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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
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/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE PERIOD ENDED MARCH 31, 2000
OR
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<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER
------------------------
NBC INTERNET, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3333463
(State of incorporation) (I.R.S. Employer Identification No.)
</TABLE>
225 BUSH STREET
SAN FRANCISCO, CALIFORNIA 94104
(415) 375-5000
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $0.0001 PAR VALUE
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
The number of shares outstanding of Registrant's Common Stock at March 31,
2000 was 36,347,786 of Class A, par value $0.0001, and 24,550,708 of Class B,
par value $0.0001.
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NBC INTERNET, INC.
TABLE OF CONTENTS
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<CAPTION>
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 31, 2000 and December 31, 1999...................... 1
Condensed Consolidated Statements of Operations
Three months ended March 31, 2000 and 1999................ 2
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2000 and 1999................ 3
Notes to Condensed Consolidated Financial Statements........ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
Item 3. Quantitative And Qualitative Disclosures About Market
Risk...................................................... 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 39
Item 2. Changes in Securities and Use of Proceeds................... 40
Item 5. Other Information........................................... 40
Item 6. Exhibits and Reports on Form 8-K............................ 43
Signature................................................... 44
</TABLE>
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NBC INTERNET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUES)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31.
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 159,127 $ 28,095
Short-term investments.................................... 227,230 176,669
Accounts receivable, net.................................. 19,572 17,223
Related party note receivable from NBC and other current
assets.................................................. 92,214 87,204
---------- ----------
Total current assets........................................ 498,143 309,191
Fixed assets, net........................................... 29,823 18,096
Goodwill, net............................................... 1,853,317 1,646,054
Other intangible assets, net................................ 116,575 113,419
Related party note receivable from NBC and other long-term
investments............................................... 461,921 393,813
Other assets, including restricted cash of $8,990 in 2000
and 1999.................................................. 11,589 13,523
---------- ----------
Total assets................................................ $2,971,368 $2,494,096
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 11,141 $ 15,687
Accrued compensation and related expenses................. 8,805 15,293
Other current liabilities................................. 27,381 19,627
Amount due to related party............................... 9,885 41,792
Deferred revenue.......................................... 38,445 18,943
---------- ----------
Total current liabilities................................... 95,657 111,342
Convertible notes payable, less unamortized discount due
to NBC and its affliates................................ 374,933 371,233
Other long-term liabilities............................... 13,565 11,737
---------- ----------
Total long-term liabilities................................. 388,498 382,970
Stockholders' equity:
Preferred stock, $0.0001 par value;
Authorized shares---10,000
Issued and outstanding shares--none in 2000 and 1999.... -- --
Class A common stock, $0.0001 par value:
Authorized shares---100,000
Issued and outstanding shares---36,348 and 27,676 in
2000 and 1999, respectively............................ 1,536,003 941,775
Class B common stock, $0.0001 par value:
Authorized shares---100,000
Issued and outstanding shares---24,551 in 2000 and
1999................................................... 1,158,336 1,158,336
Accumulated other comprehensive income.................... 19,924 4,994
Deferred compensation..................................... (18,744) (4,121)
Accumulated deficit....................................... (208,306) (101,200)
---------- ----------
Total stockholders' equity.................................. 2,487,213 1,999,784
---------- ----------
Total liabilities and stockholders' equity.................. $2,971,368 $2,494,096
========== ==========
</TABLE>
See accompanying notes.
1
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NBC INTERNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
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Net revenue:
Advertising............................................... $ 24,451 $ 1,765
E-commerce................................................ 5,672 2,657
--------- -------
Total net revenue........................................... 30,123 4,422
Cost of net revenue:
Cost of advertising revenue............................... 6,597 737
Cost of e-commerce revenue................................ 2,798 2,042
--------- -------
Total cost of net revenue................................... 9,395 2,779
Gross profit................................................ 20,728 1,643
Operating expenses:
Operating and development................................. 11,914 797
Sales and marketing....................................... 18,684 2,049
General and administrative................................ 11,585 1,623
Promotion and advertising provided by NBC................. 20,062 --
Amortization of deferred compensation..................... 1,086 230
Amortization of intangible assets......................... 69,708 862
--------- -------
Total operating expenses.................................... 133,039 5,561
--------- -------
Loss from operations........................................ (112,311) (3,918)
Other income (expense):
Interest income........................................... 9,121 640
Interest expense.......................................... (3,916) (30)
--------- -------
Net loss.................................................... $(107,106) $(3,308)
========= =======
Net loss per share--basic and diluted....................... $ (1.91) $ (0.24)
========= =======
Number of shares used in per share calcuation--basic and
diluted................................................... 56,067 13,811
========= =======
</TABLE>
See accompanying notes.
2
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NBC INTERNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
--------- --------
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Cash used in operating activities:
Net loss.................................................. $(107,106) $ (3,308)
Adjustments to reconcile net loss to net cash used in
operating activities:
Receipt of stock in exchange for services provided...... (7,395) --
Depreciation and amortization........................... 73,094 1,420
Issuance of common stock and stock options to directors
and consulants........................................ -- 157
Changes in operating assets and liabilities, net of
business combinations:
Accounts receivable................................... (8,738) (242)
Other current assets.................................. (7,796) (169)
Other assets.......................................... (1,537) (141)
Accounts payable...................................... (6,086) 868
Accrued compensation and related expenses............. (6,488) 366
Other accrued liabilities............................. 8,985 (265)
Deferred revenue...................................... 15,338 (32)
--------- --------
Net cash used in operating activities..................... (47,729) (1,346)
Cash used in investing activities:
Purchases of fixed assets................................. (12,105) (1,455)
Purchase of short-term and long-term investments.......... (143,400) (8,294)
Maturities of short-term and long-term investments........ 40,485 --
Business combinations, net of cash acquired............... 2,720 --
--------- --------
Net cash used in investing activities..................... (112,300) (9,749)
Cash provided by (used in) financing activities:
Proceeds from issuance of common stock.................... 280,089 --
Proceeds from exercise of stock options................... 19,172 36
Proceeds from note receivable............................. 23,770 --
Principal payments on capital lease obligations........... (23) (11)
Repayment of notes payable................................ (31,947) (124)
--------- --------
Net cash provided by (used in) financing activities....... 291,061 (99)
Net increase in cash...................................... 131,032 (11,194)
Cash and cash equivalents at beginning of period.......... 28,095 54,575
--------- --------
Cash and cash equivalents at end of period................ $ 159,127 $ 43,381
========= ========
</TABLE>
See accompanying notes.
3
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NBC INTERNET, INC.
SUPPLEMENTAL CASH FLOW INFORMATION
(IN THOUSANDS)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
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SUPPLEMENTAL DISCLOSURES:
NON-CASH TRANSACTIONS:
Investments in corporate securities received in connection
with media contracts.................................... $ 21,021 $ --
======== ========
Value of shares received upon cashless exercise of
warrant................................................. $ 1,988 $ --
======== ========
Deferred compensation resulting from grant of stock
options................................................. $ 12,788 $ --
======== ========
Issuance of common stock in conjuction with business and
technology acquisitions................................. $282,179 $ --
======== ========
CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 2 $ --
======== ========
</TABLE>
See accompanying notes.
4
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NBC INTERNET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
NBC Internet, Inc. ("NBCi" or the "Company") is a next-generation,
integrated media company, connecting buyers and sellers through premier portal,
entertainment, utility and e-commerce services. The Company generates revenue
primarily from online, television and radio advertising and e-commerce services
designed to deliver a comprehensive online experience to a global audience.
NBCi was formed as the result of several transactions that occurred on
November 29 and 30 of 1999, pursuant to which Xoom.com, Inc. ("Xoom.com") and
SNAP! LLC ("Snap") became wholly-owned subsidiaries of NBCi, and NBCi became the
owner of the businesses related to NBC.com, NBC-IN.com and VideoSeeker.com ("NBC
Multimedia Division") and a 10% ownership interest in CNBC.com LLC. Xoom.com was
treated as the accounting acquiror and the financial information in the
accompanying unaudited financial statements includes Xoom.com's results for the
three months ended March 31, 1999 and the consolidated results of operations of
Xoom.com, Snap and NBC Multimedia Division for the three-month period ended
March 31, 2000.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements reflect all
adjustments (consisting of only normal recurring adjustments) considered
necessary for a fair presentation of the Company's consolidated financial
condition as of March 31, 2000, the consolidated results of its operations for
the three months ended March 31, 2000 and 1999 and its cash flows for the three
months ended March 31, 2000 and 1999. All significant intercompany transactions
and balances have been eliminated in consolidation. These consolidated financial
statements should be read in conjunction with the Company's audited 1999
financial statements, including the notes thereto, and the other information set
forth therein included in the Company's 1999 Annual Report and Xoom.com's 1998
Annual Report, each filed on Form 10-K. Consolidated operating results for the
three-month period ended March 31, 2000 are not necessarily indicative of the
operating results that may be expected for the year ending December 31, 2000.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
consolidated financial statements and the reported consolidated results of
operations during the reporting period. Actual results could differ from those
estimates.
REVENUE RECOGNITION
ADVERTISING REVENUE. A significant portion of the Company's advertising
revenue is derived from the sale of promotional space on the Company's online
Internet properties. Services offered range from short-term banner
advertisements and sponsorships to long-term arrangements, which may include the
5
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NBC INTERNET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
development of co-branded, integrated Web sites. Revenue derived from such
arrangements is recognized during the period in which the service is provided,
provided that no significant obligations remain at the end of the period.
Company obligations typically include the guarantee of a minimum number of
"impressions" or times that an advertisement appears in pages viewed by users of
the Company's online properties. To the extent the minimum guaranteed
impressions are not delivered, the Company defers recognition of the
corresponding revenue until the remaining guaranteed impression levels are
achieved. Advertising revenue is also generated from integrated media sales, in
which the Company sells integrated promotional space on television advertising
purchased from NBC and radio advertising purchased from Clear Channel
Communications. Revenue derived from these arrangements for the three months
ended March 31, 2000 totaled $1.6 million for television and $340,000 for radio
advertising and is recognized in the period in which the advertisements are
aired and are included in advertising revenue. There was no revenue from
television and radio advertising during the three months ended March 31, 1999.
E-COMMERCE REVENUE. The Company recognizes revenue from e-commerce sales
when the products are shipped to customers or when contractual obligations
related to email marketing campaigns are met. The Company provides for potential
product returns and estimated warranty costs in the period of the sale. Such
costs have been minimal to date.
BARTER TRANSACTIONS. The Company trades advertisements on its online
properties and from its on-air inventory in exchange for equity ownership in
certain of its customers. The Company also trades advertisements on its online
properties and from its on-air inventory in exchange for advertisements on the
online properties of other companies. This revenue is recorded at the fair value
of services provided or the fair value of the services or equity ownership
received, whichever is more reliably determinable at the time of the
transaction.
In January 2000, the Emerging Issues Task Force of the FASB issued Issue
99-17, "Accounting for Advertising Barter Transactions" ("EITF 99-17"). EITF
99-17 established accounting and reporting standards for barter transactions
that involve nonmonetary exchanges of advertising and was adopted by the Company
on January 20, 2000. It requires that an entity recognize revenue and expenses
from advertising barter transactions at the fair value of the advertising
surrendered only when an entity has a historical practice of receiving cash for
similar transactions. The adoption of EITF 99-17 did not have a material impact
on the Company's results of operations and financial position for the three
months ended March 31, 2000.
The Company has made investments in certain strategic partners. Revenue from
companies in which the Company had strategic investments was $6.9 million for
the three months ended March 31, 2000. There was no revenue of this type in the
three months ended March 31, 1999. Revenue from the exchange of media and
advertising services for advertising in other media was $473,000 for the three
months ended March 31, 2000 and it was zero for the three months ended
March 31, 1999. Revenue from these barter transactions is recognized when
advertisements are delivered on the Company's online properties, displayed on
television or aired on radio.
6
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NBC INTERNET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, LIFE
2000 1999 (MONTHS)
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<S> <C> <C> <C>
Purchased technology......................... $ 47,882 $ 46,489 24 - 48
License to use brand names................... 34,200 34,200 60 - 84
Affiliate and other contracts................ 32,027 31,400 24 - 48
Acquired workforce........................... 5,436 3,802 24 - 48
Membership................................... 3,443 -- 24
-------- --------
Intangible assets............................ 122,988 115,891
Less: Accumulated amortization............... 6,413 2,472
-------- --------
Intangible assets, net....................... $116,575 $113,419
======== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, LIFE
2000 1999 (MONTHS)
---------- ------------- --------
<S> <C> <C> <C>
Goodwill.................................... $1,955,277 $1,681,922 24 - 84
Less: Accumulated amortization.............. 101,960 35,868
---------- ----------
Goodwill, net............................... $1,853,317 $1,646,054
========== ==========
</TABLE>
Intangible assets result from acquisitions accounted for under the purchase
method. See note 2. Amortization of intangibles is provided on the straight-line
basis over the respective estimated useful lives of the assets. The Company
periodically evaluates whether changes have occurred that would require revision
of the remaining estimated useful life of the assigned intangible assets or
render the intangibles not recoverable. If such circumstances arise, the Company
would use an estimate of the undiscounted value of expected future operating
cash flows to determine whether the intangibles are impaired. To date, no
impairment losses have been recorded.
RECLASSIFICATIONS
The Company has reclassified the presentation of certain prior year balance
sheet, statement of operations and statement of cash flows information to
conform to the current year presentation. These reclassifications had no effect
on previously reported financial positions or results of operations.
2. BUSINESS COMBINATIONS
During the three months ended March 31, 2000, the Company made the business
acquisitions described in the paragraphs that follow. The financial information
presented in the accompanying financial statements give effect to each
acquisition from the date the acquisition was consummated. There were no
business acquisitions during the three months ended March 31, 1999.
CATALYST ADVISORS, INC. On February 14, 2000, the Company acquired 100% of
the outstanding shares of Catalyst Advisors, Inc., a company that provides
real-time financial newswires for active online
7
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NBC INTERNET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS (CONTINUED)
investors. The purchase consideration consisted of 123,737 shares of the
Company's Class A common stock at a fair value of $68.69 per share and
acquisition costs of approximately $60,000.
ALLBUSINESS.COM, INC. On March 7, 2000, the Company acquired 100% of the
outstanding shares of AllBusiness.com, Inc., a Web service designed to be a
virtual partner for small and growing businesses. The purchase consideration
consisted of 4,083,021 shares of the Company's Class A common stock at a fair
value of $52.54 per share, the assumption of 997,896 options at an average price
of $6.19 per share and acquisition costs of approximately $3.4 million.
HUSDAWG COMMUNICATIONS, INC. On March 22, 2000, the Company acquired 100%
of the outstanding shares of Husdawg Communications, Inc., an online electronic
software registration company. The purchase consideration consisted of 141,963
shares of the Company's Class A common stock and the assumption of 9,015
options, both at an average fair value of $47.92 per share and acquisition costs
of approximately $120,000.
These acquisitions have been accounted for as purchase business combinations
and, accordingly, purchase prices have been allocated to the tangible and
identifiable intangible assets acquired and liabilities assumed on the basis of
their fair values on the acquisition dates. Approximately $4.8 million of the
aggregate purchase price was allocated to net tangible assets consisting
primarily of cash and cash equivalents, other assets, property and equipment,
accounts payable and accrued expenses. The historical carrying amounts of such
net assets approximated their fair values. Approximately $275.9 million of the
aggregate purchase price was allocated to intangible assets as follows (in
thousands):
<TABLE>
<CAPTION>
INTANGIBLE ASSET AMOUNT
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<S> <C>
Goodwill.................................................... $270,449
Membership.................................................. 3,443
Assembled workforce......................................... 972
Affiliate and other contracts............................... 627
Purchased technology........................................ 360
--------
Total................................................... $275,851
========
</TABLE>
For each of the acquisitions completed during the three months ended
March 31, 2000, the Company placed 10% of the shares issued as part of the
purchase consideration into an escrow account. These shares will be released one
year from the date of the acquisition upon the expiration of certain
indemnification obligations and will be released to all selling shareholders
based on their relative equity interests at the time of consummation of the
individual acquisitions.
The results of operations of each business acquisition have been included in
the Company's consolidated results of operations from the date of consummation
of each individual acquisition. Such results of operations were not material in
relation to those of the Company, individually or in aggregate.
3. JOINT VENTURES AND STRATEGIC ALLIANCES
The Company periodically enters into joint ventures and alliances with
strategic partners in both domestic and international business arenas for the
purposes of expanding business and entering new geographic regions. The joint
ventures and alliances generally provide for the Company to take a minority
8
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NBC INTERNET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. JOINT VENTURES AND STRATEGIC ALLIANCES (CONTINUED)
equity interest in the business venture. The Company accounts for these
investments using either the cost or equity methods, depending on the Company's
relative ownership interest and ability to exercise control.
SNAP ASIA
On January 12, 2000, a subsidiary of the Company entered into a joint
venture agreement with a developer of Internet content, advertising and commerce
services headquartered in Asia. The Company contributed intangible assets,
including brand name and technology, in exchange for a 35% ownership interest in
the joint venture. This joint venture is intended to develop and launch
comprehensive, localized Internet community, content, portal and shopping
services in Korea, Hong Kong, Singapore, Malaysia and Taiwan. The Company will
account for its interest in the joint venture using the equity method of
accounting.
4. RELATED PARTY TRANSACTIONS
In connection with the NBCi transactions that took place on November 29 and
30, 1999 pursuant to which the Company was formed, the Company entered into the
following:
NOTES PAYABLE
Two subordinated zero coupon convertible notes were issued by the Company.
The convertible notes will have an aggregate principal at maturity of
$486.9 million and are convertible by the holders into a total of 5,809,388
shares of Class B common stock at any time after the first anniversary of the
issuance of the note. Both notes bear interest at a rate of 4% per annum. The
notes were recorded at their present value at issuance of $370 million. As of
March 31, 2000, the total principal and interest due related to these notes was
$370 million and $4.9 million, respectively. The convertible notes have a
scheduled maturity of November 30, 2006.
NOTE RECEIVABLE
The Company received a promissory note from NBC with a principal value of
$340 million, due on November 30, 2003. The note bears interest at 5.4% and
compounds quarterly. Principal and interest payments are received by the Company
in quarterly installments of $23.8 million each. As of March 31, 2000, the total
principal and interest due to the Company related to this note was
$320.8 million and $1.4 million, respectively. Interest due to the Company is
included in other current assets.
ADVERTISING AGREEMENT WITH NBC
The Company entered into an advertising agreement (the "Agreement") with NBC
pursuant to which NBCi will purchase 15-, 30- and 60-second advertising spots
valued at $405 million over a four-year period on the NBC television network,
CNBC, MSNBC and NBC's owned and operated television stations. The advertisements
are subject to standard terms and conditions generally applicable to such
advertising. The advertising agreement may be terminated by NBC in the event of
a change in control of NBCi, a bankruptcy event with respect to NBCi or a
material breach by NBCi that is not cured with in 30 days. NBCi sells a portion
of the advertising it purchases from NBC to customers as part of an integrated
media package as described in Note 1. Proceeds from these sales are included in
advertising revenue. From the
9
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NBC INTERNET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
inception of this agreement through March 31, 2000, the Company had incurred
$36.9 million of promotional expense related to the above agreement.
5. FINANCIAL INSTRUMENTS
The Company has classified all short-term and long-term marketable
securities as available-for-sale. Available-for-sale securities are carried at
amounts that approximate fair market value based on quoted market prices.
Interest earned, realized gains and losses and declines in value judged to be
other than temporary on available-for-sale securities are included in interest
income.
Short-term and long-term investments include the following securities as of
March 31, 2000 and December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 2000
-----------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Short-term:
Market auction preferred stock.................. $ 5,000 $ -- $ -- $ 5,000
Demand and money market instrument accounts..... 114,891 10 (7) 114,894
Corporate bonds and notes....................... 134,770 -- (196) 134,574
United states government agency bonds........... 55,973 -- (206) 55,767
Foreign debt securities......................... 10,398 22 (21) 10,399
Publicly traded equity securities............... 50,787 19,756 (4,820) 65,723
--------- ------- ------- ---------
Total available-for-sale securities............. 371,819 19,788 (5,250) 386,357
Less amounts classified as cash and cash
equivalents................................... (159,134) (10) 17 (159,127)
--------- ------- ------- ---------
Total short-term available-for-sale
securities.................................... $ 212,685 $19,778 $(5,233) $ 227,230
========= ======= ======= =========
Long-term:
Corporate bonds and notes....................... $ 48,481 $ 23 $ (123) $ 48,381
United states government agency bonds........... 28,029 34 (60) 28,003
Foreign debt securities......................... 3,032 -- (12) 3,020
--------- ------- ------- ---------
Total long-term available-for-sale
securities.................................. $ 79,542 $ 57 $ (195) $ 79,404
========= ======= ======= =========
</TABLE>
10
<PAGE>
NBC INTERNET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Short-term:
Market auction preferred stock.................... $ 2,000 $ -- $ -- $ 2,000
Demand and money market instrument accounts....... 35,370 -- (91) 35,279
Corporate bonds and notes......................... 70,009 1 (89) 69,921
United states government agency bonds............. 51,473 3 (241) 51,235
Foreign debt securities........................... 8,439 11 (13) 8,437
Publicly traded equity securities................. 32,327 7,453 (1,888) 37,892
-------- ------ ------- --------
Total availabe-for-sale securities................ $199,618 $7,468 $(2,322) $204,764
Less amounts classified as cash and cash
equivalents..................................... (28,092) (3) -- (28,095)
-------- ------ ------- --------
Total short-term available-for-sale securities.... $171,526 $7,465 $(2,322) $176,669
======== ====== ======= ========
Long-term:
Corporate bonds and notes......................... $ 14,337 $ -- $ (118) $ 14,219
United states government agency bonds............. 2,996 -- (31) 2,965
-------- ------ ------- --------
Total long-term available-for-sale securities... $ 17,333 $ -- $ (149) $ 17,184
======== ====== ======= ========
</TABLE>
As of the close of business on April 28, 2000, the market value of the
Company's publicly traded equity securities had decreased approximately
$11.1 million.
The Company also invests in privately held companies and classifies these
investments as long-term investments. At March 31, 2000 and December 31, 1999,
investments in privately-held companies totaled approximately $72.5 million and
$46.4 million, respectively. These investments are accounted for using the cost
method and are included in other long-term investments in the accompanying
balance sheets. Impairment losses on closely-held securities are recorded when
events and circumstances indicate that such assets might be impaired and the
decline in value is other than temporary. To date, no such losses have been
recorded.
6. STOCKHOLDERS' EQUITY
FOLLOW-ON OFFERING
On February 9, 2000, the Company completed a follow-on offering of 4,600,000
shares of Class A common stock at a price of $81.38 per share. Of the 4,600,000
shares of Class A common stock sold in the offering, 3,650,000 were sold by the
Company and 950,000 were sold by existing stockholders. The Company received net
proceeds from the offering of approximately $280.1 million.
DEFERRED COMPENSATION
The Company recorded deferred compensation charges of $15.7 million and $0
for the three-month periods ended March 31, 2000 and 1999, respectively. Of the
amount recorded during 2000, $12.8 million was recorded to recognize the
difference between the exercise price and the deemed fair value of certain stock
options and restricted stock granted by the Company. These amounts are being
amortized by charges
11
<PAGE>
NBC INTERNET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
to operations, using the graded method, over the vesting periods of the
individual equity instruments, which range from three months to four years.
The Company incurred deferred compensation charges of $2.9 million in
connection with the issuance of shares of Class A common stock to certain key
employees of an acquired company. These amounts are being amortized by charges
to operations, using the straight-line method, over a vesting period of one
year.
7. NET LOSS PER SHARE
The Company computes net loss per share based on Financial Accounting
Standards Board Statement No. 128, "Earnings Per Share," ("SFAS 128"). In
accordance with SFAS 128, basic net income (loss) per share excludes dilutive
common stock equivalents and is calculated as net income (loss) divided by the
weighted average number of common shares outstanding. Diluted net income (loss)
per share is computed using the weighted average number of common shares
outstanding and dilutive common stock equivalents outstanding during the period.
Common equivalent shares from stock options and warrants and shares issuable
upon the conversion of a note payable were excluded from the net loss per share
calculation as their effect would be antidilutive.
8. COMPREHENSIVE LOSS
Comprehensive loss includes changes in the balances of items that are
reported directly as a separate component of consolidated stockholders' equity
on the condensed consolidated balance sheet as of March 31, 2000. Comprehensive
loss for the three months ended March 31, 2000 was as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
2000
----------
<S> <C>
Net loss.................................................... $(107,106)
Net unrealized gain on investments.......................... 14,971
Other....................................................... (41)
---------
Comprehensive loss.......................................... $ (92,176)
=========
</TABLE>
As there were no unrealized gains or losses recorded in the three months
ended March 31, 1999, comprehensive loss was equal to the net loss for the
period.
9. LEGAL PROCEEDINGS
In September 1998, Zoom Telephonics, Inc. filed a lawsuit against Xoom.com
alleging trademark infringement and related statutory violations. The Company
believes that the claims asserted by Zoom Telephonics are without merit, and
intends to vigorously defend against them. An adverse result of the litigation
would seriously harm NBCi's business and results of operations, particularly if
the litigation forces the Company to discontinue use of the Xoom.com mark or
name.
In January 1998, Xoom.com became aware that Imageline, Inc. claimed to own
the copyright in certain images that a third party, Sprint Software Pty Ltd, had
licensed to Xoom.com. Some clip art images that Imageline alleged infringed
Imageline's copyright were included by Xoom.com in versions of its Web Clip
Empire product and licensed by Xoom.com to third parties, including other
software clip publishers.
12
<PAGE>
NBC INTERNET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LEGAL PROCEEDINGS (CONTINUED)
Xoom.com's contracts with such publishers require it to indemnify the publisher
if copyrighted material licensed from Xoom.com infringes a copyright.
The Company believes the possible range of liability related to this matter
is from $0 up to $10 million; however, the Company believes it is unlikely that
the liability would exceed $1 million. Accordingly, the Company reserved
$1 million for this potential liability, the expense of which was included in
non-recurring charges for the year ended December 31, 1997. Based on information
available to date, management does not believe that the ultimate outcome of this
matter will seriously harm the Company's financial position, results of
operations and cash flows.
In addition to the matters discussed above, the Company is subject to
various legal claims that arise in the normal course of business. The Company
believes that the ultimate resolution of such matters will not have a material
impact on its financial condition, results of operations or cash flows.
11. SEGMENT DISCLOSURES
The Company operates in a single industry segment as an integrated media
company that combines portal, community, online, television and radio
advertising and e-commerce services to deliver a comprehensive, next generation
media experience to a global audience. Net revenue for the three months ended
March 31, 2000 and 1999, was $30.1 million and $4.4 million, respectively.
Revenue from portal, online, television and radio advertising are included in
advertising revenues. Net revenue is composed of advertising and e-commerce
revenue, which represent the following percentage of total net revenue for the
following periods:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Advertising................................................. 81.2% 39.9%
E-commerce.................................................. 18.8 60.1
----- -----
Total..................................................... 100.0% 100.0%
===== =====
</TABLE>
The Chief Operating Officer has been identified as the Chief Operating
Decision Maker ("CODM") because he has final authority over resource allocation
decisions and performance assessment. The COO receives information about the
Company's advertising and e-commerce operations including revenues, cost of
revenues, gross margins and related information.
13
<PAGE>
NBC INTERNET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SEGMENT DISCLOSURES (CONTINUED)
The Company's geographic sales were as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------
<S> <C> <C> <C> <C>
2000 1999
--------------- --------------
United States............................... $28,433 94.4% $3,812 86.2%
North America, excluding United States...... 581 1.9 104 2.3
Europe...................................... 839 2.8 274 6.2
Asia/Pacific................................ 167 0.6 136 3.1
Rest of the world........................... 103 0.3 96 2.2
------- ----- ------ -----
Total................................... $30,123 100.0% $4,422 100.0%
======= ===== ====== =====
</TABLE>
Export sales were 5.6% and 13.8% of net revenue for the three months ended
March 31, 2000 and 1999, respectively. For the period ended March 31, 2000, no
single customer accounted for greater than 10% of total net revenue or total
accounts receivable. For the period ended March 31, 1999, no single customer
accounted for greater than 10% of total net revenue and one customer accounted
for approximately 11% of accounts receivable.
12. SUBSEQUENT EVENTS
On April 3, 2000 the Company announced its intention to acquire 100% of the
outstanding shares and options of flyswat, Inc., a privately-held company that
has developed a free, downloadable utility that identifies and automatically
hyperlinks existing words or phrases on any Web page, for approximately
1.1 million shares of Class A common stock at an estimated fair value of $40.65
per share. In addition, a maximum of 570,000 shares of Class A common stock and
options may be issued to all shareholders of flyswat, Inc., subject to the
achievement of certain product milestones. Ten percent of the purchase
consideration payments will be placed into an escrow account and will be
released upon the expiration of certain indemnification obligations.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE DISCUSSION IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" CONTAINS TREND ANALYSES AND OTHER
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. ALL
STATEMENTS, TREND ANALYSES AND OTHER INFORMATION CONTAINED HEREIN RELATIVE TO
MARKETS FOR OUR SERVICES AND PRODUCTS AND TRENDS IN REVENUE, AS WELL AS OTHER
STATEMENTS INCLUDING SUCH WORDS AS "ANTICIPATE," "BELIEVE," "PLAN," "ESTIMATE,"
"EXPECT," "GOAL," AND "INTEND" AND OTHER SIMILAR EXPRESSIONS CONSTITUTE
FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
BUSINESS AND ECONOMIC RISKS, AND OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF FACTORS SET
FORTH ELSEWHERE HEREIN, INCLUDING "CERTAIN RISK FACTORS WHICH MAY IMPACT FUTURE
OPERATING RESULTS," PAGE 23, AS WELL AS FACTORS SET FORTH IN OUR ANNUAL REPORT
FILED ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999.
OVERVIEW
We are a next-generation integrated media company, connecting buyers and
sellers through premier portal, entertainment, utility and e-commerce services.
We generate our revenues primarily from online, television and radio advertising
and e-commerce services designed to deliver a comprehensive online experience to
a global audience. As a result of transactions that occurred on November 29 and
November 30 of 1999, Xoom.com and Snap became our wholly-owned subsidiaries, and
we became the owners of the businesses related to NBC.com, NBC-IN.com and
VideoSeeker.com and a 10% interest in CNBC.com.
We have not achieved profitability on a quarterly or annual basis to date,
and anticipate that we will incur net losses for the foreseeable future. The
extent of these losses will depend, in part, on the amount and rates of growth
in our net revenue from advertising and e-commerce. We expect our operating
expenses to increase significantly, especially in the areas of sales and
marketing, goodwill amortization and brand promotion. As a result, we will need
to increase our quarterly net revenue to achieve profitability. We believe that
period-to-period comparisons of our operating results are not meaningful and
that you should not rely upon the results for any period as an indication of
future performance. Our business, results of operations and financial condition
will be significantly and adversely affected if:
- net revenue does not grow at anticipated rates;
- increases in operating expenses are not offset by commensurate increases
in net revenue; or
- we are unable to adjust operating expense levels as a result of lower net
revenue.
Our operating losses might increase in the future, and we cannot guarantee
that we will ever achieve or sustain profitability.
We intend to continue acquiring additional companies to increase online
reach and membership and to seek additional strategic alliances with content and
distribution partners, including alliances that create co-branded sites through
which we market our services. Acquisitions carry numerous risks and
uncertainties, including:
- difficulties in integrating operations, personnel, technologies, products
and the information systems of the acquired companies;
- diversion of management's attention from other business concerns;
15
<PAGE>
- risks of entering geographic and business markets in which we have little
or no prior experience; and
- potential loss of key employees.
We cannot guarantee that we will be able to successfully integrate any
businesses, products, technologies or personnel that might be acquired in the
future. A failure to integrate acquired entities or assets successfully could
seriously harm our business, results of operations and financial condition. In
addition, we cannot guarantee that we will be successful in identifying and
closing transactions with potential acquisition candidates.
RECENT EVENTS
On April 3, 2000, we announced our intention to acquire 100% of the
outstanding shares and options of flyswat, Inc., a privately-held company that
has developed a free, downloadable utility that identifies and automatically
hyperlinks existing words or phrases on any Web page, for approximately
1.1 million shares of Class A common stock at an estimated fair value of $40.65.
In addition, a maximum of 570,000 shares of Class A common stock and options may
be issued to all selling shareholders of flyswat, Inc., subject to the
achievement of certain product milestones. Ten percent of the purchase
consideration will be placed into an escrow account and will be released upon
the expiration of certain indemnification obligations.
RESULTS OF OPERATIONS
The following table presents certain consolidated statement of operations
data for the periods indicated as a percentage of total net revenue:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
----------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Net revenue:
Advertising............................................... 81.2% 39.9%
E-commerce................................................ 18.8 60.1
------ -----
Total net revenue........................................... 100.0 100.0
Cost of net revenue:
Cost of advertising revenue............................... 21.9 16.7
Cost of e-commerce revenue................................ 9.3 46.2
------ -----
Total cost of net revenue................................... 31.2 62.9
Gross profit................................................ 68.8 37.1
Operating expenses:
Operating and development................................. 39.6 18.0
Sales and marketing....................................... 62.0 46.3
General and administrative................................ 38.5 36.7
Promotion and advertising provided by NBC................. 66.6 --
Amortization of deferred compensation..................... 3.6 5.2
Amortization of intangible assets......................... 231.4 19.5
------ -----
Total operating expenses.................................... 441.7 125.7
------ -----
Loss from operations........................................ (372.9) (88.6)
Other income (expense):
Interest income........................................... 30.3 14.5
Interest expense.......................................... (13.0) (0.7)
------ -----
Net loss.................................................... (355.6)% (74.8)%
====== =====
</TABLE>
16
<PAGE>
NET REVENUE. Total net revenue was $30.1 million in the three months ended
March 31, 2000 and $4.4 million for the corresponding period ended March 31,
1999.
ADVERTISING REVENUE. Advertising revenue, which includes online and on-air
media sales, totaled $24.5 for the three months ended March 31, 2000 and
$1.8 million for the corresponding period ended March 31, 1999. This increase in
advertising revenue was primarily due to the increase in our advertising
inventory as a result of the additional Web sites acquired through the NBCi
transactions. The increase can also be attributed to an increase in membership
and site traffic, the expansion of our advertising sales force and an increase
in the number of Web site co-branding agreements we have entered into with our
strategic partners. Included in advertising revenue in the three-month period
ended March 31, 2000 was $1.6 million of revenue from the sale of television
advertising procured from NBC and $340,000 in revenue from the sale of radio
advertising procured from Clear Channel. Also included in advertising revenue
for the three months ended March 31, 2000 was $7.4 million in revenue from
exchange of media and advertising services for equity instruments or advertising
in other media. There was no barter revenue in the three months ended March 31,
1999. Barter revenue is generally recorded at the fair value of services
provided or the fair value of the services or equity ownership received,
whichever is more determinable at the time of the transaction.
The percentage of total net revenue attributable to advertising revenue
increased to 81.2% in the three months ended March 31, 2000 from 39.9% in the
corresponding period ended March 31, 1999. This increase was the result of
advertising revenue growing at a more rapid rate than e-commerce revenue. This
was primarily due to an increase in the number of sites we maintain, increased
site traffic, an increase in our membership base and the expansion of our
advertising sales force, all of which resulted in a higher volume of advertising
customers.
E-COMMERCE REVENUE. E-commerce revenue is generated by online product
sales, fees paid to us for services provided by NBCi Direct, our e-list
management and database marketing division, and lead generation fees. E-commerce
revenue increased to $5.7 million for the three months ended March 31, 2000 from
$2.7 million for the corresponding period ended March 31, 1999. This increase in
e-commerce revenue was primarily the result of the introduction of NBCi Direct,
and to a lesser extent, an increase in the variety and volume of products sold
online.
The percentage of total net revenue attributable to e-commerce revenue
decreased to 18.8% during the three months ended March 31, 2000 from 60.1%
during the corresponding period ended March 31, 1999. This decrease was due to
the fact that e-commerce revenue grew at a less rapid rate than advertising
revenue in the three-month period ended the March 31, 2000. This is primarily
due to the substantial increase in advertising revenue earned from the
additional Web sites acquired through the NBCi transactions, as well as the
launch of NBCi.com.
COST OF NET REVENUE. Cost of net revenue increased to $9.4 million for the
three months ended March 31, 2000 from $2.8 million for the corresponding period
ended March 31, 1999, as a result of the 581.2% increase in net revenue. As a
percentage of net revenue, cost of net revenue decreased to 31.2% in the three
months ended March 31, 2000 from 62.9% in the corresponding period ended
March 31, 1999. This decrease during the three months ended March 31, 2000 can
be primarily attributed to an improvement in gross margin for advertising
revenue, which represented 81.2% of total net revenue, and to a lesser extent,
an improvement in gross margin for e-commerce revenue, which represented 18.8%
of total net revenue.
COST OF ADVERTISING REVENUE. Cost of advertising revenue consists of costs
incurred to acquire, create and produce the content of our Web sites as well as
the technical hosting and bandwidth charges associated with transmitting such
content over the Internet. Cost of advertising revenue increased to
$6.6 million for the three months ended March 31, 2000 from $737,000 for the
corresponding period ended March 31, 1999. This increase was primarily due to
the additional costs associated with the online properties we
17
<PAGE>
acquired through the NBCi transactions, including increased content costs and
hosting and bandwidth charges resulting from an increase in demand for
advertising on our online properties.
As a percentage of advertising revenue, cost of advertising revenue
decreased to 27.0% of net revenue in the three months ended March 31, 2000 from
41.8% in the corresponding period ended March 31, 1999. This decrease was
primarily due to advertising revenues growing at a higher rate than cost of
advertising revenues.
COST OF E-COMMERCE REVENUE. Cost of e-commerce revenue consists primarily
of product fulfillment fees and outbound shipping and handling costs. Cost of
e-commerce increased to $2.8 million for the three months ended March 31, 2000
from $2.0 million for the corresponding period ended March 31, 1999. This
increase was primarily the result of the growth in e-commerce product sales and
an expansion of e-commerce services offered on our online properties, including
Snap Shopping and business to small-business services.
As a percentage of e-commerce revenue, cost of e-commerce revenue decreased
to 49.3% of e-commerce revenue in the three months ended March 31, 2000 from
76.9% in the corresponding period ended March 31, 1999. This decrease was
primarily a result of a change in our product mix. During the three months ended
March 31, 1999, costs of e-commerce revenue consisted primarily of expenses
associated with the purchase of inventory for online product sales. During the
corresponding period ended March 31, 2000, our costs of e-commerce revenue
included a larger percentage of costs associated with sales generated by NBCi
Direct, which has a more favorable margin than online product sales.
OPERATING AND DEVELOPMENT EXPENSES. Operating and development expenses
consist primarily of payroll and related expenses for development and network
operations personnel and consultants, costs related to modifications,
depreciation, enhancements and new development operations to improve our online
properties. Operating and development expenses increased to $11.9 million for
the three months ended March 31, 2000 from $797,000 for the corresponding period
ended March 31, 1999. This increase was primarily due to higher payroll and
related expenses caused by additional headcount and an increase in the number of
online properties that we develop and maintain.
Operating and development expenses increased as a percentage of net revenue
to 39.6% in the three months ended March 31, 2000 from 18.0% in the
corresponding period ended March 31, 1999. This increase was due to spending for
operating and development growing at a higher rate than net revenue as a result
of a significant increase in headcount and the number of our online properties
subsequent to the consummation of the NBCi transactions.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist of
payroll and related expenses for personnel engaged in sales, marketing and
customer support, advertising and promotional distribution expenditures and
costs associated with directing traffic to our online properties from other Web
sites. Sales and marketing expenses increased to $18.7 million for the three
months ended March 31, 2000 from $2.0 million for the corresponding period ended
March 31, 1999. This increase was due to increased personnel and related
expenses required to continue to implement our sales and marketing strategy, as
well as an increase in other promotional and advertising expenses.
Sales and marketing expense as a percentage of net revenue increased to
62.0% in the three months ended March 31, 2000 from 46.3% in the corresponding
period ended March 31, 1999. This increase was due to a more rapid increase in
sales and marketing expense than total net revenue, due to having significantly
grown our sales force and increased our branding, marketing and promotional
expenditures.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of payroll and related expenses for general corporate
functions, including finance, legal, accounting, business development, human
resources, investor relations and administration, as well as outside legal and
accounting fees, director fees and insurance and facilities-related expenses
including rent. General and
18
<PAGE>
administrative expenses increased to $11.6 million for the three months ended
March 31, 2000 from $1.6 million for the corresponding period ended March 31,
1999. This increase was primarily due to increases in the number of general and
administrative personnel, as well as increases in professional services and
facilities-related expenses to support the growth of our operations.
General and administrative expenses increased as a percentage of net revenue
to 38.5% in the three months ended March 31, 2000 from 36.7% in the three months
ended March 31, 1999. This increase was due to general and administrative
expenses growing at a slightly higher rate than net revenue.
PROMOTION AND ADVERTISING PROVIDED BY NBC. Promotion and advertising
provided by NBC consists of charges incurred in connection with an advertising
agreement entered into with NBC upon consummation of the NBCi transactions
pursuant to which we will purchase advertising spots valued at $405 million over
a four-year period. We have recorded $20.1 million in promotion and advertising
expense for the three months ended March 31, 2000, and we did not record any
promotion and advertising expense related to NBC promotions in the corresponding
period ended March 31, 1999. The expense in 2000 occurred as a result of the
NBCi transactions that closed on November 30, 1999.
AMORTIZATION OF DEFERRED COMPENSATION. We recorded deferred stock
compensation charges of $15.7 million during the three months ended March 31,
2000 and we did not record any deferred compensation charges during the
corresponding period ended March 31, 1999. Of the total deferred compensation
charges, $12.8 million accounts for the difference between the exercise price
and the deemed fair value of specific equity instruments granted to our
employees, and is being amortized over vesting periods of the individual equity
instruments, which range from three months to four years. The remaining
$2.9 million accounts for charges incurred in connection with the issuance of
shares of Class A common stock to certain key employees of an acquired company,
which is being amortized over a one-year vesting period.
Amortization of deferred compensation reflects the amortization of stock
compensation charges resulting from employee stock option grants. We recorded
amortization of deferred compensation of $1.1 million for the three months ended
March 31, 2000 and $230,000 for the corresponding period ended March 31, 1999.
This increase was primarily the result of the additional noncash stock
compensation charges recorded in the first quarter of 2000 related to the hiring
of certain key executives.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
totaled $69.7 million during the three months ended March 31, 2000 and $862,000
during the corresponding period ended March 31, 1999. This increase during the
three months ended March 31, 2000 resulted primarily from the amortization of
goodwill and other intangibles related to the NBCi transactions, amortized over
periods ranging from 36 to 84 months. To a lesser extent, the additional
amortization expense during the first quarter of 2000 is also related to
acquisitions entered into subsequent to March 31, 1999, including the
acquisition of Catalyst Advisors Group, AllBusiness.com and Husdawg in the first
quarter of 2000, amortized over periods ranging from 24 to 36 months. The
amortization of intangibles during the three months ended March 31, 1999 is
attributed to the acquisitions of Paralogic Corporation, Global Bridges
Technologies, Inc. and Pagecount, Inc., as well as the purchase of certain
assets of Revolutionary Software, amortized over periods ranging from 24 to
42 months.
INTEREST INCOME. Interest income represents interest we earned on our cash
investments and additionally, in 2000, the interest earned on our
$340.0 million note receivable from NBC. We earned $9.1 million of interest
income during the three months ended March 31, 2000 and $640,000 during the
corresponding period ended March 31, 1999. This increase is mainly due to the
interest earned on our $340.0 million note receivable from NBC issued as a part
of the NBCi transactions, as well as the interest earned on cash received from
our follow-on offering completed in February 2000, which netted proceeds of
$280.1 million.
INTEREST EXPENSE. Interest expense represents interest charges related to
notes payable and capital lease obligations and additionally, in 2000, the
interest charges related to our two convertible notes payable
19
<PAGE>
to NBC that total $370.0 million. We incurred $3.9 in interest expense during
the three months ended March 31, 2000 and $30,000 during the corresponding
period ended March 31, 1999. This increase in interest expense was primarily due
to the interest expense incurred related to the two convertible notes payable to
NBC.
NET LOSS. Our net loss was $107.1 million for the three months ended
March 31, 2000 and $3.3 million in the corresponding period ended March 31,
1999. The $103.8 million increase in net loss during the three months ended
March 31, 2000 was primarily attributable to an increase in cost of net revenue
of $6.6 million, an increase in the amortization of intangibles of
$68.8 million, promotion and advertising provided by NBC of $20.1 million and an
increase in other operating expenses totaling $38.6 million, offset by an
increase in net revenue of $25.7 million and an increase in interest income of
$8.5 million.
PROVISION/(BENEFIT) FOR INCOME TAXES. For the three months ended March 31,
2000 and 1999, we did not recognize the tax benefit of our operating losses. We
believe the resulting deferred tax assets are not realizable on a more likely
than not basis. Our effective tax rate was 0% during the three months ended
March 31, 2000 and 1999, and differs from the federal statutory rate primarily
due to the limitations controlling the timing for realization of net operating
losses and tax credits established by the Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes".
FUTURE TRENDS. We believe that our operating expenses, including operating
and development, sales and marketing and general and administrative expenses,
will increase in future periods as we continue to expand our operations and
development initiatives, as well as augment our sales and promotional efforts.
Additionally, amortization of intangible assets is expected to increase
significantly in conjunction with potential business acquisitions being made as
a part of our continuing effort to increase our online reach and membership and
to seek additional strategic alliances in both domestic and foreign business
markets.
LIQUIDITY AND CAPITAL RESOURCES. We have financed our operations primarily
from proceeds received from the Xoom.com initial public offering in
December 1998, a secondary offering in April 1999, the issuance of 960,028
shares of Xoom.com common stock to NBC in July 1999 and our follow-on offering,
which was completed in February 2000.
We had cash, cash equivalents and short-term investments of $386.4 million
as of March 31, 2000. We regularly invest excess funds in short-term money
market funds, government and foreign securities and commercial paper. Net cash
used in operating activities was $47.7 million during the three months ended
March 31, 2000 and $1.3 million during the three months ended March 31, 1999.
Cash used in operating activities in the first quarter of 2000 was primarily the
result of the net loss of $107.1 million, increases in accounts receivable of
$8.7 million, decreases in accounts payable of $6.1 million, and decreases in
accrued compensation and related expenses of $6.5 million, partially offset by
amortization of intangible assets of $69.7 million related to the NBCi
transactions, and an increase in deferred revenue of $15.3 million due to the
receipt of equity instruments in exchange for services to be performed. Cash
used in operating activities in the three months ended March 31, 1999 was
primarily the result of net losses of $3.3 million, and an increase in accounts
receivable of $242,000 related to the growth of advertising revenues, partially
offset by amortization of intangible assets of $862,000 related to acquisitions,
amortization of deferred compensation of $230,000 incurred in connection with
the granting of options to employees to purchase Class A common stock and an
increase in accounts payable of $868,000 as a result of the growth of our
business.
Net cash used in investing activities was $112.3 million during the three
months ended March 31, 2000 and $9.7 million during the three months ended
March 31, 1999. Cash used in investing activities during the three months ended
March 31, 2000 was primarily the result of the purchase of investments of
$143.4 million and fixed asset additions of $12.1 million, partially offset by
the maturity of investments of $40.5 million. Cash used in investing activities
during the three months ended March 31, 1999 was used primarily to purchase
fixed assets of $1.5 million and short-term investments of $8.3 million. From
time to
20
<PAGE>
time, we expect to evaluate the acquisition of products, businesses and
technologies that complement our business. These acquisitions may involve the
use of cash investments.
Net cash provided by financing activities was $291.1 million during the
three months ended March 31, 2000, and net cash used in financing activities was
$99,000 during the same period ended March 31, 1999. Cash provided by financing
activities in the three months ended March 31, 2000 was primarily attributable
to proceeds from our secondary stock offering of $280.1 million, and proceeds
from our note receivable from NBC of $23.8 million, partially offset by the
repayment of notes payable of $32.0 million. Cash used by financing activities
in the three months ended March 31, 1999 was primarily related to the repayment
of notes payable of $124,000.
As set forth in the consolidated statements of operations, we experienced
net losses for the periods ended March 31, 2000 and 1999. We believe that we
have the financial resources needed to meet our presently anticipated business
requirements, including capital expenditure and strategic operating programs,
for at least the next 12 months. Thereafter, if cash generated by operations is
insufficient to satisfy our liquidity requirements, we may need to sell
additional equity or debt securities or obtain additional credit facilities. The
sale of additional equity or convertible debt securities may result in
additional dilution to our stockholders. We may not be able to raise any such
capital on terms acceptable to us or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Emerging Issues Task Force ("EITF"), issued EITF 00-2,
"Accounting for Website Development Costs." This issue addresses whether an
entity should capitalize costs incurred to develop a Web site and it is
effective prospectively for all costs incurred for quarters beginning after
June 30, 2000. Although we have not fully assessed the impact of adopting EITF
00-2 on our financial position and results of operations in 2000 and thereafter,
we do not expect the effect, if any, to be material.
In January 2000, the EITF issued EITF 99-17, "Accounting for Advertising
Barter Transactions." This issue established accounting and reporting standards
for barter transactions that involve nonmonetary exchanges of advertising. It
requires that an entity recognize revenues and expenses from advertising barter
transactions at the fair value of the advertising surrendered only when an
entity has a historical practice of receiving cash for similar transactions. The
adoption of EITF 99-17 did not have a material impact on our results of
operations and financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition," or SAB No. 101, which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met in order to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. Although we have not fully
assessed the impact of adopting SAB 101 on our financial position and results of
operations in 2000 and thereafter, we do not expect the effect, if any, to be
material.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is confined principally to the impact of
interest rate changes and changes in the market values of our investments.
Our exposure to interest rate risk relates primarily to our portfolio of
short- and long-term cash investments, our note receivable from NBC and our
convertible notes payable to NBC. We do not use derivative financial instruments
in our portfolio. We invest primarily in instruments issued by high quality
financial institutions and companies including demand and money market
instruments and debt issued by corporations. All of our investments have
maturities of less than two years. Investments in fixed and floating rate
interest earning instruments carry interest rate risk in that the fair value of
fixed rate securities may be adversely impacted if interest rates rise while
floating rate securities may produce less
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interest income if interest rates fall. A hypothetical 100 basis point increase
in interest rates would result in an approximate $5.8 million decrease in the
fair value of our debt securities classified as available-for-sale. Because the
interest rates on the note receivable from NBC and convertible note payable to
NBC are fixed, an increase in interest rates causes the fair value of the note
receivable to decline and the fair value of the convertible note payable to rise
and a decrease in interest rates has the opposite effect. A hypothetical 100
basis point increase in interest rates would result in a $12.5 million decrease
in the fair value of the note receivable from NBC and a $15.4 million increase
in the fair value of the note payable to NBC.
We invest in equity securities of privately held companies for the promotion
of business and strategic objectives. These investments are generally in
companies in the Internet industry. These investments are included in long-term
investments and are accounted for under the cost method when ownership is less
than 20%. For investments in which no public market exists, our policy is to
regularly review the operating performance, recent financing transactions and
cash flow forecasts for such companies in assessing the net realizable values of
the securities of these companies. We expect to identify and record impairment
losses on long-lived assets when events and circumstances indicate that such
assets might be impaired.
CERTAIN RISK FACTORS THAT MAY IMPACT FUTURE OPERATING RESULTS
This report on Form 10-Q contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated by such forward looking statements as a result of certain factors,
including those set forth below.
OUR FAILURE TO SUCCESSFULLY INTEGRATE THE OPERATIONS OF XOOM.COM, SNAP AND THE
INTERNET BUSINESSES CONTRIBUTED BY NBC COULD SERIOUSLY HARM OUR OPERATIONS
Our success will depend substantially on whether Xoom.com, Snap and the
Internet businesses contributed by NBC can be integrated by us in an efficient
and effective manner. We can provide no assurance that this will occur. The
combination of our online properties will require, among other things, the
technological integration of our Web sites, which include NBCi.com, Xoom.com,
Snap.com, NBC.com, NBC-IN.com and VideoSeeker.com and the coordination of the
sales, marketing and research and development efforts of Xoom.com, Snap and the
Internet businesses contributed by NBC.
Some of the factors contributing to the risks attendant to integration are:
- difficulties and expenses of integrating operations, technology and
personnel into our operations while preserving the goodwill of our
businesses;
- the additional financial resources that may be needed to fund our
operations;
- the potential disruption caused to the businesses of Xoom.com, Snap and
the Internet businesses contributed by NBC by the need to dedicate
management and other resources to completing the transactions;
- our ability to retain employees; and
- the difficulty of creating and maintaining uniform standards, controls,
procedures and policies.
We cannot assure you that we will be able to integrate our businesses
smoothly or successfully. The integration of operations will continue to require
significant management resources, which may distract attention from our
day-to-day operations.
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WE CANNOT ASSURE YOU THAT WE WILL BE PROFITABLE BECAUSE WE HAVE A LIMITED
OPERATING HISTORY AND OUR BUSINESSES ALSO HAVE LIMITED OPERATING HISTORIES AND
A HISTORY OF LOSSES
We and the businesses that were combined to form us have limited operating
histories. We were launched in November 1999, Xoom.com was founded in
April 1996, the Snap.com Web site was launched in September 1997, and NBC.com,
NBC-IN.com and VideoSeeker.com began operations in August 1995, October 1997 and
May 1998, respectively. NBC launched CNBC.com in June 1999. In addition,
Xoom.com, Snap and the Internet businesses contributed by NBC have not achieved
positive annual operating cash flows, and we expect to incur net losses for the
foreseeable future.
Because of the limited operating histories of our businesses and the
uncertain nature of the rapidly changing markets we serve, future results of
operations cannot be predicted. Moreover, we have difficulties forecasting our
revenue potential and operating expenses based on the limited historical
financial data of our businesses.
We currently expect that our operating expenses will continue to increase
significantly as we expand our sales and marketing operations, continue to
build, develop and extend our online brands, fund greater levels of product
development, develop and commercialize additional media properties, and acquire
complementary businesses and technologies. Accordingly, we will need to increase
revenues to be profitable. As a result, we may experience significant losses on
a quarterly and annual basis. If our actual revenue is lower than predicted, we
may be unable to adjust our operating expenses accordingly. If revenues do not
grow as expected or increases in expenses are not in line with forecasts, our
business, results of operations and financial condition could be seriously
harmed. If our operating results in any period fall below the expectations of
securities analysts and investors, the market price of our shares would likely
decline.
OUR BUSINESSES WILL BE SUBJECT TO ALL OF THE RISKS AND DIFFICULTIES FREQUENTLY
ENCOUNTERED BY EARLY STAGE COMPANIES
The prospects of our businesses are subject to all of the risks and
difficulties frequently encountered by early stage companies in new and rapidly
evolving markets, particularly those involved in the Internet and in e-commerce.
These risks include the following uncertainties and potential adverse
developments:
- the uncertainty of the level of use of the Internet and online services
and the acceptance of the Internet and other online services and products
such as those we offer;
- the lack of success of our proposed business model on the Internet;
- our failure to continue to build, develop and extend our online brands;
- our inability to obtain needed financing;
- higher than anticipated marketing costs that we will need to incur to
build, maintain and enhance our online brands;
- our inability to generate significant advertising, e-commerce or premium
service revenue;
- our inability to maintain and increase levels of traffic and membership on
our Web sites or to manage rapidly expanding operations effectively;
- the emergence of new services offered by our competitors that affect the
level of traffic on our Web sites and our ability to expand our membership
base;
- our inability to predict demand for products and services we offer and to
optimize advertising inventory levels accordingly;
- our inability to meet minimum guaranteed impressions under advertising
agreements;
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- our failure to adapt to the mix of types of advertising we will sell and
developments relating to advertising on the Web;
- our failure to anticipate and adapt to a developing Internet market and
increased competition;
- our inability to upgrade, develop and deploy our network, systems and
infrastructure and attract new personnel in a timely and effective manner;
and
- the failure of our server and networking systems to handle traffic on our
Web sites efficiently.
THE MAJORITY OF OUR CUSTOMERS ARE INTERNET COMPANIES AND OUR BUSINESS WILL BE
SERIOUSLY HARMED IF THE INTERNET DOES NOT BECOME A VIABLE COMMERCIAL
MARKETPLACE
The majority of our customers are Internet companies that are dependent upon
the acceptance of the Internet as a viable commercial marketplace. If the use of
the Internet for e-commerce transactions and as an advertising medium does not
continue to grow, we could lose a substantial portion of our customer base,
which would seriously harm our business and financial condition.
WE ANTICIPATE OUR BUSINESS WILL FLUCTUATE FROM QUARTER TO QUARTER DUE TO OUR
NEAR-TERM RELIANCE ON SHORT-TERM ADVERTISING AGREEMENTS AND SEASONAL
FLUCTUATIONS, WHICH COULD HARM OUR RESULTS OF OPERATIONS
In the near-term, a substantial portion of our net revenue is expected to be
from short-term advertising contracts, usually one to two months in length. That
means our quarterly operating results will be a function of the contracts we
enter into within the quarter and our ability to adjust spending in light of any
net revenue shortfalls. As a result, the cancellation of even a small number of
advertising contracts could significantly affect our operating results. Our
operating expenses are likely to increase significantly over the near term. To
the extent that our expenses increase but our revenues do not, our business,
operating results and financial condition may be seriously harmed.
Advertising revenues are also subject to seasonal fluctuations.
Historically, advertisers spend less in the first and third calendar quarters
and user traffic on online media properties has been lower during the summer and
during year-end vacation and holiday periods. As a result, we expect our results
of operations to fluctuate throughout the year, which may significantly harm our
business and financial condition.
OUR ADVERTISING REVENUE MAY BE AFFECTED BY THE LOSS OF TRAFFIC ON OUR WEB SITES
Advertising revenue is linked to the level of traffic on our Web sites, so
if traffic is less than the level expected by our advertising customers, revenue
from this source could be reduced. We will have some advertising contracts that
include a guaranteed minimum number of impressions on our Web sites. Reduced
traffic on our Web sites would cause us to fall short in meeting these minimum
requirements and, as a result, we may give credits to our advertisers and reduce
advertising rates, which would lead to a reduction in our revenue from
advertising.
OUR FAILURE TO ATTRACT ADVERTISING REVENUE IN QUANTITIES AND AT RATES THAT ARE
SATISFACTORY TO US COULD HARM OUR BUSINESS
We expect to derive a significant portion of our revenue from the sale of
on-air and online advertisements, including co-branded commercials, banners,
buttons, windows and text links. We are uncertain whether Web advertising will
continue to grow at a rate that will support expansion in our revenue. The
Internet as a marketing and advertising medium has not been available for a
sufficient period of time to gauge accurately its effectiveness as compared with
traditional media. Many of our suppliers and advertisers have only limited
experience with the Web as a marketing and advertising medium.
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The ability to generate significant advertising revenues will depend upon:
- the development of a large base of users of services possessing
demographic characteristics attractive to advertisers;
- the ability to continue to develop and update effective advertising
delivery and measurement systems; and
- advertising rates, which may fall based on increased competition from
online companies and offline media.
No standards have yet been widely accepted for the measurement of the
effectiveness of Web-based advertising. Advertisers may determine that banner
advertising, which currently comprises a substantial portion of our revenues, is
not an effective advertising medium. If other forms of Web-based advertising
prove more popular than banner advertisements, we may not be able to change our
operations to take advantage of such forms. Advertising filter software programs
are available that limit or remove advertising from an Internet user's desktop.
Such software, if generally adopted by users, may adversely affect the viability
of advertising on the Internet. Our advertising customers may not accept the
internal and third-party measurements of impressions received by advertisements
on our online media properties and such measurements may contain errors. We rely
primarily on our internal advertising sales force for domestic advertising
sales, which involves additional risks and uncertainties, including risks
associated with the recruitment, retention, management, training and motivation
of sales personnel. As a result of these factors, we may not be able to sustain
or increase advertising sales levels. Failure to do so may harm our business,
operating results and financial position.
WE ARE IN A HIGHLY COMPETITIVE INDUSTRY AND SOME OF OUR COMPETITORS MAY BE MORE
SUCCESSFUL IN ATTRACTING AND RETAINING CUSTOMERS
The market for Internet products and services is highly competitive.
Generally, there are no substantial barriers to entry in these markets; however,
the ability to secure financial resources necessary to promote brand awareness
is increasingly becoming a barrier to entry in the market in which we compete.
We expect that competition will continue to intensify. Negative competitive
developments could seriously harm our business and the trading price of our
Class A common stock. In addition, our competitors may still have superior or
more attractive product offerings.
We compete with many other providers of online navigation, information and
community services, such as Yahoo! (including GeoCities and Broadcast.com),
America Online (including AOL.com, Netcenter and ICQ), AltaVista, Excite@Home,
Disney (including the GO Network, which is jointly operated with Infoseek),
Lycos (including HotBot and Tripod) and Microsoft Corporation (including
msn.com).
Our businesses compete directly with a great number of other Internet sites
and other media companies across a wide range of different online services with
advantages in technical expertise, brand recognition and other factors,
including:
- metasearch services and software applications that allow a user to search
the databases of several directories and catalogs simultaneously;
- database vendors that offer information search and retrieval capabilities
with their core database products;
- Web-based e-mail and instant messaging services either on a stand alone
basis or integrated into other products and media properties;
- online merchant hosting services and the entry of an increasing number of
companies selling goods and services on the Internet;
- online content Web sites such as ESPN.com and ZDNet.com;
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- online local interactive content Web sites, such as Excite@Home's City
Guides, Lycos City Guides, America Online's Digital City, Ticketmaster
Online-CitySearch and Yahoo! Get Local;
- online video broadcast services, such as CNN VideoSelect, RealNetworks and
FoxNews;
- business portals such as Onvia, Digital Work, Office.com and
Smartonline.com;
- online community Web sites, such as iVillage, Tripod, WhoWhere, GeoCities
and theglobe.com; and
- potential new entrants in any one or all of these areas, or new areas not
considered.
In order to effectively compete, we may need to expend significant internal
engineering resources or acquire other technologies and companies to provide
such capabilities. Any of these acquisitions could be dilutive to our
stockholders.
Our carriage agreement with CNET limits CNET's ability to compete with Snap
in providing a broad based information, navigation and content aggregation
service. These restrictions, however, will no longer apply after May 9, 2000. As
a result, CNET could become a competitor of Snap. Competition from CNET could
seriously harm our business.
IF OUR INVESTMENT OF RESOURCES IN DEVELOPING AND PROMOTING OUR ONLINE BRANDS IS
NOT SUCCESSFUL, THE RESULTS OF OUR OPERATIONS COULD BE SERIOUSLY HARMED
As the number of Internet sites grows, brand recognition will play an
increasingly important role in the success of Internet companies. Establishing
and promoting our online brands in the face of pressures from our competitors
will be critical to further developing our member and user base as well as
various strategic and commercial relationships. We will need to continue to
devote substantial financial and other resources to increase and maintain the
awareness of our online brands among members, advertisers and e-commerce
partners through:
- Web advertising and marketing;
- traditional media advertising campaigns in television, print, radio and
billboards; and
- providing a high quality user experience.
For this purpose, we have agreed to purchase at least $405.0 million of
promotional services from NBC over a four-year period to develop and promote our
online brands as well as our products and services. Through March 31, 2000, we
have spent $36.9 million on such promotional services. Our results of operations
could be seriously harmed if this investment of financial and other resources in
developing and promoting our online brands does not generate a corresponding
increase in net revenue, or if the expense of developing and promoting our
online brands becomes excessive.
IF FUTURE ACQUISITIONS ARE NOT SUCCESSFUL, OR IF WE ARE NOT ABLE TO STRUCTURE
FUTURE ACQUISITIONS IN A FINANCIALLY EFFICIENT MANNER, THERE COULD BE AN
ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS
Acquiring complementary businesses, products and technologies is an integral
part of our business strategy. We are and will continue to be engaged in
exploring potential acquisitions both of publicly traded and privately held
companies. This acquisition strategy will subject us to integration risks
similar to those we face in integrating our current businesses. In addition, the
success of the acquisitions will be dependent upon the ability of our management
to maximize our financial and strategic position when incorporating the
acquiring company's technology or businesses. Any of these risks could prevent
us from realizing significant benefits from our acquisitions.
In addition, we may invest in business areas in which we do not currently
compete. Such acquisitions represent greater risks as we would be entering
markets, at potentially great expense, where we have little
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or no direct prior experience. Accordingly, such acquisitions, if unsuccessful,
could have a significant adverse impact on our financial condition and the price
of our Class A common stock. Even if we believe an acquisition is in our best
interest, investors or securities analysts may disagree and the size of a
potential acquisition could adversely impact the price of our Class A common
stock. We may also engage in other forms of financial transactions, such as
spin-offs or initial public offerings of common stock of our subsidiaries. These
transactions or large acquisitions could effectively change our corporate
structure, without providing our stockholders an opportunity to vote on the
transaction. We cannot assure that such acquisition or investment strategies, if
implemented, will prove successful.
We will face increased competition with other entities for desirable
acquisition targets. Like several of our competitors and other Internet
companies, we expect to issue common stock in future acquisitions. If the market
price of our Class A common stock suffers declines which are disproportionate
relative to our competitors or fails to keep pace with any increases in the
price of the stock of our competitors, we may not be able to compete with other
entities for desirable acquisition candidates. Our inability to acquire
complementary businesses, products and technologies may seriously harm our
business and results of operations.
In addition, issuing Class A common stock in acquisitions will dilute our
existing stockholders, while the use of cash will deplete cash reserves. We
anticipate that we will be unable to account for future acquisitions under the
"pooling of interests" method of accounting and, therefore, expect to incur
significant, one-time write-offs and amortization charges. These write-offs and
charges would decrease our future earnings or increase our future losses. Due to
all of the foregoing, our inability to structure acquisitions in a financially
efficient manner may seriously harm our business and results of operations.
THE USE OF A COMMUNITY PLATFORM IS UNPROVEN AND DEPENDS ON MAINTAINING AND
EXPANDING OUR MEMBERSHIP BASE; WE DO NOT KNOW WHETHER OUR COMMUNITY PLATFORM
WILL BE VIABLE AND PROFITABLE
A part of our business model relies on using our community platform and
membership base to generate revenues from different sources. To be profitable,
we will need to provide goods and services that are attractive to our members,
advertisers and vendors. We had previously relied on member-generated content
and the "grassroots" voluntary promotional efforts of our members to develop and
maintain our profile as a community site. A decline in voluntary promotional
activities by the members or member-generated content could make our community
services less attractive.
We cannot be sure that Internet users will continue to be interested in
communities on the Web, or that direct e-mail marketing will prove to be a
profitable or effective method of selling goods and services.
WE WILL NOT BE ABLE TO SUSTAIN THE RAPID GROWTH OF OUR INTERNET PROPERTIES
Although Xoom.com and Snap have experienced rapid growth in net revenues,
members, customers and reach in recent periods, these growth rates are likely
not sustainable. These growth rates will likely decrease and are not indicative
of future growth rates we may experience.
ANY FAILURE OF OUR NETWORK INFRASTRUCTURE COULD SERIOUSLY HARM OUR RESULTS OF
OPERATIONS
Our success depends upon the capacity, reliability and security of our
networking hardware and software infrastructure. Any failure in our networking
hardware and software infrastructure could significantly and adversely impact
the results of our operations.
Our businesses have developed systems for maintaining their Web sites,
processing transactions and managing orders internally. If, in the future, we
cannot modify these systems to accommodate increased traffic and an increased
volume of transactions and orders, we could suffer from slower response times,
problems with customer service and delays in reporting accurate financial
information.
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We use network servers that are housed separately by application at Exodus
Communications, Inc. in Santa Clara, California and GlobalCrossing Global Center
in Sunnyvale, California. Our Web sites are connected to the Internet via
multiple links 24 hours a day, seven days per week by Exodus and GlobalCrossing
Global Center. Exodus and GlobalCrossing Global Center also provide and manage
power and maintain the correct environment for our networking and server
equipment. We manage and monitor our servers and network remotely from our
headquarters in San Francisco, California. We strive to rapidly develop and
deploy high-quality tools and features into our systems without interruption or
degradation in service.
Although agreements with hosting companies will give us remedies for service
interruptions, we cannot guarantee that:
- we will have uninterrupted access to the Internet;
- our members and users will be able to reach our Web sites; or
- communications via our Web sites will be secure.
Any disruption in the Internet access provided by our hosting companies, or
any interruption in the service that our hosting companies receive from other
providers, or any failure of our hosting companies to handle higher volumes of
Internet users to our Web sites, could seriously harm our business, results of
operations and financial condition.
Despite precautions taken by our businesses and by the companies that host
our Web sites, our systems are susceptible to natural and man-made disasters
such as earthquakes, fires, floods, power loss and sabotage. Our systems also
may be vulnerable to disruptions from computer viruses and attempts by hackers
to penetrate our network security.
We are covered by insurance for loss of income from some of the events
listed above, but this insurance may not be adequate to cover all instances of
system failure. We also have insurance against loss of income due to
earthquakes, but the amount of such insurance may be insufficient, especially
given the frequency and magnitude of earthquakes in Northern California where
our primary facilities and servers are located.
Any of the events listed above could cause interference, delays, service
interruptions or suspensions in our business, and as results, seriously harm our
business and results of operations.
We must continue to expand and adapt our system infrastructure to keep pace
with the increase in the number of members who use the free services we provide.
Demands on our infrastructure that exceed current forecasts could result in
technical difficulties with our Web sites. Any system failure that interferes
with access to our Web sites and use of the free services we provide could
diminish the level of traffic on our Web sites. Continuing or repeated system
failures could impair our reputation and our brand names and reduce our commerce
and advertising revenue. At present, we do not know if we will be able to scale
the systems to handle a larger amount of traffic at higher transmission speeds.
Expanding the network infrastructure will require substantial financial,
operational and management resources, all of which could harm our financial
results and operations.
If, in the future, we cannot modify these systems to accommodate increased
traffic and an increased volume of transactions and orders, we could suffer
slower response times, problems with customer service and delays in reporting
accurate financial information. Any of these factors could significantly and
adversely impact the results of our operations.
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DIFFICULTIES WE MAY ENCOUNTER IN DEALING WITH OUR GROWTH AND EXPANSION COULD
SERIOUSLY HARM OUR RESULTS OF OPERATIONS
Our strategy is to continue growing our membership and user base at a rapid
pace. If this growth continues, we will experience a significant strain on our
resources because of:
- the need to manage relationships with various strategic partners,
technology licensors, members, advertisers and other third parties;
- difficulties in hiring and retaining skilled personnel necessary to
support our businesses;
- the need to train and manage a growing employee base; and
- pressures for the continued development of our financial and information
management systems.
Difficulties we may encounter in dealing successfully with the above risks
could seriously harm our operations. In addition, in the second quarter of 2000
we expect to move our headquarters to a new facility in San Francisco. The move
could cause disruption of our business or otherwise divert management's
attention, which could harm our financial results.
THE SUCCESSFUL OPERATION OF OUR BUSINESS DEPENDS UPON THE SUPPLY OF CRITICAL
ELEMENTS FROM OTHER COMPANIES
We depend substantially upon third parties for several critical elements of
our business, including technology, order fulfillment, content development and
distribution activities.
TECHNOLOGY: We continue to license technology and related databases from
third parties for some elements of our properties, including, among others,
technology underlying the delivery of stock quotes and current financial
information, chat services, street mapping, telephone listings and similar
services. We expect to experience interruptions and delays in service and
availability for such elements, from time to time. Furthermore, we are and
expect to be dependent on hardware suppliers for prompt delivery, installation
and service of servers and other equipment used to deliver our products and
services. Any errors, failures or delays experienced in connection with these
third-party products and information services could negatively affect our
relationship with users and adversely affect our brands and business, and could
expose us to third party liability.
ORDER FULFILLMENT: We continue to rely on other companies for critical
aspects of our e-commerce business. For example, Banta Global Turnkey
Corporation is primarily responsible for fulfilling orders for products and
services sold via our Web sites and in response to direct e-mail marketing. If
our relationship with Banta were to terminate without sufficient advance notice,
our operations would be negatively affected, even if we were able to quickly
establish a relationship with a comparable vendor to fulfill orders. The success
of our specific e-mail direct e-commerce campaigns depends on the timely supply
of inventory by the manufacturers and suppliers of the products we offer for
sale to our members. The failure of the suppliers on whom we depend would
adversely affect the results of our operations.
CONTENT DEVELOPMENT: A key element of our strategy involves the
implementation of our branded online properties targeted for specific interest
areas, demographic groups and geographic areas. In these efforts, we rely on
content development and localization efforts of third parties. We cannot
guarantee that the third parties will effectively implement these properties, or
that their efforts will result in significant revenue to us. Any failure of
these parties to develop and maintain high-quality and successful media
properties also could hurt our brands.
DISTRIBUTION RELATIONSHIPS: In order to create traffic for our online
properties and make them more attractive to advertisers and consumers, we expect
to have distribution agreements and informal relationships with leading Web
browser providers and portals, operators of online networks and leading Web
sites, manufacturers of Internet devices and computer manufacturers. These
distribution arrangements typically
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are not exclusive, and may be terminated upon little or no notice. Third parties
that provide distribution typically charge fees or otherwise impose additional
conditions on the listing of our online properties. Any failure to
cost-effectively obtain distribution could seriously harm our business, results
of operations and financial condition.
PLANNED INTERNATIONAL OPERATIONS ARE SUBJECT TO RISKS THAT COULD SERIOUSLY HARM
OUR RESULTS OF OPERATIONS
We have been establishing and plan to continue establishing operations or
forming business partnerships in other parts of the world. We have very limited
experience in international markets and may not be able to compete effectively
in international markets. The expansion of operations into international markets
will require substantial management attention and financial resources. We cannot
be certain that our investment in establishing operations in other countries
will produce desired levels of revenue. In addition, international operations
are subject to other inherent risks and problems, including:
- the impact of recessions in economies outside the United States;
- slower adoption of the Internet by users and advertisers in foreign
countries;
- greater difficulty in collecting accounts receivable;
- higher costs to develop new or specialized content;
- widely varied and changing regulatory requirements;
- difficulties and costs of staffing and managing foreign operations;
- reduced protection for intellectual property rights and enforcement of
other legal rights in some countries;
- political and economic instability;
- continued acceptance of the Euro;
- potential adverse tax effects;
- fluctuations in currency exchange rates; and
- difficulty in maintaining effective communications due to distance,
language and cultural barriers.
Some or all of the above factors could seriously harm our operations.
TO BE SUCCESSFUL IN THE CONTINUALLY EVOLVING MARKET FOR ONLINE SERVICES, WE MUST
CONTINUE TO ENHANCE OUR PROPERTIES AND DEVELOP NEW ONES
Rapid technological change, changing customer needs, frequent new product
and service introductions and evolving industry standards characterize the
Internet market. These market characteristics could render our existing
services, technology and systems obsolete. We must continually improve the
performance features and reliability of our services to respond to evolving
market demands and competition. Our business, operating results and financial
condition would be seriously harmed if we are unable to respond in a
cost-effective and timely manner to changing market conditions or customer
requirements.
To remain competitive, we must continue to enhance and improve the
functionality, features and content of our Web sites. We may not be able to
successfully maintain competitive user response times or implement new features
and functions, as these changes will likely involve the development of
increasingly complex technologies. Personalized information services, such as
our Web-based e-mail services, message boards, stock portfolios and our
community features, require significantly greater expenses than our general
services. We cannot guarantee that these higher expenses will be offset by
additional revenues.
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A key element of our business strategy is the development and introduction
of new branded online properties targeted for specific user groups with
particular demographic characteristics and geographic concentration. We may not
be successful in developing, introducing and marketing such products or media
properties and such properties may not achieve market acceptance, enhance our
brand name recognition or increase user traffic. Furthermore, enhancements of or
improvements to our Web sites or new media properties may contain undetected
errors that require significant design modifications, resulting in a loss of
customer confidence and user support and a decrease in the value of our brand
name. If we fail to effectively develop and introduce new properties, or those
properties fail to achieve market acceptance, our business, results of
operations and financial condition could be seriously harmed.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS AND
FINANCIAL CONDITION MAY BE SERIOUSLY HARMED
We view our technology as proprietary and will seek to protect it under
existing United States and international laws relating to protection of our
intellectual property. We will also develop internal procedures to control
access to and dissemination of our proprietary information. Despite our
precautions, third parties may succeed in misappropriating our intellectual
property or independently developing similar intellectual property. Protecting
our intellectual property against infringement could result in substantial legal
and other costs and could divert our limited management resources and attention,
any of which could adversely impact our business and the results of our
operations.
Some of the technology to be incorporated into our Web sites is based on
technology licensed from third parties. As we continue to introduce new
services, we may need to license additional technology. If we are unable to
license needed technology in a timely manner and on commercially reasonable
terms, we could experience delays and reductions in the quality of our services,
all of which could seriously harm our business and results of operations. Our
reputation and the value of our proprietary information could also be adversely
affected by actions of third parties to whom we license our proprietary
information and intellectual property. If someone asserts a claim relating to
proprietary technology or information against us, it may be necessary to seek a
license to such intellectual property. We cannot assure you, however, that we
will be able to obtain such licenses on commercially reasonable terms, if at
all. The failure to obtain any necessary licenses or other rights could
seriously harm our business and results of operations.
Each of our businesses has been subject to claims that they have allegedly
infringed the proprietary rights of third parties, and we cannot assure you that
third parties will not assert claims against us or our businesses in the future.
These claims, whether or not meritorious, sometimes result in litigation and
could become a drain on our management and financial resources. If successful,
claims of this nature could subject us to liability for money damages as well as
injunctive relief restricting our use of intellectual property important to our
operations, and could ultimately cause us to lose rights to some of our
intellectual property. Any of these events could seriously harm our business and
results of operations.
WE COULD BE SUBJECT TO LIABILITY FOR ONLINE CONTENT THAT MAY NOT BE COVERED BY
OUR INSURANCE
The nature and breadth of information disseminated on our Web sites and
through the sites of our members could expose us to liability in various areas,
including claims relating to:
- product information and reviews we offer;
- the content and publication of various materials based on defamation,
libel, negligence, personal injury and other legal theories;
- copyright or trademark infringement and wrongful action due to the actions
of third parties;
- use of third party content made available through our Web sites or through
content and material posted by members on their home pages or in chat
rooms and bulletin boards; and
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- damages arising from the use or misuse of the free e-mail services we will
offer.
Claims of these kinds against us could result in us incurring substantial
costs and could also be a drain on our financial and other resources. If the
number or severity of claims of this nature were significant, we would need to
implement measures to reduce our exposure and potential liability. In addition
to being a drain on our resources, this could also require taking measures that
could make our services less attractive to our members and visitors. This in
turn could reduce traffic on our Web sites, negatively impact our member and
user base, and reduce our revenue from e-commerce and advertising. Our general
liability insurance may be insufficient to cover expenses and losses arising in
connection with any claims against us. To the extent our insurance coverage does
not cover liability or expenses we incur, our business and results of operations
would be seriously harmed.
E-COMMERCE ACTIVITIES MAY EXPOSE US TO UNCERTAIN LEGAL RISKS AND POTENTIAL
LIABILITIES
As part of our business, we enter into agreements with sponsors, content
providers, service providers and merchants under which we are entitled to
receive a share of revenue from the purchase of goods and services by users of
our Web sites. In addition, we provide hosting and other services to online
merchants. These types of arrangements may expose us to additional legal risks
and uncertainties, including potential liabilities relating to the products and
services offered by such third parties.
Although we maintain liability insurance, insurance may not cover these
claims or may not be adequate. Even to the extent these types of claims do not
result in material liability, investigating and defending claims is expensive
and, if the number or severity of claims defended were significant, this could
seriously harm our business and operations.
WE COULD FACE LIABILITY FROM LEGAL PROCEEDINGS OF OUR SUBSIDIARIES THAT COULD
SERIOUSLY HARM OUR BUSINESS AND RESULTS OF OPERATIONS
Because Snap and Xoom.com are our wholly-owned subsidiaries, claims made
against Snap and Xoom.com will impact our financial condition and results of
operations. An unfavorable outcome in any matters that we are currently
litigating could seriously harm our business and results of operations and the
market price of our Class A common stock.
IF OUR CAPITAL IS INSUFFICIENT TO PROMOTE OUR BUSINESS, AND IF WE CANNOT OBTAIN
NEEDED FINANCING, WE WILL BE UNABLE TO PROMOTE OUR BRAND NAMES, EXPLOIT
ACQUISITION OPPORTUNITIES AND OTHERWISE MAINTAIN OUR POSITION RELATIVE TO OUR
COMPETITORS
We believe we have sufficient capital resources to support our operations at
least for the next 12 months. Nevertheless, we anticipate that we will need to
raise funds to maintain and develop our position in the marketplace. It may be
difficult or impossible for us to obtain financing on favorable terms, if at
all. Neither GE nor its affiliates, including NBC, has made any commitment to
provide financing to us. We cannot assure you that there will be a market for
our securities at any time when we may seek to raise needed funds by equity
financing. Raising funds by issuing equity securities or convertible debt
securities will dilute the percentage ownership of our stockholders, subject to
NBC's exercise of its preemptive rights, and we cannot assure you that an
offering of securities would be completed successfully. Also, new securities we
may issue could have rights senior to the rights of our common stock. If we
cannot obtain needed financing, we could jeopardize our ability to complete the
integration of our Web properties and otherwise meet our business plan and we
will likely be unable to promote our brand names, take advantage of acquisition
opportunities and otherwise maintain our position relative to that of our
competitors, which could seriously harm our business and results of operations.
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IF IMPORTANT STRATEGIC RELATIONSHIPS ARE DISCONTINUED FOR ANY REASON, OUR
BUSINESS AND FINANCIAL CONDITION WOULD BE SIGNIFICANTLY HARMED
Although strategic relationships are a key factor in our overall business
strategy, our strategic partners may not view their relationships with us as
significant to their own business. There is a risk that parties with whom we
have strategic alliance agreements may not perform their obligations as agreed.
We expect that our arrangements with future strategic partners generally will
not establish minimum performance requirements but instead rely on the voluntary
efforts of our partners. In addition, most of our agreements with strategic
partners are terminable by either party with little notice. If important
strategic relationships are discontinued for any reason, our business and
results of operations may be harmed.
RISKS RELATED TO OUR ORGANIZATIONAL STRUCTURE AND OUR RELATIONSHIP WITH NBC
BECAUSE NBC HAS SIGNIFICANT INFLUENCE OVER OUR MANAGEMENT AND STRATEGY, THE
ABILITY OF THE HOLDERS OF OUR CLASS A COMMON STOCK TO DETERMINE THE OUTCOME OF
MATTERS REQUIRING A STOCKHOLDER VOTE IS REDUCED
As of March 31, 2000 NBC and its affiliates owned approximately 40.3% of our
outstanding common stock. If the convertible notes held by NBC are converted,
this ownership interest could increase up to approximately 45.5%, although such
conversion cannot occur until November 30, 2000. Even before the convertible
notes are converted, however, CNET has agreed to vote its shares of Class A
common stock in the same manner as NBC with respect to change in control
transactions involving us, enabling NBC to determine the outcome of such vote.
In addition, NBC and its affiliates have rights to maintain their percentage
ownership in the event of dilutive issuances of stock by us. As a result, NBC
may be able to exercise significant influence in the future over many matters
requiring approval by our stockholders, including amending our certificate of
incorporation and bylaws, the issuance of additional shares of our Class B
common stock or the adoption of a stockholders rights plan.
In addition, NBC and its affiliates have the right to elect six of the 13
members of our board of directors, and will retain that right so long as they
own 20% of the outstanding shares of our common stock. Following conversion of
the convertible notes, for so long as NBC and its affiliates own 35% or more of
the outstanding shares of our common stock, NBC and its affiliates will have the
right to elect seven of the 13 members of our board of directors. As long as the
NBC directors do not constitute a majority of our board of directors, several
significant corporate actions by us will require the approval of our directors
appointed by NBC, including a change in control of us or our significant
subsidiaries and significant sales of assets or securities. For as long as there
are any Class B directors, those directors will have the exclusive ability to
remove our chief executive officer and to appoint our chief financial officer
and our general counsel. In addition, Robert C. Wright, the president and chief
executive officer of NBC, serves as our chairman of the board. Many of these
rights are embodied in our certificate of incorporation, and as a result any
amendment will require a vote of our stockholders.
Because of these rights, NBC has the ability to exert significant influence
over our management and strategy. While our directors appointed by NBC are
obligated by Delaware law to act in the best interests of NBCi and its
stockholders, NBC's views concerning our management and strategy may be
different from the views held by directors appointed by the holders of shares of
our Class A common stock.
NBC MAY FREELY ENGAGE IN MANY ACTIVITIES THAT MAY BE COMPETITIVE WITH OUR
BUSINESS
Under our brand integration and license agreement with NBC, NBC is obligated
not to co-brand the portal, community and e-commerce services of our competitors
with specified NBC marks, and NBC may not operate a general portal service, a
broad-based community service or a broad-based e-commerce service other than
through us. However, apart from the restrictions in the brand integration and
license agreement, our certificate of incorporation provides that NBC has the
right to engage in, and has no duty to refrain from engaging in, the same or
similar activities or lines of business as we do, to do business with our
potential or actual customers and suppliers and to employ any of our employees.
In the event that
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NBC learns of a potential corporate opportunity to both NBC and us, NBC has no
duty to communicate or present the opportunity to our management. NBC will have
no liability to us or our stockholders for breach of any fiduciary duty that may
be applicable to NBC as one of our major stockholders for acquiring or pursuing
any corporate opportunity for itself, directing the opportunity to another
person or company, or failing to communicate information about the opportunity
to us.
Moreover, our certificate of incorporation provides that persons who are
directors or officers of us and also of NBC are deemed to have fully satisfied
their fiduciary duties to us with respect to corporate opportunities of NBC and
NBCi if they act consistently with the policy regarding corporate opportunities
set forth in our certificate of incorporation. In particular, a corporate
opportunity offered to any person who is a director, but not an officer, of us
and who is also a director or officer of NBC belongs to us only if offered in
writing to such person solely in his or her capacity as our director, and
otherwise such corporate opportunity belongs to NBC.
These provisions are effective for so long as NBC owns at least 20% of our
common stock and at least one person who is one of our directors or officers is
also a director or officer of NBC. In addition, amendment of these provisions of
our certificate of incorporation in a manner adverse to NBC's interests requires
the approval of holders of at least 80% of our outstanding common stock.
Although as our principal stockholder NBC has a significant financial
interest in our success, NBC also has the objective of maximizing value for its
parent company, General Electric, and the stockholders of GE. There may be
circumstances under which NBC's corporate objectives conflict with our
operations or strategy, and, except as may otherwise be required by law, NBC has
no obligation to act in a manner beneficial to us in the event of such a
conflict. For example, NBC has entered into a distribution and marketing
agreement with ValueVision International, Inc. with respect to its home shopping
and transactional television service, and an affiliate of NBC is a principal
shareholder of ValueVision. NBC is also the parent company of the CNBC cable
channel and owns 90% of CNBC.com LLC. Moreover, NBC distributes its owned and
licensed television programming and other content over a wide array of media in
varied formats, including videostreaming and other methods of distribution of
video content via the Internet, and there is no limitation on its ability to
continue to do so or to develop new methods of distribution or delivery or forms
of content independently from us. In addition, the value of NBC-IN.com will be
dependent on our ability to negotiate content and distribution relationships
with NBC's affiliated television stations, including the 13 stations owned and
operated by NBC. Although NBC is obligated to comply with the terms of the brand
integration and license agreement, we cannot assure you that NBC will not engage
in activities that are competitive with or otherwise negatively affect our
business. Any such action by NBC may seriously harm our business, operating
results and financial condition.
NBC'S RELATIONSHIPS WITH OUR STRATEGIC PARTNERS LIMIT OUR ABILITY TO ENTER INTO
STRATEGIC RELATIONSHIPS AND TO PROVIDE NEWS, INCLUDING SPORTS AND BUSINESS
NEWS, ON OUR WEB SITES
NBC's relationships with our existing strategic partners and our future
relationships with partners may limit our ability to enter into other strategic
relationships or provide services that we might otherwise offer on our Web
sites. For example, NBC has a relationship with Microsoft that limits in
significant respects the ability of NBC and its affiliates to provide news,
including sports and business news, on any Web site other than MSNBC.com.
Consequently, our ability to develop and present news content on our sites is
limited, and our efforts must be consistent with these restrictions. In
addition, the ability of NBC and its affiliates to deliver business news video
on an interactive basis via the Internet is restricted by the terms of NBC's
joint ventures with Microsoft and Dow Jones. We may enter into similar or other
non-competition arrangements with strategic partners that may limit our ability
to engage in or provide some activities or services.
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WE ARE SIGNIFICANTLY DEPENDENT UPON THE QUALITY OF THE NBC BRAND
A deterioration in the quality or value of the NBC brand or the termination
of the brand integration and license agreement may seriously harm our business,
operating results and financial condition. Our licensed use of the NBC brand is
a critical aspect of our efforts to retain, attract and expand our user and
advertiser base, both through the advertising and promotion we will purchase on
the NBC television network as well as the inclusion of the NBC brand on our Web
sites. The television industry is characterized by a small number of
participants with significant financial resources and substantial experience in
a wide variety of media, and consequently is extremely competitive. The success
of each television network is often dependent upon its ability to deliver
programming that appeals to viewers. Television programming often requires
substantial lead time to develop and produce, and seasonal network schedules are
typically designed months before actually being aired. This limits a network's
flexibility to alter programming to respond to changes in viewers' tastes. The
relative ranking of television networks fluctuates continuously. Each network
conducts its own research and obtains research from third parties in order to
evaluate its appeal to a complex variety of demographic groups, and each network
uses this information to promote its television programming and negotiate
pricing with advertisers. While NBC has enjoyed significant success in broadcast
and cable television and we expect it to continue to devote efforts to
continuing this success, we cannot be assured that NBC television programming
will continue to appeal to viewers generally, or to the particular demographic
groups valued by advertisers. Consequently, we cannot predict the extent to
which use of the NBC brand will have a positive effect on our ability to attract
users and advertisers. In addition, NBC may terminate the brand integration and
license agreement if, among other reasons, its percentage ownership in us
declines to 5% or less, or if there is a change in control of us.
THE SIGNIFICANT INFLUENCE OF NBC AND ANTI-TAKEOVER PROVISIONS IN OUR CHARTER
DOCUMENTS COULD NEGATIVELY IMPACT OUR STOCKHOLDERS
NBC has significant influence with respect to our management and strategy.
As a result of NBC's influence, NBC is able to exercise effective control over
significant corporate transactions, which may delay or prevent a change in
control. NBC and its affiliates have enhanced voting rights with respect to the
approval of significant corporate acquisition transactions. In the event that a
third party initiates a tender offer for our common stock or we agree to enter
into any transaction that would result in a change of control, the limitations
on NBC's ability to acquire additional shares in us, to solicit proxies in
connection with an amendment to our certificate of incorporation or for the
election of Class A directors, or to propose to the holders of the Class A
common stock a merger, business combination or similar transaction terminate.
Moreover, NBC can terminate our use of the NBC trademarks and logos in the event
of a change of control of us. Other provisions of our charter documents could
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our stockholders. Any of these factors could impede or prevent
transactions that would cause a change in control in us. These anti-takeover
provisions might discourage bids for our common stock at a premium over the
common stock market price and adversely affect the trading price of our common
stock.
MARKET AND INDUSTRY RISKS
THE E-COMMERCE MARKET IS EXTREMELY COMPETITIVE AND ANY INCREASE IN COMPETITION
COULD ADVERSELY AFFECT OUR ABILITY TO MAINTAIN OR IMPROVE OUR POSITION IN THE
MARKET RELATIVE TO THAT OF OUR COMPETITORS
The e-commerce market is extremely competitive, and we expect intense
competition from an ever increasing number of companies selling goods and
services over the Internet. These competitors include: traditional retailers,
various mail-order retailers, Internet-focused retailers, manufacturers that
sell directly over the Internet and many software companies. We expect new
competitors to emerge.
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Increased competition from these and other sources could require us to
respond by establishing pricing, marketing and other programs or seeking out
additional strategic alliances or acquisitions that may be less favorable to us
than we otherwise establish or obtain. Such outcomes could seriously harm our
business, prospects, financial condition and results of operations.
MARKET CONSOLIDATION HAS CREATED AND CONTINUES TO CREATE COMPANIES THAT ARE
LARGER AND HAVE GREATER RESOURCES THAN US
In the recent past, there have been a number of significant acquisitions and
strategic plans announced among and between our competitors, including:
- America Online's acquisition of Netscape and its proposed merger with Time
Warner, Inc.;
- CMGI's acquisition of 83% of AltaVista;
- Disney's acquisition of the remaining interest in Infoseek not already
owned by Disney;
- @Home Network's acquisition of Excite; and
- Yahoo!'s acquisitions of GeoCities and Broadcast.com.
The effects these completed and pending acquisitions and strategic plans
have on us cannot be predicted with accuracy, but some of these competitors are
aligned with companies that are larger or more well established than us. In
addition, these competitors include television broadcasters with access to
unique content and substantial marketing resources. As a result, these
competitors may have access to greater financial, marketing and technical
resources than us.
RECENT ALLIANCES HAVE RESULTED IN COMPETITORS OFFERING A BROADER VARIETY OF
INTERNET RELATED SERVICES THROUGH MORE INTEGRATED WEB SITES AND THE USE OF
PROMINENT SEARCH BUTTONS TO DIRECT TRAFFIC, WHICH MAY MAKE IT MORE DIFFICULT
FOR INTERNET USERS TO FIND AND USE OUR PRODUCTS AND ONLINE PROPERTIES
Recent acquisitions and alliances have resulted and will result in greater
competition as more users of the Internet consolidate to fewer services that
incorporate search and retrieval features. In addition, providers of software
and other Internet products and services are incorporating search and retrieval
features into their offerings. For example, Web browsers offered by Microsoft
and by America Online's Netscape increasingly incorporate prominent search
buttons that direct search traffic to competing services. These features could
make it more difficult for Internet users to find and use our products and
services.
In the future, Netscape, Microsoft and other browser suppliers may also more
tightly integrate products and services similar to ours into their browsers or
their browsers' pre-set home pages. Microsoft recently announced that it will
feature and promote Internet search services provided by Alta Vista and signed a
long term partnership with LookSmart to provide directory services in the
Microsoft Network and other Microsoft online properties. Such search services
may be tightly integrated into future versions of the Microsoft operating
system, the Internet Explorer browser and other software applications, and
Microsoft may promote such services within the Microsoft Network or through
other Microsoft affiliated end-user services such as WebTV Networks. Each of
these situations creates a potential competitive advantage over us because
Internet navigational offerings of competitors may be more conveniently accessed
by users.
OUR SUCCESS WILL DEPEND UPON THE GROWTH IN THE USE OF THE INTERNET FOR
E-COMMERCE TRANSACTIONS
Our future success depends on the continued growth in the use of the
Internet and the Web for e-commerce transactions. Use of the Internet for retail
transactions is a recent development, and the continued demand and growth of a
market for services and products via the Internet is uncertain. The
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Internet may ultimately prove not to be a viable commercial marketplace for a
number of reasons, including:
- unwillingness of consumers to shift their purchasing from traditional
retailers to online purchases;
- lack of acceptable security for data and concern for privacy of personal
information;
- limitations on access and ease of use;
- congestion leading to delayed or extended response times;
- inadequate development of Web infrastructure to keep pace with increased
levels of use; and
- increased or excessive government regulation.
Because of these factors, we do not know whether our business model will
ultimately be viable and profitable. Also, in the future, some Internet access
providers may act to block or limit the use of e-mail for direct e-commerce
solicitations, whether at their own initiative or at the request of users. Our
members may also choose not to receive our e-mail offerings or may fail to
respond to such offerings. If these blocking or limiting programs become
popular, there could be a negative effect upon the viability of e-commerce on
the Web and on our business, results of operations and financial condition.
COMPETITION FOR QUALIFIED PERSONNEL IS INTENSE, AND THE LOSS OF KEY PERSONNEL
AND OUR INABILITY TO ATTRACT AND RETAIN ADDITIONAL QUALIFIED PERSONNEL COULD
HARM OUR RESULTS OF OPERATIONS
Our success depends to a significant degree upon the contributions of our
executive management team, as well as our technical, marketing and sales
personnel. Due to the integration of the operations of our businesses, our
employees may have different job responsibilities and may be required to work
with new people. To date, we have experienced and may continue to experience
loss of key management and other personnel due to the change in job
responsibilities and work environment. Our employees may voluntarily terminate
their employment with us at any time. Our success will depend upon our ability
to attract and retain additional highly qualified management, technical, sales
and marketing and customer support personnel. Locating personnel with the
combination of skills and attributes required to carry out our strategy is often
a lengthy process. In addition, competition for qualified employees is intense,
specifically in the areas of Web site development, design and integration. The
loss of key personnel, or the inability to attract and retain additional,
qualified personnel, could significantly harm our results of operations.
THE YEAR 2000 PROBLEM COULD CAUSE OUR SOFTWARE PRODUCTS AND THOSE OF OUR
SUPPLIERS TO MALFUNCTION, WHICH COULD PREVENT OR LIMIT ACCESS TO OUR ONLINE
PROPERTIES AND COULD BE COSTLY TO REMEDY
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software that
records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. Residual Year 2000 problems may
result in miscalculations, data corruption, system failures or disruption of
operations. To date we have not experienced any significant Year 2000 problems
in our internal technology systems or with the vendors of systems we believe to
be critical to our business. In addition, we believe that it is unlikely we will
experience any significant Year 2000 problems in the future.
However, our applications operate in complex network environments and
directly and indirectly interact with a number of other hardware and software
systems. We cannot predict whether Year 2000 unknown errors or defects that
affect the operation of software and systems that we use in operating our
businesses will arise in the future. If residual Year 2000 problems cause the
failure of any of the technology, software or systems necessary to operate our
business, we could lose customers, suffer significant disruptions in our
business, lose revenues and incur substantial liabilities and expenses. We
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could also become involved in costly litigation resulting from Year 2000
problems. This could seriously harm our business, financial condition and
results of operations.
REGULATORY AND LEGISLATIVE RISKS
IMPOSITION OF NEW TAXES OR FEES BY FEDERAL, STATE OR FOREIGN GOVERNMENTS ON
INTERNET TRANSACTIONS OR ON THE USE OF THE INTERNET AS A MEANS OF
COMMUNICATION COULD ADVERSELY AFFECT US
Imposition of sales or other similar taxes on our sales of merchandise in
states or countries where we ship goods could harm our results of operations.
Imposition of new taxes or fees by federal, state or foreign governments on
Internet transactions or on the use of the Internet as a means of communication
could also adversely affect us.
PRIVACY CONCERNS, GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD HAVE AN
ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS
Laws and regulations that apply directly to communications or commerce over
the Internet are becoming more prevalent. The most recent session of the United
States Congress resulted in Internet laws regarding privacy and the protection
of children, copyrights, taxation and the transmission of sexually explicit
material. The European Union recently enacted its own privacy regulations and
other countries may do so in the future. In addition, new laws may be adopted in
the United States and in other countries covering issues such as music
licensing, broadcast licensing fees and the characteristics and quality of
Internet services. Laws regulating the Internet, however, remain largely
unsettled, even in areas where there has been some legislative action. It may
take years to determine whether and how existing laws that govern intellectual
property, privacy, libel and taxation apply to the Internet. The development of
laws governing these areas, or the application to the Internet of existing laws
not designed for the Internet, may decrease the growth in the use of the
Internet. In addition, the growth and development of the e-commerce market may
prompt calls for more stringent consumer protection laws, both in the United
States and abroad, that may impose additional burdens on companies conducting
business online. The adoption or modification of laws or regulations relating to
the Internet could harm our business.
The Federal Communications Commission is currently reviewing its regulatory
positions on data transmissions over telecommunications networks and could seek
to impose some form of telecommunications carrier regulation on
telecommunications functions of information services. State public utility
commissions generally have declined to regulate information services, although
the public service commissions of some states continue to review potential
regulation of such services. Future regulation or regulatory changes could have
an adverse effect on our business and results of operations.
TRADING RISKS
OUR STOCK PRICE MAY BE VOLATILE BASED ON A NUMBER OF FACTORS, SOME OF WHICH ARE
NOT IN OUR CONTROL
The trading price of our Class A common stock has been and may continue to
be highly volatile. For example, during the quarter ended March 31, 2000, the
closing price of our Class A common stock ranged from 100 5/32 to 37 3/4, and
subsequently closed at 17 3/16 on April 17, 2000. Our stock price could be
subject to wide fluctuations in response to a variety of factors, many of which
are out of our control, including:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations;
- new products or services offered by us or our competitors;
- changes in financial estimates by securities analysts;
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- conditions or trends in the Internet industry and the portal and community
services segment in particular;
- our announcement of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
- additions or departures of key personnel; and
- sales of securities by us or our stockholders, which could occur at any
time after the closing of the transaction.
In addition, The Nasdaq National Market, where most publicly held Internet
companies are traded, has recently experienced extreme price and volume
fluctuations. These fluctuations often have been unrelated or disproportionate
to the operating performance of these companies. The trading prices of many
Internet companies continue to trade at multiples of earnings or revenues
substantially above historic levels. These trading prices and multiples may not
be sustainable. These broad market and industry factors may cause the market
price of our Class A common stock to decline, regardless of our actual operating
performance. In the past, following periods of volatility in the market price of
an individual company's securities, securities class action litigation often has
been instituted against that company. This type of litigation, if instituted,
could result in substantial costs and a diversion of management's attention and
resources.
SALES OF SUBSTANTIAL AMOUNTS OF OUR CLASS A COMMON STOCK IN THE PUBLIC MARKET
COULD LOWER OUR STOCK PRICE
As of March 31, 2000 our directors and executive officers, including Chris
Kitze, together with CNET and NBC and their affiliates beneficially owned
approximately 58.4% of our outstanding common stock and sales of substantial
amounts of these shares in the public market or the prospect of these sales may
have depressed and may continue to depress the market price of our Class A
common stock and impair our ability to sell equity or equity securities in the
future at a time and price that we deem appropriate.
In addition, we issued 4,083,021 shares of our Class A common stock, or
approximately 6.7% of our outstanding common stock, pursuant to an exemption by
reason of Section 3(a)(10) of the Securities Act, in exchange for the
outstanding capital stock of AllBusiness. These shares remain subject to
specific contractual restrictions, but the sale of these shares when free of
restriction, or the sale of shares issued in connection with other closed,
pending or potential acquisitions or investments, or the prospect of any of
these sales, could further depress the market price of our Class A common stock
and also impair our ability to sell equity or equity securities in the future or
at a time and price that we deem appropriate.
THE TRACES TRANSACTION COULD CAUSE OUR STOCK PRICE TO DECLINE
The market price volatility of our Class A common stock could increase or
the price could become depressed if investors sell their shares of our Class A
common stock in anticipation of the potential distribution into the market of
additional shares of Class A common stock as a result of the delivery of shares
of Class A common stock under the terms of the Trust Automatic Common Exchange
Securities, or TRACES, by the Automatic Common Exchange Securing Trust, by the
possible sale of shares of Class A common stock by investors who view the TRACES
as a more attractive means of equity participation in us and by hedging or
arbitrage trading activity that may develop involving the TRACES and the
Class A common stock.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1999, Snap filed a complaint against CityAuction, Inc. and
Ticketmaster Online-CitySearch in connection with an agreement entered into
between Snap and CityAuction to promote CityAuction's
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online auction site in exchange for monetary compensation and warrants to
purchase shares of CityAuction. This matter was pending in Superior Court in San
Francisco, California. In April 2000, Snap, CityAuction, Inc. and Ticketmaster
Online-CitySearch settled the litigation under confidential terms.
International Microcomputer Software, Inc. ("IMSI") has notified NBCi in a
letter dated February 8, 2000 that it intends to make a claim for
indemnification pursuant to a contract with Xoom.com in connection with a
$2.6 million judgment entered in favor of Imageline. The judgment resulted from
an arbitration award pertaining to a contract between Imageline and IMSI. NBCi
has notified IMSI that it denies any duty to indemnify IMSI in connection with
its contractual dispute with Imageline. Additional third parties may ask NBCi to
indemnify them in connection with disputes with Imageline.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In February 2000, the Company issued an aggregate of 123,737 shares of its
Class A common stock in exchange for the outstanding capital stock of Catalyst
Advisors, Inc. The shares were issued pursuant to an exemption by reason of
Section 4(2) of the Securities Act of 1933. These sales were made without
general solicitation or advertising. Each purchaser was an accredited investor
or a sophisticated investor (either alone or through its representative) with
access to all relevant information necessary.
In March 2000, the Company issued an aggregate of 5,080,917 shares of its
Class A common stock in exchange for the outstanding capital stock of
AllBusiness.com, Inc. The shares were issued pursuant to an exemption by reason
of Section 3(a)(10) of the Securities Act of 1933, after the Company obtained a
permit for the issuance of the shares pursuant to a fairness hearing held by the
California Commissioner of Corporations. These sales were made without general
solicitation or advertising.
In March 2000, the Company issued an aggregate of 150,978 shares of its
Class A common stock and 43,142 options to purchase shares of Class A common
stock in exchange for the outstanding capital stock and stock options of Husdawg
Communications, Inc. The shares were issued pursuant to an exemption by reason
of Section 4(2) of the Securities Act of 1933. These sales were made without
general solicitation or advertising. Each purchaser was an accredited investor
or a sophisticated investor (either alone or through its representative) with
access to all relevant information necessary.
In March 2000, the Company issued an aggregate of approximately 268,900
shares of its Class A common stock to William Lansing as inducement for his
entering into employment with the Company and in connection with his appointment
as Chief Executive Officer. 50% of the shares shall vest on the second
anniversary of the date of Mr. Lansing's employment agreement and the remaining
50% of the shares shall vest on the third anniversary of the date of
Mr. Lansing's employment agreement. The shares were issued pursuant to an
exemption by reason of Section 4(2) of the Securities Act of 1933. These sales
were made without general solicitation or advertising. Mr. Lansing was an
accredited investor or a sophisticated investor (either alone or through his
representative) with access to all relevant information necessary.
ITEM 5. OTHER INFORMATION
(a) Adoption of 2000 Non-Qualified Stock Option Plan
On May 1, 2000, NBCi's board of directors adopted the NBC Internet, Inc.
2000 Non-Qualified Stock Option Plan. The following is a summary of the
principal features of this stock option plan. This summary does not purport to
be a complete description of all the provisions of the stock option plan.
PURPOSES
The purposes of the stock option plan are to promote the interests of NBCi
and its stockholders by:
- attracting and retaining exceptional employees and consultants of NBCi and
its subsidiaries;
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- motivating those individuals with performance-related incentives to
achieve longer-range performance goals; and
- enabling those individuals to participate in the long-term growth and
financial success of NBCi.
ADMINISTRATION/ELIGIBLE PARTICIPANTS
This stock option plan is administered by an administrator, defined as the
board of directors of NBCi or one or more committees designated by the board of
directors. The current administrator of the stock option plan is the
compensation committee.
Directors and officers of NBCi are not eligible to become participants in
this stock option plan. Any employee or consultant to NBCi or any of its
subsidiaries, other than a director or officer of NBCi, is eligible to be
designated a participant under this stock option plan.
The committee has the authority to determine the participants to whom
options shall be granted under the stock option plan. The board of directors of
NBCi may delegate to one or more officers of NBCi the authority to grant
options.
NUMBER OF SHARES AUTHORIZED UNDER THE STOCK OPTION PLAN
The stock option plan currently authorizes the grant of options for up to
2,000,000 shares of NBCi's Class A common stock. The number of shares reserved
for issuance under the stock incentive plan is subject to adjustment to avoid
dilution or enlargement of intended benefits in the event of certain significant
corporate events.
All awards under the stock option plan will be in the form of nonqualified
stock options.
SUBSTITUTE AWARDS
Options may be awarded under the stock option plan in assumption of, or in
substitution for, outstanding stock-based awards previously granted by NBCi or
its affiliates or a company acquired by NBCi or its affiliates with which NBCi
or its affiliates combines. The number of shares underlying any such assumed or
substitute options will be counted towards the aggregate number of shares of
Class A common stock available for grant under options granted under this stock
option plan.
TERMS AND CONDITIONS OF AWARDS UNDER THE STOCK OPTION PLAN
Options granted under the stock option plan will be subject to the terms and
conditions, vesting requirements, form and timing of exercise, as applicable, as
may be determined by the administrator and specified in the applicable award
agreement or thereafter; provided that the exercise price per share of any
option granted under the stock option plan may not be less than 85% of the fair
market value per share on the date of grant.
Payment in respect of the exercise of an option granted under the stock
option plan may be made:
- in cash or its equivalent;
- through the delivery of a promissory note with such recourse, interest,
security and redemption provisions as the administrator deems appropriate;
- by exchanging shares of Class A common stock;
- subject to such rules as may be established by the administrator, through
delivery of irrevocable instructions to a broker to sell the shares being
acquired upon exercise of the option and to deliver to NBCi an amount
equal to the aggregate exercise price; or
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- by any combination of the foregoing, provided that the combined value of
the consideration received is at least equal to the aggregate exercise
price of the option.
TRANSFERABILITY
The administrator has the discretion under the stock option plan to provide
that options granted under the stock option plan may be transferred without
consideration to certain family members or trusts, partnerships or limited
liability companies in which the original grantee or his or her family members
own a 50% beneficial interest or a 50% voting interest.
CHANGE IN CONTROL
In the event of a change in control, as defined below, each currently
outstanding option under the stock option plan automatically will have its
vesting accelerated by 12 months on the effective date of the corporate
transaction. Upon consummation of the corporate transaction, all outstanding
options will terminate unless such option is assumed or replaced with a
comparable award or cash incentive program by the successor corporation or its
affiliates or such award is purchased for cash. If within 12 months of a change
in control, a participant is subsequently terminated or leaves for good reason,
each outstanding option of the participant will become fully vested and
exercisable.
Under the stock option plan a "change in control" is defined as any merger,
consolidation or other form of business combination in which the stockholders of
NBCi do not own at least 50% of the combined voting power in the surviving
entity, the acquisition of 50% of the total combined voting power of NBCi's
outstanding securities or a change in a majority of the board of directors over
a period of three years by reason of one or more contested elections, except
that any increase in securities ownership by NBC or its successors does not
constitute a change in control.
The stock option plan also provides for the accelerated vesting of
outstanding options held by participants primarily in the service of an
affiliated entity of NBCi, upon the sale, merger, consolidation or sale of
substantially all of the assets of such entity.
AMENDMENT TO STOCK OPTION PLAN
The board of directors of NBCi may amend, suspend or terminate the stock
option plan; provided that no amendment or termination will be made without
stockholder approval if such approval is necessary to comply with any tax or
regulatory requirement applicable to the stock option plan. In addition, no
action that would adversely affect the rights of any participant to options
previously granted under the stock option plan will be effective without the
participant's consent.
FEDERAL INCOME TAX CONSEQUENCES RELATING TO STOCK OPTIONS
The following summary of the federal income tax consequences of the grant
and exercise of nonqualified stock options awarded under the stock option plan,
and the disposition of shares of Class A common stock purchased pursuant to the
exercise of such stock options, is intended to reflect the current provisions of
the Internal Revenue Code and the regulations thereunder.
This summary is not intended to be a complete statement of applicable law,
nor does it address state and local tax considerations.
No income will be realized by an optionee when a nonqualified stock option
is granted. Upon exercise of a nonqualified stock option, the optionee will
recognize ordinary compensation income in an amount equal to the excess, if any,
of the fair market value of the underlying stock over the option exercise price
at the time of exercise, referred to as the "spread". The spread will be
deductible by NBCi for federal income tax purposes. The optionee's tax basis in
the underlying shares acquired by exercise of a nonqualified stock option will
equal the exercise price plus the amount taxable as compensation to the
optionee. Upon sale of
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the shares received by the optionee upon exercise of the nonqualified stock
option, any gain or loss is generally long-term or short-term capital gain or
loss, depending on the holding period. The optionee's holding period for shares
acquired pursuant to the exercise of a nonqualified stock option will begin on
the date of exercise of such option.
The payment by an optionee of the exercise price, in full or in part, with
previously acquired shares of Class A common stock will not affect the tax
treatment of the exercise described above. No gain or loss generally will be
recognized by the optionee upon the surrender of the previously acquired shares
to NBCi, and shares received by the optionee, equal in number to the previously
surrendered shares of Class A common stock, will have the same tax basis as the
shares surrendered to NBCi and will have a holding period that includes the
holding period of the shares surrendered. The value of the shares of Class A
common stock received by the optionee in excess of the number of shares
surrendered to NBCi will be taxable to the optionee. Such additional shares of
Class A common stock will have a tax basis equal to the fair market value of
such additional shares as of the date ordinary income is recognized, and will
have a holding period that begins on the date ordinary income is recognized.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The exhibits listed in the accompanying Index to Exhibits are filed as part
of this Report of Form 10-Q.
(b) REPORTS ON FORM 8-K
The Company filed the following reports on Form 8-K during the three months
ended March 31, 2000.
1. On January 12, 2000, the Company filed a report on Form 8-K/A-3 related
to the NBCi transactions. This amendment was filed for the purpose of including
financial statements and pro forma financial information and should be read in
conjunction with the Form 8-K dated as of December 1, 1999.
2. On January 24, 2000, the Company filed a report on Form 8-K announcing
its financial results for the three months ended December 31, 1999.
3. On January 27, 2000, the Company filed a report on Form 8-K announcing
its financial results for the three months and year ended December 31, 1999.
4. On February 2, 2000, the Company filed a report on Form 8-K announcing
it had entered into an agreement to acquire AllBusiness.com.
5. On March 28, 2000 the Company filed a report on Form 8-K announcing the
appointment of William Lansing as Chief Executive Officer, and the appointment
of former Chief Executive Officer, Chris Kitze, as Vice Chairman.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized,
<TABLE>
<S> <C> <C>
NBC INTERNET, INC.
Date: May 11, 2000
By: /S/ ANTHONY ALTIG
------------------------------------------
</TABLE>
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EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT PAGE
- --------------------- -------- ------------
<C> <S> <C>
2.1 Agreement and Plan of Contribution and Merger dated as of
May 9, 1999 by and among the Registrant, Xoom.com, Inc.,
CNET, Inc., Snap! LLC and Xenon 3, Inc.(1)................
2.2 First Amendment to Agreement and Plan of Contribution and
Merger dated as of October 20, 1999 by and among the
Registrant, Xoom.com, Inc. CNET, Inc., Snap! LLC and Xenon
3, Inc.(1)................................................
2.3 Second Amended and Restated Agreement and Plan of
Contribution, Investment and Merger dated July 8, 1999 by
and among the Registrant, National Broadcasting Company,
Inc., GE Investments Subsidiary, Inc., Neon Media
Corporation and Xoom.com, Inc.(1).........................
2.4 First Amendment to Second Amended and Restated Agreement and
Plan of Contribution, Investment and Merger dated October
20, 1999 by and among the Registrant, National
Broadcasting Company, Inc., GE Investments Subsidiary,
Inc., Neon Media Corporation and Xoom.com, Inc.(1)........
3.1 Restated Certificate of Incorporation of the
Registrant(2).............................................
3.2 Amended and Restated Bylaws of the Registrant(2)............
4.1 Reference is made to Exhibits 3.1 and 3.2...................
4.2 Specimen Stock Certificate of the Registrant(1).............
10.1 Form of Indemnification Agreement between the Registrant and
each of its executive officers and directors(1)...........
10.2 Agreement of Sublease between Xoom.com, Inc. and Cornerstone
Internet Solutions Company d/b/a USWeb Cornerstone dated
August 1, 1998(1).........................................
10.3 Assignment of Lease by Xaos Tools, Inc. and Acceptance of
Assignment and Assumption of Lease by Xoom.com, dated July
31, 1998(1)...............................................
10.4 Office Lease for One Beach Street, San Francisco, California
between No. 1 Beach Street, LLC and CNET, Inc. dated
September 24, 1997(1).....................................
10.5 Governance and Investor Rights Agreement between the
Registrant and National Broadcasting Company, Inc.(3).....
10.6 Standstill Agreement between the Registrant and CNET,
Inc.(3)...................................................
10.7 Brand Integration and License Agreement between NBC
Multimedia, Inc. and National Broadcasting Company, Inc.,
dated May 8, 1999(1)......................................
10.8 Stock Option Agreement between Xoom.com, Inc. and National
Broadcasting Company, Inc., dated May 9, 1999(1)..........
10.9 Voting Agreement among Xoom.com, Inc., National Broadcasting
Company, Inc., CNET, Inc., Chris Kitze and Flying Disc
Investments Limited Partnership, dated May 9, 1999(1).....
10.10 Voting and Right of First Offer Agreement between National
Broadcasting Company, Inc. and CNET, Inc.(3)..............
10.11 Loan Agreement between Xoom.com, Inc. and Sand Hill Capital,
LLC, dated as of November 3, 1998(1)......................
</TABLE>
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<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT PAGE
- --------------------- -------- ------------
<C> <S> <C>
10.12 Amended and Restated Letter Agreement between Bank of
America National Trust and Savings Association and Snap!
LLC, dated September 14, 1999(1)..........................
10.13 Agreement of Lease between Eleven Penn Plaza LLC and
Xoom.com, Inc., dated March 16, 1999(1)...................
10.14 Preferred Carriage Agreement by and between CNET, Inc.,
National Broadcasting Company, Inc., NBC Multimedia, Inc.
and Snap! LLC., dated June 30, 1998(1)...................
10.15 Addendum to Preferred Carriage Agreement between CNET, Inc.
and Snap! LLC, dated June 30, 1998(1).....................
10.16 Addendum to the Snap Agreements by and among CNET, Inc.,
National Broadcasting Company, Inc., NBC Multimedia, Inc.
and Snap! LLC., dated May 9, 1999(1).....................
10.17 Form of Severance Agreement by and between Xoom.com, Inc.
and Laurent Massa(1)......................................
10.18 1999 Stock Incentive Plan(1)................................
10.19 Stock Purchase Agreement by and between Xoom.com, Inc. and
National Broadcasting Company, Inc., dated June 11,
1999(1)...................................................
10.24 Employment Agreement by and between Xoom.com, Inc. and John
Harbottle, dated August 4, 1998(1)........................
10.25 Advertising Agreement between the Registrant and National
Broadcasting Company, Inc.(3).............................
10.26 Registration Rights Agreement by and among the Registrant,
CNET, Inc., National Broadcasting Company, Inc., GE
Investments Subsidiary, Inc., Flying Disc Investments
Limited Partnership and Chris Kitze(3)....................
10.27 $39,477,953 Subordinated Zero Coupon Convertible Debenture
due 2006(3)...............................................
10.28 $447,416,805 Subordinated Zero Coupon Convertible Debenture
due 2006(3)...............................................
10.29 $340,000,000 Term Note(3)...................................
10.30 Office Lease for 225 Bush Street, San Francisco, California
between OAIC Bush Street, LLC and Xoom.com, Inc. dated
August 13, 1999(1)........................................
10.31 Letter Agreement by and between Xoom.com, Inc. and Edmond
Sanctis, dated October 19, 1999(3)........................
10.32 Letter Agreement by and between Xoom.com, Inc. and Alan
Braverman, dated November 12, 1999(3).....................
10.33 Letter Agreement by and between Xoom.com, Inc. and John
McMenamin, dated November 17, 1999(3).....................
10.34 1999 Employee Stock Purchase Plan(3)........................
10.35 Employment Agreement by and between NBC Internet, Inc. and
William Lansing, dated March 23, 2000.....................
10.36 2000 Non-Qualified Stock Option Plan and form stock option
agreement.................................................
21.1 Subsidiaries of the Registrant(3)...........................
</TABLE>
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<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT PAGE
- --------------------- -------- ------------
<C> <S> <C>
27.1 Financial Data Schedule of NBC Internet, Inc................
</TABLE>
- ------------------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (Registration No. 333-82639) on July 12, 1999
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 333-91715) on November 29, 1999.
(3) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-94655) on January 14, 2000.
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Will Lansing
March 23, 2000
Page
March 23, 2000
Will Lansing
50 Cristofori Circle
Maple Plain, MN 55359
Dear Will:
We're delighted to offer you a position with NBC Internet, Inc. The following
outlines your compensation and benefit package and other terms of your
employment.
1. POSITION AND DUTIES. Your title will be Chief Executive Officer. In
this role, you will report to the Board of Directors of NBCi (the "Board"),
specifically to Bob Wright, Chairman of the Board. As CEO you will be
responsible for all strategic, operational, and financial aspects of running the
Company, as well as all duties customary to such position and such duties as may
be assigned to you by the Board, and you will be held accountable for delivering
the results expected by its Board and shareholders. In addition, the Company
will recommend that you be elected as a director of the Board of NBCi. You will
devote your full business time and attention to performing your duties to the
Company, except with respect to the duties you perform as a member of the boards
of directors of the entities listed on Exhibit A to this agreement, and in
accordance with NBCi policy.
2. SALARY. You will be entitled to an annual base salary of $800,000,
payable bi-monthly, which equates to $30,769.23 per pay period, less standard
payroll taxes and withholdings.
3. BONUS. You will be entitled to an annual bonus of up to $1,200,000,
with $900,000 guaranteed, and up to $300,000 discretionary, paid based on
achievement of written business objectives to be agreed upon annually between
you and NBCi's Board. Your guaranteed bonus will be paid quarterly, and your
discretionary bonus will be paid annually following the close of the year's
financial records. This will allow for quarterly fluctuations in the Company's
performance and operating results, with an eye toward determining the
discretionary bonus based on cumulative year-end results. Your bonus will be
pro-rated for 2000 based upon the portion of the year for which you are employed
by NBCi. You must be employed by NBCi on the date any quarterly or annual bonus
is payable to be eligible to receive such bonus payment.
4. START DATE. Your first day of employment will be March 27, 2000.
<PAGE>
5. STOCK OPTIONS. You will be granted an incentive stock option to
purchase 1,000,000 shares of NBCi Class A Common Stock at an exercise price
equal to the closing price of such stock on March 24, 2000. This option will be
subject to the terms and conditions of the NBCi 1999 Stock Incentive Plan and
the provisions set forth in paragraph 11 below. This option will vest over a
three-year period, with the first one-third shares vesting upon the first
anniversary of your employment start date, and the remainder vesting in equal
monthly installments over the remaining two years.
6. RESTRICTED STOCK GRANT. You will be granted the number of restricted
stock shares of NBCi Class A Common Stock valued at a total of $12,000,000,
based upon such stock's closing price on March 24, 2000, at no cost to you.
These shares will vest in the following installments: 50% of the shares will
vest on the completion of your second year of employment, and the remaining 50%
will vest on the completion of your third year of employment.
7. BENEFITS. You will receive all benefits available to peer officers. On
the first day of the month following your start date, you will be eligible to
participate in the NBCi Medical, Dental, Vision, Life, AD&D, and Long-Term
Disability plans. These benefits are also available for your dependents. You
will be eligible to participate in the NBCi 401(k) program in the next open
enrollment period, which starts the first day of each month. You will also be
provided with a daily car and driver service, at NBCi's expense, for purposes of
your personal transport to and from your home and our headquarters office in San
Francisco (or to other business-related destinations as required).
8. HOUSING LOAN. NBCi will offer you an interest-free loan in the amount
of $4,000,000, immediately upon your employment start date, for the sole purpose
of purchasing a primary residence in the local San Francisco Bay Area. This loan
will be forgiven in full by NBCi, resulting in ordinary income to you, on your
third anniversary with the company. This loan will be secured by a second
mortgage on your primary residence in the Bay Area, to be held by NBCi.
Termination of your employment by NBCi for cause (as defined below), or by you
without good reason (as defined below), prior to your third anniversary will
require you to repay the loan in full to NBCi prior to your last date of
employment. Termination of your employment by NBCi not for cause, or by you with
good reason, will result in the loan being forgiven in full as of the date of
termination.
9. RELOCATION. NBCi will cover your reasonable and customary relocation
expenses incurred in the course of moving your family to the Bay Area in
accordance with NBCi policy. This will include, but is not limited to, brokerage
fees for the sale of your existing residence, relocation services, items such as
round trip airfare for you and your family for house-hunting trip(s) as needed,
packing and shipping of your household goods and personal vehicle(s), temporary
housing and trips home for personal business and visits until your new residence
is purchased and ready for occupancy, and other related expenses.
10. PTO. You will accrue up to 15 days of PTO (paid time off) during your
first year of
<PAGE>
employment with NBCi, and 20 days of PTO each year thereafter. NBCi also offers
several paid holidays throughout the year.
11. TERM; TERMINATION. The term of this agreement shall be 3 years from
your employment start date. This agreement may be terminated by NBCi for cause
or by you for good reason on not less than 14 days' written notice. In the event
NBCi terminates this agreement for cause or you terminate this agreement without
good reason, you shall be entitled to receive only your accrued salary as of
your employment termination date, and all unvested shares of NBCi stock options
and NBCi restricted stock issued pursuant to this agreement or thereafter shall
cease vesting and be terminated or cancelled as of the employment termination
date. In the event NBCi terminates this agreement without cause or you terminate
this agreement for good reason, NBCi shall (a) immediately vest all of your
stock options and restricted stock granted pursuant to this agreement, and (b)
pay you the full amount of your base salary and guaranteed bonus through the end
of the term of this agreement, in a lump sum or series of payments, at NBCi's
discretion, and (c) forgive the loan described in paragraph 8 above; PROVIDED,
HOWEVER, that in consideration for such acceleration and payment(s) you agree to
give NBCi a full general release of claims.
For purposes of this agreement "cause" shall mean: gross misconduct in the
course of your employment; the commission of a willful act of fraud or
dishonesty in the course of your employment; your conviction of a crime
constituting a felony, or in respect of any act of fraud, dishonesty or moral
turpitude; your material breach of this agreement or the agreements described in
paragraphs 14 and 15 below; or your willful failure to perform your job duties,
which is not cured within 14 days after receiving written notice of such
failure.
For purposes of this agreement, "good reason" shall mean, subject to NBCi's
cure within 14 days after receiving written notice from you, if amenable to
cure: a change in your position or duties that results in a significant
diminution in your position, title or responsibilities; a substantial reduction
of the facilities and perquisites available to you immediately prior to such
reduction; a material reduction in cash compensation; a material reduction in
the kind/level of employee benefits; a relocation of your office of more than 50
miles; or a change in control of the Company pursuant to which you do not become
the CEO of the surviving entity.
12. NOTICE. You will be required to provide the company with a minimum of
six months' notice of (a) your intention to resign your employment without good
reason during the term of this agreement, or (b) your decision not to continue
your employment with NBCi after the expiration of this Agreement where NBCi has
offered to continue your employment as CEO on terms with respect to your base
salary, bonus and benefits that are not less favorable than such terms then in
effect. You will provide this notice in writing to the Chairman of the NBCi
Board, with a copy to NBCi's Senior Vice President of Human Resources. You
acknowledge that your failure to give NBCi such notice shall cause NBCi to
suffer material and irreparable harm, and therefore NBCi shall be entitled to
all appropriate injunctive relief, in addition to other remedies, in the event
of any such deficient notice.
<PAGE>
13. NON-COMPETITION; NON-SOLICITATION OF EMPLOYEES. You agree that during
the period of your employment with NBCi you will not perform any services or
engage in any activity, in any capacity, on behalf of any individual or entity,
that is competitive with the then current business activities of NBCi. You also
agree that for 1 year following the termination of your employment with NBCi,
whether by NBCi with or without cause or by you with or without good reason, you
will not perform any services or engage in any activity, in any capacity, on
behalf of any of the following companies: America Online, EXCITE@HOME, Lycos,
Microsoft or Yahoo, including their respective subsidiaries and any successors
in interest. In addition, you agree that during the period of your employment
with NBCi and for 1 year thereafter you will not solicit for employment, on
behalf of any individual or entity other than NBCi, any then current employee of
NBCi. Nothing in this agreement shall prohibit you from making investments on
your own behalf in any entity that is not competitive with the then current
business activities of NBCi.
14. NON-DISCLOSURE. Your employment with NBCi is conditioned on your
signing the attached NBCi Non-Disclosure Agreement. Please review this agreement
carefully.
15. PROPERTY RIGHTS. Your employment with NBCi is conditioned on your
signing the Company's Confidential Information and Property Rights Agreement.
16. IRCA. Your employment at NBCi is conditioned on your ability to
document your identity and authorization to work in the U.S. pursuant to the
Immigration Reform Control Act of 1986 ("IRCA"). Pursuant to IRCA you agree to
permit NBCi to inspect original documents that establish that you are authorized
to work in the U.S.
17. CONFIDENTIALITY. The provisions of this Agreement shall be held in
strictest confidence by NBCi and you and shall not be publicized or disclosed in
any manner whatsoever; PROVIDED, HOWEVER, that: (a) you may disclose this
Agreement to your immediate family; (b) the parties may disclose this Agreement
in confidence to their respective attorneys, accountants, auditors, tax
preparers, and financial advisors; (c) NBCi may disclose this Agreement as
necessary to fulfill standard or legally required corporate reporting or
disclosure requirements; and (d) the parties may disclose this Agreement insofar
as such disclosure may be necessary to enforce its terms or as otherwise
required by law.
18. RELEASE OF YOUR CURRENT EMPLOYMENT CONTRACT. This offer is contingent
upon your presentation to the undersigned of a written release from your current
employer, releasing you from all aspects, restrictions and encumbrances of your
current employment contract. You will be required to submit this release in
tandem with your acceptance of this offer, and prior to your employment start
date with NBCi. This letter includes all promises and agreements between you and
NBCi pertaining to your compensation, benefits and your employment relationship
with NBCi.
19. MISCELLANEOUS. This letter constitutes the full and complete agreement
between us with respect to your employment relationship with NBCi, and
supercedes and replaces any verbal
<PAGE>
agreements or commitments made prior to this date by any party. This agreement
can only be modified or amended in a writing signed by a duly authorized officer
of NBCi. This Agreement shall be construed and enforced under the laws of the
State of California.
If you wish to accept this offer of employment, please sign and date this letter
and return it to me along with the release of current employment contract
described above.
All of us would be thrilled to have you as a member of the NBC Internet team!
Sincerely,
Diane Cordova
Senior Vice President, Human Resources
I have read, understand, and agree to the foregoing terms.
Will Lansing Date
<PAGE>
EXHIBIT A
LIST OF BOARD POSITIONS
Digital River (NASDAQ: DRIV)
NetPerceptions (NASDAQ: NETP)
Big Star (NASDAQ: BGST)
Select Comfort (NASDAQ: SCSS)
Freeshop (NASDAQ: FSHP)
Perfect.com
RightNowTech
<PAGE>
NBC INTERNET, INC.
2000 NON-QUALIFIED STOCK OPTION PLAN
1. PURPOSES OF THE PLAN. The purposes of this Non-Qualified Stock
Option Plan are to attract and retain the best available personnel, to provide
additional incentive to Employees and Consultants and to promote the success of
the Company's business.
2. DEFINITIONS. As used herein, the following definitions shall
apply:
(a) "ADMINISTRATOR" means the Board or any of the
Committees appointed to administer the Plan.
(b) "AFFILIATE" and "ASSOCIATE" shall have the respective
meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange
Act.
(c) "APPLICABLE LAWS" means the legal requirements
relating to the administration of stock incentive plans, if any, under
applicable provisions of federal securities laws, state corporate and securities
laws, the Code, the rules of any applicable stock exchange or national market
system, and the rules of any foreign jurisdiction applicable to Awards granted
to residents therein.
(d) "AWARD" means the grant of an Option under the Plan.
(e) "AWARD AGREEMENT" means the written agreement
evidencing the grant of an Award executed by the Company and the Grantee,
including any amendments thereto.
(f) "BOARD" means the Board of Directors of the Company.
(g) "CAUSE" means, with respect to the termination by the
Company or a Related Entity of the Grantee's Continuous Service, that such
termination is for "Cause" as such term is expressly defined in a then-effective
written agreement between the Grantee and the Company or such Related Entity, or
in the absence of such then-effective written agreement and definition, is based
on, in the determination of the Administrator, the Grantee's: (i) refusal or
failure to act in accordance with any specific, lawful direction or order of the
Company or a Related Entity; (ii) unfitness or unavailability for service or
unsatisfactory performance (other than as a result of Disability); (iii)
performance of any act or failure to perform any act in bad faith and to the
detriment of the Company or a Related Entity; (iv) dishonesty, intentional
misconduct or material breach of any agreement with the Company or a Related
Entity; or (v) commission of a crime involving dishonesty, breach of trust, or
physical or emotional harm to any person. At least 30 days prior to the
termination of the Grantee's Continuous Service pursuant to (i) or (ii) above,
the Administrator shall provide the Grantee with notice of the Company's or such
Related Entity's intent to terminate, the reason therefor, and an opportunity
for the Grantee to cure such defects in his or her service to the Company's or
such Related Entity's satisfaction. During this 30 day (or longer) period, no
Award issued to the Grantee under the Plan may be exercised or purchased.
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(h) "CHANGE IN CONTROL" means a change in ownership or
control of the Company effected through any of the following transactions:
(i) a merger, consolidation or other form of
business combination, unless the business of the Company is continued following
any such transaction by a resulting company (which may be, but need not be, the
Company) and the stockholders of the Company immediately prior to such
transaction (the "Prior Stockholders") hold, directly or indirectly, at least
fifty percent (50%) of the total combined voting power of the resulting company
(there being excluded from the voting power held by the Prior Stockholders, but
not from the total voting power of the resulting company, any voting power
received by affiliates of a party to the transaction, other than the Company) in
their capacities as stockholders of the Company, but excluding any such
transaction that the Administrator determines shall not be a Change in Control;
or
(ii) the sale, transfer or other disposition of
all or substantially all of the assets of the Company (including the capital
stock of the Company's subsidiary corporations), but excluding any such
transaction that the Administrator determines shall not be a Change in Control;
or
(iii) acquisition by any person or related group
of persons (other than the Company or by a Company-sponsored employee benefit
plan) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange
Act) of securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities, but excluding any
such transaction that the Administrator determines shall not be a Change in
Control; or
(iv) a change in the composition of the Board
over a period of thirty-six (36) months or less such that a majority of the
Board members (rounded up to the next whole number) ceases, by reason of one or
more contested elections for Board membership, to be comprised of individuals
who are Continuing Directors;
PROVIDED, HOWEVER, that a Change in Control shall not occur as a result of an
increase in the securities ownership of National Broadcasting Company, Inc. or
its successor in interest.
(i) "CODE" means the Internal Revenue Code of 1986, as
amended.
(j) "COMMITTEE" means any committee appointed by the
Board to administer the Plan.
(k) "COMMON STOCK" means the Class A Common Stock of the
Company, except where other classes of stock are expressly referenced.
(l) "COMPANY" means NBC Internet, Inc., a Delaware
corporation.
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(m) "CONSULTANT" means any person (other than an Employee
or a Director, solely with respect to rendering services in such person's
capacity as a Director) who renders consulting or advisory services to the
Company or such Related Entity.
(n) "CONTINUING DIRECTORS" means members of the Board who
either (i) have been Board members continuously for a period of at least
thirty-six (36) months or (ii) have been Board members for less than thirty-six
(36) months and were elected or nominated for election as Board members by at
least a majority of the Board members described in clause (i) who were still in
office at the time such election or nomination was approved by the Board.
(o) "CONTINUOUS SERVICE" means that the provision of
services to the Company or a Related Entity in any capacity of Employee,
Director or Consultant, is not interrupted or terminated. Continuous Service
shall not be considered interrupted in the case of (i) any approved leave of
absence, (ii) transfers among the Company, any Related Entity, or any successor,
in any capacity of Employee, Director or Consultant, or (iii) any change in
status as long as the individual remains in the service of the Company or a
Related Entity in any capacity of Employee, Director or Consultant (except as
otherwise provided in the Award Agreement). An approved leave of absence shall
include sick leave, military leave, or any other authorized personal leave.
(p) "DIRECTOR" means a member of the Board or the board
of directors of any Related Entity.
(q) "DISABILITY" means that a Grantee would qualify for
benefit payments under the long-term disability policy of the Company or the
Related Entity to which the Grantee provides services regardless of whether the
Grantee is covered by such policy.
(r) "ELIGIBLE EMPLOYEE" means any Employee, other than an
Officer or Director.
(s) "EMPLOYEE" means any person who is an employee of the
Company or any Related Entity. The payment of a director's fee by the Company or
a Related Entity shall not be sufficient to constitute "employment" by the
Company.
(t) "EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended.
(u) "FAIR MARKET VALUE" means, as of any date, the value
of Common Stock determined as follows:
(i) Where there exists a public market for the
Common Stock, the Fair Market Value shall be (A) the closing price for a Share
for the last market trading day prior to the time of the determination (or, if
no closing price was reported on that date, on the last trading date on which a
closing price was reported) on the stock exchange determined by the
Administrator to be the primary market for the Common Stock or the Nasdaq
National Market, whichever is applicable or (B) if the Common Stock is not
traded on any such exchange or national market system, the average of the
closing bid and asked prices of a Share on the Nasdaq Small Cap Market for the
day prior to the time of the determination (or, if no such prices were
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<PAGE>
reported on that date, on the last date on which such prices were reported), in
each case, as reported in THE WALL STREET JOURNAL or such other source as the
Administrator deems reliable; or
(ii) In the absence of an established market for
the Common Stock of the type described in (i), above, the Fair Market Value
thereof shall be determined by the Administrator in good faith.
(v) "GOOD REASON" means the occurrence after a Change in
Control or a Related Entity Disposition of any of the following events or
conditions unless consented to by the Grantee:
(i) (A) a change in the Grantee's status, title,
position or responsibilities which represents a materially adverse change from
the Grantee's status, title, position or responsibilities as in effect at any
time within six (6) months preceding the date of a Change in Control or Related
Entity Disposition or at any time thereafter or (B) the assignment to the
Grantee of any duties or responsibilities which are materially and adversely
inconsistent with the Optionee's status, title, position or responsibilities as
in effect at any time within six (6) months preceding the date of a Change in
Control or Related Entity Disposition or at any time thereafter;
(ii) reduction in the Grantee's base salary to a
level below that in effect at any time within six (6) months preceding the date
of a Change in Control or Related Entity Disposition or at any time thereafter,
other than as part of a Company-wide reduction in salaries of employees
generally; or
(iii) requiring the Grantee to be based at any
place outside a 50-mile radius from the Grantee's job location or residence
prior to the Change in Control or Related Entity Disposition, except for
reasonably required travel on business which is not materially greater than such
travel requirements prior to the Change in Control or Related Entity
Disposition;
PROVIDED, HOWEVER, that reasons (i) and (ii) shall be applicable only with
respect to a Grantee who is an Employee, and not to a Grantee who is a
non-employee Director or a Consultant; and PROVIDED FURTHER, that an event or
condition described in (i) or (ii) shall not constitute "Good Reason" unless the
Grantee shall have given notice to the Company stating in writing that the
Grantee believes that event or condition is one described in this definition,
and the Company shall not have cured the same within 60 days after receipt of
the notice.
(w) "GRANTEE" means an Employee or Consultant who
receives an Award pursuant to an Award Agreement under the Plan.
(x) "IMMEDIATE FAMILY" means any child, stepchild,
grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling,
niece, nephew, mother-in-law, father-in-law, son-in law, daughter-in-law,
brother-in-law, or sister-in-law, including adoptive relationships, any person
sharing the Grantee's household (other than a tenant or employee), a trust in
which these persons have more than fifty percent (50%) of the beneficial
interest, a
4
<PAGE>
foundation in which these persons (or the Grantee) control the management of
assets, and any other entity in which these persons (or the Grantee) own more
than fifty percent (50%) of the voting interests.
(y) "INCENTIVE STOCK OPTION" means an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code.
(z) "NON-QUALIFIED STOCK OPTION" means an Option not
intended to qualify as an Incentive Stock Option.
(aa) "OFFICER" means a person who is an officer of the
Company or a Related Entity within the meaning of Section 16 of the Exchange Act
and the rules and regulations promulgated thereunder.
(bb) "OPTION" means an option to purchase Shares pursuant
to an Award Agreement granted under the Plan.
(cc) "PARENT" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(dd) "PLAN" means this 2000 Non-Qualified Stock Option
Plan.
(ee) "RELATED ENTITY" means any Parent, Subsidiary and any
business, corporation, partnership, limited liability company or other entity in
which the Company, a Parent or a Subsidiary holds a substantial ownership
interest, directly or indirectly.
(ff) "RELATED ENTITY DISPOSITION" means the sale,
distribution or other disposition by the Company, a Parent or a Subsidiary of
all or substantially all of the interests of the Company, a Parent or a
Subsidiary in any Related Entity effected by a sale, merger or consolidation or
other transaction involving that Related Entity or the sale of all or
substantially all of the assets of that Related Entity, other than any Related
Entity Disposition to the Company, a Parent or a Subsidiary.
(gg) "RULE 16b-3" means Rule 16b-3 promulgated under the
Exchange Act or any successor thereto.
(hh) "SHARE" means a share of the Common Stock or any
security into which the Common Stock shall have been converted.
(ii) "SUBSIDIARY" means a "subsidiary corporation,"
whether now or hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 10, below, the
maximum aggregate number of Shares which may be issued pursuant to Awards
initially shall be 2,000,000 Shares.
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<PAGE>
(b) Any Shares covered by an Award (or portion of an
Award) which is forfeited or canceled, expires or is settled in cash, shall be
deemed not to have been issued for purposes of determining the maximum aggregate
number of Shares which may be issued under the Plan. If any unissued Shares are
retained by the Company upon exercise of an Award in order to satisfy the
exercise price for such Award or any withholding taxes due with respect to such
Award, such retained Shares subject to such Award shall become available for
future issuance under the Plan (unless the Plan has terminated). Shares that
actually have been issued under the Plan pursuant to an Award shall not be
returned to the Plan and shall not become available for future issuance under
the Plan, except that if unvested Shares are forfeited, or repurchased by the
Company at their original purchase price, such Shares shall become available for
future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) PLAN ADMINISTRATOR.
(i) ADMINISTRATION BY BOARD OR COMMITTEE. The
Plan shall be administered by (A) the Board or (B) a Committee designated by the
Board, which Committee shall be constituted in such a manner as to satisfy the
Applicable Laws. Once appointed, such Committee shall continue to serve in its
designated capacity until otherwise directed by the Board. The Board may
authorize one or more Officers to grant such Awards and may limit such authority
as the Board determines from time to time.
(ii) ADMINISTRATION ERRORS. In the event an Award
is granted in a manner inconsistent with the provisions of this subsection (a),
such Award shall be presumptively valid as of its grant date to the extent
permitted by the Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to Applicable
Laws and the provisions of the Plan (including any other powers given to the
Administrator hereunder), and except as otherwise provided by the Board, the
Administrator shall have the authority, in its discretion:
(i) to select the Eligible Employees and
Consultants to whom Awards may be granted from time to time hereunder;
(ii) to determine whether and to what extent
Awards are granted hereunder;
(iii) to determine the number of Shares be covered
by each Award granted hereunder;
(iv) to approve forms of Award Agreements for use
under the Plan;
(v) to determine the terms and conditions of any
Award granted hereunder;
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<PAGE>
(vi) to amend the terms of any outstanding Award
granted under the Plan, provided that any amendment that would adversely affect
the Grantee's rights under an outstanding Award shall not be made without the
Grantee's written consent;
(vii) to construe and interpret the terms of the
Plan and Awards granted pursuant to the Plan, including without limitation, any
notice of Award or Award Agreement, granted pursuant to the Plan;
(viii) to establish additional terms, conditions,
rules or procedures to accommodate the rules or laws of applicable foreign
jurisdictions and to afford Grantees favorable treatment under such laws;
provided, however, that no Award shall be granted under any such additional
terms, conditions, rules or procedures with terms or conditions which are
inconsistent with the provisions of the Plan; and
(ix) to take such other action, not inconsistent
with the terms of the Plan, as the Administrator deems appropriate.
5. ELIGIBILITY. Awards may be granted to Eligible Employees and
Consultants. An Eligible Employee or Consultant who has been granted an Award
may, if otherwise eligible, be granted additional Awards. Awards may be granted
to such Eligible Employees or Consultants who are residing in foreign
jurisdictions as the Administrator may determine from time to time.
6. TERMS AND CONDITIONS OF AWARDS.
(a) TYPE OF AWARDS. All Awards shall be of Non-Qualified
Stock Options.
(b) CONDITIONS OF AWARD. Subject to the terms of the
Plan, the Administrator shall determine the provisions, terms, and conditions of
each Award including, but not limited to, the Award vesting schedule, repurchase
provisions, rights of first refusal, forfeiture provisions, form of payment
(cash, Shares, or other consideration) upon settlement of the Award, payment
contingencies, and satisfaction of any performance criteria. The performance
criteria established by the Administrator may be based on any one of, or
combination of, increase in share price, earnings per share, total stockholder
return, return on equity, return on assets, return on investment, net operating
income, cash flow, revenue, economic value added and sales, in each case as
applied to an individual, the Company or a subsidiary, division, business unit,
or department thereof. Partial achievement of the specified criteria may result
in a payment or vesting corresponding to the degree of achievement as specified
in the Award Agreement.
(c) ACQUISITIONS AND OTHER TRANSACTIONS. The
Administrator may issue Awards under the Plan in settlement, assumption or
substitution for, outstanding awards or obligations to grant future awards in
connection with the Company or a Related Entity acquiring another entity, an
interest in another entity or an additional interest in a Related Entity whether
by merger, stock purchase, asset purchase or other form of transaction.
(d) DEFERRAL OF AWARD PAYMENT. The Administrator may
establish one or more programs under the Plan to permit selected Grantees the
opportunity to elect to defer receipt of
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<PAGE>
consideration upon exercise of an Award, satisfaction of performance criteria,
or other event that absent the election would entitle the Grantee to payment or
receipt of Shares or other consideration under an Award. The Administrator may
establish the election procedures, the timing of such elections, the mechanisms
for payments of, and accrual of interest or other earnings, if any, on amounts,
Shares or other consideration so deferred, and such other terms, conditions,
rules and procedures that the Administrator deems advisable for the
administration of any such deferral program.
(e) AWARD EXCHANGE PROGRAMS. The Administrator may
establish one or more programs under the Plan to permit selected Grantees to
exchange an Award under the Plan for one or more other types of Awards under the
Plan on such terms and conditions as determined by the Administrator from time
to time.
(f) SEPARATE PROGRAMS. The Administrator may establish
one or more separate programs under the Plan for the purpose of issuing
particular forms of Awards to one or more classes of Grantees on such terms and
conditions as determined by the Administrator from time to time.
(g) EARLY EXERCISE. The Award Agreement may, but need
not, include a provision whereby the Grantee may elect at any time while an
Employee or Consultant to exercise any part or all of the Award prior to full
vesting of the Award. Any unvested Shares received pursuant to such exercise may
be subject to a repurchase right in favor of the Company or a Related Entity or
to any other restriction the Administrator determines to be appropriate.
(h) TERM OF AWARD. The term of each Award shall be the
term stated in the Award Agreement
(i) TRANSFERABILITY OF AWARDS. Awards may be transferred
(i) by gift or through a domestic relations order to members of the Grantee's
Immediate Family to the extent provided in the Award Agreement or (ii) in the
manner and to the extent determined by the Administrator.
(j) TIME OF GRANTING AWARDS. The date of grant of an
Award shall for all purposes be the date on which the Administrator makes the
determination to grant such Award, or such other date as is determined by the
Administrator. Notice of the grant determination shall be given to each Employee
or Consultant to whom an Award is so granted within a reasonable time after the
date of such grant.
7. AWARD EXERCISE PRICE, CONSIDERATION, AND TAXES.
(a) EXERCISE PRICE. The per Share exercise price for an
Option shall be not less than eighty-five percent (85%) of the Fair Market Value
per Share on the date of grant unless otherwise determined by the Administrator.
In the case of an Award issued pursuant to Section 6(c), above, the exercise or
purchase price for the Award shall be determined in accordance with the
principles of Section 424(a) of the Code.
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<PAGE>
(b) CONSIDERATION. Subject to Applicable Laws, the
consideration to be paid for the Shares to be issued upon exercise or purchase
of an Award including the method of payment, shall be determined by the
Administrator. In addition to any other types of consideration the Administrator
may determine, the Administrator is authorized to accept as consideration for
Shares issued under the Plan the following, provided that the portion of the
consideration equal to the par value of the Shares must be paid in cash or other
legal consideration permitted by the Delaware General Corporation Law:
(i) cash;
(ii) check;
(iii) delivery of Grantee's promissory note with
such recourse, interest, security, and redemption provisions as the
Administrator determines as appropriate;
(iv) surrender of Shares or delivery of a
properly executed form of attestation of ownership of Shares as the
Administrator may require (including withholding of Shares otherwise deliverable
upon exercise of the Award) which have a Fair Market Value on the date of
surrender or attestation equal to the aggregate exercise price of the Shares as
to which said Award shall be exercised (but only to the extent that such
exercise of the Award would not result in an accounting compensation charge with
respect to the Shares used to pay the exercise price unless otherwise determined
by the Administrator);
(v) payment through a broker-dealer sale and
remittance procedure pursuant to which the Grantee (A) shall provide written
instructions to a Company designated brokerage firm to effect the immediate sale
of some or all of the purchased Shares and remit to the Company, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the purchased Shares and (B) shall provide
written directives to the Company to deliver the certificates for the purchased
Shares directly to such brokerage firm in order to complete the sale
transaction; or
(vi) any combination of the foregoing methods of
payment.
(c) TAXES. No Shares shall be delivered under the Plan to
any Grantee or other person until such Grantee or other person has made
arrangements acceptable to the Administrator for the satisfaction of any
foreign, federal, state, or local income and employment tax withholding
obligations. Upon exercise of an Award, the Company shall withhold or collect
from Grantee an amount sufficient to satisfy such tax obligations.
8. EXERCISE OF AWARD.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER.
(i) Any Award granted hereunder shall be
exercisable at such times and under such conditions as determined by the
Administrator under the terms of the Plan and specified in the Award Agreement.
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<PAGE>
(ii) An Award shall be deemed to be exercised
when written notice of such exercise has been given to the Company in accordance
with the terms of the Award by the person entitled to exercise the Award and
full payment for the Shares with respect to which the Award is exercised,
including, to the extent selected, use of the broker-dealer sale and remittance
procedure to pay the purchase price as provided in Section 7(b)(v). Until the
issuance (as evidenced by the appropriate entry on the books of the Company or
of a duly authorized transfer agent of the Company) of the stock certificate
evidencing such Shares, no right to vote or receive dividends or any other
rights as a stockholder shall exist with respect to Shares subject to an Award,
notwithstanding the exercise of an Option or other Award. The Company shall
issue (or cause to be issued) such stock certificate promptly upon exercise of
the Award. No adjustment will be made for a dividend or other right for which
the record date is prior to the date the stock certificate is issued, except as
provided in the Award Agreement or Section 10, below.
(b) EXERCISE OF AWARD FOLLOWING TERMINATION OF CONTINUOUS
SERVICE.
(i) An Award may not be exercised after the
termination date of such Award set forth in the Award Agreement and may be
exercised following the termination of a Grantee's Continuous Service only to
the extent provided in the Award Agreement.
(ii) Where the Award Agreement permits a Grantee
to exercise an Award following the termination of the Grantee's Continuous
Service for a specified period, the Award shall terminate to the extent not
exercised on the last day of the specified period or the last day of the
original term of the Award, whichever occurs first.
9. CONDITIONS UPON ISSUANCE OF SHARES.
(a) Shares shall not be issued pursuant to the exercise
of an Award unless the exercise of such Award and the issuance and delivery of
such Shares pursuant thereto shall comply with all Applicable Laws, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
(b) As a condition to the exercise of an Award, the
Company may require the person exercising such Award to represent and warrant at
the time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such Shares
if, in the opinion of counsel for the Company, such a representation is required
by any Applicable Laws.
10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. Subject to any
required action by the stockholders of the Company, the number of Shares covered
by each outstanding Award, and the number of Shares which have been authorized
for issuance under the Plan but as to which no Awards have yet been granted or
which have been returned to the Plan, the exercise price of each such
outstanding Award, as well as any other terms that the Administrator determines
require adjustment shall be proportionately adjusted for (i) any increase or
decrease in the number of issued Shares resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Shares, or
similar event affecting the Shares, (ii) any other increase or decrease in the
number of issued Shares effected without receipt of consideration by the
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Company, or (iii) as the Administrator may determine in its discretion, any
other transaction with respect to Common Stock of a type described in Section
424(a) of the Code or any similar transaction; provided, however that conversion
of any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Administrator and its determination shall be final, binding and conclusive.
Except as the Administrator determines, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason hereof shall be made with respect to,
the number or price of Shares subject to an Award.
11. CHANGES IN CONTROL/RELATED ENTITY DISPOSITIONS. Except as may
be provided in an Award Agreement:
(a) In the event of any Change in Control, each Award
which is at the time outstanding under the Plan automatically shall have its
vesting accelerated by 12 months (such that (1) any Award that is not yet vested
but was otherwise scheduled to become vested within 12 months instead becomes
vested and exercisable on the effective date of the Change in Control, and (2)
any Award that is not yet vested and was otherwise scheduled to become vested on
a date that is more than 12 months after the Change in Control instead become
fully vested and exercisable on a date that is 12 months earlier than the date
provided for in by the terms of the Award). Each such Award that becomes vested
and exercisable on the effective date of the Change in Control shall also be
released from any restrictions on transfer and repurchase or forfeiture rights,
immediately prior to the specified effective date of such Change in Control, for
all of the Shares at the time represented by the vested portion of such Award.
Effective upon the consummation of the Change in Control, all outstanding Awards
under the Plan shall terminate. However, an outstanding Award under the Plan
shall not so terminate if and to the extent: (i) such Award is, in connection
with the Change in Control, either assumed by the successor corporation or
Parent thereof or replaced with a comparable Award with respect to shares of the
capital stock of the successor corporation or Parent thereof, or (ii) such Award
is to be replaced with a cash incentive program of the successor corporation
which preserves the compensation element of such Award existing at the time of
the Change in Control and provides for subsequent payout in accordance with the
same vesting schedule applicable to such Award, or (iii) such Award is purchased
for cash in an amount equal to the fair value of the Award, as reasonably
determined by the Administrator, as of the date of the Change in Control. The
determination of Award comparability above shall be made by the Administrator.
(b) Following a Change in Control and upon the
termination of the Continuous Service of a Grantee if such Continuous Service is
terminated by the Company or Related Entity or the successor employer
corporation without Cause or voluntarily by the Grantee with Good Reason within
twelve (12) months of a Change in Control, each Award of such Grantee which is
at the time outstanding under the Plan (or the replacement Award or cash
incentive program, if applicable) automatically shall become fully vested and
exercisable and be released from any restrictions on transfer and repurchase or
forfeiture rights, immediately upon the termination of such Continuous Service.
(c) Effective upon the consummation of a Related Entity
Disposition, for purposes of the Plan and all Awards, the Continuous Service of
each Grantee who is at the time
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engaged primarily in service to the Related Entity involved in such Related
Entity Disposition shall be deemed to terminate and each Award of such Grantee
which is at the time outstanding under the Plan automatically shall become fully
vested and exercisable and be released from any restrictions on transfer and
repurchase or forfeiture rights for all of the Shares at the time represented by
such Award and be exercisable in accordance with the terms of the Award
Agreement evidencing such Award. However, such Continuous Service shall be not
be deemed to terminate if such Award is, in connection with the Related Entity
Disposition, assumed by the successor entity or its Parent. In addition, such
Continuous Service shall not be deemed to terminate and an outstanding Award
under the Plan shall not so fully vest and be exercisable and released from such
limitations if and to the extent: (i) such Award is, in connection with the
Related Entity Disposition, either to be assumed by the successor entity or its
parent or to be replaced with a comparable Award with respect to interests in
the successor entity or its parent or (ii) such Award is to be replaced with a
cash incentive program of the successor entity which preserves the compensation
element of such Award existing at the time of the Related Entity Disposition and
provides for subsequent payout in accordance with the same vesting schedule
applicable to such Award; provided, however, that such Award (if assumed), the
replacement Award (if replaced), or the cash incentive program automatically
shall become fully vested, exercisable and payable and be released from any
restrictions on transfer (other than transfer restrictions applicable to
Incentive Stock Options) and repurchase or forfeiture rights immediately upon
termination of the Grantee's Continuous Service (substituting the successor
employer entity for "Company or Related Entity" for the definition of
"Continuous Service") if such Continuous Service is terminated by the successor
entity without Cause or voluntarily by the Grantee with Good Reason within
twelve (12) months of the Related Entity Disposition. The determination of Award
comparability above shall be made by the Administrator.
12. EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become
effective on the date of its adoption by the Board. It shall continue in effect
for a term of ten (10) years unless sooner terminated.
13. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN.
(a) The Board may at any time amend, suspend or terminate
the Plan. To the extent necessary to comply with Applicable Laws, the Company
shall obtain stockholder approval of any Plan amendment in such a manner and to
such a degree as required.
(b) No Award may be granted during any suspension of the
Plan or after termination of the Plan.
(c) Any amendment, suspension or termination of the Plan
(including termination of the Plan under Section 12, above) shall not affect
Awards already granted, and such Awards shall remain in full force and effect as
if the Plan had not been amended, suspended or terminated, unless mutually
agreed otherwise between the Grantee and the Administrator, which agreement must
be in writing and signed by the Grantee and the Company.
14. RESERVATION OF SHARES.
12
<PAGE>
(a) The Company, during the term of the Plan, will at all
times reserve and keep available such number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
(b) The inability of the Company to obtain authority from
any regulatory body having jurisdiction, which authority is deemed by the
Company's counsel to be necessary to the lawful issuance and sale of any Shares
hereunder, shall relieve the Company of any liability in respect of the failure
to issue or sell such Shares as to which such requisite authority shall not have
been obtained.
15. NO EFFECT ON TERMS OF EMPLOYMENT/CONSULTING RELATIONSHIP. The
Plan shall not confer upon any Grantee any right with respect to the Grantee's
Continuous Service, nor shall it interfere in any way with his or her right or
the Company's right to terminate the Grantee's Continuous Service at any time,
with or without cause.
16. NO EFFECT ON RETIREMENT AND OTHER BENEFIT PLANS. Except as
specifically provided in a retirement or other benefit plan of the Company or a
Related Entity, Awards shall not be deemed compensation for purposes of
computing benefits or contributions under any retirement plan of the Company or
a Related Entity, and shall not affect any benefits under any other benefit plan
of any kind or any benefit plan subsequently instituted under which the
availability or amount of benefits is related to level of compensation. The Plan
is not a "Retirement Plan" or "Welfare Plan" under the Employee Retirement
Income Security Act of 1974, as amended.
13
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