company and Microsoft Corporation, dated
November 13, 1998.
+10.21(*) Marketing Agreement between the Company and New Sub Services, dated August 3,
1999.
+10.22(*) Memorandum of Understanding between the Company and School Specialty, Inc.
10.23(*) Advertising Pilot Agreement between the Company and Xerox Channels Group, dated
June 30, 1999.
10.24 Voting Agreement among the Company, Lance Mortensen and QuestMark Partners,
L.P., dated May 28, 1999.
21.1(**) Subsidiaries of the Registrant.
23.1(*) Consent of Ernst & Young LLP, Independent Auditors.
23.2(*) Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included
in Exhibit 5.1).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<C> <S>
24.1(*) Power of Attorney (see Page II-6).
27.1(*) Financial Data Schedule.
</TABLE>
- ------------------------
+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
(*) Previously filed.
(**) To be filed by amendment.
(b) Financial Statement Schedules
Schedules have been omitted because the information required to be set forth
therein is not applicable or is shown in the financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referenced in Item 14 of this Registration
Statement or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered hereunder,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereto which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement; and (iii) to include
any material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Ramon, State of California, on the 13th day of September, 1999.
<TABLE>
<S> <C> <C>
ZAPME! CORPORATION
By /s/ LANCE MORTENSEN
-----------------------------------------
Name: Lance Mortensen
Title: CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
</TABLE>
POWER OF ATTORNEY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON SEPTEMBER 13,
1999 IN THE CAPACITIES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ LANCE MORTENSEN Chairman and Chief
- ------------------------------ Executive Officer,
Lance Mortensen Director
Chief Financial Officer
/s/ ROBERT STOFFREGEN and Assistant Secretary
- ------------------------------ (Principal accounting
Robert Stoffregen and financial officer)
/s/ DARRYL DEATON
- ------------------------------ Vice President and
Darryl Deaton Director
/s/ MICHAEL ARNOUSE
- ------------------------------ Director
Michael Arnouse
/s/ DOUGLAS BECKER
- ------------------------------ Director
Douglas Becker
/s/ YOEL GAT
- ------------------------------ Director
Yoel Gat
/s/ THOMAS HITCHNER
- ------------------------------ Director
Thomas Hitchner
/s/ JACK KEMP
- ------------------------------ Director
Jack Kemp
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER
--------
<C> <S>
1.1(**) Form of Underwriting Agreement.
2.1 Agreement and Plan of Merger dated , 1999 of ZapMe! Delaware Corporation, a Delaware corporation, and
ZapMe! Corporation, a California corporation.
3.1(*) Amended and Restated Articles of Incorporation effective prior to reincorporation of the Company in Delaware.
3.2 Bylaws effective prior to reincorporation of the Company in Delaware.
3.3 Form of Amended and Restated Certificate of Incorporation to be filed and become effective prior to
effectiveness of this Registration Statement.
3.4 Form of Bylaws to become effective prior to effectiveness of this Registration Statement.
3.5 Form of Second Amended and Restated Certificate of Incorporation to be filed and become effective upon the
closing of this offering.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2(*) Specimen Stock Certificate of Registrant.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, with respect to the securities being
issued.
10.1(*) Fourth Amended and Restated Investors' Rights Agreement.
10.2(*) ZapMe! Corporation f.k.a. Satellite Online Solutions Corporation, 1997 Employee Stock Option Plan and form of
Agreement.
10.3(*) ZapMe! Corporation 1998 Stock Plan, as amended and restated August 2, 1999, and forms of Agreement.
10.4(*) ZapMe! Corporation 1999 Employee Stock Purchase Plan and form of Agreement.
10.5(*) Common Stock Purchase Agreement dated September 1, 1997 by and between the Company and John Evleth.
10.6(*) Common Stock Purchase Agreement dated September 1, 1997 by and between the Company and Darryl Deaton.
10.7(*) Employment Agreement dated June 1, 1997 by and between the Company and Darryl N. Deaton.
10.8(*) Employment Offer Letter dated March 24, 1999 between the Company and Robert J. Rudy.
10.9(*) Employment Offer Letter dated April 7, 1999 between the Company and Donald D. Kingsborough.
10.10(*) Settlement Agreement and Mutual Release dated January 29, 1999 between the Company and Joshua K. Marks.
10.11(*) Warrant Agreement between the Company and FirstCorp, dated as of November 30, 1998.
10.12(*) Warrant Agreement between the Company and Sylvan Learning Systems dated as of March 3, 1999.
10.13(*) Warrant Agreement between the Company and FirstCorp, dated as of February 23, 1999.
10.14(*) Warrant Agreement between the Company and Barry R. Minsky, dated as of May 7, 1998.
10.15(*) Office Lease between the Company and Alexander Properties Company, dated August 6, 1997, and Addendums dated
August 7, 1998, September 15, 1998, October 14, 1998, October 22, 1998 and April 16, 1999.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER
--------
<C> <S>
10.16(*) Form of School Subscription Agreement.
10.17(*) Form of Indemnification Agreement entered into between the Registrant and its directors and officers.
+10.18(*) Letter Services Agreement between the Company and Spacenet, Inc., dated February 10, 1999, Service Agreement
dated June 11, 1999 and Amendment No. 1 to Services Agreement dated July 19, 1999.
+10.19(*) Products and Services Agreement between the Company and Sylvan Learning Systems, Inc., dated March 3, 1999.
+10.20(*) Letter of Understanding between the Company and Microsoft Corporation, dated November 13, 1998.
+10.21(*) Marketing Agreement between the Company and New Sub Services, dated August 3, 1999.
+10.22(*) Memorandum of Understanding between the Company and School Specialty, Inc.
10.23(*) Advertising Pilot Agreement between the Company and Xerox Channels Group, dated June 30, 1999.
10.24 Voting Agreement among the Company, Lance Mortensen and QuestMark Partners, L.P., dated May 28, 1999.
21.1(**) Subsidiaries of the Registrant.
23.1(*) Consent of Ernst & Young LLP, Independent Auditors.
23.2(*) Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit 5.1).
24.1(*) Power of Attorney (see Page II-6).
27.1(*) Financial Data Schedule.
</TABLE>
- ------------------------
+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
(*) Previously filed.
(**) To be filed by amendment.
<PAGE>
AGREEMENT AND PLAN OF MERGER
OF ZAPME! DELAWARE CORPORATION
(A DELAWARE CORPORATION),
AND
ZAPME! CORPORATION
(A CALIFORNIA CORPORATION)
THIS AGREEMENT AND PLAN OF MERGER dated as of ____________, 1999 (the
"Agreement") is between ZapMe! Delaware Corporation, a Delaware corporation
("ZapMe! Delaware"), and ZapMe! Corporation, a California corporation ("ZapMe!
California"). ZapMe! Delaware and ZapMe! California are sometimes referred to
herein as the "Constituent Corporations".
RECITALS
A. ZapMe! Delaware is a corporation duly organized and existing under
the laws of the State of Delaware and has an authorized capital of
225,417,671 shares, $.01 par value, 200,000,000 of which are designated "Common
Stock", and 25,417,671 of which are designated "Preferred Stock". As of
July 31, 1999, 1,000 shares of Common Stock were issued and outstanding, all of
which are held by ZapMe! California, and no shares of Preferred Stock were
outstanding.
B. ZapMe! California is a corporation duly organized and existing
under the laws of the State of California and has an authorized capital of
70,417,671 shares, $0.01 par value per share, of which 50,000,000 are designated
"Common Stock," and 20,417,671 of which are designated "Preferred Stock." The
Preferred Stock is divided into five series, namely Series A Preferred Stock,
consisting of 9,097,171 shares, Series B Preferred Stock, consisting of 660,000
shares, Series C Preferred Stock, consisting of 600,000 shares, Series D
Preferred Stock, consisting of 8,030,000 shares and Series E Preferred Stock,
consisting of 2,030,000 shares. As of ________, 1999, ________ shares of Common
Stock and ________ shares of Series A Preferred Stock, ________ shares of
Series B Preferred Stock, ________ shares of Series C Preferred Stock, ________
shares of Series D Preferred Stock and ________ shares of Series E Preferred
were issued and outstanding. As of ________, 1999, there were (i) outstanding
options to purchase an aggregate of ________ shares of Common Stock pursuant to
the 1997 Stock Option Plan and the 1998 Stock Plan, (ii) outstanding warrants to
purchase an aggregate of _________ shares of Common Stock, (iii) outstanding
warrants to purchase an aggregate of ________ shares of Series B Preferred
Stock, (iv) outstanding warrants to purchase an aggregate of ________ shares of
Series D Preferred Stock and (v) ________ shares of Common Stock reserved for
future option grants.
C. The Board of Directors of ZapMe! California has determined that,
for the purpose of effecting the reincorporation of ZapMe! California in the
State of Delaware, it is advisable and in the best interests of ZapMe!
California and its shareholders that ZapMe! California merge with and into
ZapMe! Delaware upon the terms and conditions herein provided.
<PAGE>
D. The respective Boards of Directors of ZapMe! Delaware and ZapMe!
California have approved this Agreement and have directed that this Agreement be
submitted to a vote of their respective shareholders and executed by the
undersigned officers.
NOW, THEREFORE, in consideration of the mutual agreements and covenants
set forth herein, ZapMe! Delaware and ZapMe! California hereby agree, subject to
the terms and conditions hereinafter set forth, as follows:
I MERGER
I.1 MERGER. In accordance with the provisions of this Agreement,
the Delaware General Corporation Law and the California General Corporation
Law, ZapMe! California shall be merged with and into ZapMe! Delaware (the
"Merger"), the separate existence of ZapMe! California shall cease, and
ZapMe! Delaware shall be, and is herein sometimes referred to as, the
"Surviving Corporation," and the name of the Surviving Corporation shall be
ZapMe! Corporation.
I.2 FILING AND EFFECTIVENESS. The Merger shall become effective when
the following actions shall have been completed:
(a) This Agreement and the Merger shall have been adopted and
approved by the stockholder/shareholders of each Constituent Corporation
in accordance with the requirements of the Delaware General Corporation
Law and the California General Corporation Law;
(b) All of the conditions precedent to the consummation of the
Merger specified in this Agreement shall have been satisfied or duly
waived by the party entitled to satisfaction thereof; and
(c) An executed Certificate of Merger or an executed
counterpart of this Agreement meeting the requirements of the Delaware
General Corporation Law shall have been filed with the Secretary of State
of the State of Delaware.
The date and time when the Merger shall become effective, as aforesaid, is
herein called the "Effective Date of the Merger."
I.3 EFFECT OF THE MERGER. Upon the Effective Date of the Merger, the
separate existence of ZapMe! California shall cease, and ZapMe! Delaware, as the
Surviving Corporation, (i) shall continue to possess all of its assets, rights,
powers and property as constituted immediately prior to the Effective Date of
the Merger, (ii) shall be subject to all actions previously taken by its and
ZapMe! California's Board of Directors, (iii) shall succeed, without other
transfer, to all of the assets, rights, powers and property of ZapMe! California
in the manner as more fully set forth in Section 259 of the Delaware
-2-
<PAGE>
General Corporation Law, (iv) shall continue to be subject to all of its debts,
liabilities and obligations as constituted immediately prior to the Effective
Date of the Merger, and (v) shall succeed, without other transfer, to all of the
debts, liabilities and obligations of ZapMe! California in the same manner as if
ZapMe! Delaware had itself incurred them, all as more fully provided under the
applicable provisions of the Delaware General Corporation Law and the California
General Corporation Law.
II CHARTER DOCUMENTS, DIRECTORS AND OFFICERS
II.1 CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of
ZapMe! Delaware as in effect immediately prior to the Effective Date of the
Merger shall continue in full force and effect as the Certificate of
Incorporation of the Surviving Corporation until duly amended in accordance with
the provisions thereof and applicable law.
II.2 BYLAWS. The Bylaws of ZapMe! Delaware as in effect immediately
prior to the Effective Date of the Merger shall continue in full force and
effect as the Bylaws of the Surviving Corporation until duly amended in
accordance with the provisions thereof and applicable law.
II.3 DIRECTORS AND OFFICERS. The directors and officers of ZapMe!
California immediately prior to the Effective Date of the Merger shall be the
directors and officers of the Surviving Corporation until their successors shall
have been duly elected and qualified or until as otherwise provided by law, the
Certificate of Incorporation of the Surviving Corporation or the Bylaws of the
Surviving Corporation.
III MANNER OF CONVERSION OF STOCK
III.1 ZAPME! CALIFORNIA COMMON STOCK. Upon the Effective Date of the
Merger, each one (1) shares of ZapMe! California Common Stock issued and
outstanding immediately prior thereto shall, by virtue of the Merger and without
any action by the Constituent Corporations, the holder of such shares or any
other person, be converted into and exchanged for one (1) fully paid and
nonassessable share of Common Stock, $.01 par value, of the Surviving
Corporation.
III.2 ZAPME! CALIFORNIA PREFERRED STOCK. Upon the Effective Date of the
Merger, each one (1) share of each series of ZapMe! California Preferred Stock
issued and outstanding immediately prior thereto shall, by virtue of the Merger
and without any action by the Constituent Corporations, the holder of such
shares or any other person, be converted into and exchanged for one (1) fully
paid and nonassessable share of the same series of Preferred Stock, $.01 par
value, of the Surviving Corporation.
III.3 ZAPME! CALIFORNIA OPTIONS, STOCK PURCHASE RIGHTS AND CONVERTIBLE
SECURITIES. Upon the Effective Date of the Merger, the Surviving Corporation
shall assume and continue the stock option plans (including without limitation
the 1997 Stock Option Plan, the 1998 Stock Plan, and all other employee
-3-
<PAGE>
benefit plans of ZapMe! California. Each outstanding and unexercised option,
warrant or other right to purchase ZapMe! California Common Stock or
Preferred Stock shall become an option, warrant or right to purchase the
Surviving Corporation's Common Stock or the Surviving Corporation's Preferred
Stock, as applicable, on the basis of one (1) share of the Surviving
Corporation's Common Stock or Preferred Stock for every one (1) shares of
ZapMe! California Common Stock or Preferred Stock issuable pursuant to any
such option, warrant or right, on the same terms and conditions and at an
exercise price per share equal to the exercise price applicable to any such
ZapMe! California option, warrant or right at the Effective Date of the
Merger.
A number of shares of the Surviving Corporation's Common Stock or the
Surviving Corporation's Preferred Stock, as applicable, shall be reserved for
issuance upon the exercise of options, warrants or rights equal to the number of
shares of ZapMe! California Common Stock or Preferred Stock so reserved
immediately prior to the Effective Date of the Merger.
III.4 ZAPME! DELAWARE COMMON STOCK. Upon the Effective Date of the
Merger, each share of Common Stock, $.01 par value, of ZapMe! Delaware issued
and outstanding immediately prior thereto shall, by virtue of the Merger and
without any action by ZapMe! Delaware, the holder of such shares or any other
person, be canceled and returned to the status of authorized but unissued
shares.
III.5 EXCHANGE OF CERTIFICATES. After the Effective Date of the Merger,
each holder of an outstanding certificate representing shares of ZapMe!
California Common Stock or Preferred Stock may, at such stockholder's option,
surrender the same for cancellation to an exchange agent designated by the
Surviving Corporation (the "Exchange Agent"), and each such holder shall be
entitled to receive in exchange therefor a certificate or certificates
representing the number of shares of the Surviving Corporation's Common Stock or
the Surviving Corporation's Preferred Stock, as applicable, into which the
surrendered shares were converted as herein provided. Until so surrendered,
each outstanding certificate previously representing shares of ZapMe! California
Common Stock or Preferred Stock shall be deemed for all purposes to represent
the number of whole shares of the Surviving Corporation's Common Stock or the
Surviving Corporation's Preferred Stock, as applicable, into which such shares
of ZapMe! California Common Stock or Preferred Stock were converted in the
Merger.
The registered owner on the books and records of the Surviving
Corporation or the Exchange Agent of any such outstanding certificate shall,
until such certificate shall have been surrendered for transfer or conversion or
otherwise accounted for to the Surviving Corporation or the Exchange Agent, have
and be entitled to exercise any voting and other rights with respect to and to
receive dividends and other distributions upon the shares of Common Stock or
Preferred Stock of the Surviving Corporation represented by such outstanding
certificate as provided above.
Each certificate representing Common Stock or Preferred Stock of the
Surviving Corporation so issued in the Merger shall bear the same legends, if
any, with respect to the restrictions on transferability as the certificates of
ZapMe! California so converted and given in exchange therefor bear, unless
-4-
<PAGE>
otherwise determined by the Board of Directors of the Surviving Corporation in
compliance with applicable laws.
If any certificate for shares of the Surviving Corporation's Common Stock
or Preferred Stock is to be issued in a name other than that in which the
certificate surrendered in exchange therefor is registered, it shall be a
condition of issuance thereof that the certificate so surrendered shall be
properly endorsed and otherwise in proper form for transfer, that such transfer
otherwise be proper, and that the person requesting such transfer pay to the
Exchange Agent any transfer or other taxes payable by reason of the issuance of
such new certificate in a name other than that of the registered holder of the
certificate surrendered or establish to the satisfaction of the Surviving
Corporation that such tax has been paid or is not payable.
IV GENERAL
IV.1 COVENANTS OF ZAPME! DELAWARE. ZapMe! Delaware covenants and
agrees that it will, on or before the Effective Date of the Merger:
(a) Qualify to do business as a foreign corporation in the
State of California and in connection therewith irrevocably appoint an
agent for service of process as required under the provisions of
Section 2105 of the California General Corporation Law;
(b) File any and all documents with the appropriate tax
authority of the State of California necessary for the assumption by
ZapMe! Delaware of all of the corporate and/or franchise tax liabilities
of ZapMe! California; and
(c) Take such other actions as may be required by the
California General Corporation Law.
IV.2 FURTHER ASSURANCES. From time to time, as and when required by
ZapMe! Delaware or by its successors or assigns, there shall be executed and
delivered on behalf of ZapMe! California such deeds and other instruments, and
there shall be taken or caused to be taken by ZapMe! Delaware and ZapMe!
California such further and other actions, as shall be appropriate or necessary
in order to vest or perfect in or conform of record or otherwise by ZapMe!
Delaware the title to and possession of all the property, interests, assets,
rights, privileges, immunities, powers, franchises and authority of ZapMe!
California and otherwise to carry out the purposes of this Agreement, and the
officers and directors of ZapMe! Delaware are fully authorized in the name and
on behalf of ZapMe! California or otherwise to take any and all such action and
to execute and deliver any and all such deeds and other instruments.
-5-
<PAGE>
IV.3 ABANDONMENT. At any time before the Effective Date of the Merger,
this Agreement may be terminated and the Merger may be abandoned for any reason
whatsoever by the Board of Directors of either ZapMe! California or ZapMe!
Delaware, or both, notwithstanding the approval of this Agreement by the
shareholders of ZapMe! California or by the sole stockholder of ZapMe! Delaware,
or by both.
IV.4 AMENDMENT. The Boards of Directors of the Constituent
Corporations may amend this Agreement at any time prior to the filing of this
Agreement (or certificate in lieu thereof) with the Secretaries of State of the
States of California and Delaware, provided that an amendment made subsequent to
the adoption of this Agreement by the shareholders of either Constituent
Corporation shall not: (1) alter or change the amount or kind of shares,
securities, cash, property and/or rights to be received in exchange for or on
conversion of all or any of the shares of any class or series thereof of such
Constituent Corporation, (2) alter or change any term of the Certificate of
Incorporation of the Surviving Corporation to be effected by the Merger, or
(3) alter or change any of the terms and conditions of this Agreement if such
alteration or change would adversely affect the holders of any class of shares
or series thereof of such Constituent Corporation.
IV.5 REGISTERED OFFICE. The registered office of the Surviving
Corporation in the County of New Castle, State of Delaware is located at
1209 Orange Street, Wilmington, Delaware 19801, the Corporation Trust Company is
the registered agent of the Surviving Corporation at such address.
IV.6 AGREEMENT. Executed copies of this Agreement will be on file at
the principal place of business of the Surviving Corporation at 3000 Executive
Parkway, San Ramon, California 94583, and copies thereof will be furnished to
any shareholder of either Constituent Corporation, upon request and without
cost.
IV.7 GOVERNING LAW. This Agreement shall in all respects be construed,
interpreted and enforced in accordance with and governed by the laws of the
State of Delaware and, so far as applicable, the merger provisions of the
California General Corporation Law.
IV.8 COUNTERPARTS. In order to facilitate the filing and recording of
this Agreement, the same may be executed in any number of counterparts, each of
which shall be deemed to be an original and all of which together shall
constitute one and the same instrument.
IV.9 FIRPTA NOTIFICATION. (a) On the Effective Date of the Merger,
ZapMe! California shall deliver to ZapMe! Delaware, as agent for the
shareholders of ZapMe! California, a properly executed statement (the
"Statement") substantially in the form attached hereto as Exhibit A. ZapMe!
Delaware shall retain the Statement for a period of not less than seven years
and shall, upon request, provide a copy thereof to any person that was a
shareholder of ZapMe! California immediately prior to the Merger. In
consequence of the approval of the Merger by the shareholders of ZapMe!
California, (i) such shareholders shall be considered to have requested that the
Statement be delivered to ZapMe! Delaware as
-6-
<PAGE>
their agent and (ii) ZapMe! Delaware shall be considered to have received a
copy of the Statement at therequest of the ZapMe! California shareholders for
purposes of satisfying ZapMe! Delaware's obligations under Treasury
Regulation Section 1.1445-2(c)(3).
(b) ZapMe! California shall deliver to the Internal Revenue
Service a notice regarding the Statement in accordance with the requirements of
Treasury Regulation Section 1.897-2(h)(2).
IN WITNESS WHEREOF, this Agreement, having first been approved by
resolutions of the Boards of Directors of ZapMe! Delaware and ZapMe! California,
is hereby executed on behalf of each of such two corporations and attested by
their respective officers thereunto duly authorized.
ZapMe! Delaware Corporation
a Delaware corporation
By: ____________________________________
Lance Mortensen
Chairman and Chief Executive Officer
ATTEST:
_______________________________
Bruce Bower, Secretary
ZapMe! Corporation
a California corporation
By: ____________________________________
Lance Mortensen
Chairman and Chief Executive Officer
ATTEST:
_______________________________
Bruce Bower, Secretary
-7-
<PAGE>
ZapMe! Corporation
(California Corporation)
OFFICERS' CERTIFICATE
Lance Mortensen and Bruce Bower certify that:
1. They are the Chief Executive Officer and the Secretary,
respectively, of ZapMe! Corporation, a corporation organized under the laws of
the State of California.
2. The corporation has authorized capital of 50,000,000 shares,
$.01 par value, of "Common Stock" and 20,417,671 of "Preferred Stock". The
Preferred Stock is divided into five series, namely Series A Preferred Stock,
consisting of 9,097,671 shares, Series B Preferred Stock, consisting of
660,000 shares, Series C Preferred Stock, consisting of 600,000 shares, Series D
Preferred Stock, consisting of 8,030,000 shares and Series E Preferred Stock,
consisting of 2,030,000 shares.
3. There were ________ shares of Common Stock and 9,097,671 shares of
Series A Preferred Stock, 160,000 shares of Series B Preferred Stock,
600,000 shares of Series C Preferred Stock, 5,894,110 shares of Series D
Preferred Stock and 2,030,000 shares of Series E Preferred Stock issued and
outstanding as of the date of the shareholders' written consent which approved
the Agreement and Plan of Merger attached hereto (the "Merger Agreement").
4. The principal terms of the Merger Agreement were approved by the
Board of Directors and by the vote of a number of shares of each class of stock
which equaled or exceeded the vote required.
5. The percentage vote required was more than (i) 50% of the votes
entitled to be cast by the holders of outstanding shares of the Common Stock,
and (ii) 50% of the votes entitled to be cast by the holders of outstanding
shares of the Preferred Stock, each voting as a separate class.
6. Lance Mortensen and Bruce Bower declare under penalty of perjury
under the laws of the State of California that each has read the foregoing
certificate and knows the contents thereof and that the same is true of their
own knowledge.
Executed in San Ramon, California on __________, 1999.
______________________________
Lance Mortensen
______________________________
Bruce Bower
<PAGE>
ZapMe! Corporation
(Surviving Corporation)
OFFICERS' CERTIFICATE
Lance Mortensen and Bruce Bower certify that:
1. They are the President and the Secretary, respectively, of ZapMe!
Corporation, a corporation organized under the laws of the State of Delaware.
2. The corporation has an authorized capital of 225,417,671 shares,
$0.01 par value, of which 200,000,000 are designated "Common Stock" and
25,417,671 of which are designated "Preferred Stock". The Preferred Stock is
divided into five series, namely Series A Preferred Stock, consisting of
9,097,671 shares, Series B Preferred Stock, consisting of 660,000 shares,
Series C Preferred Stock, consisting of 600,000 shares, Series D Preferred
Stock, consisting of 8,030,000 shares and the Series E preferred Stock,
consisting of 2,030,000 shares.
3. There are 1,000 shares of Common Stock outstanding and entitled to
vote on the Agreement and Plan of Merger attached hereto (the "Merger
Agreement"). There are no shares of Preferred Stock outstanding.
4. The principal terms of the Merger Agreement were approved by the
Board of Directors and by the vote of a number of shares of each class of stock
which equaled or exceeded the vote required.
5. The percentage vote required was more than 50% of the votes
entitled to be cast by holders of outstanding shares of Common Stock.
6. Lance Mortensen and Bruce Bower declare under penalty of perjury
under the laws of the State of Delaware that each has read the foregoing
certificate and knows the contents thereof and that the same is true of their
own knowledge.
Executed in San Ramon, California on ___________, 1999.
______________________________
Lance Mortensen
______________________________
Bruce Bower
<PAGE>
EXHIBIT A
___________, 1999
TO THE SHAREHOLDERS OF ZAPME! CORPORATION:
In connection with the reincorporation (the "Reincorporation") in
Delaware of ZapMe! Corporation, a California corporation (the "Company"),
pursuant to the Agreement and Plan of Merger dated as of __________ ___, 1999
between the Company and ZapMe! Delaware Corporation, a Delaware corporation and
wholly-owned subsidiary of the Company ("ZapMe! Delaware"), your shares of
Company stock will be replaced by shares of stock in ZapMe! Delaware.
In order to establish that (i) you will not be subject to tax under
Section 897 of the Internal Revenue Code of 1986, as amended (the "Code"), in
consequence of the Reincorporation, and (ii) ZapMe! Delaware will not be
required under Section 1445 of the Code to withhold taxes from the ZapMe!
Delaware stock that you will receive in connection therewith, the Company hereby
represents to you that, as of the date of this letter, shares of Company stock
do not constitute a "United States real property interest" within the meaning of
Section 897(c) of the Code and the regulations issued thereunder.
A copy of this letter will be delivered to ZapMe! Delaware pursuant to
Section IV.9 of the Agreement.
Under penalties of perjury, the undersigned officer of the Company hereby
declares that, to the best knowledge and belief of the undersigned, the facts
set forth herein are true and correct.
Sincerely,
_____________________________________
Lance Mortensen
Chairman and Chief Executive Officer
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT OF BYLAWS
OF
ZAPME! CORPORATION
The undersigned hereby certifies that he is the duly elected,
qualified, and acting Secretary of ZapMe! Corporation (the "Company") and
that the following resolution was adopted by the Board of Directors of the
Company on October 6, 1998, and that such resolution became effective upon
approval of such resolution by the shareholders of the Company on October 12,
1998:
RESOLVED: That the Board of Directors hereby approves an amendment to
Article III, Section 3.2 of the Company's Bylaws, subject to approval of
the outstanding shares of the Company in accordance with Section 212(a) of
the California General Corporation Law, which Bylaw section, as amended,
shall read in its entirety as follows:
"The number of directors of the corporation shall be no fewer than
five (5) and no more than eight (8), with the exact number of
directors to be fixed by resolution of the Board of Directors. No
reduction in the authorized number of directors shall have the effect
of removing any director before that director's term of office
expires."
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and
affixed the corporate seal this 12th day of October, 1998.
/s/ John Evleth
----------------------------------
John Evleth
Secretary
<PAGE>
CERTIFICATE OF AMENDMENT OF BYLAWS
OF
ZAPME! CORPORATION
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of ZapMe! Corporation (the "Company") and that the
following resolution was adopted by the Board of Directors of the Company and
became effective on April___,1999:
RESOLVED FURTHER: That, in order to remove the restrictions on the
transfer of shares, Article VIII, Section 8.7 is hereby deleted in its
entirety.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and
affixed the corporate seal this ___ day of ______________, 1999.
/s/ Bruce Bower
-----------------------------
Bruce Bower
Secretary
<PAGE>
CERTIFICATE OF AMENDMENT OF BYLAWS OF
SATELLITE ONLINE SOLUTIONS CORPORATION
The following resolution was adopted by Unanimous Written Consent of the
Board of Directors of Satellite Online Solutions Corporation, a California
corporation (the "COMPANY"), on August 24, 1998:
"RESOLVED: That, in order to increase the size of the Board of Directors
to four (4) members, Article III, Section 3.2 of the Bylaws of the Company,
subject to approval by the shareholders of the Company, is hereby amended
to read in its entirety as follows:
"The exact number of directors shall be four (4) until changed by a
bylaws amending this Section 3.2, duly adopted by the shareholders."
/s/ John Evleth
-----------------------------
John Evleth, Secretary
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
SATELLITE ONLINE SOLUTIONS CORPORATION
<PAGE>
<TABLE>
<CAPTION>
BYLAWS OF
SATELLITE ONLINE SOLUTIONS CORPORATION
TABLE OF CONTENTS
PAGE
<S> <C>
ARTICLE I CORPORATE OFFICES ...................................................1
1.1 PRINCIPAL OFFICE ...................................................1
1.2 OTHER OFFICES ......................................................1
ARTICLE II MEETINGS OF SHAREHOLDERS ...........................................1
2.1 PLACE OF MEETINGS ..................................................1
2.2 ANNUAL MEETING .....................................................1
2.3 SPECIAL MEETING ....................................................2
2.4 NOTICE OF SHAREHOLDERS' MEETINGS ...................................2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE .......................3
2.6 QUORUM .............................................................3
2.7 ADJOURNED MEETING; NOTICE ..........................................3
2.8 VOTING .............................................................4
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT ..................5
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING ............5
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS ........6
2.12 PROXIES ............................................................6
2.13 INSPECTORS OF ELECTION .............................................7
ARTICLE III DIRECTORS .........................................................8
3.1 POWERS .............................................................8
3.2 NUMBER OF DIRECTORS ................................................8
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS ...........................8
3.4 RESIGNATION AND VACANCIES ..........................................8
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE ...........................9
3.6 REGULAR MEETINGS ...................................................9
3.7 SPECIAL MEETINGS; NOTICE ...........................................9
3.8 QUORUM ............................................................10
3.9 WAIVER OF NOTICE ..................................................10
3.10 ADJOURNMENT .......................................................10
3.11 NOTICE OF ADJOURNMENT .............................................10
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING .................11
3.13 FEES AND COMPENSATION OF DIRECTORS ................................11
3.14 APPROVAL OF LOANS TO OFFICERS .....................................11
-i-
<PAGE>
TABLE OF CONTENTS
(Continued)
PAGE
<S> <C>
ARTICLE IV COMMITTEES ........................................................11
4.1 COMMITTEES OF DIRECTORS ...........................................11
4.2 MEETINGS AND ACTION OF COMMITTEES .................................12
ARTICLE V OFFICERS ...........................................................12
5.1 OFFICERS ..........................................................13
5.2 ELECTION OF OFFICERS ..............................................13
5.3 SUBORDINATE OFFICERS ..............................................13
5.4 REMOVAL AND RESIGNATION OF OFFICERS ...............................13
5.5 VACANCIES IN OFFICES ..............................................13
5.6 CHAIRMAN OF THE BOARD; CHIEF EXECUTIVE OFFICER ....................13
5.7 PRESIDENT .........................................................14
5.8 VICE PRESIDENTS ...................................................14
5.9 SECRETARY .........................................................14
5.10 CHIEF FINANCIAL OFFICER ...........................................15
ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER
AGENTS ..................................................................15
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS .........................15
6.2 INDEMNIFICATION OF OTHERS .........................................15
6.3 PAYMENT OF EXPENSES IN ADVANCE ....................................16
6.4 INDEMNITY NOT EXCLUSIVE ...........................................16
6.5 INSURANCE INDEMNIFICATION .........................................16
6.6 CONFLICTS .........................................................16
ARTICLE VII RECORDS AND REPORTS ..............................................17
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER ......................17
7.2 MAINTENANCE AND INSPECTION OF BYLAWS ..............................17
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS .............18
7.4 INSPECTION BY DIRECTORS............................................18
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER .............................18
7.6 FINANCIAL STATEMENTS ..............................................18
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS ....................19
ARTICLE VIII GENERAL MATTERS .................................................19
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING .............19
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS .........................20
-ii-
<PAGE>
TABLE OF CONTENTS
(Continued)
PAGE
<S> <C>
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED ...................20
8.4 CERTIFICATES FOR SHARES .............................................20
8.5 LOST CERTIFICATES ...................................................20
8.6 CONSTRUCTION; DEFINITIONS ...........................................21
8.7 RESTRICTIONS ON TRANSFER OF SHARES ..................................21
ARTICLE IX AMENDMENTS ..........................................................22
9.1 AMENDMENT BY SHAREHOLDERS ...........................................22
9.2 AMENDMENT BY DIRECTORS ..............................................23
</TABLE>
-iii-
<PAGE>
BYLAWS
OF
SATELLITE ONLINE SOLUTIONS CORPORATION
ARTICLE I
CORPORATE OFFICES
1.1 PRINCIPAL OFFICE
The board of directors shall fix the location of the principal executive
office of the corporation at any place within or outside the State of
California. If the principal executive office is located outside such state
and the corporation has one or more business offices in such state, then the
board of directors shall fix and designate a principal business office in the
State of California.
1.2 OTHER OFFICES
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1 PLACE OF MEETINGS
Meetings of shareholders shall be held at any place within or outside
the State of California designated by the board of directors. In the absence
of any such designation, shareholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
The annual meeting of shareholders shall be held each year on a date
and at a time designated by the board of directors. In the absence of such
designation, the annual meeting of shareholders shall be held on the second
Tuesday of April in each year at 10:00 a.m. However, if such day falls on a
legal holiday, then the meeting shall be held at the same time and place on
the next succeeding full business day. At the meeting, directors shall be
elected, and any other proper business may be transacted.
<PAGE>
2.3 SPECIAL MEETING
A special meeting of the shareholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or
by one or more shareholders holding shares in the aggregate entitled to cast
not less than ten percent (10%) of the votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors or the president or the chairman of the board, then the
request shall be in writing, specifying the time of such meeting and the
general nature of the business proposed to be transacted, and shall be
delivered personally or sent by registered mail or by telegraphic or other
facsimile transmission to the chairman of the board, the president, any vice
president or the secretary of the corporation. The officer receiving the
request shall cause notice to be promptly given to the shareholders entitled
to vote, in accordance with the provisions of Sections 2.4 and 2.5 of these
bylaws, that a meeting will be held at the time requested by the person or
persons calling the meeting, so long as that time is not less than
thirty-five (35) nor more than sixty (60) days after the receipt of the
request. If the notice is not given within twenty (20) days after receipt of
the request, then the person or persons requesting the meeting may give the
notice. Nothing contained in this paragraph of this Section 2.3 shall be
construed as limiting, fixing or affecting the time when a meeting of
shareholders called by action of the board of directors may be held.
2.4 NOTICE OF SHAREHOLDERS' MEETINGS
All notices of meetings of shareholders shall be sent or otherwise
given in accordance with Section 2.5 of these bylaws not less than ten (10)
(or, if sent by third-class mail pursuant to Section 2.5 of these bylaws,
thirty (30)) nor more than sixty (60) days before the date of the meeting.
The notice shall specify the place, date, and hour of the meeting and (i) in
the case of a special meeting, the general nature of the business to be
transacted (no business other than that specified in the notice may be
transacted) or (ii) in the case of the annual meeting, those matters which
the board of directors, at the time of giving the notice, intends to present
for action by the shareholders (but subject to the provisions of the next
paragraph of this Section 2.4 any proper matter may be presented at the
meeting for such action). The notice of any meeting at which directors are
to be elected shall include the name of any nominee or nominees who, at the
time of the notice, the board intends to present for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect
financial interest, pursuant to Section 310 of the Corporations Code of
California (the "Code"), (ii) an amendment of the articles of incorporation,
pursuant to Section 902 of the Code, (iii) a reorganization of the
corporation, pursuant to Section 1201 of the Code, (iv) a voluntary
dissolution of the corporation, pursuant to Section 1900 of the Code, or (v)
a distribution in dissolution other than in accordance with the rights of
outstanding preferred shares, pursuant to Section 2007 of the Code, then the
notice shall also state the general nature of that proposal.
-2-
<PAGE>
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of shareholders shall be given either (i)
personally or (ii) by first-class mail or (iii) by third-class mail but only
if the corporation has outstanding shares held of record by five hundred (500)
or more persons (determined as provided in Section 605 of the Code) on the
record date for the shareholders' meeting, or (iv) by telegraphic or other
written communication. Notices not personally delivered shall be sent
charges prepaid and shall be addressed to the shareholder at the address of
that shareholder appearing on the books of the corporation or given by the
shareholder to the corporation for the purpose of notice. If no such address
appears on the corporation's books or is given, notice shall be deemed to
have been given if sent to that shareholder by mail or telegraphic or other
written communication to the corporation's principal executive office, or if
published at least once in a newspaper of general circulation in the
county where that office is located. Notice shall be deemed to have been
given at the time when delivered personally or deposited in the mail or sent
by telegram or other means of written communication.
If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the
shareholder at that address, then all future notices or reports shall be
deemed to have been duly given without further mailing if the same shall be
available to the shareholder on written demand of the shareholder at the
principal executive office of the corporation for a period of one (1) year
from the date of the giving of the notice.
An affidavit of the mailing or other means of giving notice of any
shareholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.6 QUORUM
The presence in person or by proxy of the holders of a majority of the
shares entitled to vote thereat constitutes a quorum for the transaction of
business at all meetings of shareholders. The shareholders present at a duly
called or held meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
2.7 ADJOURNED MEETING; NOTICE
Any shareholders' meeting, annual or special, whether or not a quorum
is present, may be adjourned from time to time by the vote of the majority of
the shares represented at that meeting, either in person or by proxy. In the
absence of a quorum, no other business may be transacted at that meeting
except as provided in Section 2.6 these bylaws.
-3-
<PAGE>
When any meeting of shareholders, either annual or special, is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place are announced at the meeting at which the
adjournment is taken. However, if a new record date for the adjourned
meeting is fixed or if the adjournment is for more than forty-five (45) days
from the date set for the original meeting, then notice of the adjourned
meeting shall be given. Notice of any such adjourned meeting shall be given
to each shareholder of record entitled to vote at the adjourned meeting in
accordance with the provisions of Sections 2.4 and 2.5 of these bylaws. At
any adjourned meeting the corporation may transact any business which might
have been transacted at the original meeting.
2.8 VOTING
The shareholders entitled to vote at any meeting of shareholders shall
be determined in accordance with the provisions of Section 2.11 of these
bylaws, subject to the provisions of Sections 702 through 704 of the Code
(relating to voting shares held by a fiduciary, in the name of a corporation
or in joint ownership).
The shareholders' vote may be by voice vote or by ballot; provided,
however, that any election for directors must be by ballot if demanded by any
shareholder at the meeting and before the voting has begun.
Except as provided in the last paragraph of this Section 2.8, or as may
be otherwise provided in the articles of incorporation, each outstanding
share, regardless of class, shall be entitled to one vote on each matter
submitted to a vote of the shareholders. Any shareholder entitled to vote on
any matter may vote part of the shares in favor of the proposal and refrain
from voting the remaining shares or, except when the matter is the election
of directors, may vote them against the proposal; but, if the shareholder
fails to specify the number of shares which the shareholder is voting
affirmatively, it will be conclusively presumed that the shareholder's
approving vote is with respect to all shares which the shareholder is
entitled to vote.
If a quorum is present, the affirmative vote of the majority of the
shares represented and voting at a duly held meeting (which shares voting
affirmatively also constitute at least a majority of the required quorum)
shall be the act of the shareholders, unless the vote of a greater number or
a vote by classes is required by the Code or by the articles of incorporation.
At a shareholders' meeting at which directors are to be elected, a
shareholder shall be entitled to cumulate votes (i.e., cast for any candidate
a number of votes greater than the number of votes which such shareholder
normally is entitled to cast) if the candidates' names have been placed in
nomination prior to commencement of the voting and the shareholder has given
notice prior to commencement of the voting of the shareholder's intention to
cumulate votes. If any shareholder has given such a notice, then every
shareholder entitled to vote may cumulate votes for candidates in nomination
either (i) by giving one candidate a number of votes equal to the number of
directors to be elected multiplied by the number of votes to which that
shareholder's shares are normally entitled or (ii) by distributing the
shareholder's votes on the same principle among any or all of the candidates,
as the shareholder thinks fit. The candidates receiving the highest number
of affirmative
-4-
<PAGE>
votes, up to the number of directors to be elected, shall be elected; votes
against any candidate and votes withheld shall have no legal effect.
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT
The transactions of any meeting of shareholders, either annual or
special, however called and noticed, and wherever held, shall be as valid as
though they had been taken at a meeting duly held after regular call and
notice, if a quorum be present either in person or by proxy, and if, either
before or after the meeting, each person entitled to vote, who was not
present in person or by proxy, signs a written waiver of notice or a consent
to the holding of the meeting or an approval of the minutes thereof. The
waiver of notice or consent or approval need not specify either the business
to be transacted or the purpose of any annual or special meeting of
shareholders, except that if action is taken or proposed to be taken for
approval of any of those matters specified in the second paragraph of Section
2.4 of these bylaws, the waiver of notice or consent or approval shall state
the general nature of the proposal. All such waivers, consents, and approvals
shall be filed with the corporate records or made a part of the minutes of
the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of and presence at that meeting, except when the person objects at the
beginning of the meeting to the transaction of any business because the
meeting is not lawfully called or convened. Attendance at a meeting is not a
waiver of any right to object to the consideration of matters required by the
Code to be included in the notice of the meeting but not so included, if that
objection is expressly made at the meeting.
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, is signed by the
holders of outstanding shares having not less than the minimum number of
votes that would be necessary to authorize or take that action at a meeting
at which all shares entitled to vote on that action were present and voted.
In the case of election of directors, such a consent shall be effective
only if signed by the holders of all outstanding shares entitled to vote for
the election of directors. However, a director may be elected at any time to
fill any vacancy on the board of directors, provided that it was not created
by removal of a director and that it has not been filled by the directors, by
the written consent of the holders of a majority of the outstanding shares
entitled to vote for the election of directors.
All such consents shall be maintained in the corporate records. Any
shareholder giving a written consent, or the shareholder's proxy holders, or
a transferee of the shares, or a personal representative of the shareholder,
or their respective proxy holders, may revoke the consent by a writing
received by the secretary of the corporation before written consents of the
number of shares required to authorize the proposed action have been filed
with the secretary.
-5-
<PAGE>
If the consents of all shareholders entitled to vote have not been
solicited in writing and if the unanimous written consent of all such
shareholders has not been received, then the secretary shall give prompt
notice of the corporate action approved by the shareholders without a
meeting. Such notice shall be given to those shareholders entitled to vote
who have not consented in writing and shall be given in the manner specified
in Section 2.5 of these bylaws. In the case of approval of (i) a contract or
transaction in which a director has a direct or indirect financial interest,
pursuant to Section 310 of the Code, (ii) indemnification of a corporate
"agent," pursuant to Section 317 of the Code, (iii) reorganization of the
corporation, pursuant to Section 1201 of the Code, and (iv) a distribution in
dissolution other than in accordance with the rights of outstanding preferred
shares, pursuant to Section 2007 of the Code, the notice shall be given at
least ten (10) days before the consummation of any action authorized by that
approval.
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS
For purposes of determining the shareholders entitled to notice of any
meeting or to vote thereat or entitled to give consent to corporate action
without a meeting, the board of directors may fix, in advance, a record date,
which shall not be more than sixty (60) days nor less than ten (10) days
before the date of any such meeting nor more than sixty (60) days before any
such action without a meeting, and in such event only shareholders of record
on the date so fixed are entitled to notice and to vote or to give consents,
as the case may be, notwithstanding any transfer of any shares on the books
of the corporation after the record date, except as otherwise provided in the
Code.
If the board of directors does not so fix a record date:
(a) the record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at the close of
business on the business day next preceding the day on which notice is given
or, if notice is waived, at the close of business on the business day next
preceding the day on which the meeting is held; and
(b) the record date for determining shareholders entitled to
give consent to corporate action in writing without a meeting, (i) when no
prior action by the board has been taken, shall be the day on which the first
written consent is given, or (ii) when prior action by the board has been
taken, shall be at the close of business on the day on which the board adopts
the resolution relating to that action, or the sixtieth (60th) day before the
date of such other action, whichever is later.
The record date for any other purpose shall be as provided in Article
VIII of these bylaws.
2.12 PROXIES
Every person entitled to vote for directors, or on any other matter,
shall have the right to do so either in person or by one or more agents
authorized by a written proxy signed by the person and filed with the
secretary of the corporation. A proxy shall be deemed signed if the
shareholder's name
-6-
<PAGE>
is placed on the proxy (whether by manual signature, typewriting, telegraphic
transmission or otherwise) by the shareholder or the shareholder's
attorney-in-fact. A validly executed proxy which does not state that it is
irrevocable shall continue in full force and effect unless (i) the person who
executed the proxy revokes it prior to the time of voting by delivering a
writing to the corporation stating that the proxy is revoked or by executing
a subsequent proxy and presenting it to the meeting or by voting in person at
the meeting, or (ii) written notice of the death or incapacity of the maker
of that proxy is received by the corporation before the vote pursuant to that
proxy is counted; provided, however, that no proxy shall be valid after the
expiration of eleven (11) months from the date of the proxy, unless otherwise
provided in the proxy. The dates contained on the forms of proxy
presumptively determine the order of execution, regardless of the postmark
dates on the envelopes in which they are mailed. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Sections 705(e) and 705(f) of the Code.
2.13 INSPECTORS OF ELECTION
Before any meeting of shareholders, the board of directors may appoint
an inspector or inspectors of election to act at the meeting or its
adjournment. If no inspector of election is so appointed, then the chairman of
the meeting may, and on the request of any shareholder or a shareholder's
proxy shall, appoint an inspector or inspectors of election to act at the
meeting. The number of inspectors shall be either one (1) or three (3). If
inspectors are appointed at a meeting pursuant to the request of one (1) or
more shareholders or proxies, then the holders of a majority of shares or
their proxies present at the meeting shall determine whether one (1) or three
(3) inspectors are to be appointed. If any person appointed as inspector
fails to appear or fails or refuses to act, then the chairman of the meeting
may, and upon the request of any shareholder or a shareholder's proxy shall,
appoint a person to fill that vacancy.
Such inspectors shall:
(a) determine the number of shares outstanding and the voting
power of each, the number of shares represented at the meeting, the existence
of a quorum, and the authenticity, validity, and effect of proxies;
(b) receive votes, ballots or consents;
(c) hear and determine all challenges and questions in any
way arising in connection with the right to vote;
(d) count and tabulate all votes or consents;
(e) determine when the polls shall close;
(f) determine the result; and
-7-
<PAGE>
(g) do any other acts that may be proper to conduct the
election or vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the Code and any limitations in the
articles of incorporation and these bylaws relating to action required to be
approved by the shareholders or by the outstanding shares, the business and
affairs of the corporation shall be managed and all corporate powers shall be
exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
The exact number of directors shall be three (3) until changed by a
bylaw amending this Section 3.2, duly adopted by the shareholders.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
Directors shall be elected at each annual meeting of shareholders to
hold office until the next annual meeting. Each director, including a
director elected to fill a vacancy, shall hold office until the expiration of
the term for which elected and until a successor has been elected and
qualified.
3.4 RESIGNATION AND VACANCIES
Any director may resign effective on giving written notice to the
chairman of the board, the president, the secretary or the board of
directors, unless the notice specifies a later time for that resignation to
become effective. If the resignation of a director is effective at a future
time, the board of directors may elect a successor to take office when the
resignation becomes effective.
Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote
or written consent of the shareholders or by court order may be filled only
by the affirmative vote of a majority of the shares represented and voting at
a duly held meeting at which a quorum is present (which shares voting
affirmatively also constitute a majority of the required quorum), or by the
unanimous written consent of all shares entitled to vote thereon. Each
director so elected shall hold office until the next annual meeting of the
shareholders and until a successor has been elected and qualified.
-8-
<PAGE>
A vacancy or vacancies in the board of directors shall be deemed to
exist (i) in the event of the death, resignation or removal of any director,
(ii) if the board of directors by resolution declares vacant the office of a
director who has been declared of unsound mind by an order of court or
convicted of a felony, (iii) if the authorized number of directors is
increased, or (iv) if the shareholders fail, at any meeting of shareholders
at which any director or directors are elected, to elect the number of
directors to be elected at that meeting.
The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors, but any such election
other than to fill a vacancy created by removal, if by written consent, shall
require the consent of the holders of a majority of the outstanding shares
entitled to vote thereon.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the board of directors may be held at any place
within or outside the State of California that has been designated from time
to time by resolution of the board. In the absence of such a designation,
regular meetings shall be held at the principal executive office of the
corporation. Special meetings of the board may be held at any place within or
outside the State of California that has been designated in the notice of the
meeting or, if not stated in the notice or if there is no notice, at the
principal executive office of the corporation.
Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in
the meeting can hear one another; and all such directors shall be deemed to
be present in person at the meeting.
3.6 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice if
the times of such meetings are fixed by the board of directors.
3.7 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any
vice president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's
address as it is shown on the records of the corporation. If the notice is
mailed, it shall be deposited in the United States mail at least four (4)
days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone or telegram, it shall be delivered
personally or by telephone or to the telegraph company at least forty-eight
(48) hours before the time of the holding of the meeting. Any oral notice
given personally or by telephone may be communicated either to the director
or to a person at the office of the director who the person giving
-9-
<PAGE>
the notice has reason to believe will promptly communicate it to the
director. The notice need not specify the purpose of the place of the
meeting, if the meeting is to be held at the principal executive office of
the corporation.
3.8 QUORUM
A majority of the authorized number of directors shall constitute a
quorum for the transaction of business, except to adjourn as provided in
Section 3.10 of these bylaws. Every act or decision done or made by a
majority of the directors present at a duly held meeting at which a quorum is
present shall be regarded as the act of the board of directors, subject to
the provisions of Section 310 of the Code (as to approval of contracts or
transactions in which a director has a direct or indirect material financial
interest), Section 311 of the Code (as to appointment of committees),
Section 317(e) of the Code (as to indemnification of directors), the
articles of incorporation, and other applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such directors. All such waivers, consents, and approvals shall be
filed with the corporate records or made part of the minutes of the meeting.
A waiver of notice need not specify the purpose of any regular or special
meeting of the board of directors.
3.10 ADJOURNMENT
A majority of the directors present, whether or not constituting a
quorum, may adjourn any meeting to another time and place.
3.11 NOTICE OF ADJOURNMENT
Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four (24) hours.
If the meeting is adjourned for more than twenty-four (24) hours, then notice
of the time and place of the adjourned meeting shall be given before the
adjourned meeting takes place, in the manner specified in Section 3.7 of
these bylaws, to the directors who were not present at the time of the
adjournment.
-10-
<PAGE>
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the board of directors
may be taken without a meeting, provided that all members of the board
individually or collectively consent in writing to that action. Such action
by written consent shall have the same force and effect as a unanimous vote
of the board of directors. Such written consent and any counterparts thereof
shall be filed with the minutes of the proceedings of the board.
3.13 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation, if
any, for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.13 shall
not be construed to preclude any director from serving the corporation in any
other capacity as an officer, agent, employee or otherwise and receiving
compensation for those services.
3.14 APPROVAL OF LOANS TO OFFICERS(1)
The corporation may, upon the approval of the board of directors alone,
make loans of money or property to, or guarantee the obligations of, any
officer of the corporation or its parent or subsidiary, whether or not a
director, or adopt an employee benefit plan or plans authorizing such loans
or guaranties provided that (i) the board of directors determines that such a
loan or guaranty or plan may reasonably be expected to benefit the
corporation, (ii) the corporation has outstanding shares held of record by
100 or more persons (determined as provided in Section 605 of the Code) on
the date of approval by the board of directors, and (iii) the approval of the
board of directors is by a vote sufficient without counting the vote of any
interested director or directors.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board.
The board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The
- --------------------
(1) This section is effective only if it has been approved by the shareholders
in accordance with Sections 315(b) and 152 of the Code.
-11-
<PAGE>
appointment of members or alternate members of a committee requires the vote
of a majority of the authorized number of directors. Any committee, to the
extent provided in the resolution of the board, shall have all the authority
of the board, except with respect to:
(a) the approval of any action which, under the Code, also
requires shareholders' approval or approval of the outstanding shares;
(b) the filling of vacancies on the board of directors or in any
committee;
(c) the fixing of compensation of the directors for serving on the
board or any committee;
(d) the amendment or repeal of these bylaws or the adoption of new
bylaws;
(e) the amendment or repeal of any resolution of the board of
directors which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation, except
at a rate or in a periodic amount or within a price range determined by
the board of directors; or
(g) the appointment of any other committees of the board of
directors or the members of such committees.
4.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these bylaws,
Section 3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7
(special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of
notice), Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and
Section 3.12 (action without meeting), with such changes in the context of
those bylaws as are necessary to substitute the committee and its members for
the board of directors and its members; provided, however, that the time of
regular meetings of committees may be determined either by resolution of the
board of directors or by resolution of the committee, that special meetings of
committees may also be called by resolution of the board of directors, and
that notice of special meetings of committees shall also be given to all
alternate members, who shall have the right to attend all meetings of the
committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these bylaws.
ARTICLE V
OFFICERS
-12-
<PAGE>
5.1 OFFICERS
The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of
the board of directors, a chairman of the board, one or more vice presidents,
one or more assistant secretaries, one or more assistant treasurers, and such
other officers as may be appointed in accordance with the provisions of
Section 5.3 of these bylaws. Any number of offices may be held by the same
person.
5.2 ELECTION OF OFFICERS
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
these bylaws, shall be chosen by the board, subject to the rights, if any, of
an officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or may empower the president to
appoint, such other officers as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and
perform such duties as are provided in these bylaws or as the board of
directors may from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors at any regular or special meeting of the board or, except
in case of an officer chosen by the board of directors, by any officer upon
whom such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless
otherwise specified in that notice, the acceptance of the resignation shall
not be necessary to make it effective. Any resignation is without prejudice
to the rights, if any, of the corporation under any contract to which the
officer is a party.
5.5 VACANCIES IN OFFICES
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed
in these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD; CHIEF EXECUTIVE OFFICER
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and
perform such other powers and duties as may from time to time be assigned to
him by the board of directors or as may be prescribed by these bylaws. If the
-13-
<PAGE>
Board so decides, the chairman of the board shall also be the chief executive
officer of the corporation.
5.7 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the board
of directors to the chairman of the board or chief executive officer, if
there be such an officer, the president shall be the chief executive officer
of the corporation and shall, subject to the control of the board of
directors, have general supervision, direction, and control of the business
and the officers of the corporation. He shall preside at all meetings of the
shareholders and, in the absence or nonexistence of a chairman of the board,
at all meetings of the board of directors. He shall have the general powers
and duties of management usually vested in the office of president of a
corporation, and shall have such other powers and duties as may be prescribed
by the board of directors or these bylaws.
5.8 VICE PRESIDENTS
In the absence or disability of the president, the vice presidents, if
any, in order of their rank as fixed by the board of directors or, if not
ranked, a vice president designated by the board of directors, shall perform
all the duties of the president and when so acting shall have all the powers
of, and be subject to all the restrictions upon, the president. The vice
presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them respectively by the board of
directors, these bylaws, the president or the chairman of the board.
5.9 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors,
committees of directors and shareholders. The minutes shall show the time and
place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented
at shareholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the board of
directors, a share register, or a duplicate share register, showing the names
of all shareholders and their addresses, the number and classes of shares
held by each, the number and date of certificates evidencing such shares, and
the number and date of cancellation of every certificate surrendered for
cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the shareholders and of the board of directors required to be given by law
or by these bylaws. He shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such
other duties as may be prescribed by the board of directors or by these
bylaws.
-14-
<PAGE>
5.10 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts
of its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables
in the name and to the credit of the corporation with such depositaries as
may be designated by the board of directors. He shall disburse the funds of
the corporation as may be ordered by the board of directors, shall render to
the president and directors, whenever they request it, an account of all of
his transactions as chief financial officer and of the financial condition of
the corporation, and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or these bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner permitted
by the Code, indemnify each of its directors and officers against expenses
(as defined in Section 317(a) of the Code), judgments, fines, settlements,
and other amounts actually and reasonably incurred in connection with any
proceeding (as defined in Section 317(a) of the Code), arising by reason of
the fact that such person is or was an agent of the corporation. For purposes
of this Section 6.1, a "director" or "officer" of the corporation includes any
person (i) who is or was a director or officer of the corporation, (ii) who is
or was serving at the request of the corporation as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise,
or (iii) who was a director or officer of a corporation which was a
predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the manner
permitted by the Code, to indemnify each of its employees and agents (other
than directors and officers) against expenses (as defined in Section 317(a)
of the Code), judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding (as defined in Section
317(a) of the Code), arising by reason of the fact that such person is or was
an agent of the corporation. For purposes of this Article VI, an "employee"
or "agent" of the corporation (other than a director or officer) includes any
person (i) who is or was an employee or agent of the corporation, (ii) who is
or was serving at
-15-
<PAGE>
the request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 PAYMENT OF EXPENSES IN ADVANCE
Expenses incurred in defending any civil or criminal action or
proceeding for which indemnification is required pursuant to Section 6.1
or for which indemnification is permitted pursuant to Section 6.2 following
authorization thereof by the Board of Directors shall be paid by the
corporation in advance of the final disposition of such action or proceeding
upon receipt of an undertaking by or on behalf of the indemnified party to
repay such amount if it shall ultimately be determined that the indemnified
party is not entitled to be indemnified as authorized in this Article VI.
6.4 INDEMNITY NOT EXCLUSIVE
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the Articles of
Incorporation.
6.5 INSURANCE INDEMNIFICATION
The corporation shall have the power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent
of the corporation against any liability asserted against or incurred by such
person in such capacity or arising out of such person's status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of this Article VI.
6.6 CONFLICTS
No indemnification or advance shall be made under this Article VI,
except where such indemnification or advance is mandated by law or the order,
judgment or decree of any court of competent jurisdiction, in any
circumstance where it appears:
(1) That it would be inconsistent with a provision of the Articles
of Incorporation, these bylaws, a resolution of the shareholders or an
agreement in effect at the time of the accrual of the alleged cause of the
action asserted in the proceeding in which the expenses were incurred or
other amounts were paid, which prohibits or otherwise limits indemnification;
or
(2) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
-16-
<PAGE>
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER
The corporation shall keep either at its principal executive office or
at the office of its transfer agent or registrar (if either be appointed), as
determined by resolution of the board of directors, a record of its
shareholders listing the names and addresses of all shareholders and the
number and class of shares held by each shareholder.
A shareholder or shareholders of the corporation who holds at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation or who holds at least one percent (1%) of such voting shares and
has filed a Schedule 14B with the Securities and Exchange Commission relating
to the election of directors, may (i) inspect and copy the records of
shareholders' names, addresses, and shareholdings during usual business hours
on five (5) days' prior written demand on the corporation, (ii) obtain from
the transfer agent of the corporation, on written demand and on the tender of
such transfer agent's usual charges for such list, a list of the names and
addresses of the shareholders who are entitled to vote for the election of
directors, and their shareholdings, as of the most recent record date for
which that list has been compiled or as of a date specified by the
shareholder after the date of demand. Such list shall be made available to
any such shareholder by the transfer agent on or before the later of five (5)
days after the demand is received or five (5) days after the date specified
in the demand as the date as of which the list is to be compiled.
The record of shareholder shall also be open to inspection on the
written demand of any shareholder or holder of a voting trust certificate, at
any time during usual business hours, for a purpose reasonably related to the
holder's interests as a shareholder or as the holder of a voting trust
certificate.
Any inspection and copying under this Section 7.1 may be made in person
or by an agent or attorney of the shareholder or holder of a voting trust
certificate making the demand.
7.2 MAINTENANCE AND INSPECTION OF BYLAWS
The corporation shall keep at its principal executive office or, if its
principal executive office is not in the State of California, at its principal
business office in California the original or a copy of these bylaws as
amended to date, which bylaws shall be open to inspection by the shareholders
at all reasonable times during office hours. If the principal executive
office of the corporation is outside the State of California and the
corporation has no principal business office in such state, then the
secretary shall, upon the written request of any shareholder, furnish to that
shareholder a copy of these bylaws as amended to date.
-17-
<PAGE>
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS
The accounting books and records and the minutes of proceedings of the
shareholders, of the board of directors, and of any committee or committees
of the board of directors shall be kept at such place or places as are
designated by the board of directors or, in absence of such designation, at
the principal executive office of the corporation. The minutes shall be kept
in written form, and the accounting books and records shall be kept either in
written form or in any other form capable of being converted into written
form.
The minutes and accounting books and records shall be open to inspection
upon the written demand of any shareholder or holder of a voting trust
certificate, at any reasonable time during usual business hours, for a purpose
reasonably related to the holder's interests as a shareholder or as the
holder of a voting trust certificate. The inspection may be made in person or
by an agent or attorney and shall include the right to copy and make extracts.
Such rights of inspection shall extend to the records of each subsidiary
corporation of the corporation.
7.4 INSPECTION BY DIRECTORS
Every director shall have the absolute right at any reasonable time to
inspect all books, records, and documents of every kind as well as the
physical properties of the corporation and each of its subsidiary
corporations. Such inspection by a director may be made in person or by an
agent or attorney. The right of inspection includes the right to copy and
make extracts of documents.
7.5 ANNUAL REPORT TO SHAREHOLDERS WAIVER
The board of directors shall cause an annual report to be sent to the
shareholders not later than one hundred twenty (120) days after the close of
the fiscal year adopted by the corporation. Such report shall be sent at
least fifteen (15) days (or, if sent by third-class mail, thirty-five (35)
days) before the annual meeting of shareholders to be held during the next
fiscal year and in the manner specified in Section 2.5 of these bylaws for
giving notice to shareholders of the corporation.
The annual report shall contain (i) a balance sheet as of the end of the
fiscal year, (ii) an income statement, (iii) a statement of changes in
financial position for the fiscal year, and (iv) any report of independent
accountants or, if there is no such report, the certificate of an authorized
officer of the corporation that the statements were prepared without audit
from the books and records of the corporation.
The foregoing requirement of an annual report shall be waived so long as
the shares of the corporation are held by fewer than one hundred (100)
holders of record.
7.6 FINANCIAL STATEMENTS
If no annual report for the fiscal year has been sent to shareholders,
then the corporation shall, upon the written request of any shareholder made
more than one hundred twenty (120) days after the
-18-
<PAGE>
close of such fiscal year, deliver or mail to the person making the request,
within thirty (30) days thereafter, a copy of a balance sheet as of the end
of such fiscal year and an income statement and statement of changes in
financial position for such fiscal year.
If a shareholder or shareholders holding at least five percent (5%) of
the outstanding shares of any class of stock of the corporation makes a
written request to the corporation for an income statement of the corporation
for the three-month, six-month or nine-month period of the then current
fiscal year ended more than thirty (30) days before the date of the request,
and for a balance sheet of the corporation as of the end of that period, then
the chief financial officer shall cause that statement to be prepared, if not
already prepared, and shall deliver personally or mail that statement or
statements to the person making the request within thirty (30) days after the
receipt of the request. If the corporation has not sent to the shareholders
its annual report for the last fiscal year, the statements referred to in the
first paragraph of this Section 7.6 shall likewise be delivered or mailed to
the shareholder or shareholders within thirty (30) days after the request.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or by the certificate of an authorized
officer of the corporation that the financial statements were prepared
without audit from the books and records of the corporation.
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation,
or any other person authorized by the board of directors or the president or
a vice president, is authorized to vote, represent, and exercise on behalf of
this corporation all rights incident to any and all shares of any other
corporation or corporations standing in the name of this corporation. The
authority herein granted may be exercised either by such person directly or
by any other person authorized to do so by proxy or power of attorney duly
executed by such person having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the shareholders entitled to receive payment
of any dividend or other distribution or allotment of any rights or the
shareholders entitled to exercise any rights in respect of any other lawful
action (other than action by shareholders by written consent without a
meeting), the board of directors may fix, in advance, a record date, which
shall not be more than sixty (60) days before any such action. In that case,
only shareholders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights,
-19-
<PAGE>
or to exercise such rights, as the case may be, notwithstanding any transfer
of any shares on the books of the corporation after the record date so fixed,
except as otherwise provided in the Code.
If the board of directors does not so fix a record date, then the record
date for determining shareholders for any such purpose shall be at the close
of business on the day on which the board adopts the applicable resolution or
the sixtieth (60th) day before the date of that action, whichever is later.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders
for payment of money, notes or other evidences of indebtedness that are
issued in the name of or payable to the corporation, and only the persons so
authorized shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the
agency power of an officer, no officer, agent or employee shall have any
power or authority to bind the corporation by any contract or engagement or
to pledge its credit or to render it liable for any purpose or for any amount.
8.4 CERTIFICATES FOR SHARES
A certificate or certificates for shares of the corporation shall be
issued to each shareholder when any of such shares are fully paid. The board
of directors may authorize the issuance of certificates for shares partly
paid provided that these certificates shall state the total amount of the
consideration to be paid for them and the amount actually paid. All
certificates shall be signed in the name of the corporation by the chairman
of the board or the vice chairman of the board or the president or a vice
president and by the chief financial officer or an assistant treasurer or the
secretary or an assistant secretary, certifying the number of shares and the
class or series of shares owned by the shareholder. Any or all of the
signatures on the certificate may be facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on a certificate ceases to be that
officer, transfer agent or registrar before that certificate is issued, it
may be issued by the corporation with the same effect as if that person were
an officer, transfer agent or registrar at the date of issue.
8.5 LOST CERTIFICATES
-20-
<PAGE>
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter
is surrendered to the corporation and cancelled at the same time. The board
of directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim
that may be made against it, including any expense or liability, on account
of the alleged loss, theft or destruction of the certificate or the issuance
of the replacement certificate.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Code shall govern the construction of
these bylaws. Without limiting the generality of this provision, the singular
number includes the plural, the plural number includes the singular, and the
term "person" includes both a corporation and a natural person.
8.7 RESTRICTIONS ON TRANSFER OF SHARES
Before there can be a valid sale or transfer for consideration of any of
the shares (the term "shares" shall include any securities convertible into
shares) of the corporation by any holder thereof, he shall first offer those
shares to the corporation and then to the other holders of common shares in
the following manner:
(a) The offering shareholder shall deliver a notice in writing by
mail or otherwise to the secretary of the corporation stating the price,
terms, and conditions of such proposed sale or transfer, the number of shares
to be sold or transferred, and his intention so to sell or transfer the
shares. Within ten (10) days thereafter, the corporation shall have the prior
right to purchase all (but not less than all unless this requirement is
waived by the seller) of the shares offered at the price and upon the terms
and conditions stated in such notice. Should the corporation fail to purchase
all of said shares, then, at the expiration of said ten (10) day period or
prior thereto upon the determination of the corporation to purchase none of
such shares so offered, the secretary of the corporation shall, within two
(2) days thereafter, mail or deliver to each of the other shareholders a
notice setting forth the particulars concerning the shares not purchased by
the corporation described in the notice received from the offering
shareholder. The other shareholders shall have the right to purchase all (but
not less than all unless this requirement is waived by the seller) of the
shares specified in the secretary's notice. Each shareholder shall deliver to
the secretary by mail or otherwise a written offer or offers to purchase all
or any specified number of shares upon the terms described in the secretary's
notice within eighteen (18) days after the secretary's notice was mailed or
delivered to the other shareholders. If the total number of shares specified
in such offers received within such period by the secretary exceeds the
number of shares referred to in the secretary's notice, then each offering
shareholder shall be entitled to purchase such portion of the shares referred
to in the secretary's notice as the number of shares of the corporation which
he holds bears to the total number of shares held by all shareholders
desiring to purchase the shares referred to in the secretary's notice.
-21-
<PAGE>
(b) If all of the shares referred to in the secretary's notice are
not disposed of under such apportionment, then each shareholder desiring to
purchase shares in a number in excess of his proportionate share, as provided
above, shall be entitled to purchase such proportion of those shares which
remain thus undisposed of as the total number of shares which he holds bears
to the total number of shares held by all of the shareholders desiring to
purchase shares in excess of those to which they are entitled under such
apportionment. Such apportionment shall be made successively until all of the
shares offered have been allocated to purchasing shareholders.
(c) If none or only a part of the shares in the offering
shareholder's notice to the secretary is purchased by the corporation or by
other shareholders within a thirty (30) day period from the date of delivery of
the notice by the offering shareholder, the offering shareholder may sell or
transfer to any person or persons all shares of stock referred to in his
notice to the secretary that were not purchased by the corporation or by the
other shareholders, but only within a period of one hundred twenty (120) days
from the date of his first notice; provided, however, that he shall not sell
or transfer such shares at a lower price or on terms more favorable to the
purchaser or transferee than those specified in his notice to the secretary.
After said 120-day period, the foregoing procedure for first offering shares
to the corporation and shareholders shall again apply.
(d) Within the limitations herein provided, the corporation may
purchase the shares of this corporation from any offering shareholder;
provided, however, that at no time shall the corporation be permitted to
purchase all of its outstanding shares. Any sale or transfer or purported
sale or transfer of the shares of the corporation shall be null and void
unless the terms, conditions, and provisions of this Section 8.7 are strictly
observed and followed.
(e) The corporation shall place an appropriate legend on all
certificates for its shares referring to the provisions of this Section 8.7
restricting the transfer of shares.
ARTICLE IX
AMENDMENTS
9.1 AMENDMENT BY SHAREHOLDERS
New bylaws may be adopted or these bylaws may be amended or repealed by
the vote or written consent of holders of a majority of the outstanding
shares entitled to vote; provided, however, that if the articles of
incorporation of the corporation set forth the number of authorized directors
of the corporation, then the authorized number of directors may be changed
only by an amendment of the articles of incorporation.
-22-
<PAGE>
9.2 AMENDMENT BY DIRECTORS
Subject to the rights of the shareholders as provided in Section 9.1 of
these bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing
the authorized number of directors (except to fix the authorized number of
directors pursuant to a bylaw providing for a variable number of directors),
may be adopted, amended or repealed by the board of directors.
-23-
<PAGE>
CERTIFICATE OF ADOPTION OF BYLAWS
OF
SATELLITE ONLINE SOLUTIONS CORPORATION
CERTIFICATE BY SECRETARY OF ADOPTION BY INCORPORATOR
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of Satellite Online Solutions Corporation and that the
foregoing Bylaws, comprising twenty-three (23) pages, were adopted as the
Bylaws of the corporation of June 25, 1997, by the person appointed in the
Articles of Incorporation to act as the Incorporator of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and
affixed the corporate seal this 25th day of June, 1997.
/s/ Lance Mortensen Secretary
----------------------------------
Lance Mortensen, Secretary
-24-
<PAGE>
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ZAPME! CORPORATION
Lance Mortensen and Bruce Bower hereby certify that:
FIRST: The original name of this corporation is ZapMe! Delaware
Corporation and the date of filing the original Certificate of Incorporation of
this corporation with the Secretary of State of the State of Delaware is
_______________, 1999.
SECOND: They are the duly elected and acting Chief Executive Officer and
Secretary, respectively, of ZapMe! Delaware Corporation, a Delaware corporation.
THIRD: The Certificate of Incorporation of this corporation is hereby
amended and restated to read as follows:
I.
The name of the corporation (the "Corporation") is:
ZapMe! Corporation
II.
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, Wilmington, Delaware 19801, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
III.
The nature of the business or purposes to be conducted or promoted by the
Corporation is to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of Delaware.
IV.
This Corporation is authorized to issue two classes of stock to be
designated, respectively, Common Stock and Preferred Stock. The total number of
shares of Common Stock this Corporation is authorized to issue is 200,000,000,
par value $0.01, and the total number of shares of Preferred Stock this
Corporation is authorized to issue is 25,417,671, par value $0.01. Of the
Preferred Stock, 9,097,671 shares shall be designated Series A Preferred Stock
("Series A
<PAGE>
Preferred"), 660,000 shares shall be designated Series B Preferred
Stock ("Series B Preferred"), 600,000 shares shall be designated Series C
Preferred Stock ("Series C Preferred"), 8,030,000 shares shall be designated
Series D Preferred Stock ("Series D Preferred") 2,030,000 shares shall be
designated Series E Preferred Stock ("Series E Preferred"), and 5,000,000 shares
shall be undesignated.
The undesignated 5,000,000 shares of Preferred Stock may be issued from
time to time in one or more series. The Board of Directors is authorized to
determine the number of shares of any such series. The Board of Directors is
also authorized to determine or alter the powers, designations, preferences,
rights and restrictions to be imposed upon any wholly unissued series of
Preferred Stock and, within the limits and restrictions stated in any resolution
or resolutions of the Board of Directors originally fixing the number of shares
constituting any series, to increase (but not above the total number of
authorized shares of the class) or decrease (but not below the number of shares
of such series then outstanding) the number of shares of any series subsequent
to the issue of shares of that series.
The Corporation shall from time to time in accordance with the laws of
the State of Delaware increase the authorized amount of its Common Stock if at
any time the number of shares of Common Stock remaining unissued and available
for issuance shall not be sufficient to permit conversion of the Preferred
Stock.
The relative rights, preferences, privileges and restrictions granted to
or imposed on the respective classes of the shares of capital stock or the
holders thereof are as follows:
SECTION 1. GENERAL DEFINITIONS. For purposes of this Article the
following definitions shall apply:
(a) "IPO" shall mean the first closing of a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offer and sale of
Common for the account of the corporation to the public.
(b) "JUNIOR PREFERRED" shall mean the Series A Preferred and
the Series B Preferred.
(c) "LIQUIDATION EVENT" shall be deemed to be occasioned by and
to include a liquidation, dissolution or winding up of the corporation, whether
voluntary or involuntary, other than a liquidation, dissolution or winding up
effected in connection with a Merger Event.
(d) "MERGER EVENT" shall mean the occurrence of any transaction
to which the corporation is a party pursuant to which all Common is converted
into the right to receive other securities, cash or other property (including,
without limitation, any recapitalization or reclassification of the Common
(other than a change in par value, or from par value to no par value, or from no
par value to par value, or as a result of a subdivision or combination of the
-2-
<PAGE>
Common), any consolidation of the corporation with, or merger of the corporation
into, any other Person, any merger of another Person into the corporation (other
than a merger which does not result in a reclassification, conversion, exchange
or cancellation of outstanding shares of Common) or any sale or transfer of all
or substantially all of the assets of the corporation to any other Person or any
compulsory share exchange).
(e) "PERSON" shall mean any individual, corporation, limited
liability company, partnership, joint venture, association, business trust,
joint stock company, trust, unincorporated organization or government or agency
or political subdivision thereof.
(f) "PREFERRED LIQUIDATION AMOUNT" shall mean at any date:
(i) $0.10016827 per share of Series A Preferred, (ii) $2.50 per share of Series
B Preferred, (iii) $5.00 per share of Series C Preferred, (iv) $5.00 per share
of Series D Preferred, and (v) $5.00 per share of Series E Preferred; plus,
(w) in the case of the Series D Preferred, at any date of determination, an
amount equal to 15% per annum of the Preferred Liquidation Amount (as in effect
from time to time) accruing on a daily basis, but calculated with the effect of
compounding on a quarterly basis as of each Quarterly Payment Date, for the
period from March 10, 1999 through and including the date of determination,
(x) in the case of the Series E Preferred, at any date of determination, an
amount equal to 7.5% per annum of the Preferred Liquidation Amount (as in effect
from time to time) accruing on a daily basis, but calculated with the effect of
compounding on a quarterly basis as of each Quarterly Payment Date, for the
period from August 4, 1999 through and including the date of determination, (y)
in the case of all shares of Preferred (including the Series D Preferred), an
amount equal to all declared and unpaid dividends on such share and (z) in the
case of the Series C Preferred, at any date of determination, an amount equal to
all PIK Dividends pursuant to and in accordance with Section 2(b) or any
prorated PIK Dividend to the extent such determination date is on a date other
than a Quarterly Payment Date. The Preferred Liquidation Amount of each series
of Preferred shall be appropriately adjusted in each case for stock splits,
reverse stock splits, stock dividends, stock combinations, and other events with
similar effect (any such event, a "Recapitalization") that are declared or
effected with respect to such shares from March 10, 1999 through and including
the date of determination.
(g) "QUARTERLY PAYMENT DATE(S)" shall mean April 1, July 1,
October 1 and January 1 of each year.
(h) "SENIOR PREFERRED" shall mean the Series C Preferred, the
Series D Preferred and Series E Preferred.
(i) "SUBSIDIARY" shall mean any Person at least 50% of whose
outstanding voting equity interests shall at the time be owned by such Person or
by one or more of such Subsidiaries.
-3-
<PAGE>
SECTION 2. DIVIDEND RIGHTS.
(a) PREFERENCE ON DIVIDENDS. The holders of Preferred shall be
entitled to receive, when, as and if declared by the Board of Directors of the
corporation, dividends prior and in preference to payment of any dividend with
respect to the Common (other than dividends payable solely in Common and, with
respect to the Senior Preferred, prior and in preference to payment of any
dividend with respect to the Junior Preferred); PROVIDED that the Cash Dividends
or PIK Dividends paid to the holders of Series C Preferred pursuant to paragraph
(b) below shall be mandatory and senior to all other dividend rights of any
other holder of shares of Common or Preferred. Without limitation of the
preceding sentence, no dividend or distribution shall be declared or paid on any
shares of Common (other than dividends payable solely in Common) unless at the
same time an equivalent dividend or distribution is paid or declared and set
aside for payment on the Preferred (on an as converted to Common basis) and all
accrued but unpaid dividends on the Preferred have been paid.
(b) MANDATORY DIVIDENDS FOR SERIES C PREFERRED. On each
Quarterly Payment Date, the corporation shall pay, and the holders of shares of
Series C Preferred shall be entitled to receive, out of the assets of the
corporation legally available therefor, a dividend on each share of Series C
Preferred at a rate per annum equal to ten percent (10%) of the Preferred
Liquidation Amount (in effect immediately prior to such dividend) of such share
(as may be increased from time to time pursuant to this paragraph (b)), which
amount (the "Dividend Amount") may be paid to the holder of such share in cash
(a "Cash Dividend"). In the event the corporation does not pay a Cash Dividend
on a Quarterly Payment Date with respect to any shares of Series C Preferred,
the Preferred Liquidation Amount of each such share (in effect immediately prior
to such dividend) automatically shall be increased in an amount equal to the
Dividend Amount (such increase is referred to in this Article V(B) as a "PIK
Dividend"), which increase shall be in lieu of the payment of a Cash Dividend
and shall be deemed to be a dividend that has been paid. The Board of Directors
shall declare such dividends on each Quarterly Payment Date.
SECTION 3. LIQUIDATION PREFERENCE.
(a) SENIOR PREFERRED. Upon the occurrence of a Liquidation
Event, each holder of Senior Preferred shall be entitled to receive, prior and
in preference to any distribution or payment of any of the assets or surplus
funds of the corporation to the holders of the Junior Preferred or the Common by
reason of their ownership of such stock, an amount in cash equal to the greater
of: (i) the aggregate Preferred Liquidation Amount of all shares of Senior
Preferred held by such holder, and (ii) the amount receivable upon such
Liquidation Event by a holder of the number of shares of Common into which such
shares of Senior Preferred would have been converted if all shares of Preferred
were converted into Common pursuant to Section 4(a) hereof immediately prior to
the Liquidation Event. The holders of Senior Preferred shall not thereafter be
entitled to any further payment. If, upon any such Liquidation Event, the
corporation's assets to be distributed among the holders of the Senior Preferred
are insufficient to permit payment to such holders of the aggregate amounts to
which they are entitled to receive under this paragraph
-4-
<PAGE>
(a), then the entire assets available to be distributed to the corporation's
shareholders shall be distributed pro rata among the holders of Senior
Preferred in proportion to the full aforesaid preferential amounts to which
each such holder is entitled. The corporation shall provide each holder of
Senior Preferred with a calculation of the Preferred Liquidation Amount for
each series of Senior Preferred prior to any distributions arising from the
applicable Liquidation Event.
(b) JUNIOR PREFERRED. Upon the occurrence of a Liquidation
Event, and after payment of the full preferential amounts payable to the holders
of the Senior Preferred under paragraph (a), each holder of Junior Preferred
shall be entitled to receive, prior and in preference to any distribution or
payment of any of the assets or surplus funds of the corporation to the holders
of the Common by reason of their ownership of such stock, an amount in cash
equal to the aggregate applicable Preferred Liquidation Amount for all shares of
Junior Preferred held by them, and the holders of Junior Preferred shall not be
entitled to any further payment. If, upon any such Liquidation Event and after
payment of the full preferential amounts payable to the holders of the Senior
Preferred under paragraph (a), the corporation's remaining assets to be
distributed among the holders of the Junior Preferred are insufficient to permit
payment to such holders of the full aggregate amounts to which they are entitled
to receive under this paragraph (b), then the entire remaining assets available
for distribution shall be distributed ratably among the holders of the Junior
Preferred in proportion to the full aforesaid preferential amounts to which each
such holder is entitled.
(c) PAYMENT TO COMMON. Upon the occurrence of a Liquidation
Event, and after payment has been made to the holders of the Preferred of the
full aggregate amounts to which they shall be entitled as set forth above, then
the entire remaining assets of the corporation available for distribution, if
any, shall be distributed ratably among the holders of the Common based on the
number of shares of Common held by such holders.
(d) VALUATION. For purposes of this Section 3, if the
distributions or consideration received by the shareholders of the corporation
is other than cash or publicly traded securities listed on an exchange or
transaction reporting system, its fair market value will be determined in good
faith by the Board of Directors of the corporation, or, if appropriate, by the
court or Person acting as a liquidator; PROVIDED, HOWEVER, that if property
other than cash or publicly-traded securities with a purported aggregate value
of at least $25 million is involved, the value of such other property shall be
determined by an independent appraiser or independent financial advisor
qualified to value the subject property selected by the corporation but subject
to the reasonable approval of the holders of a majority of the Senior Preferred,
voting as a single class. In the case of publicly traded securities listed on
an exchange, fair market value shall mean the average last closing sale price as
reported by such exchange or by a consolidated transaction reporting system for
the five trading-day period immediately preceding the date such Liquidation
Event is consummated. In the case of publicly traded securities not listed on
an exchange, fair market value shall mean the average last closing bid price as
reported by the National Association of Securities Dealers Automatic Quotation
System, Inc. or such successor or similar organization,
-5-
<PAGE>
for the five trading-day period immediately preceding the date on which such
Liquidation Event is consummated.
SECTION 4. CONVERSION. The holders of the Preferred shall have
conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Preferred shall be
convertible, at the option of the holder thereof, at any time or from time to
time after the date of issuance of such share at the office of the corporation
of any transfer agent for the Preferred, into such number of fully paid and
nonassessable shares of Common, as is determined by dividing (i) the applicable
Preferred Liquidation Amount for each share of Preferred in effect at the time
of conversion, by (ii) the applicable Conversion Price (determined as
hereinafter provided) in effect at the time of conversion. The initial price at
which shares of Common shall be deliverable upon conversion (the "Conversion
Price") shall be $0.10016827 for each share of Series A Preferred, $2.50 for
each share of Series B Preferred and $5.00 for each share of Senior Preferred,
in each case per share of Common. Such Conversion Price shall be subject to
adjustment as hereinafter provided. In no event shall any adjustment hereunder
be made to the Conversion Price to reflect the issuance of any additional shares
of Common pursuant to Section 5(b) of this Article V(B).
(b) AUTOMATIC CONVERSION.
(i) Each share of Preferred automatically shall be
converted into shares of Common at the then effective and applicable Conversion
Price upon the earlier to occur of: (x) the closing date of an IPO at an
aggregate offering price of not less than forty million dollars ($40,000,000)
(before deducting underwriter's discounts and commissions) at a share price to
the public of at least $10 per share (as adjusted for any Recapitalization
declared or effected with respect to the Common after March 10, 1999 and
recalculated to disregard the effect of any additional shares which may become
issuable as a result of the provisions of Section 5(b) of this Article V(B))
(hereinafter, a "Qualified Public Offering"), and (y) the date specified in a
written consent signed by (A) the holders of a majority of the shares of
Preferred then outstanding and (B) the holders of a majority of the shares of
Series C Preferred, Series D Preferred and Series E Preferred, each voting as a
separate class. The holders of Series C Preferred or Series D Preferred may be
entitled to receive additional shares of Common in connection with the
conversion of their shares as set forth in Section 5(b) of this Article V(B).
(ii) Each share of Series E Preferred automatically shall
be converted into a share of Series D Preferred upon the earlier to occur of:
(x) January 1, 2000, and (y) an issuance of any Common or security convertible
into Common at a price per share less than the Preferred Liquidation Amount of
the Series E Preferred. Should the Series E convert pursuant to this section
4(b)(ii), the shares converted into Series D Preferred shall be treated as
having been issued as Series D Preferred from their original date of issuance.
-6-
<PAGE>
(c) MECHANICS OF CONVERSION. No fractional shares or scrip
representing fractional shares shall be issued upon the conversion of any share
of Preferred. If, upon conversion of all of the shares of Preferred held by a
registered holder which are being converted, except for the provisions of this
Section 4(c), the registered holder would be entitled to receive a fractional
share of Common, then an amount equal to such fractional share multiplied by the
then fair market value (as determined in good faith by the corporation's Board
of Directors) of a share of the corporation's Common shall be paid by the
corporation in cash to such registered holder. Before any holder of Preferred
shall be entitled to convert the same into shares of Common or Preferred, as
applicable, the holder shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the corporation or of any transfer agent for the
Preferred, and shall give written notice to the corporation at such office that
the holder elects to convert the same; provided that (1) in the case of an
automatic conversion as provided in Section 4(b)(i)(x) or 4(b)(ii) the Preferred
shall nonetheless be deemed converted when as set forth therein and the
certificates therefor shall be deemed to represent the underlying Common or
Preferred, as applicable, until such time as the certificates are delivered at
the office of the corporation or the transfer agent and (2) a written notice of
conversion may be given in connection with a conversion as provided in Section
4(a) or Section 4(b)(i)(y) conditioned upon, and with effect immediately prior
to, the occurrence of a particular event. The corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such holder of
Preferred, a certificate or certificates for the number of shares of Common or
Preferred, as applicable, to which the holder shall be entitled as aforesaid and
a check payable to the holder in the amount of any cash amounts payable as the
result of a conversion into fractional shares of Common. Such conversion shall
be deemed to have been made immediately prior to the close of business on the
date of such surrender of the shares of Preferred to be converted, or in the
case of automatic conversion as provided in Section 4(b)(i)(x), on the closing
date of the offering, and the person or persons entitled to receive the shares
of Common issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common on such date.
(d) ADJUSTED FOR SUBDIVISIONS AND COMBINATIONS. If the
corporation at any time or from time to time after the filing of these Restated
Articles of Incorporation effects a subdivision of the outstanding Common,
without a corresponding subdivision with respect to the Preferred, the
Conversion Price of each series of Preferred then in effect immediately before
that subdivision shall be proportionately decreased, and, conversely, if the
corporation at any time or from time to time combines the outstanding shares of
Common, without a corresponding combination with respect to the Preferred, the
Conversion Price of each series of preferred then in effect immediately before
the combination shall be proportionately increased. Any adjustment of the
Conversion Price of any series of Preferred under this Section 4(d) shall become
effective simultaneously with the subdivision or combination triggering such
adjustment.
-7-
<PAGE>
(e) ADJUSTMENTS TO CONVERSION PRICES FOR CERTAIN DIVIDENDS AND
DISTRIBUTIONS.
(i) In the event the corporation at any time or from
time to time after the filing of these Restated Articles of Incorporation makes,
or fixes a record date for the determination of holders of Common entitled to
receive, a dividend or other distribution payable in additional shares of
Common, without a corresponding dividend with respect to the Preferred, then and
in each such event the Conversion Price then in effect for each series of
Preferred shall be decreased as of the time of such issuance or, in the event
such a record date is fixed, as of the close of business on such record date, by
multiplying the Conversion Price then in effect by a fraction (x) the numerator
of which is the total number of shares of Common issued and outstanding
immediately prior to the time of such issuance on the close of business on such
record date and (y) the denominator of which is the total number of shares of
Common issued and outstanding immediately prior to the time of such issuance or
the close of business on such record date PLUS the number of shares of Common
issuable in payment of such dividend or distribution; PROVIDED, HOWEVER, that if
such record date is fixed and such dividend is not fully paid or if such
distribution is not fully made on the date fixed therefor, the Conversion Price
shall be recomputed accordingly as of the close of business on such record date
and thereafter the Conversion Price shall be adjusted pursuant to this
Section 4(e) as of the time of actual payment of such dividends or
distributions.
(ii) For purposes of this Section 4(e), the number of
shares of Common at any time issued and outstanding shall not include shares
held in the treasury of the corporation.
(f) ADJUSTMENTS FOR OTHER DIVIDENDS OR DISTRIBUTIONS. In the
event the corporation at any time or from time to time after the filing of these
Restated Articles of Incorporation makes or fixes a record date for the
determination of holders of shares of Common entitled to receive a dividend or
other distribution payable in securities or other property of the corporation
(other than shares of Common adjusted under Section 4(e)) without a
corresponding dividend or distribution with respect to the Preferred, then, and
in each such event, provision shall be made so that the holders of shares of
Preferred shall receive upon conversion thereof, in addition to the number of
shares of Common receivable thereupon, the amount of securities and other
property of the corporation which they would have received had their shares of
Preferred been converted into shares of Common on the date of such event and had
they thereafter, during the period from the date of such event to and including
the date of conversion, retained such securities and other property receivable
by them as aforesaid during such period, subject to all other adjustments called
for during such period under this Section 4 with respect to the rights of the
holders of shares of Preferred.
(g) ADJUSTMENTS FOR RECLASSIFICATION, EXCHANGE AND
SUBSTITUTION. If the shares of Common issuable upon conversion of the Preferred
shall be changed into the same or a different number of shares of any other
class or classes of stock, whether by recapitalization, reclassification or
otherwise (other than a subdivision or combination of shares, stock dividend,
reorganization, merger, consolidation or sale of assets as provided for
elsewhere in this
-8-
<PAGE>
Section 4), then and in any such event each holder of Preferred thereafter
shall have the right to convert such stock into the kind and amount of stock
and other securities and property receivable upon such recapitalization,
reclassification or other change, by holders of the number of shares of
Common into which such shares of Preferred might have been converted
immediately prior to such recapitalization, reclassification or change, all
subject to such further adjustments applicable as specified herein.
(h) REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF
ASSETS. If at any time or from time to time there is a capital reorganization
of or change in the Common (other than a recapitalization, subdivision,
combination, reclassification or exchange of shares provided for elsewhere in
this Section 4) or a merger or consolidation of the corporation with or into
another Person, or the voluntary direct or indirect sale of all or substantially
all of the corporation's properties and assets to any other Person (except an
event which is governed under Section 3 or Section 6), then, as a part of such
reorganization, merger, consolidation or sale, provision shall be made so that
the holders of the Preferred thereafter shall be entitled to receive, upon
conversion of the Preferred, the number of shares of stock or other securities
or property of the corporation, or of such successor Person resulting from such
reorganization, merger, consolidation or sale, to which a holder of Common
deliverable upon conversion would have been entitled on such capital
reorganization, merger, consolidation or sale. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Section 4
with respect to the rights of the holders of the Preferred after the
reorganization, merger, consolidation or sale to the end that the provisions of
this Section 4 (including adjustment of the Conversion Price then in effect and
number of shares issuable upon conversion of the Preferred) shall be applicable
after that event and be as nearly equivalent to the provisions hereof as may be
practicable. This Section 4(h) shall similarly apply to successive
reorganizations, mergers, consolidations and sales.
(i) RESERVATION OF COMMON ISSUABLE UPON CONVERSION. The
corporation shall at all times reserve and keep available out of its authorized
but unissuable shares of Common or otherwise take such action, or cause to be
taken such action, as may be necessary for the purpose of effecting the
conversion of the shares of the Preferred and the performance of the
corporation's obligations under Section 5(b) such number of its shares of Common
or other securities or property as shall from time to time be sufficient to
effect the conversion of all outstanding shares of the Preferred; and if at any
time the number of authorized but unissued shares of Common or other securities
of this corporation shall not be sufficient to effect the conversion of all
outstanding shares of the Preferred, in addition to such other remedies as shall
be available to the holder of such Preferred, this corporation will take such
corporate action as may be necessary to increase its authorized but unissued
shares of Common to such number of shares of Common to such number of shares as
shall be sufficient for such purposes.
(j) NO IMPAIRMENT. The corporation will not, by amendment of
its Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action or omission, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder by the
-9-
<PAGE>
corporation, and will at all times in good faith assist in carrying out of all
provisions hereof, including without limitation this Section 4, and in the
taking of all such action as may be necessary or appropriate in order to protect
the conversion rights of the holders of the Preferred against impairment, or
dilution in accordance with the provisions hereof.
(k) CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of
each adjustment or readjustment of any Conversion Price for any series of
Preferred pursuant to this Section 4, the corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to each holder of the Preferred a certificate
executed by the corporations's president or chief financial officer setting
forth such adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. The corporation shall, upon the
written request at any time of any holder of Preferred, furnish or cause to be
furnished to such holder a like certificate setting forth (i) such adjustments
and readjustments, (ii) the conversion price for such series of Preferred at
such time in effect, and (iii) the number of share of Common Stock which at the
time would be received upon the conversion of such series of Preferred.
SECTION 5. ADDITIONAL RIGHTS OF SENIOR PREFERRED
(a) SERIES C REDEMPTION RIGHTS.
(i) On August 27, 2001 (the "First Redemption Date"),
and on each six month anniversary of the First Redemption Date (the First
Redemption Date and each such additional date, a "Redemption Date"), at the
individual option of each holder of shares of Series C Preferred, the
corporation shall redeem for cash the number of shares of Series C Preferred
held by such holder that is specified in a request for redemption delivered to
the corporation by the holder at least ten (10) days prior to the applicable
Redemption Date, out of any funds legally available therefor, at a price per
share equal to twice the Preferred Liquidation Amount then in effect for each
such share.
(ii) If the funds of the corporation legally available
for redemption of shares of Series C Preferred at the applicable Redemption Date
are insufficient to redeem the total number shares of Series C Preferred to be
redeemed on such date, those funds which are legally available will be used to
redeem the maximum possible number of such shares ratably among the holders such
shares to be redeemed based upon the total number of shares then requested to be
redeemed by each such holder.
(iii) The shares of Series C Preferred not redeemed upon
an applicable Redemption Date because of the failure of the holder thereof to so
elect and the shares of Series C Preferred not redeemed upon an applicable
Redemption Date because of an insufficiency as described in paragraph (ii) above
shall remain outstanding and entitled to all the rights and preferences provided
herein, including the right to receive mandatory dividends as provided in
Section 2(b).
-10-
<PAGE>
(b) ISSUANCE OF ADDITIONAL SHARES OF COMMON UPON PUBLIC
OFFERING.
(i) FORMULA. In the event of an IPO (which may include
shares sold for the account of Persons other than the corporation) where the
offering price to the public per share of Common (as appropriately adjusted for
any Recapitalization effected with respect to the Common after March 10, 1999
and through and including the closing of the IPO) (the "IPO Price") is less than
the Minimum Price (as defined in clause (bb) below), each holder of Series C
Preferred or Series D Preferred will be entitled, effective immediately prior to
the IPO, to receive immediately upon the occurrence of the IPO newly issued
additional shares of fully paid and nonassessable Common as determined by the
following formula:
(MP-X)Y
AS = -----------
X
where:
(aa) AS = the number of additional shares of Common to be issued to
such holder in connection with the conversion of such
holder's shares of Series C Preferred or Series D
Preferred;
(bb) MP = the "Minimum Price" which (A) in the case of shares of
Series C Preferred, shall be equal to $15.00, and (B) in
the case of shares of Series D Preferred, shall be equal to
$10.00 (in either case, as appropriately adjusted for any
Recapitalization effected or declared with respect to the
Common);
(cc) X = the IPO Price; and
(dd) Y = the number of shares of Common into which such holder's
shares of Series C Preferred or Series D Preferred were
convertible pursuant to Section 4(a) hereof immediately
prior to and taking account of the IPO.
(ii) FRACTIONAL SHARES. No fractional shares of Common
shall be issued pursuant to paragraph (i) above, but in lieu thereof, the
corporation shall pay the holder entitled thereto an amount of cash equal to
such fraction, multiplied by the IPO Price.
SECTION 6. SPECIAL PROVISIONS FOR MERGER EVENTS.
(a) DISTRIBUTIONS ON MERGER EVENTS.
(i) The corporation shall not undertake a Merger Event
unless as a condition and term of the Merger Event, each holder of outstanding
Senior Preferred shall be entitled to receive, upon the occurrence of the Merger
Event, the cash or securities payable in
-11-
<PAGE>
such Merger Event in an amount equal to the aggregate Senior Preferred Merger
Amount, as defined in Section 6(b), of the shares of Senior Preferred then
held by such holder.
(ii) If, after payment of the Senior Preferred Merger
Amount to the holders of Senior Preferred pursuant to Section 6(a)(i), any
proceeds remain available for distribution in respect of the Merger Event, the
holders of Junior Preferred shall be entitled to receive in cash or in
securities received from the acquiring corporation, or in a combination thereof,
at the closing of any such transaction constituting a Merger Event, an amount
equal to the aggregate Preferred Liquidation Amount of the shares of Junior
Preferred held by each such holder. In the event the full Preferred Liquidation
Amount for the outstanding shares of Junior Preferred is not paid in accordance
herewith, then the entire remaining amount payable in respect of the Merger
Event shall be distributed ratably among the holders of the Junior Preferred in
proportion to the aggregate Preferred Liquidation Amount of the shares of Junior
Preferred held by each such holder.
(iii) Following the payments to the holders of Preferred
as set forth above, the remaining proceeds of the Merger Event (if any) shall be
distributed to the holders of Common ratably in proportion to the number of
shares of Common held by each such holder.
(iv) In no event shall the corporation undertake any
Merger Event in which the form of the consideration payable to holders of Common
or Junior Preferred is different from the form of the consideration payable to
holders of Senior Preferred.
(b) "SENIOR PREFERRED MERGER AMOUNT" DEFINED. For purposes of
this Section 6, the "Senior Preferred Merger Amount" shall mean:
(i) in the case of a share of Series C Preferred, at the
date of a Merger Event, the greater of (A) the Preferred Liquidation Amount of
such share on the date of such Merger Event, multiplied by three, and (B) the
amount receivable upon such Merger Event by a holder of the number of shares of
Common into which such share of Series C Preferred would have been converted if
all shares of Preferred were converted into Common pursuant to Section 4(a)
immediately prior to such Merger Event.
(ii) in the case of a share of Series D Preferred at the
date of a Merger Event, the greater of (A) the Preferred Liquidation Amount of
such share on the date of such Merger Event, multiplied by two, and (B) the
amount receivable upon such Merger Event by a holder of the number of shares of
Common into which such share of Series D Preferred would have been converted if
all shares of Preferred were converted into Common pursuant to Section 4(a)
immediately prior to such Merger Event.
(iii) in the case of a share of Series E Preferred at
the date of a merger Event, the greater of (A) the Preferred Liquidation
Amount of such share on the date of such Merger Event, multiplied by two, and
(B) the amount receivable upon such Merger Event by a
-12-
<PAGE>
holder of the number of shares of Common into which such share of Series E
Preferred would have been converted if all shares of Preferred were converted
into Common pursuant to Section 4(a) immediately prior to such Merger Event.
(c) VALUATION. For purposes of this Section 6, if the
distributions or consideration received by the shareholders of the corporation
upon a Merger Event is other than cash or publicly traded securities listed on
an exchange or transaction reporting system, its fair market value will be
determined in good faith by the Board of Directors of the corporation, or, if
appropriate, by the court or Person acting as a liquidator; PROVIDED, HOWEVER,
that if property other than cash or publicly-traded securities with a purported
aggregate value of at least $25 million is involved, the value of such other
property shall be determined by an independent appraiser or independent
financial advisor qualified to value the subject property selected by the
corporation but subject to the reasonable approval of the holders of a majority
of the Senior Preferred, voting as a single class. In the case of publicly
traded securities listed on an exchange, fair market value shall mean the
average last closing sale price as reported by such exchange or by a
consolidated transaction reporting system for the five trading-day period
immediately preceding the date such Merger Event is consummated. In the case of
publicly traded securities not listed on an exchange, fair market value shall
mean the average last closing bid price as reported by the National Association
of Securities Dealers Automatic Quotation System, Inc. or such successor or
similar organization, for the five trading-day period immediately preceding the
date on which such Merger Event is consummated.
SECTION 7. VOTING RIGHTS.
(a) GENERAL. Except as otherwise expressly provided herein
or as required by law, the holders of issued and outstanding Common and the
holders of issued and outstanding Preferred shall have one vote for each
share of Common then held or deemed to be held (assuming the conversion into
Common of all then-outstanding shares of Preferred), voting together as a
single class, at the record date for determination of the stockholders
entitled to vote on such matters, or, if no such record date is established,
at the date such vote is taken or any written consent of stockholders is
solicited, such votes to be counted together with all other shares of stock
of the corporation having general voting power and not separately as a class.
Holders of shares of Common and Preferred shall be entitled to notice of any
stockholders' meeting in accordance with the Bylaws of the corporation. No
fractional votes shall be permitted, and any fractional voting rights
resulting from the above formula (after aggregating all shares of Common into
which shares of Preferred held by each holder could be converted) shall be
rounded to the nearest whole number (with one-half being rounded upward).
(b) VOTING FOR THE ELECTION OF DIRECTORS. The Series D
Preferred, voting separately as a class, shall be entitled to elect one (1)
director (the "Series D Preferred Director") of the corporation at each annual
election (and to fill any vacancies with respect thereto), which right shall
expire on the consummation of an IPO. All other directors shall be elected by
the holders of Preferred and Common, voting together as a single class.
-13-
<PAGE>
SECTION 8. COVENANTS.
(a) In addition to any other rights provided by law, the
corporation shall not, without first obtaining the affirmative vote or written
consent of (i) the holders of Preferred holding not less than a majority of the
outstanding Preferred, voting together as a single class, (ii) the holders of
the Series C Preferred holding not less than a majority of the outstanding
Series C Preferred, voting together as a separate class, (iii) the holders of
the Series D Preferred holding not less than a majority of the outstanding
Series D Preferred, voting together as a separate class and (iv) the holders of
the Series E Preferred holding not less than a majority of the outstanding
Series E Preferred, voting together as a separate class, in each case determined
on an as-converted into Common basis:
(i) increase or decrease the authorized number of shares
of the Preferred or any series of Preferred;
(ii) authorize or issue shares of any class or series
having any preference or priority superior to or on a parity with any such
preference or priority of any issued and outstanding series of Preferred;
(iii) reclassify any Common or other shares of the
corporation which do not have a preference or priority over or with any series
of Preferred into shares having any preference or priority as to dividends,
liquidation rights or voting rights superior to or on a parity with any such
preference or priority of any series of Preferred;
(iv) pay or declare any dividend or make any other
distribution on any shares of Common or Junior Preferred (except dividends
payable in kind) or repurchase or redeem any outstanding Common;
(v) pay or declare any dividend or make any other
distribution on any shares of Senior Preferred (except Cash Dividends or PIK
Dividends payable in respect of shares of Series C Preferred) provided that no
vote of the Junior Preferred shall be required for any dividend or distribution
made solely to the Senior Preferred;
(vi) repurchase, redeem or retire any shares of capital
stock of the corporation, other than repurchases described in Section 9 below;
provided that no vote of the Junior Preferred shall be required for any
repurchase, redemption or retirement of solely Senior Preferred;
(vii) (A) effect any Merger Event or (B) permit any
recapitalization, reorganization or reclassification; or
(viii) take action which would have a material and
adverse alteration or change of the rights, preferences or privileges of any
series of Senior Preferred.
-14-
<PAGE>
(b) Other than matters addressed by Section 8(a)(i) through
(vi) or 8(a)(vii)(A), which matters shall be governed by Section 8(a), the
corporation shall not, without first obtaining the affirmative vote or
written consent of (i) the holders of Series D Preferred holding not less
than two-thirds (66.66%) of the outstanding Series D Preferred and (ii) the
holders of Series E Preferred holding not less than two-thirds (66.66%) of
the outstanding Series E Preferred, each voting as separate series, make any
change or modification of the terms, rights or privileges of the Series D
Preferred or the Series E Preferred, as the case may be, that is adverse in
any respect to the terms, rights or privileges of the Series D Preferred or
the Series E Preferred, as the case may be.
(c) The corporation shall not grant or sell to any Person
(other than a wholly owned subsidiary of the corporation so long as it remains
such) any Common or any securities convertible into, or exchangeable or
exercisable for any Common, at a price per share of Common that is less than the
greater of (x) the Preferred Liquidation Amount of (i) the Series D Preferred or
(ii) the Series E Preferred or (y) the "Current Value" (as defined below) of the
Common (other than pursuant to employee stock options not to exceed 5,400,000
shares of Common or pursuant to Preferred outstanding or issued in connection
with the filing of the Amended and Restated Articles of Incorporation) without
first obtaining the affirmative vote or written consent of the holders of the
Series D Preferred holding not less than a majority of the outstanding Series D
Preferred and the holders of the Series E Preferred holding not less than a
majority of the outstanding Series E Preferred, each voting as separate series
(but excluding, for purposes of such calculation, the shares of Series D
Preferred or Series E Preferred, as the case may be, of any Series D holder or
Series E holder, as the case may be, to whom the grant or sale in question is
proposed to be made).
"Current Value" of a share of Common, for purposes of the
preceding paragraph, shall be determined by the Board of Directors of the
corporation acting in good faith and with reference to any recent sales or
transfers of Common or securities convertible, exchangeable or exercisable into
Common to the extent reasonable.
SECTION 9. RESIDUAL RIGHTS. All rights accruing to the outstanding
shares of the corporation not expressly provided for to the contrary herein
shall be vested in the Common.
SECTION 10. STATUS OF CONVERTED OR REDEEMED STOCK. In the event any
shares of Preferred shall be redeemed or converted, the shares so converted or
redeemed shall be canceled and shall not have the status of authorized but
unissued shares of Preferred and shall not be issuable by the corporation and
the Articles of Incorporation of this corporation shall be amended to effect the
corresponding reduction in the corporation's capital stock.
V.
The Corporation is to have perpetual existence.
VI.
-15-
<PAGE>
The following provisions are inserted for the management of the business
and the conduct of the affairs of the Corporation, and for further definition,
limitation and regulation of the powers of the Corporation and of its directors
and stockholders:
(a) The business of the Corporation shall be managed by or
under the direction of the Board of Directors.
(b) Special meetings of stockholders of the Corporation may be
called only by the President, the Chairman of the Board or by the Board of
Directors pursuant to a resolution adopted by a majority of the total number of
authorized directors (whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is presented to the
Board for adoption).
VII.
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the Corporation.
VIII.
Elections of directors need not be by written ballot unless the Bylaws of
the Corporation shall so provide.
IX.
The number of directors which constitute the whole Board of Directors of
the Corporation shall be as set forth in the Bylaws of the Corporation and may
be fixed from time to time by the Board of Directors pursuant to a resolution
adopted by a majority of the total number of authorized directors (whether or
not there exist any vacancies in previously authorized directorships at the time
any such resolution is presented to the Board of Directors for adoption). At
each annual meeting of stockholders, directors of the corporation shall be
elected to hold office until the expiration of the term for which they are
elected and until their successors have been duly elected and qualified; except
that if any such election shall not be so held, such election shall take place
at a stockholders' meeting called and held in accordance with the General
Corporation Law of the State of Delaware.
Vacancies occurring on the Board of Directors for any reason may be
filled by vote of a majority of the remaining members of the Board of Directors,
although less than a quorum, at any meeting of the Board of Directors or by
unanimous written consent of the Board of Directors. A person so elected by the
Board of Directors to fill a vacancy shall hold office until the next succeeding
annual meeting of stockholders of the Corporation and until his or her successor
shall have been duly elected and qualified.
-16-
<PAGE>
X.
To the fullest extent permitted by the Delaware General Corporation Law
as the same exists or as may hereafter be amended, a director of the Corporation
shall not be personally liable to the Corporation or its stockholders for
monetary damages for breach fiduciary duty as a director.
The Corporation shall indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director, officer or employee of
the Corporation or any predecessor of the Corporation or serves or served at any
other enterprise as a director, officer or employee at the request of the
Corporation or any predecessor to the Corporation.
Neither any amendment nor repeal of this Article TEN, nor the adoption of
any provision of this Corporation's Certificate of Incorporation inconsistent
with this Article TEN, shall eliminate or reduce the effect of this Article TEN,
in respect of any matter occurring, or any action or proceeding accruing or
arising or that, but for this Article TEN, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision.
XI.
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
XII.
Effective upon the closing of a Qualified Public Offering, no action that
is required or permitted to be taken by the stockholders of the Corporation at
any annual or special meeting of stockholders may be effected by written consent
of stockholders in lieu of a meeting of stockholders.
XIII.
Advance notice of new business and stockholder nominations for the
election of directors shall be given in the manner and to the extent provided in
the Bylaws of the corporation.
XIV.
-17-
<PAGE>
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
* * * * *
A. This Amended and Restated Certificate of Incorporation has been
duly approved by the Board of Directors of this corporation.
B. This Amended and Restated Certificate of Incorporation has been
duly adopted in accordance with the provisions of Sections 228 and 245 of the
General Corporation Law of the State of Delaware by the Board of Directors and
the stockholders of the corporation. A majority of the outstanding shares of
Common Stock and Preferred Stock, and a majority of the outstanding shares of
Preferred Stock approved this Amended and Restated Certificate of Incorporation
by written consent in accordance with Section 228 of the General Corporation Law
of the State of Delaware and in accordance with the corporation's Certificate of
Incorporation and written notice of such was given by the corporation in
accordance with Section 228.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
-18-
<PAGE>
IN WITNESS WHEREOF, ZapMe! Corporation has caused this Amended and
Restated Certificate of Incorporation to be signed by the Chief Executive
Officer and the Secretary in San Ramon, California, this _____ day of
_______________, 1999.
ZapMe! Corporation
By:
----------------------------
Lance Mortensen
Chief Executive Officer
ATTEST:
By:
-------------------------
Bruce Bower
Secretary
<PAGE>
Exhibit 3.4
BYLAWS
OF
ZAPME! DELAWARE CORPORATION
(A DELAWARE CORPORATION)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I CORPORATE OFFICES . . . . . . . . . . . . . . . . . . . 1
1.1 REGISTERED OFFICE . . . . . . . . . . . . . . . . . . . . 1
1.2 OTHER OFFICES . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II MEETINGS OF STOCKHOLDERS . . . . . . . . . . . . . . . 1
2.1 PLACE OF MEETINGS . . . . . . . . . . . . . . . . . . . . 1
2.2 ANNUAL MEETING. . . . . . . . . . . . . . . . . . . . . . 1
2.3 SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . 2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS. . . . . . . . . . . . . 2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER
BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . 2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. . . . . . . 4
2.7 QUORUM. . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.8 ADJOURNED MEETING; NOTICE . . . . . . . . . . . . . . . . 5
2.9 VOTING. . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.10 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT. . . . .5
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING . . . . . . . .6
2.12 PROXIES. . . . . . . . . . . . . . . . . . . . . . . . . .7
2.13 ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . .7
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE. . . . . . . . . . .7
2.15 INSPECTORS OF ELECTION . . . . . . . . . . . . . . . . . .8
2.16 INSPECTORS OF ELECTION AND PROCEDURES FOR COUNTING WRITTEN
CONSENTS. . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE III DIRECTORS . . . . . . . . . . . . . . . . . . . . . .10
3.1 POWERS. . . . . . . . . . . . . . . . . . . . . . . . . .10
3.2 NUMBER OF DIRECTORS . . . . . . . . . . . . . . . . . . .10
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS. . . . . . . . .10
3.4 RESIGNATION AND VACANCIES . . . . . . . . . . . . . . . .11
3.5 REMOVAL OF DIRECTORS. . . . . . . . . . . . . . . . . . .12
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE. . . . . . . . .12
3.7 FIRST MEETINGS. . . . . . . . . . . . . . . . . . . . . .12
3.8 REGULAR MEETINGS. . . . . . . . . . . . . . . . . . . . .13
3.9 SPECIAL MEETINGS; NOTICE. . . . . . . . . . . . . . . . .13
3.10 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.11 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . 14
3.12 ADJOURNMENT. . . . . . . . . . . . . . . . . . . . . . . 14
3.13 NOTICE OF ADJOURNMENT. . . . . . . . . . . . . . . . . . 14
3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. . . . 14
3.15 FEES AND COMPENSATION OF DIRECTORS . . . . . . . . . . . 14
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<CAPTION>
PAGE
----
<S> <C>
3.16 APPROVAL OF LOANS TO OFFICERS. . . . . . . . . . . . . . 14
3.17 SOLE DIRECTOR PROVIDED BY CERTIFICATE OF INCORPORATION . 15
3.18 CONDUCT OF BUSINESS. . . . . . . . . . . . . . . . . . . 15
ARTICLE IV COMMITTEES . . . . . . . . . . . . . . . . . . . . . .15
4.1 COMMITTEES OF DIRECTORS . . . . . . . . . . . . . . . . .15
4.2 MEETINGS AND ACTION OF COMMITTEES . . . . . . . . . . . .16
4.3 COMMITTEE MINUTES . . . . . . . . . . . . . . . . . . . .16
ARTICLE V OFFICERS. . . . . . . . . . . . . . . . . . . . . . . .16
5.1 OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . .16
5.2 APPOINTMENT OF OFFICERS . . . . . . . . . . . . . . . . .17
5.3 SUBORDINATE OFFICERS. . . . . . . . . . . . . . . . . . .17
5.4 REMOVAL AND RESIGNATION OF OFFICERS . . . . . . . . . . .17
5.5 VACANCIES IN OFFICES. . . . . . . . . . . . . . . . . . .18
5.6 CHAIRMAN OF THE BOARD . . . . . . . . . . . . . . . . . .18
5.7 PRESIDENT . . . . . . . . . . . . . . . . . . . . . . . .18
5.8 VICE PRESIDENTS . . . . . . . . . . . . . . . . . . . . .18
5.9 SECRETARY . . . . . . . . . . . . . . . . . . . . . . . .19
5.10 CHIEF FINANCIAL OFFICER. . . . . . . . . . . . . . . . . 19
5.11 ASSISTANT SECRETARY. . . . . . . . . . . . . . . . . . . 19
5.12 ADMINISTRATIVE OFFICERS. . . . . . . . . . . . . . . . . 20
5.13 AUTHORITY AND DUTIES OF OFFICERS . . . . . . . . . . . . 20
ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
OTHER AGENTS. . . . . . . . . . . . . . . . . . . . . . . . . 20
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS . . . . . . . .20
6.2 INDEMNIFICATION OF OTHERS . . . . . . . . . . . . . . . .21
6.3 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . .22
ARTICLE VII RECORDS AND REPORTS . . . . . . . . . . . . . . . . .22
7.1 MAINTENANCE AND INSPECTION OF RECORDS . . . . . . . . . .22
7.2 INSPECTION BY DIRECTORS . . . . . . . . . . . . . . . . .22
7.3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
REPRESENTATION OF SHARES OF OTHER CORPORATIONS. . . . . . . . 23
7.4 CERTIFICATION AND INSPECTION OF BYLAWS. . . . . . . . . .23
ARTICLE VIII GENERAL MATTERS. . . . . . . . . . . . . . . . . . .23
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING . .23
-ii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<CAPTION>
PAGE
----
<S> <C>
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS . . . . . . . .23
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED. . . .24
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES. . . . .24
8.5 SPECIAL DESIGNATION ON CERTIFICATES . . . . . . . . . . .25
8.6 LOST CERTIFICATES . . . . . . . . . . . . . . . . . . . .25
8.7 TRANSFER AGENTS AND REGISTRARS. . . . . . . . . . . . . .25
8.8 CONSTRUCTION; DEFINITIONS . . . . . . . . . . . . . . . .26
8.10 FISCAL YEAR. . . . . . . . . . . . . . . . . . . . . . . 26
8.11 SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.12 STOCK TRANSFER AGREEMENTS . . . . . . . . . . . . . . . .26
8.13 REGISTERED STOCKHOLDERS. . . . . . . . . . . . . . . . . 26
8.14 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE IX AMENDMENTS . . . . . . . . . . . . . . . . . . . . . .27
ARTICLE X DISSOLUTION . . . . . . . . . . . . . . . . . . . . . .27
ARTICLE XI CUSTODIAN. . . . . . . . . . . . . . . . . . . . . . .28
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES. . . . . . . 28
11.2 DUTIES OF CUSTODIAN. . . . . . . . . . . . . . . . . . . 29
</TABLE>
-iii-
<PAGE>
BYLAWS
OF
ZAPME! DELAWARE CORPORATION
(a Delaware corporation)
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation in the State of Delaware shall
be in the City of Dover, County of Kent. The name of the registered agent of
the corporation at such location is the Corporation Trust Corporation.
1.2 OTHER OFFICES
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place within or outside the
State of Delaware designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date and
at a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the third
Tuesday in March in each year at 10:00 a.m. However, if such day falls on a
legal holiday, then the meeting shall be held at the same time and place on the
next succeeding full business day. At the meeting, directors shall be elected,
and any other proper business may be transacted if brought before the meeting in
accordance with Section 2.5 of these Bylaws.
<PAGE>
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time by the
Board of Directors, by the Chairman of the Board or by the Chief Executive
Officer.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
Except as otherwise provided by the General Corporation Law of Delaware
or the Certificate of Incorporation notices of all meetings of stockholders
shall be sent or otherwise given in accordance with Section 2.6 of these bylaws
not less than ten (10) nor more than sixty (60) days before the date of the
meeting to each stockholder entitled to vote at such meeting. The notice shall
specify the place, date and hour of the meeting and (i) in the case of a special
meeting, the purpose or purposes for which the meeting is called and no business
other than that specified in the notice may be transacted or (ii) in the case of
the annual meeting, those matters which the board of directors, at the time of
giving the notice, intends to present for action by the stockholders. The
notice of any meeting at which directors are to be elected shall include the
name of any nominee or nominees who, at the time of the notice, the board
intends to present for election.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
(a) To be properly brought before an annual meeting,
nominations for the election of directors or other business must be
(i) specified in the notice of meeting (or any supplement thereto) given by or
at the direction of the board of directors, (ii) otherwise properly brought
before the meeting by or at the direction of the board of directors or
(iii) otherwise properly brought before the meeting by a stockholder in
accordance with Section 2.5(b). To be properly brought before a special
meeting, nominations for the election of directors or other business must be
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the board of directors.
(b) For business to be properly brought before an annual
meeting by a stockholder, the stockholder must have given timely notice thereof
in writing to the Secretary of the corporation. To be timely, a stockholder's
notice shall be delivered to the Secretary at the principal executive offices of
the Corporation not later than the close of business on the one hundred
twentieth (120th) day prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that the date of the
meeting is advanced more than thirty (30) days prior to or delayed by more than
thirty (30) days after the anniversary of the preceding year's annual meeting,
notice by the stockholder to be timely must be so delivered not earlier than the
close of business on the one hundred twentieth (120th) day prior to such annual
meeting and not later than the close of business on the later of the ninetieth
(90th) day prior to such annual meeting or the tenth (10th) day following the
day on which public announcement of the date of such meeting is first made. A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting: (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and address, as they
-2-
<PAGE>
appear on the corporation's books, of the stockholder proposing such
business, (iii) the class and number of shares of the corporation which are
beneficially owned by the stockholder, (iv) any material interest of the
stockholder in such business and (v) any other information that is required
to be provided by the stockholder pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), in his
capacity as a proponent to a stockholder proposal. Notwithstanding the
foregoing, in order to include information with respect to a stockholder
proposal in the proxy statement and form of proxy for a stockholder's
meeting, stockholders must provide notice as required by the regulations
promulgated under the Exchange Act. Notwithstanding anything in these bylaws
to the contrary, no business shall be conducted at any annual meeting except
in accordance with the procedures set forth in this Section 2.5. The
chairman of the annual meeting shall, if the facts warrant, determine and
declare at the meeting that business was not properly brought before the
meeting and in accordance with the provisions of this Section 2.5, and, if he
or she should so determine, he or she shall so declare at the meeting that
any such business not properly brought before the meeting shall not be
transacted.
(c) Only persons who are nominated in accordance with the
procedures set forth in this paragraph (c) shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of the
corporation may be made at a meeting of stockholders by or at the direction of
the Board of Directors or by any stockholder of the corporation entitled to vote
in the election of directors at the meeting who complies with the notice
procedures set forth in this paragraph (c). Such nominations, other than those
made by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the corporation in accordance with
the provisions of paragraph (b) of this Section 2.5. Such stockholder's notice
shall set forth (i) as to such stockholder giving notice, the information
required to be provided pursuant to paragraph (b) of this Section 2.5; and (ii)
as to each person, if any, whom the stockholder proposes to nominate for
election or re-election as a director: (A) the name, age, business address and
residence address of such person, (B) the principal occupation or employment of
such person, (C) the class and number of shares of the corporation which are
beneficially owned by such person, (D) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nominations are to
be made by the stockholder and (E) any other information relating to such person
that is required to be disclosed in solicitations of proxies for elections of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Exchange Act (including without limitation such person's written
consent to being named in the proxy statement, if any, as a nominee and to
serving as a director if elected). At the request of the Board of Directors,
any person nominated by a stockholder for election as a director shall furnish
to the Secretary of the corporation that information required to be set forth in
the stockholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a director of the corporation unless nominated
in accordance with the procedures set forth in this paragraph (c). The chairman
of the meeting shall, if the facts warrants, determine and declare at the
meeting that a nomination was not made in accordance with the procedures
prescribed by these bylaws, and if he should so determine, he shall so declare
at the meeting, and the defective nomination shall be disregarded.
-3-
<PAGE>
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the stockholder to the
corporation for the purpose of notice. Notice shall be deemed to have been
given at the time when delivered personally or deposited in the mail or sent by
telegram or other means of written communication. If any notice addressed to a
stockholder at the address of that stockholder appearing on the books of the
corporation is returned to the corporation by the United States Postal Service
marked to indicate that the United States Postal Service is unable to deliver
the notice to the stockholder at that address, then all future notices or
reports shall be deemed to have been duly given without further mailing if the
same shall be available to the stockholder on written demand of the stockholder
at the principal executive office of the corporation for a period of one (1)
year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.7 QUORUM
The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. Where a separate vote by a class or classes is
required, a majority, present in person or by proxy, of the shares of such class
or classes entitled to take action with respect to that vote on that matter
shall constitute a quorum. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman of
the meeting or (ii) the holders of a majority of the shares represented at the
meeting and entitled to vote thereat, present in person or represented by proxy,
shall have power to adjourn the meeting in accordance with Section 2.8 of these
bylaws.
When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which, by express provision of the laws of the State of Delaware or
of the certificate of incorporation or these bylaws, a different vote is
required, in which case such express provision shall govern and control the
decision of the question.
If a quorum be initially present, the stockholders may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken is approved by a
majority of the stockholders initially constituting the quorum.
-4-
<PAGE>
2.8 ADJOURNED MEETING; NOTICE
Any stockholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by (i) the chairman of the meeting
or (ii) the vote of the holders of a majority of the shares represented at that
meeting and entitled to vote thereat, either in person or by proxy. In the
absence of a quorum, no other business may be transacted at that meeting except
as provided in Section 2.7 of these bylaws.
When a meeting is adjourned to another time and place, unless these
bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the corporation may transact any business
that might have been transacted at the original meeting. If the adjournment is
for more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.9 VOTING
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.12 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint
owners, and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation
or these bylaws, each stockholder shall be entitled to one vote for each share
of capital stock held by such stockholder. Any stockholder entitled to vote on
any matter may vote part of the shares in favor of the proposal, refrain from
voting the remaining shares or, may vote them against the proposal; but, if the
stockholder fails to specify the number of shares which the stockholder is
voting affirmatively, it will be conclusively presumed that the stockholder's
approving vote is with respect to all shares which the stockholder is entitled
to vote.
2.10 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT
The transactions of any meeting of stockholders, either annual or
special, however called and noticed, and wherever held, shall be as valid as
though they had been taken at a meeting duly held after regular call and notice,
if a quorum be present either in person or by proxy, and if, either before or
after the meeting, each person entitled to vote, who was not present in person
or by proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. The waiver of notice or consent
or approval need not specify either the business to be transacted or the purpose
of any annual or special meeting of stockholders. All such waivers, consents,
and approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.
-5-
<PAGE>
Attendance by a person at a meeting shall also constitute a waiver of
notice of and presence at that meeting, except when the person objects at the
beginning of the meeting to the transaction of any business because the meeting
is not lawfully called or convened. Attendance at a meeting is not a waiver of
any right to object to the consideration of matters required by law to be
included in the notice of the meeting but not so included, if that objection is
expressly made at the meeting.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat the board of directors may fix, in advance, a record
date, which shall not precede the date upon which the resolution fixing the
record date is adopted by the board of directors and which shall not be more
than sixty (60) days nor less than ten (10) days before the date of any such
meeting, and in such event only stockholders of record on the date so fixed are
entitled to notice and to vote, notwithstanding any transfer of any shares on
the books of the corporation after the record date.
If the board of directors does not so fix a record date the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the business day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting
unless the board of directors fixes a new record date for the adjourned meeting,
but the board of directors shall fix a new record date if the meeting is
adjourned for more than thirty (30) days from the date set for the original
meeting.
In order that the corporation may determine the stockholders entitled to
consent to corporate action in writing without a meeting, the board of directors
may fix a record date, which record date shall neither precede nor be more than
ten (10) days after the date upon which such resolution is adopted by the board
of directors. Any stockholder of record seeking to have the stockholders
authorize or take action by written consent shall, by written notice to the
secretary, request the board of directors to fix a record date. The board of
directors shall promptly, but in all events within ten (10) days after the date
on which such notice is received, adopt a resolution fixing the record date.
If the board of directors has not fixed a record date within such time,
the record date for determining stockholders entitled to consent to corporate
action in writing without a meeting, when no prior action by the board of
directors is required by law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the corporation in the manner prescribed in the first paragraph of Section 2.11
of these bylaws. If the board of directors has not fixed a record date within
such time and prior action by the board of directors is required by law, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting shall be at the close of business on the date on
which the board of directors adopts the resolution taking such prior action.
-6-
<PAGE>
The record date for any other purpose shall be as provided in Section 8.1
of these bylaws.
2.12 PROXIES
Every person entitled to vote for directors, or on any other matter,
shall have the right to do so either in person or by one or more agents
authorized by a written proxy signed by the person and filed with the secretary
of the corporation in accordance with the procedure established for the meeting
or taking of action in writing, as the case may be, but no such proxy shall be
voted or acted upon after three (3) years from its date, unless the proxy
provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission, telefacsimile or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(e) of the General Corporation Law of Delaware
(relating to the irrevocability of proxies).
2.13 ORGANIZATION
The president, or in the absence of the president, the chairman of the
board, and in the absence of the chairman of the board, the vice presidents, in
order of their rank as fixed by the board of directors, shall call the meeting
of the stockholders to order, and shall act as chairman of the meeting. In the
absence of the president, the chairman of the board, and all of the vice
presidents, the stockholders shall appoint a chairman for such meeting. The
chairman of any meeting of stockholders shall determine the order of business
and the procedures at the meeting, including such matters as the regulation of
the manner of voting and the conduct of business. The date and time of the
opening and closing of the polls for each matter upon which the stockholders
will vote at the meeting shall be announced at the meeting. The secretary of
the corporation shall act as secretary of all meetings of the stockholders, but
in the absence of the secretary at any meeting of the stockholders, the chairman
of the meeting may appoint any person to act as secretary of the meeting.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present. The stock
ledger shall be the only evidence as to who are the stockholders entitled to
examine the stock ledger, the list of stockholders or the books of the
-7-
<PAGE>
corporation, or to vote in person or by proxy at any meeting of stockholders and
of the number of shares held by each such stockholder.
2.15 INSPECTORS OF ELECTION
The corporation may, and to the extent required by law, shall, in advance
of any meeting of stockholders, appoint one or more inspectors to act at the
meeting and make a written report thereof. The corporation may designate one or
more persons as alternate inspectors to replace any inspector who fails to act.
If no inspector or alternate is able to act at a meeting of stockholders, the
person presiding at the meeting may, and to the extent required by law, shall,
appoint one or more inspectors to act at the meeting. Each inspector, before
entering upon the discharge of his duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of his ability. Every vote taken by ballots shall be
counted by an inspector or inspectors appointed by the chairman of the meeting.
Such inspectors shall:
(a) determine the number of shares outstanding and the voting
power of each, the number of shares represented at the meeting, the existence of
a quorum, and the authenticity, validity, and effect of proxies;
(b) receive votes, ballots or consents;
(c) hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) count and tabulate all votes or consents;
(e) determine when the polls shall close;
(f) determine and certify the result; and
(g) do any other acts that may be proper to conduct the
election or vote with fairness to all stockholders.
2.16 INSPECTORS OF ELECTION AND PROCEDURES FOR COUNTING WRITTEN
CONSENTS
Within three (3) business days after receipt of the earliest dated
consent delivered to the corporation in the manner provided in Section 228(c) of
the General Corporation Law of Delaware or the determination by the board of
directors of the corporation that the corporation should seek corporate action
by written consent, as the case may be, the secretary may, but is not required
to, engage nationally recognized independent inspectors of elections for the
purpose of performing a
-8-
<PAGE>
ministerial review of the validity of the consents and revocations. The cost
of retaining inspectors of election shall be borne by the corporation.
Consents and revocations shall be delivered to the inspectors upon
receipt by the corporation, the stockholder or stockholders soliciting consents
or soliciting revocations in opposition to action by consent proposed by the
corporation (the "Soliciting Stockholders") or their proxy solicitors or other
designated agents. As soon as consents and revocations are received, the
inspectors shall review the consents and revocations and shall maintain a count
of the number of valid and unrevoked consents. The inspectors shall keep such
count confidential and shall not reveal the count to the corporation, the
Soliciting Stockholders or their representatives or any other person or entity.
As soon as practicable after the earlier of (i) sixty (60) days after the date
of the earliest dated consent delivered to the corporation in the manner
provided in Section 228(c) of the General Corporation Law of Delaware or (ii) a
written request therefor by the corporation or the Soliciting Stockholders
(whichever is soliciting consents) (which request, except in the case of
corporate action by written consent taken pursuant to the solicitations of not
more than ten (10) persons, may be made no earlier than after such reasonable
amount of time after the commencement date of the applicable solicitation of
consents as is necessary to permit the inspectors to commence and organize their
count, but in no event less than five (5) days after such commencement date),
notice of which request shall be given to the party opposing the solicitation of
consents, if any, which request shall state that the corporation or Soliciting
Stockholders, as the case may be, have a good faith belief that the requisite
number of valid and unrevoked consents to authorize or take the action specified
in the consents has been received in accordance with these bylaws, the
inspectors shall issue a preliminary report to the corporation and the
Soliciting Stockholders stating: (i) the number of valid consents; (ii) the
number of valid revocations; (iii) the number of valid and unrevoked consents;
(iv) the number of invalid consents; (v) the number of invalid revocations; and
(vi) whether, based on their preliminary count, the requisite number of valid
and unrevoked consents has been obtained to authorize or take the action
specified in the consents.
Unless the corporation and the Soliciting Stockholders shall agree in
writing to a shorter or longer period, the corporation and the Soliciting
Stockholders shall have 48 hours to review the consents and revocations and to
advise the inspectors and the opposing party in writing as to whether they
intend to challenge the preliminary report of the inspectors. If no written
notice of an intention to challenge the preliminary report is received within 48
hours after the inspectors' issuance of the preliminary report, the inspectors
shall issue to the corporation and the Soliciting Stockholders their final
report containing the information from the inspectors' determination with
respect to whether the requisite number of valid and unrevoked consents was
obtained to authorize and take the action specified in the consents. If the
corporation or the Soliciting Stockholders issue written notice of an intention
to challenge the inspectors' preliminary report within 48 hours after the
issuance of that report, a challenge session shall be scheduled by the
inspectors as promptly as practicable. A transcript of the challenge session
shall be recorded by a certified court reporter. Following completion of the
challenge session, the inspectors shall as promptly as practicable issue their
final report to the corporation and the Soliciting Stockholders, which report
shall contain the information included in the preliminary report, plus all
changes made to the vote totals as a result of the challenge
-9-
<PAGE>
and a certification of whether the requisite number of valid and unrevoked
consents was obtained to authorize or take the action specified in the
consents. A copy of the final report of the inspectors shall be included in
the book in which the proceedings of meetings of stockholders are recorded.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and
to any limitations in the certificate of incorporation or these bylaws relating
to action required to be approved by the stockholders or by the outstanding
shares, the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the board of
directors.
3.2 NUMBER OF DIRECTORS
Unless otherwise provided in the corporation's certificate of
incorporation, the board of directors shall consist of seven (7) members until
changed by a bylaw amending this Section 3.2, duly adopted by the board of
directors or by the stockholders, or by a duly adopted amendment to the
certificate of incorporation. No reduction of the authorized number of
directors shall have the effect of removing any director before that director's
term of office expires. If for any cause, the directors shall not have been
elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these bylaws, directors shall hold
office until the expiration of the term for which elected and until a successor
has been elected and qualified; except that if any such election shall not be so
held, such election shall take place at a stockholders' meeting called and held
in accordance with the General Corporation Law of Delaware.
Directors need not be stockholders unless so required by the certificate
of incorporation or these bylaws, wherein other qualifications for directors may
be prescribed.
Elections of directors need not be by written ballot.
-10-
<PAGE>
3.4 RESIGNATION AND VACANCIES
Any director may resign effective on giving written notice to the
chairman of the board, the president, the secretary or the board of directors,
unless the notice specifies a later time for that resignation to become
effective. If the resignation of a director is effective at a future time, only
a majority of the board of directors then in office, including those who have so
resigned (until the effective date of such resignation), shall have the power to
fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective.
Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director. Each director so elected shall hold office until the next annual
meeting of the stockholders and until a successor has been elected and
qualified.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from
any increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled only by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created directorships of
such class or classes or series may be filled only by a majority of the
directors elected by such class or classes or series thereof then in office, or
by a sole remaining director so elected. In the event that no directors elected
by such class or classes of stock or series remain, the majority of the other
directors then in office, although less than a quorum, or a sole remaining
director may fill such vacancy or vacancies.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as
-11-
<PAGE>
aforesaid, which election shall be governed by the provisions of Section 211
of the General Corporation Law of Delaware as far as applicable.
3.5 REMOVAL OF DIRECTORS
Unless otherwise restricted by statute, by the certificate of
incorporation or by these bylaws, any director or the entire board of directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors; provided, however,
that, if and so long as stockholders of the corporation are entitled to
cumulative voting, if less than the entire board is to be removed, no director
may be removed without cause if the votes cast against his removal would be
sufficient to elect him if then cumulatively voted at an election of the entire
board of directors. Whenever the holders of any class or series are entitled to
elect one or more directors by the certificate of incorporation, this Section
3.5 shall apply, in respect to the removal without cause of a director or
directors so elected, to the vote of the holders of the outstanding shares of
that class or series and not to the vote of the outstanding shares as a whole.
No reduction of the authorized number of directors shall have the effect
of removing any director prior to the expiration of such director's term of
office.
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the board of directors may be held at any place
within or outside the State of Delaware that has been designated from time to
time by resolution of the board. In the absence of such a designation, regular
meetings shall be held at the principal executive office of the corporation.
Special meetings of the board may be held at any place within or outside the
State of Delaware that has been designated in the notice of the meeting or, if
not stated in the notice or if there is no notice, at the principal executive
office of the corporation.
Any meeting of the board, regular or special, may be held by conference
telephone or similar communication equipment, so long as all directors
participating in the meeting can hear one another; and all such participating
directors shall be deemed to be present in person at the meeting.
3.7 FIRST MEETINGS
The first meeting of each newly elected board of directors shall be held
at such time and place as shall be fixed by the vote of the stockholders at the
annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
-12-
<PAGE>
3.8 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice at
such time as shall from time to time be determined by the board of directors.
If any regular meeting day shall fall on a legal holiday, then the meeting shall
be held at the same time and place on the next succeeding full business day.
3.9 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the chief executive
officer, any vice president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail,
telecopy or telegram, charges prepaid, addressed to each director at that
director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least two
(2) days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone, telecopy or telegram, it shall be
delivered personally or by telephone or telecopy or to the telegraph company at
least four (4) hours before the time of the holding of the meeting. Any oral
notice given personally or by telephone may be communicated either to the
director or to a person at the office of the director who the person giving the
notice has reason to believe will promptly communicate it to the director. If
the meeting is to be held at the principal executive office of the corporation,
the notice need not specify the place of the meeting. Moreover, a notice of
special meeting need not state the purpose of such meeting, and, unless
indicated in the notice thereof, any and all business may be transacted at a
special meeting.
3.10 QUORUM
A majority of the authorized number of directors shall constitute a
quorum for the transaction of business, except to adjourn as provided in
Section 3.12 of these bylaws. Every act or decision done or made by a majority
of the directors present at a duly held meeting at which a quorum is present
shall be regarded as the act of the board of directors, subject to the
provisions of the certificate of incorporation and applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the quorum for that meeting.
3.11 WAIVER OF NOTICE
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such directors. All such waivers shall be filed with the
-13-
<PAGE>
corporate records or made part of the minutes of the meeting. A waiver of
notice need not specify the purpose of any regular or special meeting of the
board of directors.
3.12 ADJOURNMENT
A majority of the directors present, whether or not constituting a
quorum, may adjourn any meeting of the board to another time and place.
3.13 NOTICE OF ADJOURNMENT
Notice of the time and place of holding an adjourned meeting of the board
need not be given unless the meeting is adjourned for more than twenty-four (24)
hours. If the meeting is adjourned for more than twenty-four (24) hours, then
notice of the time and place of the adjourned meeting shall be given before the
adjourned meeting takes place, in the manner specified in Section 3.9 of these
bylaws, to the directors who were not present at the time of the adjournment.
3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the board of directors
may be taken without a meeting, provided that all members of the board
individually or collectively consent in writing to that action. Such action by
written consent shall have the same force and effect as a unanimous vote of the
board of directors. Such written consent and any counterparts thereof shall be
filed with the minutes of the proceedings of the board of directors.
3.15 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation, if
any, for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.15 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
3.16 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or any of its
subsidiaries, including any officer or employee who is a director of the
corporation or any of its subsidiaries, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be
-14-
<PAGE>
deemed to deny, limit or restrict the powers of guaranty or warranty of the
corporation at common law or under any statute.
3.17 SOLE DIRECTOR PROVIDED BY CERTIFICATE OF INCORPORATION
In the event only one director is required by these bylaws or the
certificate of incorporation, then any reference herein to notices, waivers,
consents, meetings or other actions by a majority or quorum of the directors
shall be deemed to refer to such notice, waiver, etc., by such sole director,
who shall have all the rights and duties and shall be entitled to exercise all
of the powers and shall assume all the responsibilities otherwise herein
described as given to the board of directors.
3.18 CONDUCT OF BUSINESS
At any meeting of the board of directors, business shall be transacted in
such order and manner as the board may from time to time determine, and all
matters shall be determined by the vote of a majority of the directors present,
except as otherwise provided herein or required by law.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one or more committees, each
consisting of one or more directors, to serve at the pleasure of the board. The
board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. The appointment of members or alternate members of a committee
requires the vote of a majority of the authorized number of directors. Any
committee, to the extent provided in the resolution of the board, shall have and
may exercise all the powers and authority of the board, but no such committee
shall have the power or authority to (i) amend the certificate of incorporation
(except that a committee may, to the extent authorized in the resolution or
resolutions providing for the issuance of shares of stock adopted by the board
of directors as provided in Section 151(a) of the General Corporation Law of
Delaware, fix the designations and any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such shares
for, shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation or fix the number of shares
of any series of stock or authorize the increase or decrease of the shares of
any series), (ii) adopt an agreement of merger or consolidation under
Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend
to the stockholders the sale, lease or exchange of all or substantially all of
the corporation's property and assets, (iv) recommend to the stockholders a
dissolution of the corporation
-15-
<PAGE>
or a revocation of a dissolution or (v) amend the bylaws of the corporation;
and, unless the board resolution establishing the committee, a supplemental
resolution of the board of directors, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to
adopt a certificate of ownership and merger pursuant to Section 253 of the
General Corporation Law of Delaware.
4.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the following provisions of Article III of these
bylaws: Section 3.6 (place of meetings; meetings by telephone), Section 3.8
(regular meetings), Section 3.9 (special meetings; notice), Section 3.10
(quorum), Section 3.11 (waiver of notice), Section 3.12 (adjournment),
Section 3.13 (notice of adjournment) and Section 3.14 (board action by written
consent without meeting), with such changes in the context of those bylaws as
are necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
4.3 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
ARTICLE V
OFFICERS
5.1 OFFICERS
The Corporate Officers of the corporation shall be a president, a
secretary and a chief financial officer. The corporation may also have, at the
discretion of the board of directors, a chairman of the board, a chief executive
officer, a chief operating officer, a chief technical officer, one or more vice
presidents (however denominated), one or more assistant secretaries, a
treasurer, one or more assistant treasurers and such other officers as may be
appointed in accordance with the provisions of Section 5.3 of these bylaws. Any
number of offices may be held by the same person.
-16-
<PAGE>
In addition to the Corporate Officers of the Company described above,
there may also be such Administrative Officers of the corporation as may be
designated and appointed from time to time by the president of the corporation
in accordance with the provisions of Section 5.12 of these bylaws.
5.2 APPOINTMENT OF OFFICERS
The Corporate Officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
these bylaws, shall be chosen by the board of directors, subject to the rights,
if any, of an officer under any contract of employment, and shall hold their
respective offices for such terms as the board of directors may from time to
time determine.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or may empower the president to
appoint, such other Corporate Officers as the business of the corporation may
require, each of whom shall hold office for such period, have such power and
authority, and perform such duties as are provided in these bylaws or as the
board of directors may from time to time determine.
The president may from time to time designate and appoint Administrative
Officers of the corporation in accordance with the provisions of Section 5.12 of
these bylaws.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of a Corporate Officer under any contract
of employment, any Corporate Officer may be removed, either with or without
cause, by the board of directors at any regular or special meeting of the board
or, except in case of a Corporate Officer chosen by the board of directors, by
any Corporate Officer upon whom such power of removal may be conferred by the
board of directors.
Any Corporate Officer may resign at any time by giving written notice to
the corporation. Any resignation shall take effect at the date of the receipt
of that notice or at any later time specified in that notice; and, unless
otherwise specified in that notice, the acceptance of the resignation shall not
be necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the Corporate
Officer is a party.
Any Administrative Officer designated and appointed by the president may
be removed, either with or without cause, at any time by the president. Any
Administrative Officer may resign at any time by giving written notice to the
president or to the secretary of the corporation.
-17-
<PAGE>
5.5 VACANCIES IN OFFICES
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise such other
powers and perform such other duties as may from time to time be assigned to him
by the board of directors or as may be prescribed by these bylaws. If there is
no president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the board
of directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction and control of the business and the officers of the corporation. He
or she shall preside at all meetings of the stockholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He or she shall have the general powers and duties of management
usually vested in the office of president of a corporation, and shall have such
other powers and perform such other duties as may be prescribed by the board of
directors or these bylaws.
The president shall, without limitation, have the authority to execute
bonds, mortgages and other contracts requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the corporation.
5.8 VICE PRESIDENTS
In the absence or disability of the president, and if there is no
chairman of the board, the vice presidents, if any, in order of their rank as
fixed by the board of directors or, if not ranked, a vice president designated
by the board of directors, shall perform all the duties of the president and
when so acting shall have all the powers of, and be subject to all the
restrictions upon, the president. The vice presidents shall have such other
powers and perform such other duties as from time to time may be prescribed for
them respectively by the board of directors, these bylaws, the president or the
chairman of the board.
-18-
<PAGE>
5.9 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of the board of directors,
committees of directors and stockholders. The minutes shall show the time and
place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He or she shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable
times be open to inspection by any director for a purpose reasonably related to
his position as a director.
The chief financial officer shall deposit all money and other valuables
in the name and to the credit of the corporation with such depositaries as may
be designated by the board of directors. He or she shall disburse the funds of
the corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his or
her transactions as chief financial officer and of the financial condition of
the corporation, and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or these bylaws.
5.11 ASSISTANT SECRETARY
The assistant secretary, if any, or, if there is more than one, the
assistant secretaries in the order determined by the board of directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the secretary or in the event of his or her inability or refusal
to
-19-
<PAGE>
act, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
5.12 ADMINISTRATIVE OFFICERS
In addition to the Corporate Officers of the corporation as provided in
Section 5.1 of these bylaws and such subordinate Corporate Officers as may be
appointed in accordance with Section 5.3 of these bylaws, there may also be such
Administrative Officers of the corporation as may be designated and appointed
from time to time by the president of the corporation. Administrative Officers
shall perform such duties and have such powers as from time to time may be
determined by the president or the board of directors in order to assist the
Corporate Officers in the furtherance of their duties. In the performance of
such duties and the exercise of such powers, however, such Administrative
Officers shall have limited authority to act on behalf of the corporation as the
board of directors shall establish, including but not limited to limitations on
the dollar amount and on the scope of agreements or commitments that may be made
by such Administrative Officers on behalf of the corporation, which limitations
may not be exceeded by such individuals or altered by the president without
further approval by the board of directors.
5.13 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing powers, authority and duties, all officers
of the corporation shall respectively have such authority and powers and perform
such duties in the management of the business of the corporation as may be
designated from time to time by the board of directors.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner permitted
by the General Corporation Law of Delaware as the same now exists or may
hereafter be amended, indemnify any person against expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred in connection with any threatened, pending or completed
action, suit, or proceeding in which such person was or is a party or is
threatened to be made a party by reason of the fact that such person is or was a
director or officer of the corporation. For purposes of this Section 6.1, a
"director" or "officer" of the corporation shall mean any person (i) who is or
was a director or officer of the corporation, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise or
-20-
<PAGE>
(iii) who was a director or officer of a corporation which was a predecessor
corporation of the corporation or of another enterprise at the request of
such predecessor corporation.
The corporation shall be required to indemnify a director or officer in
connection with an action, suit, or proceeding (or part thereof) initiated by
such director or officer only if the initiation of such action, suit, or
proceeding (or part thereof) by the director or officer was authorized by the
board of Directors of the corporation.
The corporation shall pay the expenses (including attorney's fees)
incurred by a director or officer of the corporation entitled to indemnification
hereunder in defending any action, suit or proceeding referred to in this
Section 6.1 in advance of its final disposition; provided, however, that payment
of expenses incurred by a director or officer of the corporation in advance of
the final disposition of such action, suit or proceeding shall be made only upon
receipt of an undertaking by the director or officer to repay all amounts
advanced if it should ultimately be determined that the director or officer is
not entitled to be indemnified under this Section 6.1 or otherwise.
The rights conferred on any person by this Article shall not be exclusive
of any other rights which such person may have or hereafter acquire under any
statute, provision of the corporation's Certificate of Incorporation, these
bylaws, agreement, vote of the stockholders or disinterested directors or
otherwise.
Any repeal or modification of the foregoing provisions of this Article
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware as the same now
exists or may hereafter be amended, to indemnify any person (other than
directors and officers) against expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred in
connection with any threatened, pending or completed action, suit, or
proceeding, in which such person was or is a party or is threatened to be made a
party by reason of the fact that such person is or was an employee or agent of
the corporation. For purposes of this Section 6.2, an "employee" or "agent" of
the corporation (other than a director or officer) shall mean any person (i) who
is or was an employee or agent of the corporation, (ii) who is or was serving at
the request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
-21-
<PAGE>
6.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at
such place or places as designated by the board of directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records of its business and properties.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders and its other books and records for a purpose
reasonably related to his or her position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
-22-
<PAGE>
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, if any, the president, any vice president, the
chief financial officer, the secretary or any assistant secretary of this
corporation, or any other person authorized by the board of directors or the
president or a vice president, is authorized to vote, represent and exercise on
behalf of this corporation all rights incident to any and all shares of the
stock of any other corporation or corporations standing in the name of this
corporation. The authority herein granted may be exercised either by such
person directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
7.4 CERTIFICATION AND INSPECTION OF BYLAWS
The original or a copy of these bylaws, as amended or otherwise altered
to date, certified by the secretary, shall be kept at the corporation's
principal executive office and shall be open to inspection by the stockholders
of the corporation, at all reasonable times during office hours.
ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the stockholders entitled to receive payment
of any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the board of directors may fix, in advance, a record date, which shall not
precede the date upon which the resolution fixing the record date is adopted and
which shall not be more than sixty (60) days before any such action. In that
case, only stockholders of record at the close of business on the date so fixed
are entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided by law.
If the board of directors does not so fix a record date, then the record
date for determining stockholders for any such purpose shall be at the close of
business on the day on which the board of directors adopts the applicable
resolution.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other
-23-
<PAGE>
evidences of indebtedness that are issued in the name of or payable to the
corporation, and only the persons so authorized shall sign or endorse those
instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
The board of directors, except as otherwise provided in these bylaws, may
authorize and empower any officer or officers, or agent or agents, to enter into
any contract or execute any instrument in the name of and on behalf of the
corporation; such power and authority may be general or confined to specific
instances. Unless so authorized or ratified by the board of directors or within
the agency power of an officer, no officer, agent or employee shall have any
power or authority to bind the corporation by any contract or engagement or to
pledge its credit or to render it liable for any purpose or for any amount.
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the board
of directors, every holder of stock represented by certificates and, upon
request, every holder of uncertificated shares, shall be entitled to have a
certificate signed by, or in the name of the corporation by, the chairman or
vice-chairman of the board of directors, or the president or vice-president, and
by the treasurer or an assistant treasurer, or the secretary or an assistant
secretary of such corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the date of issue.
Certificates for shares shall be of such form and device as the board of
directors may designate and shall state the name of the record holder of the
shares represented thereby; its number; date of issuance; the number of shares
for which it is issued; a summary statement or reference to the powers,
designations, preferences or other special rights of such stock and the
qualifications, limitations or restrictions of such preferences and/or rights,
if any; a statement or summary of liens, if any; a conspicuous notice of
restrictions upon transfer or registration of transfer, if any; a statement as
to any applicable voting trust agreement; if the shares be assessable, or, if
assessments are collectible by personal action, a plain statement of such facts.
Upon surrender to the secretary or transfer agent of the corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
-24-
<PAGE>
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, or upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.5 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences and the relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.6 LOST CERTIFICATES
Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.7 TRANSFER AGENTS AND REGISTRARS
The board of directors may appoint one or more transfer agents or
transfer clerks, and one or more registrars, each of which shall be an
incorporated bank or trust company -- either domestic or foreign, who shall be
appointed at such times and places as the requirements of the corporation may
necessitate and the board of directors may designate.
-25-
<PAGE>
8.8 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of
this provision, as used in these bylaws, the singular number includes the
plural, the plural number includes the singular, and the term "person" includes
both an entity and a natural person.
8.9 DIVIDENDS
The directors of the corporation, subject to any restrictions contained
in the certificate of incorporation, may declare and pay dividends upon the
shares of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the corporation's
capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.10 FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.11 SEAL
The corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof to be
impressed or affixed or in any other manner reproduced.
8.12 STOCK TRANSFER AGREEMENTS
The corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
8.13 REGISTERED STOCKHOLDERS
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
-26-
<PAGE>
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
8.14 NOTICES
Except as otherwise specifically provided herein or required by law, all
notices required to be given to any stockholder, director, officer, employee or
agent shall be in writing and may in every instance be effectively given by hand
delivery, by mail, postage paid, or by facsimile transmission. Any such notice
shall be addressed to such stockholder, director, officer, employee or agent at
his last known address as it appears on the books of the corporation. The time
when such notice shall be deemed received, if hand delivered, or dispatched, if
sent by mail or facsimile, transmission, shall be the time of the giving of the
notice.
ARTICLE IX
AMENDMENTS
The original or other bylaws of the corporation may be adopted, amended
or repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
Whenever an amendment or new bylaw is adopted, it shall be copied in the
book of bylaws with the original bylaws, in the appropriate place. If any bylaw
is repealed, the fact of repeal with the date of the meeting at which the repeal
was enacted or the filing of the operative written consent(s) shall be stated in
said book.
ARTICLE X
DISSOLUTION
If it should be deemed advisable in the judgment of the board of
directors of the corporation that the corporation should be dissolved, the
board, after the adoption of a resolution to that effect by a majority of the
whole board at any meeting called for that purpose, shall cause notice to be
mailed to each stockholder entitled to vote thereon of the adoption of the
resolution and of a meeting of stockholders to take action upon the resolution.
-27-
<PAGE>
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with
Section 103 of the General Corporation Law of Delaware. Upon such certificate's
becoming effective in accordance with Section 103 of the General Corporation Law
of Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent
in writing, either in person or by duly authorized attorney, to a dissolution,
no meeting of directors or stockholders shall be necessary. The consent shall
be filed and shall become effective in accordance with Section 103 of the
General Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed with the consent. The consent filed with the Secretary of State shall
have attached to it the affidavit of the secretary or some other officer of the
corporation stating that the consent has been signed by or on behalf of all the
stockholders entitled to vote on a dissolution; in addition, there shall be
attached to the consent a certification by the secretary or some other officer
of the corporation setting forth the names and residences of the directors and
officers of the corporation.
ARTICLE XI
CUSTODIAN
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
The Court of Chancery, upon application of any stockholder, may appoint
one or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(i) at any meeting held for the election of directors
the stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification of
their successors; or
(ii) the business of the corporation is suffering or is
threatened with irreparable injury because the directors are so divided
respecting the management of the affairs of the corporation that the required
vote for action by the board of directors cannot be obtained and the
stockholders are unable to terminate this division; or
-28-
<PAGE>
(iii) the corporation has abandoned its business and has
failed within a reasonable time to take steps to dissolve, liquidate or
distribute its assets.
11.2 DUTIES OF CUSTODIAN
The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.
-29-
<PAGE>
CERTIFICATE OF ADOPTION OF BYLAWS
OF
ZAPME! DELAWARE CORPORATION
CERTIFICATE BY SECRETARY OF ADOPTION BY BOARD OF DIRECTORS
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of ZapMe! Delaware Corporation. and that the foregoing
Bylaws, comprising thirty (30) pages, were adopted as the Bylaws of the
corporation on________, 1999, by the person Board of Directors of the
corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this ___th
day of _____, 1999.
--------------------------------
Bruce Bower
Secretary
-30-
<PAGE>
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ZAPME! CORPORATION
Lance Mortensen and Bruce Bower hereby certify that:
FIRST: The original name of this corporation is ZapMe! Delaware
Corporation and the date of filing the original Certificate of Incorporation of
this corporation with the Secretary of State of the State of Delaware is
_______________, 1999.
SECOND: They are the duly elected and acting Chief Executive Officer and
Secretary, respectively, of ZapMe!Corporation, a Delaware corporation.
THIRD: The Certificate of Incorporation of this corporation is hereby
amended and restated to read as follows:
I.
The name of the corporation (the "Corporation") is:
ZapMe! Corporation
II.
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, Wilmington, Delaware 19801, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
III.
The nature of the business or purposes to be conducted or promoted by the
Corporation is to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of Delaware.
IV.
This Corporation is authorized to issue two classes of stock to be
designated, respectively, Common Stock and Preferred Stock. The total number of
shares of Common Stock this Corporation is authorized to issue is 200,000,000,
par value $0.01, and the total number of shares of Preferred Stock this
Corporation is authorized to issue is 5,000,000, par value $0.01.
<PAGE>
The undesignated 5,000,000 shares of Preferred Stock may be issued from
time to time in one or more series. The Board of Directors is authorized to
determine the number of shares of any such series. The Board of Directors is
also authorized to determine or alter the powers, designations, preferences,
rights and restrictions to be imposed upon any wholly unissued series of
Preferred Stock and, within the limits and restrictions stated in any resolution
or resolutions of the Board of Directors originally fixing the number of shares
constituting any series, to increase (but not above the total number of
authorized shares of the class) or decrease (but not below the number of shares
of such series then outstanding) the number of shares of any series subsequent
to the issue of shares of that series.
The Corporation shall from time to time in accordance with the laws of
the State of Delaware increase the authorized amount of its Common Stock if at
any time the number of shares of Common Stock remaining unissued and available
for issuance shall not be sufficient to permit conversion of the Preferred
Stock.
V.
The Corporation is to have perpetual existence.
VI.
The following provisions are inserted for the management of the business
and the conduct of the affairs of the Corporation, and for further definition,
limitation and regulation of the powers of the Corporation and of its directors
and stockholders:
(a) The business of the Corporation shall be managed by or
under the direction of the Board of Directors.
(b) Special meetings of stockholders of the Corporation may be
called only by the President, the Chairman of the Board or by the Board of
Directors pursuant to a resolution adopted by a majority of the total number of
authorized directors (whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is presented to the
Board for adoption).
VII.
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the Corporation.
VIII.
Elections of directors need not be by written ballot unless the Bylaws of
the Corporation shall so provide.
-2-
<PAGE>
IX.
The number of directors which constitute the whole Board of Directors of
the Corporation shall be as set forth in the Bylaws of the Corporation and may
be fixed from time to time by the Board of Directors pursuant to a resolution
adopted by a majority of the total number of authorized directors (whether or
not there exist any vacancies in previously authorized directorships at the time
any such resolution is presented to the Board of Directors for adoption). At
each annual meeting of stockholders, directors of the corporation shall be
elected to hold office until the expiration of the term for which they are
elected and until their successors have been duly elected and qualified; except
that if any such election shall not be so held, such election shall take place
at a stockholders' meeting called and held in accordance with the General
Corporation Law of the State of Delaware.
Vacancies occurring on the Board of Directors for any reason may be
filled by vote of a majority of the remaining members of the Board of Directors,
although less than a quorum, at any meeting of the Board of Directors or by
unanimous written consent of the Board of Directors. A person so elected by the
Board of Directors to fill a vacancy shall hold office until the next succeeding
annual meeting of stockholders of the Corporation and until his or her successor
shall have been duly elected and qualified.
X.
To the fullest extent permitted by the Delaware General Corporation Law
as the same exists or as may hereafter be amended, a director of the Corporation
shall not be personally liable to the Corporation or its stockholders for
monetary damages for breach fiduciary duty as a director.
The Corporation shall indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director, officer or employee of
the Corporation or any predecessor of the Corporation or serves or served at any
other enterprise as a director, officer or employee at the request of the
Corporation or any predecessor to the Corporation.
Neither any amendment nor repeal of this Article X, nor the adoption of
any provision of this Corporation's Certificate of Incorporation inconsistent
with this Article X, shall eliminate or reduce the effect of this Article X, in
respect of any matter occurring, or any action or proceeding accruing or arising
or that, but for this Article X, would accrue or arise, prior to such amendment,
repeal or adoption of an inconsistent provision.
-3-
<PAGE>
XI.
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
XII.
No action that is required or permitted to be taken by the stockholders
of the Corporation at any annual or special meeting of stockholders may be
effected by written consent of stockholders in lieu of a meeting of
stockholders.
XIII.
Advance notice of new business and stockholder nominations for the
election of directors shall be given in the manner and to the extent provided in
the Bylaws of the corporation.
XIV.
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
* * * * *
A. This Second Amended and Restated Certificate of Incorporation has
been duly approved by the Board of Directors of this corporation.
B. This Second Amended and Restated Certificate of Incorporation has
been duly adopted in accordance with the provisions of Sections 228 and 245 of
the General Corporation Law of the State of Delaware by the Board of Directors
and the stockholders of the corporation. A majority of the outstanding shares
of Common Stock and Preferred Stock, and a majority of the outstanding shares of
Preferred Stock approved this Amended and Restated Certificate of Incorporation
by written consent in accordance with Section 228 of the General Corporation Law
-4-
<PAGE>
of the State of Delaware and in accordance with the corporation's Certificate of
Incorporation and written notice of such was given by the corporation in
accordance with Section 228.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
-5-
<PAGE>
IN WITNESS WHEREOF, ZapMe! Corporation has caused this Second Amended and
Restated Certificate of Incorporation to be signed by the Chief Executive
Officer and the Secretary in San Ramon, California, this _____ day of
_______________, 1999.
ZapMe! Corporation
By:
--------------------------
Lance Mortensen
Chief Executive Officer
ATTEST:
By:
----------------------------
Bruce Bower
Secretary
<PAGE>
EXHIBIT 5.1
[WILSON SONSINI GOODRICH & ROSATI, P.C. LETTERHEAD]
_______ __, 1999
ZapMe! Corporation
3000 Executive Parkway, Suite 150
San Ramon, CA 94583
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We are acting as counsel to ZapMe! Corporation, Inc., a Delaware
corporation (the "Company"), in connection with the registration of
__________ shares of the Company's Common Stock, par value $0.01 per share,
including __________ shares subject to an over-allotment option
(collectively, the "Shares"), pursuant to a Registration Statement on Form
S-1 (Registration No. 333-84557), as amended (the "Registration Statement"),
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended. The Shares are being sold by the Company.
As counsel for the Company, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of such documents,
corporate records, certificates of public officials and other instruments as
we have deemed necessary for the purposes of rendering this opinion. In our
examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity
with the originals of all documents submitted to us as copies.
Based upon the foregoing, we are of the opinion that the Shares to be
registered for sale by the Company have been duly authorized by the Company,
and when issued, delivered and paid for in accordance with the terms of the
underwriting agreement referred to in the Registration Statement and in
accordance with the resolutions adopted by the Board of Directors of the
Company, will be, validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the
Registration Statement, and we consent to the reference of our name under the
caption "Legal Matters" in the Prospectus forming a part of the Registration
Statement.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
Exhibit 10.24
ZAPME! CORPORATION
VOTING AGREEMENT
THIS AGREEMENT is made as of the 28th day of May, 1999, by and among
ZapMe! Corporation, a California corporation (the "Company"), Lance
Mortensen, and QuestMark Partners, L.P. ("QuestMark Partners").
WHEREAS, QuestMark Partners is investing as of the date hereof pursuant
to that certain Series D Preferred Stock Purchase Agreement (the "Stock
Purchase Agreement"), dated March 31, 1999, by and among the Company and the
purchasers of the Company's Series D Preferred Stock listed on SCHEDULE A
thereto;
WHEREAS, to induce QuestMark Partners to invest, the parties desire to
enter into this Agreement to permit a representative of QuestMark Partners to
be nominated as a member of the Company's Board of Directors and to provide
for the voting of certain shares for such representative's election; and
IT IS HEREBY AGREED AS FOLLOWS:
1. AGREEMENT TO NOMINATE. During the term of this Agreement, the
Company hereby agrees to take such actions as are necessary to nominate for
election to the Company's Board of Directors one (1) individual designated by
QuestMark Partners (the "QUESTMARK PARTNERS NOMINEE"), separate from the
Series D Preferred Director, as contemplated by and defined in the Company's
Amended and Restated Articles of Incorporation.
2. AGREEMENT TO VOTE. During the term of this Agreement, Lance
Mortensen hereby agrees and covenants to vote all of the shares of the
Company's voting securities now or hereafter owned by him, whether
beneficially or otherwise (the "Shares"), as is minimally necessary (together
with the vote of all of the voting securities of the Company held by
QuestMark Partners, when cumulated and voted in favor of the QuestMark
Partners Nominee) at a meeting of shareholders of the Company, or by written
consent in lieu of any such meeting, to cause to be elected to the Company's
Board of Directors the QuestMark Partners Nominee.
3. REMOVALS; VACANCIES. The Company hereby agrees to take such actions
as necessary, and Lance Mortensen agrees to vote his Shares and take such
other actions as are necessary for the removal of any QuestMark Partners
Nominee who is elected to the Board pursuant to Section 2 upon the request of
QuestMark Partners and for the election to the Board of a substitute
designated by QuestMark Partners in accordance with the provisions of Section
1 and Section 2 hereof.
<PAGE>
4. SUCCESSORS IN INTEREST. The provisions of this Agreement shall be
binding upon the successors in interest of the Shareholder to any of the
Shares. The Company shall not permit the transfer of any Shares on its books
or issue a new certificate representing any Shares unless and until the
person to whom such security is to be transferred shall have executed a
written agreement pursuant to which such person becomes a party to this
Agreement and agrees to be bound by all the provisions hereof as if such
person was a party hereunder.
5. TERMINATION. This Agreement shall terminate upon the occurrence of
the first closing of a firm commitment underwritten public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of common stock for the account of the
corporation to the public.
6. AMENDMENTS AND WAIVERS. Any term hereof may be amended and the
observance of any term hereof may be waived (either generally or in a
particular instance and either retroactively or prospectively) only with the
written consent of the Company, the Shareholder and QuestMark Partners. Any
amendment or waiver so effected shall be binding upon the Company, the
Shareholder and QuestMark Partners.
7. SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be held to be
prohibited by or invalid under applicable law, such provision shall be
effective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions
of this Agreement.
8. GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of California as applied to contracts among
California residents entered into and to be performed entirely within
California.
9. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10. SUCCESSORS AND ASSIGNS. Except as otherwise provided in this
Agreement, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors and assigns of the parties hereto.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year hereinabove first written.
ZAPME! CORPORATION
By: /s/ Lance Mortensen
--------------------------------
Print Name: Lance Mortensen
------------------------
Title: CEO
-----------------------------
LANCE MORTENSEN
/s/ Lance Mortensen
----------------------------------
QUESTMARK PARTNERS, L.P.
By: /s/ Thomas R. Hitchner
--------------------------------
Print Name: Thomas R. Hitchner
------------------------
Title: President & COO
QuestMark Advisors, LLC
-----------------------------
-3-
