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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 000-1084561
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ZAPME! CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 91-1836242
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3000 EXECUTIVE PARKWAY #150
SAN RAMON, CALIFORNIA 94583
(Address of principal executive offices)
Registrant's telephone number, including area code: (925) 543-0300
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past (90) days. Yes /X/ No / /
The number of shares of the issuer's Common Stock outstanding as of April
28, 2000 was 43,994,104.
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INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999................................ 3
Consolidated Statements of Operations for the three
months March 31, 2000 and 1999....................... 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 1999................. 5
Notes to Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.......................................... 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................... 25
Item 2. Changes in Securities and Use of Proceeds............ 25
Item 3. Defaults Upon Senior Securities...................... 26
Item 4. Submission of Matters to a Vote of Security Holders.. 26
Item 5. Other Information.................................... 26
Item 6. Exhibits and Reports on Form 8-K..................... 26
Signatures.................................................... 27
</TABLE>
2
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ZAPME! CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 98,275 $112,714
Accounts receivable........................................... 3,222 1,500
Other receivables............................................. 2,447 3,344
Notes receivable from stockholder............................. 669 134
Prepaid expenses and other current assets..................... 795 801
-------- --------
Total current assets............................................ 105,408 118,493
Equipment, net.................................................. 39,112 30,393
Restricted cash................................................. 571 565
Other assets.................................................... 2,722 1,741
-------- --------
Total assets.................................................... $147,813 $151,192
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses......................... $ 8,639 $ 10,117
Accrued compensation and related expenses..................... 1,335 1,723
Deferred revenue.............................................. 127 677
Current portion of capital lease obligations.................. 13,977 11,070
-------- --------
Total current liabilities....................................... 24,078 23,587
Capital lease obligations....................................... 18,008 13,292
-------- --------
Total liabilities............................................... 42,086 36,879
Stockholders' equity (deficit):
Preferred stock, $0.01 par value:
Authorized shares - 5,000,000 at March 31, 2000 and
December 31, 1999
Issued and outstanding shares - none at March 31, 2000 and
December 31, 1999
Common stock, $0.01 par value:
Authorized shares - 200,000,000 at March 31, 2000 and
December 31, 1999
Issued and outstanding shares - 43,966,397 at March 31,
2000 and 43,803,781 at December 31, 1999................. 183,431 183,765
Deferred stock compensation................................... (9,192) (11,642)
Receivable due from stockholder............................... (6,500) (6,500)
Accumulated deficit........................................... (62,012) (51,310)
-------- --------
Total stockholders' equity (deficit)............................ 105,727 114,313
-------- --------
Total liabilities, redeemable convertible preferred stock and
stockholders' equity (deficit) ............................... $147,813 $151,192
-------- --------
-------- --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
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ZAPME! CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
----------------------
<S> <C> <C>
Revenue................................... $ 1,254 $ 6
Revenue from affiliates................... 4,156 -
--------- ---------
Total Revenue............................. $ 5,410 $ 6
Costs and expenses:
Cost of services........................ 4,647 212
Research and development................ 1,363 472
Sales and marketing..................... 2,327 864
General and administrative.............. 6,170 860
Amortization of deferred stock
compensation.......................... 2,028 882
--------- ---------
Total costs and expenses.................. 16,535 3,290
--------- ---------
Loss from operations...................... (11,125) (3,284)
Interest income (expense), net............ 423 (3)
--------- ---------
Net Loss.................................. $(10,702) $ (3,287)
--------- ---------
--------- ---------
Accretion and dividend on redeemable
convertible preferred stock............. -- (580)
--------- ---------
Net loss applicable to common
stockholders............................ (10,702) (3,867)
--------- ---------
--------- ---------
Net loss per share
Basic and diluted....................... (0.25) (0.25)
--------- ---------
--------- ---------
Pro forma basic and diluted............... -- (0.14)
--------- ---------
--------- ---------
Shares used in calculation of net loss per
share:
Basic and diluted....................... 42,236 13,234
--------- ---------
--------- ---------
Pro forma basic and diluted............... -- 23,496
--------- ---------
--------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
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ZAPME! CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
---------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss............................................... $(10,702) $(3,287)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred stock compensation....... 2,028 882
Depreciation and amortization..................... 3,152 241
Common stock issued for services.................. 9 -
Warrant issued for services....................... 49 -
Changes in operating assets and liabilities:
Accounts receivable............................. (1,721) (46)
Other receivables............................... 898 (2)
Prepaid expenses and other current assets....... 6 (27)
Restricted cash................................. (7) (202)
Other assets.................................... (1,095) (34)
Accounts payable and accrued expenses........... (1,476) 775
Accrued compensation and related expenses....... (388) 256
Deferred revenue................................ (550) -
--------- --------
Net cash used in operating activities.................. (9,797) (1,444)
INVESTING ACTIVITIES
Purchase of equipment, net............................. (1,708) (140)
Notes receivable from stockholder...................... (535) -
--------- --------
Net cash used in investing activities.................. (2,243) (140)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock, net......... - 9,904
Proceeds from the issuance of common stock, net........ 147 7
Proceeds from borrowings on notes payable.............. - 700
Payments on lease obligations.......................... (2,546) (48)
--------- --------
Net cash provided by (used in) financing activities.... (2,399) 10,563
--------- --------
Increase (decrease) in cash and cash equivalents....... (14,439) 8,979
Cash and cash equivalents at beginning of period....... 112,714 815
--------- --------
Cash and cash equivalents at end of period............. $ 98,275 $ 9,794
--------- --------
--------- --------
SUPPLEMENTAL DISCLOSURES:
Conversion of notes payable to stockholders to
preferred stock..................................... $ - $ 200
--------- --------
--------- --------
Accretion and dividends of redeemable preferred stock.. $ - $ 113
--------- --------
--------- --------
Accretion of mandatory dividends and guaranteed return
of preferred stock................................... $ - $ 467
--------- --------
--------- --------
Capital lease obligations incurred..................... $ 10,168 $ 2,900
--------- --------
--------- --------
Warrants issued in connection with lease financing..... $ - $ 2
--------- --------
--------- --------
Warrants issued in connection with Products and Services
Agreement............................................ $ - $ 750
--------- -------
--------- -------
Cash paid for interest................................. $ 1,194 $ 17
--------- -------
--------- -------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
5
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ZAPME! CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of r)Star Broadband Networks, Inc., a Delaware Corporation, a wholly
owned subsidiary of ZapMe! All significant intercompany accounts and
transaction have been eliminated in consolidation. In this document, ZapMe!
and its subsidiary are collectively referred to as the "Company."
The unaudited consolidated financial information as of March 31, 2000
and March 31, 1999 include all adjustments (consisting only of normal
recurring adjustments) that the Company considers necessary for a fair
presentation of the results for the periods shown. The results of operations
for such periods are not necssarily indicative of the results expected for
the full fiscal year or for any future period. These financial statements
should be read in conjunction with the financial statements as of December
31, 1999 and related notes.
2. BASIC AND DILUTED EARNINGS PER SHARE
Basic and diluted net loss per share information for all periods is
presented under the requirements of FASB Statement No. 128, "Earnings per
Share." Basic loss per share has been computed using the weighted average
number of common shares outstanding during the period, less shares that may
be repurchased and excludes any anti-dilutive effects of options, warrants
and convertible securities. Potentially dilutive issuances have also been
excluded from computation of diluted net loss per share as their inclusion
would be antidilutive.
The calculation of historical basic and diluted net loss per share is as
follows (in thousands, except per share amounts):
6
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
----------------------
<S> <C> <C>
Historical:
Net loss.................................. $(10,702) $(3,287)
Accretion and dividend on redeemable
convertible preferred stock -- (580)
-------- -------
Net Loss applicable to common stockholders $(10,702) $(3,867)
-------- -------
-------- -------
Weighted average shares of common stock
outstanding............................. 43,891 14,289
Less: Weighted average shares subject to
repurchase.............................. (1,655) (1,055)
-------- -------
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share.............. 42,236 13,234
-------- -------
-------- -------
Basic and diluted net loss per share.... $ (0.25) $ (0.25)
-------- -------
-------- -------
Pro forma:
Net loss.................................. $ -- $3,287
-------- -------
Weighted average shares of common stock
outstanding used in computing based and
diluted net loss per share (from
above).................................. -- 13,234
Adjustment to reflect the effect of the
conversion of preferred stock from the
date of issuance........................ -- 10,311
-------- -------
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share.............. -- 23,545
-------- -------
-------- -------
Pro forma basic and diluted net loss
per share............................... -- $ (0.14)
-------- -------
-------- -------
</TABLE>
3. STOCKHOLDERS' EQUITY
In October 1999, the Company completed its Initial Public Offering and
all shares of preferred stock were converted into common stock. Subsequent to
the Initial Public Offering, the Company authorized 5 million shares of an
additional series of preferred stock. As of December 31, 1999, no shares were
issued and outstanding. The holders of Series C preferred stock were accreted
dividends in 1999. Additionally, redemption value privileges were accreted
and charged to accumulated deficit in 1999. Holders of the Series C, D, and E
preferred stock received liquidation preferences in the form of common stock
in connection with the Initial Public Offering, in the amount of 309,299,
456,902, and 35,758 shares, respectively, in the aggregate amount of
$6,393,552.
Because of the proximity of the issuance of the Series E preferred stock
to the commencement of the Company's Initial Public Offering, the Company
concluded that a beneficial conversion feature was present in the preferred
stock on the date of issuance. For purposes of evaluating this beneficial
conversion feature, the Company considered that the value implied in the
public offering price ($11.00) represented the fair value of the common stock
on the date the Series E was issued. In accordance with Emerging Issues Task
Force Abstract No. 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,"
the Company recorded a deemed dividend charge of $12,180,000 with a
corresponding increase to Convertible Preferred Stock.
7
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WARRANTS
The Company had the following warrants outstanding at March 31, 2000 to
purchase shares of stock:
<TABLE>
<CAPTION>
EXERCISE PRICE PER
NUMBER OF SHARES PREFERRED STOCK SHARE EXPIRATION OF WARRANTS
---------------- --------------- ------------------ ----------------------
<S> <C> <C> <C>
250,000 Series B $3.00 May 2003
250,000 Series B 3.50 May 2003
100,000 Series D 5.00 June 2004
150,000 Common 5.00 December 2003
50,000 Common 5.00 June 2004
30,000 Common 5.00 October 2000
12,500 Common 8.00 October 2000
842,500
</TABLE>
INITIAL PUBLIC OFFERING
In October 1999, the Company completed an initial public offering in
which the Company sold 9,000,000 shares of its common stock at a price of
$11.00 per share. Concurrently with the underwritten initial public offering,
the Company sold to various stockholders associated with Gilat Satellite
Networks, at $10.23 per share, an aggregate of 488,753 shares of the
Company's common stock. The proceeds to the Company from the offerings, after
deducting underwriting discounts and commissions, were approximately $97.1
million. Upon closing of the underwritten offering, all of the Company's then
outstanding preferred stock converted into common stock. After the offering,
the Company's authorized capital consists of 205,000,000 shares of capital
stock (200,000,000 shares of common stock and 5,000,000 shares of preferred
stock) of which approximately 43,994,104 shares of common stock were
outstanding at April 28, 2000.
4. COMMITMENTS AND CONTINGENCIES
In June 1999, the Company entered into an agreement whereby a minimum
number of school sites would be established and maintained for a fixed
monthly fee for a minimum of three years. In September 1999, the agreement
was amended and the fixed monthly fee on the minimum number of sites was
increased, which increased the maximum obligation on installed sites to
approximately $60.6 million. Additionally, the Company will record an asset
and related lease obligation for all equipment for which ownership is
transferred to the Company. As of March 31, 2000, approximately 1,200 sites
have been deployed under the agreement.
5. RELATED PARTY TRANSACTIONS
In August 1999 a majority of the Company's directors approved the
issuance of an immediately exercisable option to purchase 300,000 shares of
the Company's common stock to a director of the Company at an exercise price
of $5.00 per share. The shares were and are subject to a right of repurchase
in favor of the Company, which will expire at a rate of one third each
anniversary date of the date of grant. In September 1999, the officer
exercised the right to purchase the shares. The Company recorded deferred
stock compensation of approximately $1.8 million, which will be amortized by
charge to operations over the vesting period of the stock using a graded
vesting method. The Company has also agreed to loan the amount necessary to
pay for the aggregate purchase price of the option, which will be secured by
a full recourse promissory note. The note has a term of four years and bears
an interest rate of 5.98%.
In September 1999, the Company hired a new chief executive officer. As
part of the officer's employment agreement, the Company granted a right to
purchase one million shares of the Company's common stock at an exercise
price of $5.00 per share. The shares are subject to a right of repurchase in
favor of the Company, which will expire at a rate of twenty-five percent on
the first anniversary of the grant date and one forty-eighth of the shares at
the end of each month thereafter. In September 1999, the officer exercised
the right and the Company recorded deferred stock compensation of
approximately $6.0 million, which will be amortized by a charge to operations
over the vesting period of the stock using a graded vesting method. The
Company has also lent the amount necessary to pay for the aggregate purchase
price of the option, which is secured by a full recourse promissory note. The
note has a term of four years and bears an interest rate of 5.98%.
The Company recorded revenue totaling $4,156,000 in the three-month
period ended March 31, 2000 from affiliates with which the Company has
strategic business alliances for sponsorship and advertising, representing
77% of total revenue for the period. The Company shares common board members
with these affiliates and/or the affiliates own more than 5% each of the
Company's outstanding common stock.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT
The discussion in this Report on Form 10-Q contains certain trend
analysis and other forward-looking statements. Words such as "anticipate,"
"believe," "plan," "estimate," "expect," "seek," and "intend," and words of
similar import are intended to identify such forward-looking statements.
These statements are not guarantees of future performance and are subject to
business and economic risks and uncertainties, which are difficult to
predict. Therefore, our actual results of operations may differ materially
from those expressed or forecasted in the forward-looking statements as a
result of a number of factors, including, but not limited to, those set forth
in this discussion under "Certain Risk Factors Which May Impact Future
Operating Results" and other risks detailed from time to time in reports
filed with the SEC.
All forward-looking statements of the Company are qualified by and
should be read in conjunction with such risk disclosure. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements whether as a result of new information, future events or otherwise.
OVERVIEW
ZapMe! has built and is expanding the country's largest broadband
Internet Media Network specializing in education. ZapMe!'s solution utilizes
"always on" satellite technology which delivers technology tools and
educational resources to schools at no cost to the schools. We believe that
by providing PC's, software, installation, and support along with broadband
connectivity to the Internet, we will help bridge the digital divide and
provide students of all social and economic backgrounds access to the
technology and information that are critical in today's knowledge-based
economy.
We commenced operations in June 1997 and began offering sponsorships
through our proprietary network in December 1998. From inception through
March 31, 2000, 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.
9
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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 lease and 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 March 31, 2000, we had deployed ZapMe! labs to approximately 1,800
schools in 45 states. Total student enrollment in schools with deployed
ZapMe! labs was over 1.5 million, each of whom had access to a ZapMe! user
account. Additionally, over 830 school districts had approved and signed our
three-year agreement which permits us to install ZapMe! labs in over 3,700
additional middle and high schools.
We have incurred net losses of approximately $43.4 million for the
period of inception through March 31, 2000. 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, the Company has generated revenue primarily from
content sponsorship fees paid by strategic partners. Four sponsors - Inacom,
Toshiba, Gilat, and Sylvan - accounted for approximately 77% of our revenue
in the three months ended March 31, 2000.
We derive revenue from sponsorship, e-commerce and network services.
Sponsorship revenue consists of fees charged for messages delivered over our
network. Revenue related to sponsorship of content on our network is
generally recognized over the time periods that the sponsorship is provided
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 and referred through our network. Revenue from
e-commerce is recognized upon notification from the contracting partner that
a qualifying sale has occurred. Network services revenue is derived from the
distribution of content and products delivered through our network, and from
educational services delivered in the ZapMe! labs such as teacher training,
tutoring
10
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and other educational programs offered through a strategic alliance with
Sylvan Learning Systems. Network services and other revenue is recognized in
the time period in which the underlying service is delivered. Network
services and other revenue also include revenue from our five-year agreement
with Sylvan which provides for a sharing of revenue derived from the delivery
of Sylvan programs in ZapMe! computer labs. This agreement allows Sylvan to
offer student tutoring, teacher training, and other programs in the ZapMe!
computer labs. Fees payable under this agreement are 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!.
COSTS OF REVENUE. Costs of revenue 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 the space segment pursuant to fixed price
agreements. Commencing July 1999, a space segment vendor began to install and
lease satellite dishes as well as provide space segment under a long-term
fixed-price per school contract.
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, 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 amortization
of deferred stock compensation of approximately $2.0 million during the
quarter ended March 31, 2000 as a result of stock options granted during 1998
and 1999 and shares of common stock sold to officers of ZapMe! at prices
below the deemed fair market value at the date of grant. Deferred stock
compensation is amortized over the vesting period of the options, generally
three to four years, or the performance period for various warrants we
granted using a graded vesting method. As a result, amortization of deferred
stock compensation will adversely impact our operating results for the next
four years.
Future amortization expense is estimated to be approximately $4.7
million for the remaining nine months of 2000, and approximately $3.1
million, $1.2 million and $202,000 for 2001, 2002 and 2003, respectively.
INCOME TAXES. There was no provision for federal or state income taxes
for any period since inception due to our operating losses. At December 31,
1999, we had net operating loss carryforwards for federal income tax purposes
of approximately $21.9 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 $8.1 million during the year ended
December 31, 1999. 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.
11
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NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. We recorded accretion and a
dividend on our redeemable convertible preferred stock of approximately
$580,000 for the three months ended March 31, 1999 and none for the three
months ended March 31, 2000.
RESULTS OF OPERATIONS
REVENUE. Total revenues increased to approximately $5.4 million for the
three months ended March 31, 2000. Because we were in the development stage
in the first fiscal quarter of 1999, substantially no revenue was reported
for the three months ended March 31, 1999. Four sponsors - Inacom, Toshiba,
Gilat, and Sylvan - accounted for approximately 77% of our total revenue for
the three months ended March 31, 2000. During the three month period ended
March 31, 2000, we added approximately 16 new sponsors.
COSTS OF REVENUE. Costs of revenue increased to approximately $4.6
million for the three months ended March 31, 2000. Given the minimal network
deployment level in early 1999, costs of revenue for the three months ended
March 31, 1999 were just $212,000. The increase in 1999 and 2000 was due
primarily to 1) depreciation related to network equipment installed in
significantly more schools, 2) space segment costs related to the increased
number of installed schools, and 3) call center costs to support users. We
expect costs of revenue to continue to increase with the ongoing deployment
of the ZapMe! network.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
to approximately $1,363,000 for the three months ended March 31, 2000 from
approximately $472,000 for the three months ended March 31, 1999. The
increase was due primarily to increased payroll and consulting fees as we
continue to develop our network capabilities. Initial tests of our two-way
satellite technology were successful. We expect to increase installation of
this technology during the second half of the year. We believe that continued
investment in research and development will contribute to attaining our
strategic objectives and, as a result, expect research and development
expenses to increase in future periods.
SALES AND MARKETING. Sales and marketing expenses increased to
approximately $2.3 million for the three months ended March 31, 2000 from
approximately $864,000 for the three months ended March 31, 1999. The
increase in the level of expense was due primarily to compensation associated
with the increased number of sales and marketing personnel and related
overhead, and increased travel costs associated with our direct selling
efforts. We expect selling and marketing expenses to increase in absolute
dollars in future periods as we hire additional personnel, promote our home
client, and develop incentive programs to increase in-school and at home
usage of the ZapMe! network.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to approximately $6.2 million for the three months ended March 31,
2000 from approximately $860,000 for the three months ended March 31, 1999.
The increase in the level of expenses is due primarily to litigation and
other reserves and increased personnel and related overhead necessary to
support our increased scale of operations, particularly the addition of key
executive staff. We expect general and administrative expenses to increase as
we expand our operations.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred
stock compensation increased to approximately $2.0 million for the three
months ended March 31, 2000 from approximately $882,000 for three months
ended March 31, 1999. The deferred stock compensation is amortized over the
vesting period of the related options using a graded vesting method.
INTEREST INCOME (EXPENSE), NET. Interest income (expense), net
increased to approximately $423,000 for the three months ended March 31, 2000
from approximately $(3,000) for the three months ended March 31, 1999. The
increase is due to substantially higher interest income on cash balances
derived primarily from proceeds from our initial public offering of Common
Stock in October, 1999.
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Our revenue, operating expenses and operating results may vary
significantly from quarter to quarter. The fluctuations may be due to a
number of factors, many of which are beyond our control. These factors
include:
- the rate of expansion of our network through deployment into
additional schools;
- the rate of usage of our network in schools and at home;
- our ability to generate and sustain significant levels of
sponsorship revenue;
- fluctuations in the use of our network and in demand for our
products and services related to the school calendar, including
vacations and holidays;
- the burden of lease payment obligations;
- government action to regulate or otherwise restrict our ability to
serve schools;
- our ability to manage costs, including personnel costs; and
- costs relating to possible acquisitions and integration of
technologies or businesses.
Due to all of the foregoing factors, our quarterly revenue and operating
results are difficult to forecast, and we believe that period-to-period
comparisons of our operating results will not necessarily be meaningful and
should not be relied upon as an indication of future performance.
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LIQUIDITY AND CAPITAL RESOURCES
On October 25, 1999, we closed our underwritten initial public offering
and a concurrent offering of our Common Stock, which resulted in the net
proceeds of approximately $95.5 million.
Net cash used in operating activities increased to approximately $9.8
million for the three months ended March 31, 2000 from approximately $1.4
million for the three months ended March 31, 1999. In each period, cash used
by operating activities was primarily a result of the net losses for such
period offset by amortization deferred stock compensation. The increase in
the current period was due to a larger net loss.
Net cash used in investing activities increased to approximately $2.2
million for three months ended March 31, 2000 from approximately $140,000 for
the three months ended March 31, 1999. The uses in each period resulted from
the acquisition of capital assets, primarily leased computer equipment
installed in schools and our office, as well as notes receivable from
stockholders in the current period.
Cash provided by (used in) financing activities decreased to
approximately $(2.4) million for three months ended March 31, 2000 from
approximately $10.6 million for the three months ended March 31, 1999. The
decrease was attributable to no new stock issuance in the current period and
increased payments on lease obligations.
Capital lease obligations incurred increased to approximately $10.2
million for the three months ended March 31, 2000 from $2.9 million for the
three months ended March 31, 1999. Lease financing was used primarily to
acquire and install computer equipment in schools. The increase was due to
higher school deployment levels in the current period.
In June 1999, we entered into an agreement whereby a minimum number of
school sites would be established and maintained for a fixed monthly fee for
a minimum of three years. In September 1999, the agreement was amended and
the fixed monthly fee on the minimum number of sites was increased, which
increased the minimum obligation on installed sites to approximately $60.6
million. This obligation represents the estimated minimum acquisition cost of
equipment to be installed under this agreement.
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.
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 the next twelve months.
We may need to raise additional funds in order to support more rapid
expansion, develop new vertical markets, respond to competitive pressures,
acquire complementary businesses or technologies, or respond to unanticipated
developments. We may seek to raise additional funds through private or public
sales of securities, strategic financial and business relationships, bank
debt, lease financing, or otherwise. If additional funds are raised through
the issuance of equity securities, the percentage of ZapMe! owned by 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.
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CERTAIN RISK FACTORS WHICH MAY IMPACT FUTURE OPERATING RESULTS
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond its control. The following
discussion highlights some of these risks and the possible impact of these
factors on future results of operations.
WE HAVE AN UNPROVEN BUSINESS MODEL AND A LIMITED OPERATING HISTORY.
Because we were incorporated in June 1997 and only launched our network
in June 1998, we have a limited operating history on which investors can base
an evaluation of our business and prospects. Our revenue and income potential
are unproven and our business model is unique, constantly evolves and will
continue to evolve. We only recently began generating revenue from
sponsorships and to date we have not generated any material revenue from
e-commerce or network services. We have limited insight into trends that may
emerge and affect our business.
An investor in our common stock must carefully consider the risks and
difficulties frequently encountered by companies in an early stage of
development, as well as the risks we face due to our participation in a new
and rapidly evolving market. Our business strategy may not be successful and
we may not successfully overcome these risks.
WE HAVE INCURRED SUBSTANTIAL LOSSES AND ANTICIPATE CONTINUED LOSSES.
We incurred net losses of approximately $43.4 million for the period of
inception through March 31, 2000. These losses resulted primarily from costs
related to developing the ZapMe! network, deploying the ZapMe! network to
schools and developing content and features for the ZapMe! network. We have
not achieved profitability. We expect to have increasing net losses and
negative cash flows for the foreseeable future. The size of these net losses
will depend, in part, on the rate of growth in our revenues from our
sponsors, e-commerce offerings and network services and on the level of our
expenses. We intend to increase our operating expenses substantially as we:
- increase the number of users of our network through the deployment
of our network to additional schools;
- increase our network usage through marketing activities and the
addition of new features; and
- increase our general and administrative functions to support our
growing operations.
As a result, we expect that our operating expenses will increase
significantly for the foreseeable future. With increased expenses, we will
need to generate significant additional revenues to achieve profitability.
Consequently, it is possible that we will never achieve profitability, and
even if we do achieve profitability, we may not sustain or increase
profitability on a quarterly or annual basis in the future. If we do not
achieve or sustain profitability in the future, then we may be unable to
continue our operations.
WE EXPECT OUR QUARTERLY FINANCIAL RESULTS TO FLUCTUATE AND OUR EARLY STAGE OF
DEVELOPMENT LIMITS OUR ABILITY TO PREDICT REVENUES AND EXPENSES PRECISELY.
Our quarterly and annual operating results have varied in the past and
are likely to fluctuate significantly in the future due to a variety of
factors, many of which are outside of our control. Factors that might cause
quarterly fluctuations in our operating results include the factors described
in the subheadings below. To respond to these and other factors, we may need
to make business decisions that could impact our quarterly operating results.
Most of our expenses, such as lease payment obligations, employee
compensation and rent, are relatively fixed in the short term. Moreover, our
expense levels are based, in part, on our expectations regarding future
revenue levels. As a result, if total revenues for a particular quarter are
below our expectations we could not proportionately reduce our operating
expenses for that quarter. Therefore, this revenue shortfall would have a
disproportionate effect on our expected operating results for that quarter.
Consequently, we believe that period-to-period comparisons of our operating
results are not necessarily meaningful, and should not be viewed as
indicators of our future performance. In addition, during future periods our
quarterly or annual operating results may fail to meet the expectations of
securities analysts or investors. In this case the trading price of our
common stock would likely decrease.
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OUR METHODS OF GENERATING REVENUES ARE NEW AND LARGELY UNTESTED.
The success of our business will depend on our ability to generate
revenue. We have only recently begun to generate revenue, and because our
methods of generating revenue are new and largely untested we may generate
lower revenues than we expect. Further, if we are unable to generate multiple
new sources of revenue, our future revenue growth will suffer. Currently, we
expect to receive the majority of our revenue from:
- sponsorships;
- e-commerce; and
- network services, including marketing and profit sharing fees.
From inception through March 31, 2000, we generated approximately 90% of
our revenue from sponsorships. Although we expect to generate a portion of
our future revenue through e-commerce and network services, we have not
generated any material e-commerce or network service revenue through March
31, 2000. As a result, our expected primary methods of generating revenue are
relatively new to us and largely untested.
We expect that revenue from sponsorships will make up a significant
amount of our revenue for the foreseeable future, although we may never
achieve significant sponsorship revenue. If Internet and online advertising
do not continue to grow, or if sponsorship on the ZapMe! network does not
achieve market acceptance, our revenues generated from sponsorships will be
lower than expected, and may be insufficient to support our business model.
The success of our e-commerce initiative depends on our adult
users--parents, teachers and administrators--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 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 community
billboard which is always present on our interface. 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 e-mail. 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: Ask Jeeves,
Classroom Connect, Dell, Inacom, Microsoft, New Sub Services, School
Specialty, Spacenet, Sylvan, Toshiba, Xerox and Yahoo!. We rely heavily on
our strategic alliance relationships. These
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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.
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 are able to cease sponsorship of
our network quickly and without penalty, thereby increasing our exposure to
competitive pressures. Our current sponsors may discontinue sponsorship of
our network 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. Four sponsors - Inacom, Toshiba, Gilat, and Sylvan - accounted
for approximately 77% of our revenue during the three months ended March 31,
2000. Our revenue from sponsorships will not increase if we are unable to
renew our material agreements, replace such agreements with similar
agreements with new sponsors, or sufficiently diversify our sponsor base so
that we do not rely on a small number of sponsors for a significant portion
of our revenue.
OUR VARIED SALES CYCLES COULD HARM OUR RESULTS OF OPERATIONS IF FORECASTED
SALES ARE DELAYED OR DO NOT OCCUR.
The length of time between the date of initial contact with a potential
sponsor and the execution of a contract with the potential sponsor varies
significantly and depends on the nature of the arrangement. Furthermore,
contracting with potential sponsors is subject to delays over which we have
little or no control, including:
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- potential sponsors' adoption of the ZapMe! network, which is an
entirely new advertising medium, as an acceptable use of
advertising budgets;
- potential sponsors' budgetary constraints;
- potential sponsors' internal acceptance reviews; and
- the possibility of cancellation or delay of projects by sponsors.
During any given sales cycle, we may expend substantial funds and
management resources and yet not obtain sponsorship revenue. Our results of
operations for a particular period may suffer if sales to sponsors forecasted
in a particular period are delayed or do not otherwise occur.
OPPOSITION TO OUR NETWORK, ADVERTISING IN SCHOOLS AND UNRESTRICTED INTERNET
ACCESS MAY LEAD TO NEGATIVE PUBLICITY, REGULATORY CONTROL, LEGAL ACTION,
BOYCOTTS OR OTHER ACTIONS THAT COULD HARM OUR BUSINESS.
We expect to generate a significant portion of our revenue from
sponsorships purchased by marketers interested in addressing our student
population across the ZapMe! network in schools. This business model may
prove controversial and lead to negative publicity as well as action by the
government or private interests to restrict or stop our network. To date,
some third parties that oppose corporate advertising in schools, as well as
sponsorships on the ZapMe! network, have engaged in publicity campaigns to
deter sponsors from dealing with the companies engaging in advertising or
sponsorship activities and have sought legislation to curb this practice. In
particular, California recently enacted a law that imposes additional
procedural requirements before local public school boards can enter into
contracts involving advertising in schools. In particular, starting in the
year 2000, California public school boards must (a) notice a public hearing
and make certain findings regarding the importance and affordability of a
covered product or service, such as the ZapMe! network, before entering into
new contracts and (b) give parents the right to opt in writing that their
children not participate. This law could delay deployment of the ZapMe!
network and reduce student participation in California. Similar or more
restrictive legislation is possible in other states including Minnesota, and
at the local and federal levels. For example, Congress is currently
considering legislation that would require prior, written parental consent
before any entity could collect any information for any commercial purpose
from any student under 18. Anti-school-advertising groups have had some
successes in the past seeking regulation and boycotts of companies that
advertise in schools, such as Channel One, a wholly-owned subsidiary of
Primedia, Inc. Moreover, any new restriction, law or regulation pertaining to
online media, sponsorships or e-commerce in schools, or the application or
interpretation of existing laws, could decrease the demand for our service,
increase our cost of doing business or otherwise have a negative impact on
our business.
The Internet is the subject of an increasing number of laws and
regulations. These laws or regulations may relate to liability for
information retrieved from or transmitted over the Internet, online content
regulation, user privacy, taxation and the quality of products and services.
In addition, these new laws have not yet been interpreted by the courts, and
consequently their applicability and reach are not defined. Moreover, the
applicability to the Internet of existing laws governing issues such as
intellectual property ownership, copyright, defamation, obscenity and
personal privacy is uncertain and developing. We may be subject to claims
that our services violate such laws. Any new legislation or regulation in the
United States or abroad or the application of existing laws and regulations
to the Internet could impose significant restrictions, requirements or
additional costs on our business, require us to change our operating methods,
or subject us to additional liabilities and cause the price of our common
stock to decline.
WE ARE DEPENDENT ON OUR NETWORK INFRASTRUCTURE, AND IN PARTICULAR ON
SATELLITES AND SATELLITE TRANSMISSION TECHNOLOGY, AND ANY FAILURE OF OUR
NETWORK WOULD HARM OUR OPERATIONS.
Our business plan calls for rapidly deploying our network to many
additional schools. Our network infrastructure may not be able to support the
demands this growth places on it and its performance and reliability may
decline. We have experienced and may in the future experience interruptions
in service as a result of outages and other delays occurring throughout our
network infrastructure. If these outages or delays occur frequently in the
future, use of our network could grow more slowly or decline.
Our network operations center and our communications and other computer
hardware are also subject to disruptions which are beyond our control and for
which we may not have adequate insurance. Fire, floods, earthquakes, power
loss, telecommunications failures, break-ins and similar events could damage
our communications hardware and other network operations.
Each school installed with the ZapMe! network is connected to our
network through a satellite link. The complete or partial loss of the
satellite used to transmit data to schools could affect the performance of
our network. Our network currently uses a single satellite.
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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-a very time consuming and expensive process. The loss of a
satellite could also result in increased costs of using satellites. We are
dependent on transmissions from the satellite to our customer sites, and
these transmissions may be interrupted or experience other difficulty, which
could result in service interruptions and delays in our network. In addition,
the use of the satellite to provide transmissions to our customers requires a
direct line of sight between the satellite and the receiver at the school and
is subject to distance and rain attenuation. In markets which experience
heavy rainfall we may need to use greater power to maintain transmission
quality. Such changes may require Federal Communications Commission, or FCC,
approval which may not be granted.
WE MAY BE SUBJECT TO THIRD PARTY ABUSES OF OUR NETWORK, SUCH AS "SPAM" OR
"HACKING," WHICH COULD LEAD TO INTERRUPTIONS IN OUR SERVICE AND OTHER ADVERSE
CONSEQUENCES WHICH COULD BE EXPENSIVE TO FIX, SUBJECT US TO LIABILITY OR
RESULT IN LOWER USE OF OUR NETWORK THAN WE EXPECT.
The future success of our business depends on the security of our
network. Computer viruses or problems caused by our users or other third
parties, such as the sending of excessive volumes of unsolicited bulk e-mail
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 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
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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 include America Online, Channel One,
Family Education Network, Helius, Inc., bigchalk.com and Lightspan.
Many of our existing competitors, as well as potential new competitors,
have longer operating histories, greater name recognition, larger customer
bases and significantly greater financial, technical and marketing resources
than we do. This may allow them to devote greater resources than we can to
the development and promotion of their products and services. Many of these
competitors offer a wider range of products and services than we do. These
products and services may attract users to our competitors' sites and,
consequently, result in lower usage of our network.
SCHOOLS MAY USE ALTERNATIVE MEANS TO ACQUIRE COMPUTERS AND INTERNET
ACCESS, WHICH COULD REDUCE OUR POTENTIAL USER BASE AND MAY LEAD TO LOWER THAN
EXPECTED REVENUES.
An immediate attraction of deploying our network is free access to
computers and the Internet. However, for a variety of reasons, schools may
decide to use other methods to acquire computers and Internet access. If
schools decide to use means other than deployment of our network, it will
limit our user base, and consequently we will have lower than expected
revenues from sponsorships, e-commerce and network services. Aside from
purchasing the computers and Internet access from already existing budgets or
from donations from parents or other members of the community, some other
methods of acquiring computer equipment and Internet access that schools may
turn to include the government subsidized E-Rate and various free computer
equipment and Internet access companies and offerings.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FUND OUR OPERATIONS WHEN
NEEDED.
We expect to use our existing cash 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 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
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addition, advertising sales in traditional media, such as television and
radio, generally are lower in the first and third calendar quarters of each
year. If our market makes the transition from an emerging to a more developed
market, these traditional seasonal and cyclical patterns may develop in the
future. These patterns would exacerbate seasonality to which we are subject
by further reducing advertising revenues in the first and third calendar
quarter of each year. Seasonal and cyclical patterns in online advertising
and e-commerce in general may also affect our revenue. Because our operating
history is so limited, it is difficult for us to accurately predict these
trends and plan accordingly. Since our operating expenses are based on future
revenue performance, it is possible that seasonal fluctuations could
materially and adversely affect our revenue and results of operations.
OUR NETWORK IS NEW AND WE MAY NEED TO DEVELOP TOOLS TO ATTRACT SPONSORS AND
PARTNERS.
No standard measurement currently exists to determine the effectiveness
or market reach of the sponsor messages that is available on our network. We
may need to develop standards and systems measuring these factors to support
and promote our network as a significant advertising medium. If we fail to
develop such standards, 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.
Despite our best efforts, 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, including the Children's Online
Privacy Protection Act. We could incur additional expenses, or be required to
alter, or eliminate, various current practices if new regulations regarding
the use or distribution of information collected online are introduced or if
our privacy practices are investigated.
WE MAY BE SUBJECT TO LIABILITY FOR PRODUCTS SOLD THROUGH OUR NETWORK.
To date, we have had very limited experience in the sale of products
online and the development of relationships with manufacturers or suppliers
of such products. However, we plan to develop a range of e-commerce
opportunities. Consumers may sue us if any of the products that we sell
online are defective, fail to perform properly or injure the user. Liability
claims resulting from our sale of products could require us to spend
significant time and money in litigation or to pay significant damages.
WE MAY BE SUBJECT TO LIABILITY FOR PUBLISHING OR DISTRIBUTING CONTENT OVER
OUR NETWORK.
We may be subject to claims relating to content that is published on or
downloaded from the ZapMe! network. We also could be subject to liability for
content that is accessible from our network through links to other web sites
or that is posted by members in chat rooms or bulletin boards. Although we
carry general liability insurance, our insurance may not cover potential
claims of this type, such as defamation or trademark infringement, or may not
be adequate to cover all costs incurred in defense of potential claims or to
indemnify us for all liability that may be imposed. In addition, any claims
like this, with or without merit, could require us to change our network in a
manner that could be less attractive to our customers and would result in the
diversion of our financial resources and management personnel.
WE MAY NOT BE ABLE TO DELIVER VARIOUS SERVICES IF THIRD PARTIES FAIL TO
PROVIDE RELIABLE SOFTWARE, SYSTEMS AND RELATED SERVICES TO US.
All of our advertisements are served using software licensed from
NetGravity. While there is other software available, it would substantially
disrupt our business in the near term to switch to another provider. As such,
we are reliant on NetGravity and its software. If NetGravity's software fails
to perform as expected, or if we are not able to renew such agreement or
license or internally develop similar software in the future, we may not be
able to effectively display advertisements to our users. In such event, our
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revenue from sponsorships would likely suffer. On October 26, 1999,
DoubleClick, an Internet advertising provider, acquired NetGravity in a
stock-for-stock transaction. Although we have experienced no change in our
relationship, we can not predict how the acquisition will affect our
relationship with DoubleClick in the future.
In addition we are dependent on various third parties for other
software, systems and related services. Several of the third parties that
provide software and services to us have a limited operating history, have
relatively immature technology and are themselves dependent on reliable
delivery of services from others. As a result, our ability to deliver various
services to our users may suffer due to the failure of these third parties to
provide reliable software, systems and related services to us.
THE INABILITY TO OBTAIN KEY SOFTWARE FROM THIRD PARTIES MAY HARM OUR BUSINESS.
We rely on software licensed from third parties, including applications
that are integrated with internally developed software and used in our
products. Most notably, we license remote management software and Windows NT.
These third-party technology licenses may not continue to be available to us
on commercially reasonable terms, or at all, and we may not be able to obtain
licenses for other existing or future technologies that we desire to
integrate into our products. Our business could be seriously harmed if we
cannot maintain existing third-party technology licenses or enter into
licenses for other existing or future technologies needed for our products.
OUR SUCCESS DEPENDS UPON THE SUCCESSFUL DEVELOPMENT OF NEW SERVICES AND
FEATURES IN THE FACE OF RAPIDLY EVOLVING TECHNOLOGY.
Our market is characterized by rapidly changing technologies, frequent
new service introductions and evolving industry standards. The recent growth
of the Internet and intense competition in our industry exacerbate these
market characteristics. Our future success will depend on our ability to
adapt to rapidly changing technologies by continually improving the
performance, features and reliability of our network. We may experience
difficulties that could delay or prevent the successful development,
introduction or marketing of new features, content or network services. In
addition, our new enhancements must meet the requirements of our current and
prospective users and must achieve significant market acceptance. We could
also incur substantial costs if we need to modify our service or
infrastructures to adapt to these changes.
FAILURE TO MANAGE THE GROWTH OF OUR OPERATIONS COULD HARM OUR BUSINESS AND
STRAIN OUR MANAGERIAL, OPERATIONAL AND FINANCIAL RESOURCES.
We have rapidly and significantly expanded our operations. We anticipate
that further significant expansion will be required to grow our user base if
we are to be successful in implementing our business strategy. We may not be
able to implement management information and control systems in an efficient
and timely manner, and our current or planned personnel, systems, procedures
and controls may not be adequate to support our future operations. If we are
unable to manage growth effectively, our business would suffer. To manage the
expected growth of our operations and personnel, we will be required to:
- improve existing and implement new operational, financial and
management controls, reporting systems and procedures;
- install new management information systems; and
- train, motivate and manage our sales and marketing, engineering,
technical and customer support employees.
THE LOSS OF KEY PERSONNEL MAY HURT OUR ABILITY TO OPERATE OUR BUSINESS
EFFECTIVELY.
Our success depends to a significant degree upon the continued
contributions of the principal members of our sales, engineering and
management departments, many of whom perform important management functions
and would be difficult to replace. Specifically, we believe that our future
success is highly dependent on our senior management, and in particular on
Lance Mortensen, our Chairman, and Rick Inatome, our Chief Executive Officer.
The loss of the services of any key personnel, particularly senior
management, could seriously harm our business.
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IF WE ARE UNABLE TO RETAIN AND HIRE ADDITIONAL QUALIFIED PERSONNEL AS
NECESSARY, WE MAY NOT BE ABLE TO SUCCESSFULLY ACHIEVE OUR OBJECTIVES.
We have recently hired and anticipate continuing to hire additional
engineering, sales, marketing, e-commerce, customer support and accounting
personnel. We may not be able to attract and retain the necessary personnel
to accomplish our business objectives, and we may experience constraints that
will adversely affect our ability to deploy the ZapMe! network in a timely
fashion or to support our users and operations. We have at times experienced,
and continue to experience, difficulty in recruiting qualified personnel.
Recruiting qualified personnel is an intensely competitive and time-consuming
process.
WE ARE CURRENTLY IN ARBITRATION WITH ONE OF OUR FORMER OFFICERS, WHICH IF
RESOLVED AGAINST US COULD RESULT IN OUR OBLIGATION TO PAY LARGE DAMAGES OR
ACCELERATED VESTING OF THE OFFICER'S ZAPME! STOCK.
We filed a demand for arbitration with our former President and
Director, Frank J. Vigil, related to his employment at and departure from
ZapMe!. Mr. Vigil filed a response to our demand and a counterclaim. We
cannot assure you that we will prevail in this arbitration, and any decision
against us could result in an obligation to pay some or all of the damages
Mr. Vigil has sought in his counterclaim. These damages could be substantial.
Notably, under the terms of his employment agreement and related agreements,
Mr. Vigil was permitted to purchase 1.35 million shares of common stock of
ZapMe!. Some of those shares were subject to a right of repurchase by ZapMe!
at the time of Mr. Vigil's separation from ZapMe!. Mr. Vigil may claim that,
under the terms of his employment agreement, the closing of this offering
could result in the cancellation of the right of repurchase and the full
vesting of his stock. A decision against us with regard to the validity of
the employment contract and related agreements could therefore result in the
complete vesting of Mr. Vigil's stock.
WE COULD BE REQUIRED TO RECORD A SIGNIFICANT ACCOUNTING EXPENSE UPON THE
VESTING OF A WARRANT.
As part of our agreement with Sylvan, we issued a warrant to purchase
150,000 shares of our common stock at $5.00 per share. This warrant becomes
exercisable if Sylvan meets a specified milestone by December 31, 2003.
ZapMe! recorded deferred stock compensation of approximately $557,000 as of
March 31, 2000. The amount was computed using the Black-Scholes option
valuation model and will be remeasured at each measurement date. ZapMe! could
be required to record additional significant non-cash accounting expense
based on the value of the warrant during the life of the warrant. The value
of the warrant at each measurement date will depend on the value of our
common stock at that time.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS AND RESULT
IN INCREASED DEBT AND ASSUMPTION OF CONTINGENT LIABILITIES.
As part of our business strategy, we expect to review acquisition
prospects that would complement our current product offerings, augment our
market coverage, enhance our technical capabilities, or otherwise offer
growth opportunities. While we have no current agreements or negotiations
underway with respect to any such acquisitions, we may acquire businesses,
products or technologies in the future. In the event of such future
acquisitions, we could:
- issue equity securities which would dilute current stockholders'
percentage ownership;
- incur substantial debt; or
- assume contingent liabilities.
Such actions by us could have a detrimental effect on our results of
operations and/or the price of our common stock. Acquisitions also entail
numerous risks, including:
- difficulties in assimilating acquired operations, technologies,
products or personnel;
- unanticipated costs associated with the acquisition that could
materially adversely affect our results of operations;
- negative effects on our reported results of operations from
acquisition related charges and of amortization of acquired
technology and other intangibles;
- diversion of management's attention from other business concerns;
- adverse effects on existing business relationships with suppliers and
customers;
- risks of entering markets in which we have no or limited prior
experience; and
- potential loss of key employees of acquired organizations.
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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.
Despite our efforts to protect our intellectual property, we may be
unsuccessful in doing so. We may be unable to obtain patents or register
trademarks for a variety of reasons, including a mistaken belief that these
items are eligible for intellectual property protection or that we are the
entity entitled to this protection, if any. Our copyrights and trade secrets
may similarly turn out to be ineligible for legal protection. In addition,
parties may attempt to disclose, obtain or use its proprietary information
despite, or in the absence of, a confidentiality agreement. Some foreign
countries do not protect intellectual property rights to the same extent as
the United States, and intellectual property law in the United States is
still uncertain and evolving as applied to Internet-related industries. The
status of domain names and the regulatory bodies in charge of them is also
unsettled. Any inability to register or otherwise protect our intellectual
property rights could seriously harm our business since it could enable
competitors to copy important features on our network.
Furthermore, third parties may assert intellectual property infringement
claims against ZapMe!. These claims, possibly including those from companies
from which we license key technology for its operations, could result in
significant liability, the inability to use key rights and technologies, and
the invalidation of our own proprietary rights. In addition, regardless of
the outcome, any litigation could be time-consuming, expensive, and
distracting of management's time and attention.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates
primarily to the increase or decrease in the amount of interest income we can
earn on our investment portfolio and on the increase or decrease in the
amount of interest expense we must pay with respect to our various
outstanding debt instruments. The risk associated with fluctuating interest
expense is limited, however, to the expense related to those debt instruments
and credit facilities which are tied to market rates. We do not use
derivative financial instruments in our investment portfolio. We ensure the
safety and preservation of our invested principal funds by limiting default
risks, market risk and reinvestment risk. We mitigate default risk by
investing in safe and high-credit quality securities. A hypothetical increase
or decrease in market interest rates by 10% from the market interest rates at
March 31, 2000 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. As of March 31, 2000 we
had not engaged in any foreign currency activity and had no operations
outside of the United States.
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PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 7, 1999, we filed a demand for arbitration with our Former
President and Director, Frank J. Vigil, related to his employment at and
departure from ZapMe!. We assert that ZapMe! was induced by Mr. Vigil's
fraudulent representations to enter into an employment agreement with him. We
seek the rescission of the employment agreement, as well as the return of all
benefits received by Mr. Vigil under the agreement, and costs and fees
associated with the arbitration.
On July 26, 1999, Mr. Vigil filed a response to our demand and a
counterclaim. Mr. Vigil denied the allegations contained in our demand. Mr.
Vigil's counterclaim alleges breach of contract, breach of implied covenant
of good faith and fair dealing, fraud in the inducement of contract,
intentional misrepresentation, defamation, and violations of the California
Labor Code, all related to the circumstances of his employment at and
departure from ZapMe!.
Each party to the arbitration has asserted various defenses to the
claims and counterclaims. We cannot provide any assurance that we will
prevail in this arbitration, and any decision against us could result in an
obligation to pay some or all of the damages Mr. Vigil has sought in his
counterclaim. These damages could be substantial. Notably, under the terms of
his employment agreement and related agreements, Mr. Vigil was permitted to
purchase 1.35 million shares of common stock of ZapMe!. Some of those shares
were subject to a right of repurchase by ZapMe! at the time of Mr. Vigil's
separation from ZapMe!. Mr. Vigil may claim that, under the terms of his
employment agreement, the closing of our offering of Common Stock in October
1999 resulted in the cancellation of the right of repurchase and the full
vesting of his stock. A decision against us with regard to the validity of
the employment contract and related agreements could therefore result in the
complete vesting of Mr. Vigil's stock.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) The sales of the securities listed below were deemed to be exempt from
registration under the Securities Act of 1933, as amended (the
"Securities Act") in reliance on Section 4(2) of the Securities Act or
Rule 701 promulgated under Section 3(b) of the Securities Act as
transactions by an issuer not involving a public offering or
transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The
recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and
warrants issued in such transactions. All recipients had adequate
access, through their relationships with the Company, to information
about the Company.
(i) During the period from January 1, 2000 through March 31, 2000,
the Company granted options to purchase an aggregate of
732,771 shares of common stock to an aggregate of 89
directors, officers, employees and consultants pursuant to the
Company's 1999 Stock Option Plan (the "Option Plan").
(ii) During the period from January 1, 2000 through March 31, 2000,
options to purchase an aggregate of 165,499 shares of common
stock were exercised by an aggregate of 11 directors,
officers, employees and consultants pursuant to the Option
Plan.
(iii) In August 1999, the Company sold and issued an aggregate of
2,030,000 shares of Series E preferred stock at a price of
$5.00 per share to certain investors. Each share of Series E
preferred stock converted into approximately 1.017 shares of
common stock upon the closing of our initial public offering
in October 1999.
(iv) In September 1999, the Company sold and issued and aggregate
of 1,300,000 shares of common stock at a price of $5.00 per
share to certain directors of the Company under Restricted
Stock Purchase Agreements.
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(d) On October 20, 1999, we commenced our underwritten initial public
offering of 9,000,000 shares of common stock at $11.00 per share
and a concurrent offering of 488,753 shares of common stock, at
$10.23 per share, pursuant to a registration statement (No.
333-84557) (the "Initial Registration Statement") and a related
registration statement (333-89367) filed pursuant to Rule 462(b) of
the Securities Act. The Initial Registration Statement was declared
effective by the Securities and Exchange Commission on October 19,
1999. The offering has been terminated and all shares were sold.
The managing underwriters for the underwritten initial public
offering were Merrill Lynch & Co., Deutsche Bank Securities Inc.,
Thomas Weisel Partners LLC and Wit Capital Corporation. Proceeds to
the Company from the offering (after deducting underwriting fees)
were approximately $97.1 million. In addition, we incurred
approximately $1.6 million for expenses related to the initial
public offering. As of March 31, 2000, substantially all of the net
proceeds from our Initial Public Offering remain available for
general corporate purposes. All net proceeds are invested in
short-term financial instruments. No payments constituted direct or
indirect payments to any of our directors, officers or general
partners or their associates, to persons owning 10% or more of any
class of our equity securities, or to any of our affiliates.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
In December 1999 ZapMe! began operations of r)Star Broadband Networks,
Inc., a wholly-owned subsidiary of ZapMe! Corporation. r)Star develops and
provides new specialized, broadband Internet Media Networks for enterprise
organizations, healthcare, higher education, entertainment and hospitality
markets. The subsidiary will sell ZapMe!'s excess bandwidth, not currently
used after school hours, to industries seeking affordable nationwide
broadband access. Lance Mortensen, founder and former CEO of ZapMe!, is
president of r)Star. He remains Chairman of the Board of Directors of ZapMe!
ITEM 6. EXHIBITS AND REPORTS ON 8-K
a) Exhibits
The exhibits listed in the accompanying Index to Exhibits are filed as a
part of this Form 10-Q.
b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZAPME! CORPORATION
(Registrant)
By: /s/ Rick Inatome
--------------------------------------
PRESIDENTS AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
By: /s/ Ken Tinsley
--------------------------------------
TREASURER
(PRINCIPAL FINANCIAL OFFICER)
Date: May 12, 2000
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------
<S> <C>
10.1 Employment Offer Letter dated September 15, 1999 by and
between the Company and Rick Inatome.
10.2 Employment Offer Letter Dated March 14, 2000 by and between
the Company and Robert Edwards.
10.3 Settlement Agreement and Mutual Release dated February 4, 2000
by and between the Company and Robert Stoffregen.
11.1 Computation of Net Loss Per Share.
27.1 Financial Data Schedule.
</TABLE>
<PAGE>
Exhibit 10.1
September 15, 1999
Rick Inatome
Dear Rick:
It is with great pleasure that the Board of Directors of ZapMe!
Corporation extends an offer to you to join us as Chief Executive Officer of
the Company commencing September 15, 1999. This letter will confirm the
details of your employment offer.
As Chief Executive Officer, an exempt position, you will receive a
monthly salary of $20,000.00 which will be paid semi-monthly in accordance
with the Company's normal payroll procedures. You also will be entitled to
participate in an Employee Bonus Program. The Employee Bonus Program is
designed to reward you based on the Company achieving certain annual
operating and financial goals. These goals will be determined by the Board of
Directors and communicated to you within 60 days of your employment start
date. You will be eligible to receive a target Employee Bonus of $240,000
provided that you are a full-time employee of the Company on your first
anniversary. The actual bonus you may earn will depend upon the attainment of
the performance objectives outlined in the bonus agreement. The Employee
Bonus is paid on or about 30 days from the first year anniversary of your
start date.
In addition within 6 months from the completion of the Company's
Initial Public Offering ("IPO"), the Board agrees to review your compensation
package and to consider adjusting your level of compensation to a level
competitive with Chief Executive Officers of other companies that are similar
to the Company in business and stage of development.
As a Company employee, you are also eligible to receive certain
employee benefits, including medical and dental insurance benefits, which
will be available to you on the first day of the month following your first
60 days of employment. Both a PPO and HMO are available, and the Company
currently pays 90% of the cost of either plan you choose. The Company will
also make available to you to $50,000 company paid term life insurance
coverage. In addition, the Company shall have in place, within sixty (60)
days after the date of this letter, a long-term disability insurance policy
for executive level employees. In connection with the IPO, the Company is
also evaluating a restructuring of executive benefits, and you will be
entitled to participate in any executive benefits program the Company adopts.
Given your relocation to the Bay Area from Michigan, the company
will provide a comprehensive executive relocation plan for you. This plan
will reimburse you for all reasonably incurred direct relocation expenses,
such as fees for moving your and your family's personal effects, travel for
you and your family, temporary housing, and the like (but excluding
adjustments for differences is housing values between the Bay Area and
Michigan and realtor fees in connection with selling your home in Michigan),
and will be adjusted and grossed up in a manner that you will be tax neutral.
<PAGE>
The Company will reimburse you for all reasonable expenses paid by
you that are incurred in the ordinary course of conducting Company business.
The Company will also reimburse you for reasonable travel and lodging
expenses you incur prior to relocating to the Bay Area during your first year
of employment.
You will be entitled to vacation time in accordance with the
Company's policy, which is that you will receive three weeks vacation per
year for your first ten years of employment and four weeks per year
thereafter. The Company expects that you will use vacation days in the year
earned.
In addition, the Board will approve the sale of 1,000,000 shares of
the Company's Common Stock (the "Restricted Stock") to you under a Restricted
Stock Purchase Agreement (the "Agreement"), the form of which is enclosed.
The per share purchase price of the Restricted Stock will be five dollars
($5.00). The Agreement will also provide that the Company shall have the
right to repurchase the Restricted Stock at any time that you cease to be a
full-time employee of the Company, at the initial purchase price of the
Restricted Stock. This repurchase right will lapse as to 25% of the
Restricted Stock on your first anniversary of full-time employment, and as to
1/48 of the Restricted Stock each full month thereafter that you remain a
full-time employee of the Company, subject to potential acceleration as
provided in the following two paragraphs.
If there is a "Change of Control" before the date that your
full-time employment with the Company ends, then the repurchase right on the
Restricted Stock will immediately lapse. A "Change of Control" means (a) the
sale or other disposition of all or substantially all of the Company's assets
to any "person" (as such term is used in Section 13(d) of the Securities
Exchange Act of 1934, as amended), entity or group of persons acting in
concert; or (b) a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation that would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity or its controlling
entity) at least 51% of the total voting power represented by the voting
securities of the Company or such surviving entity (or its controlling
entity) outstanding immediately after such merger or consolidation.
If the Company terminates your employment without your consent
before September 15, 2000 and after a "Trigger Event," then the repurchase
right on a fraction of the Restricted Stock will lapse, provided that your
employment was terminated for a reason other than "cause" (as defined below),
death or "disability" (as defined in section 22(e)(3) of the Internal Revenue
Code). The fraction will equal the number of whole months that you work
full-time with the Company prior to your termination of employment, divided
by 48. For example, if you terminate employment on February 15, 2000 in a
qualifying termination, the repurchase right would lapse as to 12.5% of the
Restricted Stock (calculated as six full months of employment, divided by 48,
equals 12.5%). A "Trigger Event" means (a) the acquisition by a "person" (as
such term is used in Section 13(d) of the Securities Exchange Act of 1934, as
amended), entity, or group of persons acting in concert, of more than thirty
percent (30%) of the shares of the Company's outstanding stock (but excluding
acquisitions or ownership by Lance Mortensen, Michael Arnouse and their
respective affiliates); or (b) the sale or other disposition of more than 25%
of Lance Mortensen's shares of Common Stock (based on his ownership as of
this date, but
<PAGE>
adjusted for any stock dividends or similar changes in the shares), other
than to a living trust of which Mr. Mortensen serves as the sole trustee or
co-trustee with his spouse, an irrevocable trust for the benefit of him, his
spouse or one or more persons who are his descendants, his siblings, or the
descendants of a sibling, a family limited partnership, limited liability
company or other entity established for estate planning purposes and
controlled by Mr. Mortensen and/or his spouse.
The Restricted Stock grant shall further be subject to such
restrictions and limitations as are provided in the enclosed Agreement. The
Company will provide to you a loan sufficient to purchase the Restricted
Stock that will be evidenced by a promissory note and security agreement
signed by you covering the Restricted Stock. The forms of note and security
agreement to be used for this purpose are enclosed as exhibits to the
Agreement.
Also, if the Company terminates your employment without your consent
and for a reason other than "cause", death or "disability" (as defined
above), then the Company will continue to pay you your then current base
salary for a period of one year, provided that for the entire one year period
you do not directly or indirectly, (1) engage, participate or invest in any
business activity anywhere in the world which develops, manufactures or
markets products or performs services which are competitive with the products
or services of the Company at the time of the your termination, or products
or services which the Company has under development or which are the subject
of active planning at the time of your termination, (2) hire or attempt to
employ, recruit or otherwise influence any person to leave employment with
the Company, and (3) solicit business from any of the Company's customers and
users, resellers or distributors on behalf of any business which competes
with the Company. However, you may own as a passive investor, publicly-traded
securities of any corporation which competes with the business of the Company
so long as such securities do not, in the aggregate, constitute more than 1%
of any class of outstanding securities of such corporations. For purposes of
this paragraph, "cause" means (1) any act of personal dishonesty taken by you
in connection with your responsibilities as an employee and intended to
result in your personal enrichment (or that of your associates) at the
expense of the Company or its stockholders, (2) any conviction (or plea of no
contest) of a felony or an act of fraud, (3) continued violations of your
employment-related obligations which are willful and deliberate after there
has been delivered to you a written demand from the Board regarding such
activities and you have had a reasonable opportunity to correct the
violations, or (4) willful refusal to carry out legally permissible
instructions from the Board after you have been given written notice of a
failure to carry out such instructions and a reasonable opportunity to
correct the situation.
If the Company terminates your employment without your consent
before the Company's Common Stock is registered under the 1934 Act and for a
reason other than "cause" (as defined above), death or "disability" (as
defined above), then you will have a "put" right on the Restricted Stock,
whereby the Company must purchase back your Restricted Stock within 60 days
after your involuntary termination for an amount equal to the per share price
that you paid for the Stock.
<PAGE>
As a Company employee, you will be expected to abide by the
Company's rules and regulations, including the Company's Employee Handbook,
and to sign and comply with the Confidential Information, Invention
Assignment and Terms of Employment Agreement (a copy of which is enclosed
herewith) that prohibits unauthorized use or disclosure of the Company's
proprietary information. You must execute and return the Confidential
Information, Invention Assignment and Terms of Employment Agreement prior to
your commencing employment with the Company.
For purposes of federal immigration law, you will be required to
provide the Company with documentary evidence of your identity and
eligibility for employment in the United States. Such documentation must be
provided to us within three (3) business days of your date of hire, or our
employment relationship with you may be terminated.
You should be aware that your employment with ZapMe! constitutes at
will employment. As a result, you are free to resign at any time, for any
reason or for no reason. Similarly, the Company is free to conclude its
employment relationship with you at any time, with or without cause or
advance notice. This at will employment relationship may not be changed
except in a writing signed by an authorized member of the Board. This at-will
employment relationship will not affect your right to potential severance
pay, accelerated vesting or other benefits under this Agreement or any other
plan or agreement of the Company.
Of course, the terms of this offer may not be modified or amended
except by a written agreement executed by you and an authorized member of the
Board, and shall, together with such other written agreements you and the
Company may enter in connection with your employment, constitute the entire
agreement between you and the Company relating to the terms of your
employment, and supersedes and any other employment agreements or promises
made to you by anyone whether oral or written.
Rick, we hope that you will view our offer in a most positive light.
We have tried to work very closely with you to structure an opportunity and a
financial arrangement that meets your needs and gives you an incentive for
exceptional performance. As you know, this offer needs ratification by the
Board, which will meet within the next two weeks. If you agree with the terms
contained in this letter, please notify me by the end of the day of September
17, 1999.
<PAGE>
We look forward to your positive response and would appreciate your
signing a copy of our offer letter as acknowledgement of your acceptance of
the terms of this offer. Once you have returned this signed acceptance, we
will proceed to effect a smooth transition and to make appropriate
announcements within our company and to external audiences. We sincerely hope
you will join us in the very near future.
Very truly yours,
Lance Mortensen
Chief Executive Officer and
Chairman of the Board
Accepted:
By:__________________________ Date: September __, 1999
Rick Inatome
<PAGE>
Exhibit 10.2
March 13, 2000
Mr. Robert Edwards
Dear Bob:
It is with great pleasure that the Board of Directors of ZapMe! Corporation
extends an offer to you to join us as Vice President, Chief Financial Officer
for the Company commencing March 14, 2000. This letter will confirm the
details of your employment offer.
As Vice President, Chief Financial Officer, you will receive a monthly salary
of $16,667 which will be paid semi-monthly in accordance with the Company's
normal payroll procedures. You also will be entitled to participate in an
Employee Bonus Program. The Employee Bonus Program is designed to reward you
based on the Company achieving certain annual operating and financial goals.
These goals will be determined by the Chief Executive Officer and
communicated to you within sixty (60) days of your employment start date. You
will be eligible to receive a target Employee Bonus provided that you are a
full-time employee of the Company on your first anniversary. The actual bonus
you may earn will depend upon the attainment of the performance objectives
outlined in the bonus agreement. The Employee Bonus is paid on or about
thirty (30) days from the first year anniversary of your start date.
As a Company employee, you are also eligible to receive certain employee
benefits, including medical and dental insurance benefits, which will be
available to you on the first day of the month following your first sixty
(60) days of employment. In addition, the Company shall have in place, within
sixty (60) days after the date of this letter, a long-term disability
insurance policy for executive level employees. You will also be entitled to
participate in any executive benefits program the Company adopts.
The Company will reimburse you for all reasonable expenses paid by you that
are incurred in the ordinary course of conducting Company business. Due to
the fact that you live in the area, we did not include a relocation package.
You will be entitled to vacation time in accordance with the Company's
policy, which is that you will receive three weeks vacation per year for your
first ten years of employment and four weeks per year thereafter. The Company
expects that you will use vacation days in the year earned.
<PAGE>
Mr. Robert Edwards
March 13, 2000
Page Two
In addition, and subject to the approval of the Company's Board of Directors,
you will receive an option to purchase 200,000 shares of the Company's Common
Stock. The per share exercise of such stock option will be determined by the
Board of Directors, based on the fair market value of a share of the
Company's Common Stock on the date the option is granted to you by the Board
of Directors. The option will vest as to one-fourth of the shares subject
thereto on your first anniversary of employment, and one forty-eighth of the
shares subject thereto each month thereafter until fully vested.
As a Company employee, you will be expected to abide by the Company's rules
and regulations, including the Company's Employee Handbook, and to sign and
comply with the Confidential Information, Invention Assignment and Terms of
Employment Agreement (a copy of which is enclosed herewith) that prohibits
unauthorized use or disclosure of the Company's proprietary information. You
must execute and return the Confidential Information, Invention Assignment
and Terms of Employment Agreement prior to your commencing employment with
the Company.
For purposes of federal immigration law, you will be required to provide the
Company with documentary evidence of your identity and eligibility for
employment in the United States. Such documentation must be provided to us
within three (3) business days of your date of hire, or our employment
relationship with you may be terminated.
Your employment with ZapMe! constitutes at-will employment. As a result, you
are free to resign at any time, for any reason or for no reason. Similarly,
the Company is free to conclude its employment relationship with you at any
time, with our without cause or advance notice. This at-will employment
relationship may not be changed except in a writing signed by an authorized
member of the Board. This at-will employment relationship will not affect
your right to potential severance pay or other benefits under this Agreement
or any other plan or agreement of the Company.
Of course, the terms of this offer may not be modified or amended except by a
written agreement executed by you and an authorized member of the Board, and
shall, together with such other written agreements you and the Company may
enter into in connection with your employment, constitute the entire
agreement between you and the Company relating to the terms of your
employment, and supersedes any other employment agreements or promises made
to you by anyone whether oral or written.
<PAGE>
Mr. Robert Edwards
March 13, 2000
Page Three
Bob, we hope that you will view our offer in a most positive light. We
believe we have structured an opportunity and a financial arrangement that
meets your needs and gives you strong incentive for exceptional performance.
As you know, this offer needs ratification by the Board, which will meet
within the next two weeks. If you agree with the terms contained in this
letter, please notify me by the end of the day of March 13, 2000.
We look forward to your positive response and would appreciate your signing a
copy of our offer letter as acknowledgement of your acceptance of the terms
of this offer. Once you have returned this signed acceptance, we will work
with you to effect a smooth transition and to make appropriate announcements
within our Company and to external audiences at the appropriate time. We look
forward to your joining us.
Very truly yours,
R. Kimberly Gaynor
Executive Vice President & CMO
Accepted:
By: ________________________________________ Dated: March , 2000
Robert Edwards
<PAGE>
Exhibit 10.3
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
This Settlement Agreement and Mutual Release ("Agreement") is made
by and between ZapMe! Corporation (the "Company") and Robert Stoffregen
("Employee").
WHEREAS, Employee is employed by the Company;
WHEREAS, the Company and Employee have entered into an Employment,
Confidential Information, Invention Assignment and Arbitration Agreement (the
"Confidentiality Agreement") and an Indemnification Agreement;
WHEREAS, the Company and Employee have mutually agreed to terminate
the employment relationship and to release each other from any claims arising
from or related to the employment relationship;
NOW THEREFORE, in consideration of the mutual promises made herein,
the Company and Employee (collectively referred to as "the Parties") hereby
agree as follows:
1. TERMINATION. Employee's employment with the Company will
terminate effective February 4, 2000.
2. CONSIDERATION.
(a) CONSULTING. The Company agrees to pay Employee a
nonrefundable retainer of two thousand dollars ($2,000) per month, creditable
against Employee's work as a Consultant at three hundred dollars ($300) per
hour, beginning February 5, 2000 through June 25, 2000, payable to Employee
in accordance with the Company's regular payroll practices.
(b) VESTING OF STOCK. The Company agrees that Employee
will vest in an additional thirteen thousand three hundred and thirty three
(13,333) shares of the Company's Common Stock on June 25, 2000 under the
Stock Option Grant dated June 25, 1999. This amount of vesting stock is in
addition to the thirty six thousand six hundred and sixty six (36,666) shares
that Employee vested in on January 1, 2000 under the Stock Option Grant dated
December 14, 1998. Employee agrees that he shall have no right to vest in any
other shares under this or any other agreement with the Company.
(c) COMPUTER EQUIPMENT. The Company agrees that
Employee may retain (i) certain computer equipment currently located at
Employee's residence and (ii), as long as it does not impose an undue burden
on the Company, satellite access to the ZapMe! netspace.
3. CONFIDENTIAL INFORMATION. Employee shall continue to
maintain the confidentiality of all confidential and proprietary information
of the Company and shall continue to comply with the terms and conditions of
the Confidentiality Agreement between Employee and the Company. Employee
shall return all the Company property and confidential and proprietary
information in his possession to the Company on the Effective Date of this
Agreement.
Page 1
<PAGE>
4. RELEASE OF CLAIMS. Employee agrees that the foregoing
consideration represents settlement in full of all outstanding obligations
owed to Employee by the Company. Employee and the Company, on behalf of
themselves, and their respective heirs, family members, executors, officers,
directors, employees, investors, shareholders, administrators, affiliates,
divisions, subsidiaries, predecessor and successor corporations, and assigns,
hereby fully and forever releases each other their respective heirs, family
members, executors, officers, directors, employees, investors, shareholders,
administrators, affiliates, divisions, subsidiaries, predecessor and
successor corporations, and assigns, from, and agree not to sue concerning,
any claim, duty, obligation or cause of action relating to any matters of any
kind, whether presently known or unknown, suspected or unsuspected, that any
of them may possess arising from any omissions, acts or facts that have
occurred up until and including the Effective Date of this Agreement
including, without limitation,
(a) any and all claims relating to or arising from
Employee's employment relationship with the Company and the termination of
that relationship;
(b) any and all claims relating to, or arising from,
Employee's right to purchase, or actual purchase of shares of stock of the
Company, including, without limitation, any claims for fraud,
misrepresentation, breach of fiduciary duty, breach of duty under applicable
state corporate law, and securities fraud under any state or federal law;
(c) any and all claims for wrongful discharge of
employment; termination in violation of public policy; discrimination; breach
of contract, both express and implied; breach of a covenant of good faith and
fair dealing, both express and implied; promissory estoppel; negligent or
intentional infliction of emotional distress; negligent or intentional
misrepresentation; negligent or intentional interference with contract or
prospective economic advantage; unfair business practices; defamation; libel;
slander; negligence; personal injury; assault; battery; invasion of privacy;
false imprisonment; and conversion;
(d) any and all claims for violation of any federal,
state or municipal statute, including, but not limited to, Title VII of the
Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age
Discrimination in Employment Act of 1967, the Americans with Disabilities Act
of 1990, the Fair Labor Standards Act, the Employee Retirement Income
Security Act of 1974, The Worker Adjustment and Retraining Notification Act,
Older Workers Benefit Protection Act; the California Fair Employment and
Housing Act, and Labor Code section 201, ET SEQ. and section 970, ET SEQ.;
(e) any and all claims for violation of the federal,
or any state, constitution;
(f) any and all claims arising out of any other laws
and regulations relating to employment or employment discrimination; and
(g) any and all claims for attorneys' fees and costs.
The Company and Employee agree that the release set forth in this section
shall be and remain in effect in all respects as a complete general release
as to the matters released. This release does not extend to any obligations
incurred under this Agreement.
Page 2
<PAGE>
5. ACKNOWLEDGMENT OF WAIVER OF CLAIMS UNDER ADEA. Employee
acknowledges that he is waiving and releasing any rights he may have under
the Age Discrimination in Employment Act of 1967 ("ADEA") and that this
waiver and release is knowing and voluntary. Employee and the Company agree
that this waiver and release does not apply to any rights or claims that may
arise under ADEA after the Effective Date of this Agreement. Employee
acknowledges that the consideration given for this waiver and release
Agreement is in addition to anything of value to which Employee was already
entitled. Employee further acknowledges that he has been advised by this
writing that (a) he should consult with an attorney PRIOR to executing this
Agreement; (b) he has at least twenty-one (21) days within which to consider
this Agreement; (c) he has at least seven (7) days following the execution of
this Agreement by the parties to revoke the Agreement; and (d) this Agreement
shall not be effective until the revocation period has expired.
6. CIVIL CODE SECTION 1542. The parties represent that they
are not aware of any claim by either of them against the other other than the
claims that are released by this Agreement. Employee and the Company
acknowledge that they have been advised by legal counsel and are familiar
with the provisions of California Civil Code Section 1542, which provides as
follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT
THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM
MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR.
Employee and the Company, being aware of said code section, agree to
expressly waive any rights they may have thereunder, as well as under any
other statute or common law principles of similar effect.
7. NO PENDING OR FUTURE LAWSUITS. Employee represents that he
has no lawsuits, claims, or actions pending in his name, or on behalf of any
other person or entity, against the Company or any other person or entity
referred to herein. Employee also represents that he does not intend to bring
any claims on his own behalf or on behalf of any other person or entity
against the Company or any other person or entity referred to herein.
8. TAX CONSEQUENCES. The Company makes no representations or
warranties with respect to the tax consequences of the payment of any sums
under the terms of this Agreement. Employee agrees and understands that he is
responsible for payment, if any, of local, state and/or federal taxes on the
sums paid hereunder by the Company and any penalties or assessments thereon,
including any penalties or assessments resulting from the allocation of the
sums paid hereunder. Employee further agrees to indemnify and hold the
Company harmless from any claims, demands, deficiencies, penalties,
assessments, executions, judgments, or recoveries by any government agency
against the Company for any amounts claimed due on account of Employee's
failure to pay, or delayed payment of, federal or state taxes or damages
sustained by the Company by reason of any such claims, including reasonable
attorneys' fees.
9. NO COOPERATION. Employee agrees that he will not counsel or
assist any attorneys or their clients in the presentation or prosecution of any
disputes, differences, grievances, claims,
Page 3
<PAGE>
charges, or complaints by any third party against the Company and/or any
officer, director, employee, agent, representative, shareholder or attorney
of the Company, unless under a subpoena or other court order to do so.
10. NON-DISPARAGEMENT AND NON-DISRUPTION. Each party agrees to
refrain from any disparagement, defamation, libel, slander, disruption or any
other actions adverse to the interests of the other and its respective
officers, directors, employees, investors, shareholders, administrators,
affiliates, divisions, subsidiaries, predecessor and successor corporations,
and assigns or tortious interference with the contracts and relationships of
the other and its respective officers, directors, employees, investors,
shareholders, administrators, affiliates, divisions, subsidiaries,
predecessor and successor corporations, and assigns. All inquiries by
potential future employers of Employee will be directed to the Company 's
Director of Human Resources. Upon inquiry, the Company shall disclose only
Employee's last position and dates of employment.
11. NO ADMISSION OF LIABILITY. The Parties understand and
acknowledge that this Agreement constitutes a compromise and settlement of
disputed claims. No action taken by the Parties hereto, or either of them,
either previously or in connection with this Agreement shall be deemed or
construed to be (a) an admission of the truth or falsity of any claims
heretofore made or (b) an acknowledgment or admission by either party of any
fault or liability whatsoever to the other party or to any third party.
12. COSTS. The Parties shall each bear their own costs, expert
fees, attorneys' fees and other fees incurred in connection with this
Agreement.
13. ARBITRATION. The Parties agree that any and all disputes
arising out of the terms of this Agreement, their interpretation, and any of
the matters herein released, including any potential claims of harassment,
discrimination or wrongful termination shall be subject to binding
arbitration held in Santa Clara County, California, under the Arbitration
Rules set forth in California Code of Civil Procedure Section 1280, ET seq.,
including section 1283.05, (the "Rules") and pursuant to California law. The
Parties agree that the prevailing party in any arbitration shall be entitled
to injunctive relief in any court of competent jurisdiction to enforce the
arbitration award.
14. AUTHORITY. The Company represents and warrants that the
undersigned has the authority to act on behalf of the Company and to bind the
Company and all who may claim through it to the terms and conditions of this
Agreement. Employee represents and warrants that he has the capacity to act
on his own behalf and on behalf of all who might claim through him to bind
them to the terms and conditions of this Agreement. Employee warrants and
represents that there are no liens or claims of lien or assignments in law or
equity or otherwise of or against any of the claims or causes of action
released herein.
15. NO REPRESENTATIONS. Each party represents that it has had
the opportunity to consult with an attorney, and has carefully read and
understands the scope and effect of the provisions of this Agreement. Neither
party has relied upon any representations or statements made by the other
party hereto which are not specifically set forth in this Agreement.
16. SEVERABILITY. In the event that any provision hereof becomes
or is declared by a court of competent jurisdiction to be illegal, unenforceable
or void, this Agreement shall continue in full
Page 4
<PAGE>
force and effect without said provision.
17. ENTIRE AGREEMENT. This Agreement, the Consulting Agreement
dated February 3, 2000, and the Indemnification Agreement represent the
entire agreement and understanding between the Company and Employee
concerning Employee's separation from the Company, and supersede and replace
any and all prior agreements and understandings concerning Employee's
relationship with the Company and his compensation by the Company.
18. NO ORAL MODIFICATION. This Agreement may only be amended in
writing signed by Employee and the President of the Company.
19. GOVERNING LAW. This Agreement shall be governed by the laws
of the State of California.
20. EFFECTIVE DATE. This Agreement is effective seven days
after it has been signed by both Parties.
21. COUNTERPARTS. This Agreement may be executed in
counterparts, and each counterpart shall have the same force and effect as an
original and shall constitute an effective, binding agreement on the part of
each of the undersigned.
22. VOLUNTARY EXECUTION OF AGREEMENT. This Agreement is
executed voluntarily and without any duress or undue influence on the part or
behalf of the Parties hereto, with the full intent of releasing all claims.
The Parties acknowledge that:
(a) They have read this Agreement;
(b) They have been represented in the preparation,
negotiation, and execution of this Agreement by legal counsel of their own
choice or that they have voluntarily declined to seek such counsel;
(c) They understand the terms and consequences of this
Agreement and of the releases it contains;
(d) They are fully aware of the legal and binding
effect of this Agreement.
Page 5
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement on the
respective dates set forth below.
ZAPME! CORPORATION
Dated: February 3, 2000 By
-------------------------------------------
Rick Inatome
Chief Executive Officer
ROBERT STOFFREGEN, an individual
Dated: February 3, 2000
---------------------------------------------
Robert Stoffregen
Page 6
<PAGE>
EXHIBIT 11.1
COMPUTATION OF NET LOSS PER SHARE
Basic and diluted net loss per share information for all periods is
presented under the requirements of FASB Statement No. 128, "Earnings per
Share." Basic loss per share has been computed using the weighted average
number of common shares outstanding during the period, less shares that may
be repurchased and excludes any anti-dilutive effects of options, warrants
and convertible securities. Potentially dilutive issuances have also been
excluded from computation of diluted net loss per share as their inclusion
would be anti-dilutive.
The calculation of historical and pro forma basic and diluted net loss
per share is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
----------------------------
<S> <C> <C>
Historical:
Net loss.................................. $ (10,702) $ (3,287)
Accretion and dividend on redeemable
convertible preferred stock............. -- (580)
-------------- -------------
Net Loss applicable to common stockholders $ (10,702) $ (3,867)
-------------- -------------
-------------- -------------
Weighted average shares of common stock
outstanding............................. 43,891 14,289
Less: Weighted average shares subject to
repurchase.............................. (1,655) (1,055)
-------------- -------------
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share.............. 42,236 13,234
-------------- -------------
-------------- -------------
Basic and diluted net loss per share.... $ (0.25) $ (0.25)
-------------- -------------
-------------- -------------
Pro forma:
Net loss................................... -- $ 3,287
-------------- -------------
-------------- -------------
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per shares (from above). -- $ 13,234
Adjustment to reflect the effect of the
conversion of preferred stock from the
date of issuance......................... -- $ 10,311
-------------- -------------
Weighted average shares of common stock
outstanding used in computing pro forma
basic and diluted net loss per share..... -- $ 23,545
-------------- -------------
-------------- -------------
Pro forma basic and diluted net loss
per share................................ -- (0.14)
-------------- -------------
-------------- -------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, STATEMENT OF OPERATION AND STATEMENT OF CASH FLOWS INCLUDED IN THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2000 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 98,275
<SECURITIES> 0
<RECEIVABLES> 3,222
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 105,408
<PP&E> 46,344
<DEPRECIATION> 7,233
<TOTAL-ASSETS> 147,813
<CURRENT-LIABILITIES> 24,078
<BONDS> 18,008
0
0
<COMMON> 183,431
<OTHER-SE> (77,704)
<TOTAL-LIABILITY-AND-EQUITY> 147,813
<SALES> 0
<TOTAL-REVENUES> 5,410
<CGS> 0
<TOTAL-COSTS> 4,647
<OTHER-EXPENSES> 11,888
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,702)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,702)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,702)
<EPS-BASIC> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
