<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 14, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NETZERO, INC.
(Exact Name of Registrant as Specified in Its Charter)
------------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7370 95-4644384
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification
Organization) Number)
</TABLE>
2555 TOWNSGATE ROAD
WESTLAKE VILLAGE, CALIFORNIA 91361
(805) 418-2000
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
------------------------------
MARK R. GOLDSTON
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
NETZERO, INC.
2555 TOWNSGATE ROAD
WESTLAKE VILLAGE, CALIFORNIA 91361
(805) 418-2000
(Name, Address Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
------------------------------
COPIES TO:
RICHARD A. FINK, ESQ. KENNETH M. SIEGEL, ESQ.
KEVEN F. BAXTER, ESQ. PAUL B. SHINN, ESQ.
JOSEPH H. CHI, ESQ. ROBERT E. DAWSON, ESQ.
AMY J. HANSEN, ESQ. WILSON SONSINI GOODRICH & ROSATI
BROBECK, PHLEGER & HARRISON LLP 650 PAGE MILL ROAD
38 TECHNOLOGY DRIVE PALO ALTO, CALIFORNIA 94304-1050
IRVINE, CALIFORNIA 92618 (650) 493-9300
(949) 790-6300
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------------
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE
SECURITIES TO BE REGISTERED OFFERING PRICE (1)
<S> <C>
Common Stock, $0.001 par value.................................................. $115,000,000
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT OF
SECURITIES TO BE REGISTERED REGISTRATION FEE
<S> <C>
Common Stock, $0.001 par value.................................................. $31,970
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(o).
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL, NOR DOES IT SEEK AN OFFER TO BUY, THESE SECURITIES IN ANY STATE WHERE
THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION. DATED JULY , 1999.
Shares
[LOGO]
NETZERO, INC.
Common Stock
------------------
This is an initial public offering of shares of common stock of NetZero,
Inc. NetZero is offering all of the shares of common stock to be sold in
this offering.
Prior to this offering, there has been no public market for the common
stock. It is currently estimated that the initial public offering price per
share will be between $ and $ . Application has been made
for quotation of the common stock on The Nasdaq National Market under the symbol
"NZRO".
SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT CERTAIN FACTORS YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- ----------------
<S> <C> <C>
Initial public offering price.................................................. $ $
Underwriting discount.......................................................... $ $
Proceeds, before expenses, to NetZero.......................................... $ $
</TABLE>
The underwriters may purchase, under certain circumstances, up to an
additional shares of common stock from NetZero, at the initial public
offering price less the underwriting discount.
------------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
HAMBRECHT & QUIST
WIT CAPITAL CORPORATION
------------------------
Prospectus dated , 1999.
<PAGE>
[INSIDE FRONT COVER]
[SCHEMATIC OF THE ZEROPORT WINDOW]
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY SHOULD BE READ TOGETHER WITH, AND IS QUALIFIED IN ITS
ENTIRETY BY, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND THE
NOTES TO THOSE STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS
OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS: (1) REFLECTS THE AUTOMATIC
CONVERSION OF OUR OUTSTANDING SERIES A, SERIES B, SERIES C AND SERIES D
PREFERRED STOCK INTO COMMON STOCK IMMEDIATELY PRIOR TO THE CLOSING OF THIS
OFFERING; (2) REFLECTS THE 3-FOR-2 STOCK SPLIT TO BE EFFECTED IN JULY 1999; (3)
REFLECTS OUR REINCORPORATION INTO DELAWARE WHICH WE WILL COMPLETE PRIOR TO THE
OFFERING; AND (4) ASSUMES THAT THE UNDERWRITERS DO NOT EXERCISE THE
OVER-ALLOTMENT OPTION GRANTED TO THEM.
NETZERO, INC.
NetZero is pioneering a new Internet service model that provides consumers
with free and easy access to the Internet while offering online advertisers a
highly effective way to target those users. We offer users a simple and
compelling proposition--free and unlimited Internet access as well as free
e-mail and navigational tools to enhance their online experience. For
advertisers, our service offers a powerful online direct marketing tool with
features and functionality that have distinct advantages over traditional forms
of online advertising. The value of NetZero's proposition is evidenced by our
growth; between our October 1998 launch and June 30, 1999, approximately 1.17
million users registered for our service. During June 1999, approximately
613,000 of these users accessed our service and were delivered over 830 million
advertising impressions. Our services are offered in over 1,100 cities
nationwide.
An important feature of our service is The ZeroPort, a small window
displayed on our users' computer screens while they are online that is always
visible regardless of where they navigate. Users can move The ZeroPort to any
location on their screen but cannot close it or reduce its size. The ZeroPort
displays advertisements and advertiser-sponsored buttons and icons, all of which
can link directly to sites and services such as news, financial information,
sports and shopping. We generate revenues by selling advertisements and
sponsorships on The ZeroPort and by referring our users to sponsors' Web-sites.
We plan to receive fees from advertisers when our users subscribe for services
or purchase products or when other performance criteria are satisfied.
While the Internet has emerged as an attractive new advertising medium,
advertisers are seeking solutions to enhance its effectiveness for targeting
users and delivering messages. Most online advertisers have difficulties
successfully targeting their audiences, largely due to a lack of precise data on
user demographics and online behavior. Online advertisers also face challenges
capturing the attention of users and delivering messages for a sustained period
of time as they can with television and radio. We obtain demographic information
from our users and track their online activity, enabling us to offer advertisers
the ability to target users, measure advertising effectiveness and potentially
improve the return on their advertising dollars. Moreover, in contrast to
traditional online advertisements which can generally be scrolled off of a
viewer's screen, The ZeroPort is always visible during a user's online session,
enabling our advertisers to display messages for a sustained period of time. We
believe NetZero offers solutions that enhance the effectiveness of online
advertising and can redefine the way products and services are marketed online.
We were incorporated in California in July 1997 and plan to reincorporate in
Delaware prior to completion of the offering. Our executive offices are located
at 2555 Townsgate Road, Westlake Village, California 91361, and our telephone
number is (805) 418-2000. Information contained on our Web-site or The ZeroPort
does not constitute part of this prospectus. NetZero-TM-, The ZeroPort-TM-,
zCast-TM- and SPEEDY Assistant-TM- are our trademarks. This prospectus also
includes trademarks of entities other than NetZero.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by NetZero.............. shares
Common stock to be outstanding after this
offering................................... shares
Use of proceeds.............................. For general corporate purposes, principally
working capital, capital expenditures, and
possible acquisitions.
Proposed Nasdaq National Market symbol....... "NZRO"
</TABLE>
The number of shares to be outstanding after this offering excludes
5,875,651 shares of common stock available for issuance pursuant to our stock
plans, of which 3,527,100 shares are subject to outstanding options as of June
30, 1999, at a weighted average exercise price of $0.68 per share.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth certain of our summary financial data. This
information should be read in conjunction with the financial statements and
notes thereto appearing elsewhere in the prospectus.
<TABLE>
<CAPTION>
NINE
THREE MONTHS ENDED MONTHS
JULY 21, 1997 ------------------------------------------- ENDED
(INCEPTION) THROUGH SEPTEMBER 30, DECEMBER 31, MARCH 31, MARCH 31,
JUNE 30, 1998 1998 1998 1999 1999
------------------- -------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ -- $ -- $ 122 $ 781 $ 903
Gross loss......................... -- (6) (942) (3,198) (4,146)
Loss from operations............... (19) (217) (1,789) (5,125) (7,131)
Net loss........................... (25) (217) (1,795) (5,095) (7,107)
Net loss per share:
Basic and diluted(1)............. $ -- $ (0.02) $ (0.22) $ (0.50) $ (0.67)
Weighted average shares--basic
and diluted(1)................. 15,000 13,451 8,025 10,277 10,587
Pro forma basic and diluted net
loss per share(2).............. $ (0.28)
Shares outstanding used in pro
forma basic and diluted net
loss per share
calculation(2)................. 25,088
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
----------------------------------------
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
--------- ------------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................... $ 6,715 $ 39,986 $
Working capital (deficit)............................................... 4,845 38,116
Total assets............................................................ 10,088 43,359
Capital leases, less current portion.................................... 817 817 817
Redeemable convertible preferred stock.................................. 2,015 -- --
Total stockholders' equity (deficit).................................... 4,860 40,146
</TABLE>
- ------------------------
(1) See Notes 2 and 8 of Notes to Financial Statements for determination of
shares used in computing basic and diluted net loss per share.
(2) Pro forma to give effect to the conversion of all issued and outstanding
shares of convertible preferred stock into common stock and to include $33.3
million in proceeds from our May 1999 Series D convertible preferred stock
offering.
(3) As adjusted to reflect the sale of shares of common stock offered
hereby at an assumed initial public offering price of $ per
share after deducting the underwriting discount and estimated offering
expenses payable by NetZero. See "Use of Proceeds" and "Capitalization".
4
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE
ONLY ONES WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US
OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS.
IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, RESULTS OF
OPERATIONS AND FINANCIAL CONDITION COULD BE MATERIALLY AND ADVERSELY AFFECTED,
THE VALUE OF OUR STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT.
WE FACE RISKS ASSOCIATED WITH OUR OPERATIONS
WE CANNOT PREDICT OUR SUCCESS BECAUSE OUR BUSINESS MODEL IS UNPROVEN AND WE HAVE
OPERATED OUR BUSINESS FOR ONLY A SHORT PERIOD OF TIME.
Our business model is unproven and a number of other businesses offering
free Internet access have failed. Furthermore, since we only began offering
Internet access in October 1998, we have a limited operating history, which will
make it difficult for you to evaluate our performance. You should carefully
consider the risks and difficulties we may encounter in the new and rapidly
evolving Internet market. These risks include our ability to:
- retain and increase our user base;
- generate sufficient revenues to cover our costs;
- manage our telecommunications costs;
- develop brand recognition with users and advertisers;
- provide adequate levels of user support;
- upgrade and scale our communications network and internal server
capacity;
- respond to technological developments in the industry; and
- comply with evolving standards relating to the use of information
obtained from, and privacy of, Internet users.
If we are not able to successfully address these risks, our business,
results of operations and financial condition could be materially and adversely
affected. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for detailed information on our limited
operating history.
OUR BUSINESS WILL BE SERIOUSLY HARMED IF WE FAIL TO RETAIN AND GROW OUR USER
BASE OR DEMONSTRATE THAT OUR REGISTERED USERS ARE ACTUALLY USING OUR SERVICE.
The success of our business will depend on our ability to retain our
existing user base, add new users and demonstrate to advertisers that our users
are using our service on a regular basis. To date, we have relied extensively on
"viral" or "word-of-mouth" marketing to attract the vast majority of our users
and will continue to do so for the foreseeable future. Such marketing is outside
of our control and there can be no assurance that it will generate rates of
growth in our user base comparable to what we have experienced to date. In
addition, we intend to generate new users through other distribution channels.
If such distribution channels prove more costly than anticipated, it could
adversely impact our ability to grow. If we are unable to grow our user base,
our ability to generate revenues, decrease per-user telecommunications costs and
implement our strategy will be materially and adversely affected.
5
<PAGE>
There are a variety of reasons why users would discontinue using our
service. Many users may dislike The ZeroPort--which is always present--or may
not wish to have their online activities tracked and prefer to pay for Internet
access without advertising or tracking. In addition, releases of our software
have had, and may have in the future, reliability and other issues which may
result in user dissatisfaction. To date, we have provided minimal user support
compared to the support offered by other Internet service providers. While we
intend to focus our resources and efforts on enhancing our users' online
experience, there can be no assurance that existing users will accept The
ZeroPort or be satisfied with our user support efforts, or that our service will
match or exceed the quality, speed and reliability of competitive Internet
access services. If our users believe that the level of support they receive is
inadequate, our user turnover rate will likely increase.
A number of our registered users may not actively use our service for
periods of time. While approximately 1.17 million users had registered for our
service as of June 30, 1999, approximately 613,000 had used our service in the
previous 30 days. If we are not able to demonstrate to our advertisers that we
have an active and growing user base, advertisers may choose not to advertise
with us and our business, results of operations and financial condition could be
materially and adversely affected.
We also believe that intense competition from our Internet access
competitors, some of which offer many free hours of service, rebates on computer
purchases, or other promotions for new users, will cause some of our existing or
potential users to switch to our competitors' services. It is relatively easy
for Internet users to switch to competing providers and we cannot be certain
that any steps we take will maintain or improve user retention. We also believe
that a number of our users also have Internet access accounts with our
competitors and that such users do not use NetZero as their primary Internet
service provider. In addition, some new users use the Internet only as a novelty
and do not become consistent users of Internet services and, therefore, may be
more likely to discontinue their service. These factors adversely affect our
user turnover rates. We cannot assure you that our user turnover rate will not
increase in the future. Any increase in user turnover rates could have a
material adverse effect on our business, results of operations and financial
condition.
OUR FAILURE TO GENERATE ADVERTISING REVENUES IN QUANTITIES AND AT RATES THAT ARE
SATISFACTORY TO US COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS
OF OPERATIONS AND FINANCIAL CONDITION.
We do not charge our users any fees for our Internet access and e-mail
services. The success of our business depends primarily on our ability to
generate advertising revenues. We cannot be sure that advertisers will continue
to purchase advertising space on the Internet or that our particular business
model will be attractive to advertisers. A significant portion of our revenues
may be dependent on our ability to fulfill various performance criteria, such as
having our users subscribe to specific services or purchase specific products of
advertisers. Whether such criteria are fulfilled will depend on our ability to
effectively target users through identifying relevant demographic criteria and
developing targeting data. We are in the early stages of that process and may
encounter technical limitations on our ability to target users based on their
demographic information. The quality of our demographic information also depends
on the accuracy of the information provided by our users, which we do not
corroborate. Therefore, we cannot assure you that we will be able to effectively
target users and achieve performance-based revenues. If we fail to do so, our
business, results of operations and financial condition could be materially and
adversely affected.
In addition, competition for Internet-based advertising revenues is intense
and the amount of available standard banner advertising space on the Internet is
increasing at a significant rate. These
6
<PAGE>
factors are causing Internet advertising rates to decline and we expect that
these rates may continue to decline in the future. Therefore, we cannot assure
you that we will be able to attract advertising revenues in quantities and at
rates that are sufficient to support our business model. Our failure to do so
would likely have a material adverse effect on our business, results of
operations and financial condition.
WE RELY ON A SMALL NUMBER OF TELECOMMUNICATIONS CARRIERS AND MAY BE UNABLE TO
FIND ADEQUATE REPLACEMENTS IF THEIR RATES INCREASE, SERVICE QUALITY DECLINES, OR
IF THEY DISCONTINUE DOING BUSINESS WITH US.
Our business substantially depends on the capacity, affordability,
reliability and security of our telecommunications networks. To use our
services, users must initiate telephone connections between their personal
computers and computer hardware in local or regional facilities known as points
of presence (POPs) provided by third-party telecommunications carriers. These
telecommunications providers also provide connections between their POPs and our
central computers. Only a small number of telecommunications companies can
provide the network services we require. There has been significant
consolidation in the telecommunications industry, and there is a significant
risk that further consolidation could make us reliant on an even smaller number
of providers. Most of our telecommunications services are provided pursuant to
short-term agreements that the telecommunications service providers can
terminate or elect not to renew. As a result, there is a significant risk that
any or all of our current telecommunications service providers could decide not
to provide us with service at rates acceptable to us, or at all.
RISK OF CONFLICTS OF INTEREST. Many telecommunications companies offer, or
have announced that they will begin to offer, Internet access services, making
them direct competitors of ours. In addition, each of our telecommunications
providers supplies network access to some of our competitors, and could choose
to grant those competitors preferential network access, potentially limiting our
users' ability to access the Internet. If our telecommunications service
providers were to decrease the levels of service or access provided to us, or if
they were to terminate their relationships with us for competitive or other
reasons, and we were not able to develop alternate sources of supply, our
business, results of operations and financial condition would be materially and
adversely affected.
RISK OF UNACCEPTABLE SERVICE QUALITY. Our reliance on third-party
telecommunications service providers also exposes us to the risks that such
providers will fail to provide service or that their service quality will not be
acceptable. In either event, we would likely lose users who are dissatisfied
with our service, which could materially and adversely affect our business,
results of operations and financial condition. Since we do not have direct
control over our telecommunications carriers' network reliability and the
quality of their service, we cannot assure you that we will be able to provide
consistently reliable Internet access for our users.
RISK OF PRICE SENSITIVITY. Our financial results are highly sensitive to
variations in prices for the telecommunications services we purchase. We cannot
assure you that telecommunications prices will decline, or that such prices will
not increase. Some of our telecommunications providers impose minimum connection
charges. Our business could be harmed if minimum connection charges increase or
become more prevalent. In addition, the availability and pricing of POPs varies
geographically, and we may not be able to obtain new or substitute POPs in
certain geographic areas within the required lead times or on commercially
reasonable terms, if at all. We cannot assure you that our telecommunications
providers will continue to provide us access to their POPs on commercially
acceptable price terms, or that alternative services will be available on such
terms.
7
<PAGE>
WE DEPEND ON NETGRAVITY SOFTWARE TO EFFECTIVELY SERVE ADVERTISEMENTS TO THE
ZEROPORT.
All of our advertisements are served using software licensed from
NetGravity. While there is other software available, it would substantially
disrupt our business in the near term to switch to another provider. As such, we
are reliant on NetGravity and its software. Our agreement with NetGravity
expires in 2001. If NetGravity's software fails to perform as expected, or if we
are not able to renew such agreement or license or internally develop similar
software in the future, we may not be able to effectively display advertisements
to our users. In such event, our business, results of operations and financial
condition would be materially and adversely affected. On July 13, 1999,
DoubleClick, an Internet advertising provider, and NetGravity announced that
they had entered into a merger agreement pursuant to which DoubleClick will
acquire NetGravity in a stock-for-stock transaction.
WE ANTICIPATE FUTURE LOSSES AND NEGATIVE CASH FLOW.
As of March 31, 1999, we had an accumulated deficit of approximately $7.1
million. We expect that our losses and negative cash flow will increase for the
foreseeable future as we continue to expand our operations and incur expenses in
connection with:
- purchasing telecommunications service capabilities in anticipation of a
growing user base;
- obtaining additional equipment and software for our network
infrastructure to enable us to expand and improve the quality of our
services;
- adding personnel;
- continuing to develop our direct and indirect sales and marketing
efforts;
- increasing our product development efforts; and
- expanding our user support services.
Our ability to achieve profitability and positive cash flow depends upon a
number of factors, including our ability to increase revenue or reduce per-user
costs. Although our revenues have grown in recent quarters, we cannot be certain
that we will be able to sustain these growth rates or that we will obtain
sufficient revenues to achieve profitability or positive cash flow. If we do
achieve profitability, we cannot be certain that we can sustain or increase
profitability on a quarterly or annual basis in the future. If we fail to do so,
the market price for our common stock could suffer.
OUR MARKETS ARE VERY COMPETITIVE AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY,
ESPECIALLY AGAINST ESTABLISHED INDUSTRY COMPETITORS.
We compete for users and advertising customers.
COMPETITION FOR USERS
We currently compete or expect to compete for users with the following types
of companies that provide access services:
- established online service and content providers, such as America
Online and The Microsoft Network;
- independent national Internet service providers, such as EarthLink,
MindSpring and Prodigy;
- national long-distance carriers, such as AT&T, GTE and MCI WorldCom;
8
<PAGE>
- local telephone companies and regional Bell operating companies, such
as Pacific Bell;
- numerous regional and local commercial Internet service providers;
- computer hardware and software and other technology companies, such as
IBM and Microsoft;
- cable operators and online cable services, such as Excite@Home;
- other free Internet service providers; and
- nonprofit or educational Internet service providers.
We face competition for users and expect that competition in this market
will continue to intensify for the foreseeable future. Existing competitors may
take steps such as reducing their subscriber fees, offering promotions for
access services or bundling free access services with other product offerings.
In addition, we believe that new competitors for Internet users, including major
computer manufacturers such as Dell, software companies such as Microsoft, media
and telecommunications companies, will continue to enter the Internet access
market. New entrants or existing competitors could adopt Internet access models
similar to ours, thereby limiting the value of our consumer proposition. As
awareness of the Internet grows, existing competitors are likely to further
increase their emphasis on their Internet access services, resulting in even
greater competition for us. In addition, telecommunications companies with far
greater resources, distribution channels and brand awareness may offer their own
Internet access services to users. These companies have their own
telecommunications network infrastructure and therefore have lower
communications costs in connection with the Internet access services they
provide. These advantages reduce the overall cost of Internet access for such
companies and may significantly increase competitive pressures on us. The
ability of our competitors to acquire other Internet service providers, to enter
into strategic alliances or joint ventures or to bundle other services and
products with Internet access services could also put us at a significant
competitive disadvantage.
We cannot predict whether we will be able to compete successfully against
current or future competitors. As a result, we cannot assure you that
competitive pressures faced by us will not materially and adversely affect our
business, results of operations or financial condition. Increased competition
could cause us to increase our sales and marketing expenses and related user-
acquisition costs and could also result in increased user turnover and decreased
advertising revenues. Since we do not charge our users membership fees, we may
not be able to offset the effects of these increased costs and we may not have
the resources to continue to compete successfully. These developments would
materially and adversely affect our business, results of operations and
financial condition.
We also face competition from companies that provide broadband connections
to users' homes, including local and long-distance telephone companies, cable
television companies, electric utility companies, wireless communications
companies and other Internet service providers. These companies may use
broadband technologies to include Internet access or business services such as
Web hosting in their basic bundle of services or may offer Internet access or
business services for little or no additional charge. Most of our service is
offered via dial-up modems which are limited to access speeds of up to 56 kbps.
Broadband technologies enable users to transmit and receive print, video, voice
and data in digital form at significantly faster access speeds. While the market
for such broadband technologies is still emerging, we believe it will continue
to grow and pose an increasingly significant source of competition. We may have
to develop new technologies or add broadband access services to remain
competitive. Our pursuit of these technological advances may require substantial
time and expense. We cannot be certain that we will succeed in adapting our
Internet access service business to compete effectively with these technologies.
9
<PAGE>
Furthermore, to the extent that we need to provide broadband access
services, we face the risk that the companies that own broadband networks may
prevent us from delivering Internet access through the wire and cable
connections that they own. The availability and terms of Internet service
providers' access to broadband local telephone company networks are under
regulatory and judicial review. Our ability to compete with telephone and cable
television companies that are able to support broadband transmission, and to
provide better Internet services and products, may depend on future regulation
to guarantee open access to the broadband networks. However, in January 1999,
the Federal Communications Commission declined to take any action to mandate or
otherwise regulate access by Internet service providers to broadband cable
facilities at this time. It is unclear whether and to what extent local and
state regulatory agencies will take any initiatives to implement this type of
regulation, and whether they will be successful in establishing their authority
to do so. Similarly, the FCC is considering proposals that could limit the right
of Internet service providers to connect with their users over broadband local
telephone lines. In addition to competing directly in the Internet access
market, both cable and telephone facilities operators are also aligning
themselves with certain Internet service providers who would receive
preferential or exclusive use of broadband local connections to end users. If
high-speed, broadband facilities increasingly become the preferred mode by which
users access the Internet and we are unable to gain access to these facilities
on reasonable terms, our business, results of operations and financial condition
could be materially and adversely affected. In addition, we do not currently
compete internationally. If the ability to provide Internet access
internationally becomes a competitive advantage in the Internet access industry,
we may be at a competitive disadvantage relative to our competitors who offer
such services.
We cannot predict what effect technological developments will have on our
competitive position. The rapid development of new competing technologies and
standards increases the risk that current or new competitors could develop
products and services that reduce the competitiveness of our products and
services. If our products and services become obsolete or less competitive with
other available products and services, our business, results of operations and
financial condition could be materially and adversely affected.
COMPETITION FOR ADVERTISING CUSTOMERS
We compete for Internet advertising and sponsorship revenues with Web search
engine and portal companies such as Yahoo!, Lycos, Excite@Home and Infoseek,
with large Web publishers such as CNN.com and CNET and with other online content
providers such as America Online and Microsoft. Further, we compete with
Internet advertising providers, such as DoubleClick, Adsmart, 24/7 Media and
ValueClick. We also encounter competition from a number of other sources,
including content aggregation companies, advertising sales networks, advertising
agencies, and other companies which facilitate Internet advertising.
We may not be able to compete successfully against current or future
competitors for advertising revenues, many of whom have longer operating
histories, greater name recognition, larger user bases, significantly greater
financial, technical and marketing resources and more established relationships
with advertisers than we do. These advantages may allow such competitors to
respond more quickly than we can to new or emerging technologies and changes in
advertiser requirements. They may also be able to devote greater resources than
we can to the development, promotion and sale of their products and services.
Such competitors may also engage in more extensive research and development,
undertake more far-reaching marketing campaigns, adopt more aggressive pricing
policies and make more attractive offers to existing and potential employees,
strategic partners, advertisers and Web publishers. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products or services to address the
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needs of our prospective customers. As a result, it is possible that new
competitors may emerge and rapidly acquire significant market share. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share. It is possible that we will not be able to compete
successfully or that competitive pressures will materially and adversely affect
our business, results of operations or financial condition.
Companies doing business on the Internet, including us, must also compete
with television, radio, cable and print media for a share of advertisers' total
advertising budgets. Advertisers may be reluctant to devote a significant
portion of their advertising budget to Internet advertising if they perceive the
Internet to be a limited or ineffective advertising medium.
OUR BUSINESS WILL BE ADVERSELY AFFECTED IF USER DEMAND FOR OUR SERVICE EXCEEDS
OUR TELECOMMUNICATIONS AND SERVER CAPACITY.
We may from time to time experience dramatic increases in our user base
resulting in sign-ups and usage which exceed our telecommunications capacity and
the capacity of our internal servers. As a result, users may be unable to
register or log on to our service, may experience a general slow-down in their
Internet access or may be disconnected from their sessions. Excessive user
demand could also result in system failures of our internal server networks.
Inaccessability, interruptions or other limitations on the ability to access our
service due to excessive user demand or any failure of our servers to handle
user traffic, would have a material adverse effect on our business, results of
operations and financial condition.
WE MUST ENHANCE OUR INTERNAL NETWORK INFRASTRUCTURE TO MEET ADDITIONAL DEMAND OR
CHANGING USER REQUIREMENTS.
Our internal network infrastructure is composed of a complex system of
application, database, ad and e-mail servers. Service interruptions originating
within our internal network have occurred in the past and may occur in the
future, especially when usage exceeds capacity. We will need substantial
financial, operational, and management resources to enhance our systems,
particularly our database servers and storage capabilities, to handle a large
number of users. We cannot be certain that we will be able to accomplish this on
a timely basis and at a commercially reasonable cost, or at all. If we fail to
do so, our business, results of operations and financial condition could be
materially and adversely affected.
WE MAY NOT BE SUCCESSFUL IN MANAGING OUR GROWTH.
Our rapid growth has placed, and is expected to continue to place, a
significant strain on our managerial, operational and financial resources. For
us to effectively manage our rapidly growing operations, we must continue to
assimilate our new personnel and implement and improve our
operational, financial, and management information systems. We will also have to
anticipate our future telecommunications capacity needs within lead-time
requirements. If we fail to procure sufficient quantities of telecommunications
products and services, we may be unable to provide our current and future users
with acceptable service levels. We also run the risk of purchasing excessive
amounts of telecommunications products and services based on incorrect
assumptions and projections regarding increased usage. In such event, we would
be required to bear the costs of excess telecommunications capacity without
commensurate increases in revenues. We cannot assure you that we will be able to
effectively manage these and other aspects of our business. Our failure to do so
would likely have a material adverse effect on our business, results of
operations and financial condition.
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IF WE ARE UNSUCCESSFUL IN ESTABLISHING AND MAINTAINING THE NETZERO BRAND, OR IF
WE INCUR EXCESSIVE EXPENSES IN PROMOTING AND MAINTAINING OUR BRAND, OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION WOULD BE MATERIALLY AND
ADVERSELY AFFECTED.
We believe that establishing and maintaining the NetZero brand is critical
to retain and expand our user base. Promotion of the NetZero brand will depend
on our success in providing high-quality Internet products and services.
However, such success will depend, in part, on the services, products and
efforts of third parties, over which we have little or no control. For instance,
if our third party telecommunication service providers fail to provide quality
service, our users' ability to access the Internet may be interrupted, which may
adversely affect the NetZero brand. If our users and advertisers do not perceive
our existing products and services as high quality, or if we introduce new
products or services or enter into new business ventures that are not favorably
received by our users and advertisers, then we will be unsuccessful in building
brand recognition and brand loyalty in the marketplace. We may also need to
devote substantial resources to create and maintain a distinct brand loyalty
among our users and to promote and maintain the NetZero brand in a very
competitive market. If we are unsuccessful in establishing or maintaining the
NetZero brand or if we incur excessive expenses in promoting and maintaining our
brand, our business, results of operation and financial condition could be
materially and adversely affected.
OUR SUCCESS DEPENDS UPON THE SUCCESSFUL DEVELOPMENT OF NEW PRODUCTS AND SERVICES
IN THE FACE OF RAPIDLY EVOLVING TECHNOLOGY.
The market for Internet access is characterized by rapidly changing
technology, evolving industry standards, changes in user needs, and frequent new
service and product introductions. Our future success will depend, in part, on
our ability to use leading technologies effectively, to continue to develop our
technical expertise, and to enhance our existing services and develop or obtain
new services to meet changing user needs on a timely and cost-effective basis.
We may not be successful in achieving these goals.
RELIANCE ON THIRD PARTIES. We rely upon third parties to help us develop
technologies that enhance our current product and service offerings. If our
relationships with such third parties are impaired or terminated, then we would
have to find other developers on a timely basis or develop technology completely
on our own. We cannot predict whether we will be able to obtain the third-party
technology necessary for continued development and introduction of new and
enhanced products and services. In addition, we cannot predict whether we will
be able to obtain third-party technology on commercially reasonable terms or
replace third-party technology in the event such technology becomes unavailable,
obsolete or incompatible with future versions of our products or services. The
absence of, or any significant delay in, the replacement of third-party
technology could have a material adverse effect on our business, results of
operations and financial condition.
RISK RELATED TO CHANGING STANDARDS. We believe that our ability to compete
successfully will also depend upon the continued compatibility and
interoperability of our services with products and architectures offered by
various vendors. Although we intend to support emerging standards in the market
for Internet access, industry standards may not be established or, if they are
established, we may not be able to conform to these new standards in a timely
fashion and maintain a competitive position in the market. For instance, we have
been notified that Sun Microsystems is upgrading its JAVA language and that the
new version will require more memory to implement. Our software uses the JAVA
language extensively and we will have to modify our resources accordingly to
accommodate the new version. We cannot assure you that we will be able to make
such modifications, or any other modifications which may be required to adapt to
new or changing standards, in a cost-effective and timely manner, or at all. In
addition, others may develop services or technologies that will render our
services or technology noncompetitive or obsolete. Our business and prospects
could be seriously harmed if we are not able to adapt to changes in
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technology and industry standards, and to develop and introduce new and enhanced
products and service offerings.
RISK OF NEW TECHNOLOGY. We can provide no assurances that future advances
in technology will be beneficial to, or compatible with, our business.
Furthermore, we may not successfully use new technologies effectively or adapt
our proprietary technology to user requirements or emerging industry standards
on a timely basis. Our ability to remain technologically competitive may require
substantial expenditures and lead time. If we are unable to adapt in a timely
manner to changing market conditions or user requirements, our business, results
of operations and financial condition could be materially and adversely
affected.
WE MAY NOT BE SUCCESSFUL IN PROTECTING OUR PROPRIETARY RIGHTS OR AVOIDING CLAIMS
THAT WE INFRINGE UPON THE PROPRIETARY RIGHTS OF OTHERS.
Our success depends in part upon our software and related documentation. We
principally rely upon copyright, trade secret, and contract laws to protect our
proprietary technology. We cannot be certain that we have taken adequate steps
to prevent misappropriation of our technology or that our competitors will not
independently develop technologies that are substantially equivalent or superior
to our technology. Our ability to prevent others from using our software could
materially and adversely affect our business, results of operation and financial
condition.
In addition, since we provide our Internet access software for free, we are
extremely susceptible to various forms of unauthorized use of our software. For
instance, we have experienced, and expect to continue to experience, numerous
instances of third parties selling unauthorized copies of our software. Others
have attempted to charge fees for installing our software without our
permission. Such actions could adversely affect NetZero's brand name.
We have permission and, in some cases, licenses from each developer of the
software that we bundle in NetZero's front-end software product for users.
Although we do not believe that the software or the trademarks we use or any of
the other elements of our business infringe on the proprietary rights of any
third parties, third parties may assert claims against us for infringement of
their proprietary rights and these claims may be successful. In addition, a
number of third-party owners of patents have claimed to hold patents that cover
various forms of online transactions or online technology. As with other online
service providers, patent claims could be asserted against us based upon our
services or technologies.
We could incur substantial costs and diversion of management resources in
the defense of any claims relating to proprietary rights, which could materially
and adversely affect our business, results of operations and financial
condition. Parties making these claims could secure a judgment awarding
substantial damages as well as injunctive or other equitable relief that could
effectively block our ability to license our products in the United States or
abroad. Such a judgment against us could prevent us from operating our business
or have other material adverse effects on our business, results of operations
and financial condition. If a third party asserts a claim relating to
proprietary technology or information against us, we may seek licenses to the
intellectual property from the third party. We cannot be certain, however, that
third parties will extend licenses to us on commercially reasonable terms, or at
all. If we fail to obtain the necessary licenses or other rights, it could
materially and adversely affect our business, results of operations and
financial condition.
WE MAY BE UNABLE TO OBTAIN THE ADDITIONAL CAPITAL REQUIRED TO GROW OUR BUSINESS.
Our ability to grow depends significantly on our ability to expand our
operations by contracting for additional POPs and expanding our internal network
infrastructure. These expansion efforts will require significant advance capital
equipment expenditures and commitments for telecommunications capacity. If the
proceeds from this offering, cash on hand, cash generated from
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operations and the amounts available under lease lines, are not sufficient to
meet our cash requirements, we will need to seek additional capital from public
or private equity or debt sources to fund our growth and operating plans and
respond to other contingencies. We may not be able to raise needed cash on terms
acceptable to us or at all. Financings may be on terms that are dilutive or
potentially dilutive to our stockholders. If sources of financing are required,
but are insufficient or unavailable, we will be required to modify our growth
and operating plans to the extent of available funding, which would have a
material adverse effect on our business, results of operations and financial
condition.
OUR NETWORK AND BUSINESS IS VULNERABLE TO SECURITY BREACHES, VIRUSES AND
INAPPROPRIATE USE BY INTERNET USERS, WHICH COULD DISRUPT OUR SERVICE.
The future success of our business will depend on the security of our
network and, in part, on the security of the network infrastructures of our
third-party telecommunications service providers, over which we have no control.
Computer viruses or problems caused by our users or other third parties, such as
the sending of excessive volumes of unsolicited bulk e-mail or "spam", could
lead to interruptions, delays, or cessation in service to our users. In
addition, the sending of "spam" through our network could result in third
parties asserting claims against us. We cannot assure you that we would prevail
in such claims and our failure to do so could result in large judgments which
would have a material and adverse effect on our business, results of operation
and financial condition. Users or other third parties could also potentially
jeopardize the security of confidential information stored in our computer
systems or our users' computer systems by their inappropriate use of the
Internet, including "hacking" or "cracking", which could cause losses to us or
our users or deter persons from using our services. Users or third parties may
also potentially expose us to liability by "identity theft", or posing as
another NetZero user. Unauthorized access by current and former employees or
others could also potentially jeopardize the security of confidential
information stored in our computer systems and those of our users.
We expect that our users will increasingly use the Internet for commercial
transactions in the future. Any network malfunction or security breach could
cause these transactions to be delayed, not completed at all, or completed with
compromised security. Users or others may assert claims of liability against us
as a result of any failure by us to prevent these network malfunctions and
security breaches, and may deter others from using our services, which could
cause our business prospects to suffer. Although we intend to continue using
industry-standard security measures, such measures have been circumvented in the
past, and we cannot assure you that these measures will not be circumvented in
the future. We also cannot assure you that the security measures of our
third-party network providers will be adequate. In addition, to alleviate
problems caused by computer viruses or other inappropriate uses or security
breaches, we may have to interrupt, delay, or cease service to our users, which
could have a material adverse effect on our business, results of operations and
financial condition.
In addition, various software programs have been developed that specifically
target The ZeroPort to disable our ability to deliver advertisements to a user.
While we believe we have been able to limit the effectiveness of such attempts,
we cannot assure you that we will be able to continue to do so in the future.
Widespread adoption of this type of software would materially and adversely
affect our ability to operate our business.
WE WILL DEPEND ON A SMALL NUMBER OF KEY CUSTOMERS FOR A SIGNIFICANT PORTION OF
OUR REVENUES.
We anticipate that a small number of customers may account for a significant
portion of our revenues. For example, we anticipate deriving a substantial
portion of our revenues from an agreement with LookSmart for the quarter ended
June 30, 1999, and expect that this agreement will continue to account for a
substantial percentage of our revenues through April 2000 when the
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agreement expires. Additionally, two other customers accounted for 20% and 24%
of our revenues for the nine-month period ended March 31, 1999. Our business,
results of operations and financial condition will be materially and adversely
affected if we are unable either to renew our material agreements or to replace
such agreements with similar agreements with new customers.
WE ARE DEPENDENT ON THIRD-PARTY HARDWARE SUPPLIERS.
The expansion of our network infrastructure and the expansion of Internet
services in general is placing, and will continue to place, a significant demand
on our suppliers, some of which have limited resources and production capacity.
From time to time, we have experienced delayed delivery from suppliers of
modems, servers, and other equipment. In particular, our servers are a critical
part of our infrastructure and we will need to add additional servers to expand
our operations. We currently purchase, and expect to continue to purchase, all
of our servers from Sun Microsystems. Since we do not have an agreement with Sun
Microsystems regarding future server purchases, we have no assurance that Sun
Microsystems will continue to supply servers to us. We may be unable to
implement our planned expansion and our users may be unable to connect to our
network if:
- we are not able to obtain additional modems, servers and other
equipment in a timely manner;
- such equipment is not available on commercially acceptable terms; or
- we are unable to develop alternative sources of supply, if required.
WE HAVE LIMITED EXPERIENCE WITH THE THIRD-PARTY SOFTWARE WE USE TO RUN OUR
OPERATIONS.
Virtually every aspect of our operations, including finance, billing,
accounting, storage and retrieval of user data, and advertisement tracking, uses
or interfaces with a centralized software system provided by Oracle. We have
only limited experience with the operation of this system. Difficulty with the
operation of, or errors, defects or malfunctions in the operation of this
system, could result in loss of data, erroneous overcharges or undercharges to
advertising customers or disruption of operations, any one of which could
materially and adversely affect our business, results of operations and
financial condition.
FAILURE TO ACHIEVE YEAR 2000 COMPLIANCE MAY HAVE MATERIAL ADVERSE EFFECTS ON OUR
BUSINESS.
A significant portion of the world's computer hardware and software has
historically used only two digits to identify the year in a date, often meaning
that the computer will fail to distinguish dates in the 21st century from dates
in the 20th century. As a result, various problems may arise from the improper
processing of dates and date-sensitive calculations by computers and other
machinery as the Year 2000 is approached and reached. These problems include
system failures or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar business activities.
Our failure, or the failure of third parties on which we rely, to adequately
address Year 2000 readiness issues could result in an interruption, or a
failure, of our normal business activities or operations. Presently, we believe
that the primary risks that we face with regard to the Year 2000 are those
arising from third-party services or products. In particular, we depend heavily
on third party vendors to provide both network services and equipment. A
significant Year 2000-related disruption of these network services or equipment
could cause our users and advertisers to consider seeking alternate providers or
advertising space, or cause an unmanageable burden on user service and technical
support. This, in turn, could materially and adversely affect our business,
results of operations and financial condition.
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In addition, the failure of our internal computer systems or of third-party
equipment or software to operate without Year 2000 complications could require
us to incur significant unanticipated expenses to remedy any problems and could
expose us to claims for losses incurred by our users due to such Year 2000
complications. The defense of any such claims, with or without merit, could
require us to incur substantial costs and would divert management's time and
attention, which could have a material adverse effect on our business, results
of operations and financial condition.
Furthermore, our business depends on the continued operation of, and
widespread access to, the Internet. To the extent that the normal operation of
the Internet is disrupted by the Year 2000 issue, or if a large portion of our
users and advertisers are unable to access the Internet due to Year 2000-related
issues in connection with their own systems, our business, results of operations
and financial condition could be materially and adversely affected.
WE RELY ON A RELATIVELY NEW MANAGEMENT TEAM AND NEED ADDITIONAL PERSONNEL TO
GROW OUR BUSINESS.
Most of our senior management team has only recently joined us. For example,
Mark Goldston, our Chief Executive Officer, joined us in March 1999, Charles
Hilliard, our Chief Financial Officer, joined us in April 1999, and Perri
Procida, our Senior Vice President, Sales, joined us in May 1999. There can be
no assurance that we will successfully assimilate our recently hired officers or
that we can successfully locate, hire, assimilate and retain qualified key
management personnel. Our business is largely dependent on the personal efforts
and abilities of our senior management and certain other key personnel. Any of
our officers or employees can terminate his or her employment relationship at
any time. The loss of these certain key employees or our inability to attract or
retain other qualified employees could seriously harm our business and
prospects. We do not carry key man life insurance on any of our key employees.
Our future success also depends on our ability to attract, retain and
motivate highly skilled technical, managerial, editorial, merchandising,
marketing and user service personnel. We plan to dramatically hire additional
personnel in all areas of our business. Competition for such personnel is
intense, particularly in the Internet and high technology industry. As a result,
we may be unable to successfully attract, assimilate or retain qualified
personnel. We may also be unable to retain the employees we currently employ or
attract additional technical personnel. The failure to retain and attract the
necessary personnel could have a material adverse effect on our business,
results of operations and financial condition.
OUR OPERATIONS AND SERVICES ARE VULNERABLE TO NATURAL DISASTERS.
Our operations and services depend on the extent to which our computer
equipment and the telecommunications infrastructure of our third-party network
providers is protected against damage from fire, earthquakes, power loss,
telecommunications failures, and similar events. A significant portion of our
computer equipment, including critical equipment dedicated to our Internet
access services, is located at our headquarters and at a co-location facility in
Los Angeles, California. Despite precautions taken by us and our third-party
network providers, over which we have no control, a natural disaster or other
unanticipated problems at our headquarters, network hub, or a third-party
network provider POP could cause interruptions in the services that we provide.
If disruptions occur, we may have no means of replacing these network elements
on a timely basis or at all. We do not currently maintain fully redundant or
back-up Internet services, backbone facilities or other fully redundant
computing and telecommunications facilities. Extensive or multiple interruptions
in providing users with Internet access are a primary reason for user decisions
to stop using access services. Accordingly, any disruption of our services due
to system failure could have a material and adverse effect on our business,
results of operations and financial condition. Furthermore, we do not currently
have any business disruption insurance.
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IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE FUTURE ACQUISITIONS INTO OUR
OPERATIONS, THEN OUR RESULTS AND FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED.
We evaluate acquisition opportunities on an ongoing basis and at any given
time may be engaged in discussions with respect to possible acquisitions or
other business combinations. We may seek strategic acquisitions that can
complement our current or planned business activities. Such acquisitions may not
be available at the times or on terms acceptable to us, or at all. In addition,
acquiring a business involves many risks, including:
- potential disruption of our ongoing business and diversion of resources
and management time;
- unforeseen obligations or liabilities;
- possible inability of management to maintain uniform standards,
controls, procedures and policies;
- difficulty assimilating the acquired operations and personnel;
- risks of entering markets in which we have little or no direct prior
experience;
- potential impairment of relationships with employees or users as a
result of changes in management; and
- potential dilutive issuances of equity, large and immediate write-offs,
the incurrence of debt, and amortization of goodwill or other
intangible assets, any of which could materially or adversely affect
our results of operations and financial condition.
We cannot assure you that we will make any acquisitions or that we will be
able to obtain additional financing for such acquisitions, if necessary. If any
acquisitions are made, we cannot assure that we will be able to successfully
integrate the acquired business into our operations or that the acquired
business will perform as expected.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS AND WE MAY FAIL
TO MEET EXPECTATIONS.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, including those set forth in this "Risk
Factors" section. In future quarters, our operating results may be below the
expectations of public market analysts and investors and the price of our common
stock may fall. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
WE FACE RISKS RELATED TO THE INTERNET INDUSTRY
WE FACE RISKS RELATING TO UNCERTAIN LEGAL LIABILITY AND GOVERNMENT REGULATION
ASSOCIATED WITH THE INTERNET.
The law relating to the liability of Internet service providers for
information carried on, stored on, or disseminated through their networks is
continuing to evolve and remains unsettled. While no one has ever filed a claim
against us relating to information carried on, stored on, or disseminated
through our network, someone may file a claim of that type in the future. If
that happens, we may have to spend significant amounts of money to defend
ourselves against these claims and, if we are not successful in our defense, the
amount of damages that we may have to pay could be significant. Our liability
insurance may not cover potential claims relating to the Internet services we
provide or may not be adequate to indemnify us for all liabilities that may be
imposed on us. Any costs that we incur as a result of defending these claims or
the amount of liability that we may
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suffer if our defense is not successful could materially and adversely affect
our business, results of operations and financial condition.
Additionally, a number of legislative and regulatory proposals under
consideration by federal, state, local and foreign governmental organizations
may lead to laws or regulations concerning online content, user privacy,
taxation, parental consent for access by their minor children, access charges,
liability for third-party activities, bulk e-mail or "spam", encryption
standards, e-commerce, domain name registration and use, copyright infringement,
and other intellectual property issues. It is also uncertain as to how existing
laws will be applied by the judiciary to the Internet. The adoption of new laws
or the application of existing laws may decrease the growth in the use of the
Internet, which could in turn decrease the demand for our services, increase our
cost of doing business or otherwise have a material adverse effect on our
business, results of operations and financial condition.
We cannot predict the impact, if any, that any future regulatory changes or
developments may have on our business, results of operations and financial
condition. Changes in the regulatory environment relating to the Internet access
industry, including regulatory changes that directly or indirectly affect
telecommunication costs or increase the likelihood or scope of competition from
regional telephone companies or others, could have a material adverse effect on
our business, results of operations and financial condition.
REGULATION OF CONTENT AND ACCESS--LAWS PROTECTING MINORS. Prohibition and
restriction of Internet content and access could dampen the growth of Internet
use, decrease the acceptance of the Internet as a communications and commercial
medium, expose us to liability and thereby have a material adverse effect on our
business, results of operations and financial condition. A variety of
restrictions on content and access, primarily as they relate to children, have
been enacted or proposed. The Child Online Protection Act of 1998 prohibits and
imposes criminal penalties and civil liability on anyone engaged in the business
of selling or transferring, by means of the World Wide Web, material that is
harmful to minors without restricting access to such material by persons under
seventeen years of age. In addition, the Federal Telecommunications Act of 1996
imposes fines on any entity that knowingly permits any telecommunications
facility under such entity's control to be used to make obscene or indecent
material available to minors via an interactive computer service. Numerous
states have adopted or are currently considering similar types of legislation.
We cannot predict whether any claim under such federal statutes, similar state
statutes or common law will be asserted against us, or if asserted, whether it
will be successful. In addition, laws have been proposed which would require
Internet service providers to supply, at cost, filtering technologies to limit
or block the access of minors to unsuitable materials on the Internet. The
imposition of content restrictions and potential liability for materials carried
on or disseminated through our systems could require us to implement measures to
reduce our exposure to such liability. Such measures may require the expenditure
of substantial resources or the discontinuation of certain product or service
offerings. Further, the costs of defending against any such claims and potential
adverse outcomes of such claims could have a material adverse effect on our
business, results of operations and financial condition.
LIABILITY FOR DEFAMATION, NEGLIGENCE AND INFRINGEMENT. Because users
download and redistribute materials that are cached or replicated by us in
connection with our Internet services, claims could be made against us under
both U.S. and foreign law for defamation, negligence, copyright or trademark
infringement, or other theories based on the nature and content of such
materials. While we have attempted to obtain safe harbor protection against
claims of copyright infringement under the Digital Millenium Copyright Act of
1998, there can be no guarantee that we will prevail in any such claims. We also
could be exposed to liability with respect to the offering of third-party
content that may be accessible through our services, including links to
Web-sites maintained by our users or other third parties, or posted directly to
our Web-site, and subsequently
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retrieved by a third party through our services. It is also possible that if any
third-party content provided through our services contains errors, third parties
who access such material could make claims against us for losses incurred in
reliance on such information. You should know that these types of claims have
been successfully brought against online service providers. In particular,
copyright and trademark laws are evolving both domestically and internationally,
and it is uncertain how broadly the rights provided under these laws will be
applied to online environments. It is impossible for us to determine who the
potential rights holders may be with respect to all materials available through
our services.
PRIVACY CONCERNS. We provide users with free Internet access and other free
services in exchange for demographic information when they register with us. In
addition, we can track and use information relating to our users' online
behavior when they are connected to the Internet through our service. Internet
user privacy has become an issue both in the United States and abroad and some
commentators, privacy advocates and government bodies have recommended or taken
actions to limit the use of personal profiles or other personal information by
those collecting such information, particularly as it relates to children. For
example, the Children's Online Protection Act authorizes the Federal Trade
Commission to develop regulations for the collection of data from children by
commercial Web-site operators. However, we cannot predict the exact form of the
regulations that the FTC may adopt. There can be no assurance that the United
States or foreign nations will not adopt additional legislation to protect such
privacy. Any such action could affect the way in which we are allowed to conduct
our business, especially those aspects that involve the collection or use of
personal information, and could have a material adverse effect on our business,
results of operations and financial condition.
TAX TREATMENT OF INTERNET AND E-COMMERCE. The tax treatment of the Internet
and e-commerce is currently unsettled. A number of proposals have been made at
the federal, state and local levels and by certain foreign governments that
could impose taxes on the online sale of goods and services and certain other
Internet activities. Recently, the Internet Tax Information Act was signed into
law, placing a three-year moratorium on new state and local taxes on Internet
commerce. However, there can be no assurance that future laws imposing taxes or
other regulations on commerce over the Internet would not substantially impair
the growth of e-commerce and as a result have a material adverse effect on our
business, results of operations and financial condition.
TELECOMMUNICATIONS REGULATION. As an Internet service provider, we are not
currently directly regulated by the Federal Communications Commission or any
other agency, other than regulations applicable to businesses generally. In a
report to Congress adopted on April 10, 1998, the FCC reaffirmed that Internet
service providers should be classified as unregulated "information service
providers", rather than regulated "telecommunications providers" under the terms
of the Telecommunications Act of 1996. This finding is important because it
means that regulations that apply to telephone companies and similar carriers do
not apply to us. We also are not required to contribute a percentage of our
gross revenues to support "universal service" subsidies for local telephone
services and other public policy objectives, such as enhanced communications
systems for schools, libraries, and some health care providers. The FCC action
is also likely to discourage states from regulating Internet service providers
as telecommunications carriers or imposing similar subsidy obligations.
Nevertheless, Internet-related regulatory policies are continuing to
develop, and it is possible that we could be exposed to regulation in the
future. For example, in the same report to Congress, the FCC stated its
intention to consider whether to regulate voice and fax telephony services
provided over the Internet as "telecommunications" even though Internet access
itself would not be
19
<PAGE>
regulated. We cannot predict whether the FCC will modify its current policies
against regulation of Internet service providers.
We could also be affected by any change in the ability of our users to reach
our network through a dial-up telephone call without any additional charges. The
FCC has ruled that connections linking end users to their Internet service
providers are jurisdictionally interstate rather than local, but the FCC did not
subject such calling to the access charges that apply to traditional
telecommunications companies. Local telephone companies assess access charges to
long distance companies for the use of the local telephone network to originate
and terminate long distance calls, generally on a per-minute basis. We could be
adversely affected by any regulatory change that would result in application of
access charges to Internet service providers because this would substantially
increase the cost of using the Internet. Since the largest component of our
operating costs is comprised of telecommunications costs, any increase in such
costs would have a material adverse effect on our business, results of
operations and financial condition.
State public utility commissions generally have declined to regulate
enhanced or information services. Some states, however, have continued to
regulate particular aspects of enhanced services in limited circumstances, such
as where they are provided by incumbent local exchange carriers that operate
telecommunications networks. Moreover, the public service commissions of some
states continue to review potential regulation of such services. We cannot
assure you that state regulatory authorities will not seek to regulate aspects
of these activities as telecommunications services.
WORKFORCE INVESTMENT ACT OF 1998. Section 508 of the Workforce Investment
Act of 1998 requires that all Web-sites operated by a federal agency, as well as
those operated by anyone doing business with the federal government, modify
their Web-sites to make them accessible to those who are handicapped. There are
proposals to extend this Act to all Web-sites, which could increase our costs
and make our service less attractive to the non-handicapped.
SEASONAL TRENDS IN INTERNET USAGE AND ADVERTISING SALES MAY NEGATIVELY AFFECT
OUR BUSINESS.
Seasonal trends could affect the advertising revenues we generate from
operating our Internet services. To the extent that our advertising revenues
depend on the amount of usage by our users, any seasonal fluctuations in
Internet usage could affect our advertising revenues during such periods of
fluctuation. In addition, the rate at which new users sign up for our services
may be lower during certain seasons and holiday periods. Because our operating
history is so limited, it is difficult for us to accurately predict these trends
and plan accordingly. Since our operating expenses are based on our expectations
of future revenues, it is possible that seasonal fluctuations could materially
and adversely affect our business, results of operations and financial
condition.
IF INTERNET USAGE DOES NOT CONTINUE TO GROW, WE MAY NOT BE ABLE TO EXECUTE OUR
BUSINESS PLAN.
If the use of the Internet does not continue to grow or evolves in a way
that we cannot address, our business, financial condition and operating results
could be materially and adversely affected. Substantially all of our revenues
are dependent on the continued use and expansion of the Internet. Use of the
Internet has grown dramatically, but no assurance can be given of the continued
use and expansion of the Internet. A decrease in the demand for Internet
services or a reduction in the currently anticipated growth for such services
could have a material adverse effect on our business, results of operations and
financial condition. We have based our business model on certain assumptions
regarding the continued growth of use of the Internet. If these assumptions turn
out to be incorrect, our projections may be materially different than actual
results or circumstances, which could have a material adverse effect on our
business, results of operations and financial condition.
20
<PAGE>
PROTECTION OF OUR DOMAIN NAMES IS UNCERTAIN.
We currently hold the Web domain name relating to our brand, NetZero.com, as
well as numerous other related Web domain names. The acquisition and maintenance
of domain names generally is regulated by governmental agencies and their
designees. The regulation of domain names in the United States and in foreign
countries is subject to change in the near future. Such changes in the United
States are expected to include a transition from the current system to a system
which is controlled by a non-profit corporation and the creation of additional
top-level domains. Governing bodies may establish additional top-level domains,
appoint additional domain name registrars, or modify the requirement for holding
domain names. As a result, we may be unable to acquire or maintain relevant
domain names in the countries in which we conduct, or plan to conduct, business.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear. Therefore,
we may be unable to prevent third parties from acquiring domain names that are
similar to, infringe upon, dilute or otherwise decrease the value of our
trademarks and other proprietary rights.
WE ARE SUBJECT TO RISKS RELATED TO THE OFFERING
NO PUBLIC MARKET EXISTS FOR OUR COMMON STOCK.
Prior to this offering, there has been no public market for our common stock
and we cannot be sure that an active trading market for our common stock will
develop or continue as a result of this offering. We will determine the initial
public offering price of the shares of our common stock through negotiations
with the underwriters. Please see "Underwriting" for more information.
THE CONCENTRATED CONTROL OF OUR COMPANY COULD ADVERSELY AFFECT STOCKHOLDERS.
After this offering, our executive officers, directors and 5% stockholders,
in the aggregate, will control % of our voting stock. As a result, these
stockholders will have significant influence and ability to control most matters
requiring board and stockholder approval, including a significant corporate
transaction like the sale of our company, a change in control or the terms of
future equity financings. Such stockholders may have interests adverse to those
of other stockholders in general, and they may use their influence to approve or
take actions which are adverse to your interests.
PURCHASERS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
If you purchase common stock in this offering, you will incur immediate and
substantial dilution in the net tangible book value of the shares purchased. We
estimate this dilution to be approximately $ per share, or
approximately % (based on an assumed initial public offering price of
$ ). Additional dilution may occur upon the exercise of outstanding
stock options.
OUR STOCK PRICE COULD FLUCTUATE SIGNIFICANTLY.
The trading price of our common stock is likely to be volatile and could
fluctuate widely in response to factors such as the following, some of which are
beyond our control:
- general economic factors;
- changes in expectations of our future financial performance, including
financial estimates by securities analysts and investors;
- changes in operating and stock price performance of other Internet and
online companies similar to us; or
- future sales of our common stock.
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<PAGE>
Domestic and international stock markets often experience significant price
and volume fluctuations. These fluctuations, as well as general economic and
political conditions unrelated to our performance, may adversely affect the
price of our common stock. In particular, following initial public offerings,
the market prices for stocks of Internet and technology-related companies often
reach levels that bear no relationship to the operating performance of these
companies. These market prices are generally not sustainable and could vary
widely. If our common stock trades to such high levels following this offering,
it could eventually experience a significant decline. Therefore, you may not be
able to resell shares of our stock at or for more than the price you paid.
SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD ADVERSELY AFFECT OUR
STOCK PRICE.
The market price of our common stock could decline as a result of sales by
our existing stockholders of shares of common stock in the market after this
offering, or the perception that these sales could occur. These sales also might
make it difficult for us to sell securities in the future at a time and at a
price that we deem appropriate. You should read "Shares Eligible For Future
Sale" for a more detailed discussion of when and how many additional shares of
our stock may be sold after this offering.
OUR MANAGEMENT HAS BROAD DISCRETION OVER THE USE OF THE PROCEEDS FROM THIS
OFFERING.
The net proceeds of this offering are estimated to be approximately
$ million (approximately $ million if the underwriters'
over-allotment option is exercised in full) at an assumed initial public
offering price of $ per share and after deducting the estimated
underwriting discount and estimated offering expenses. Our management will
retain broad discretion as to the allocation of the proceeds of this offering
and may use such proceeds in a manner in which you may not agree.
CERTAIN PROVISIONS IN OUR CHARTER DOCUMENTS COULD DETER TAKEOVER EFFORTS.
Provisions of our Amended and Restated Certificate of Incorporation, Bylaws
and Delaware law could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders. In addition, we are
subject to the provisions of Section 203 of the Delaware General Corporation
Law, as amended from time to time. This statute could prohibit or delay the
accomplishment of mergers or other takeover or change in control in attempts
with respect to us and, accordingly, may discourage attempts to acquire us.
22
<PAGE>
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are based on our
current expectations, assumptions, estimates and projections about us and our
industry. When used in this prospectus, the words "expects", "anticipates",
"estimates", "intends", "believes" and similar expressions are intended to
identify forward-looking statements. These statements include, but are not
limited to, statements under the captions "Risk Factors", "Use of Proceeds",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Business" and elsewhere in this prospectus.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those projected. The
cautionary statements made in this prospectus should be read as being applicable
to all related forward-looking statements wherever they appear in this
prospectus. We assume no obligation to update such forward-looking statements
publicly for any reason, or to update the reasons actual results could differ
materially from those anticipated in such forward-looking statements, even if
new information becomes available in the future.
23
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the shares of common stock offered
hereby are estimated to be approximately $ ($ million if the
underwriters exercise their over-allotment option in full) based upon an assumed
offering price of $ per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us.
We intend to use the net proceeds of the offering:
- for use in expansion of our business, including additions and
enhancements to our server and network infrastructure and the
functionality of The ZeroPort;
- as additional working capital; and
- for general corporate purposes.
As of the date of this prospectus, we cannot specify with certainty the
particular uses for the net proceeds to be received upon completion of the
offering. Pending such uses, the net proceeds of the offering will generally be
invested in short-term, interest-bearing investment-grade instruments. We intend
to maintain flexibility in our use of the proceeds of this offering. The amounts
actually expended for each of the purposes listed above are at our discretion
and may vary significantly depending upon a number of factors, including the
growth of our user base, capital spending requirements and developments in the
Internet access market. Accordingly, we reserve the right to reallocate the
proceeds of this offering as we deem appropriate.
From time to time, in the ordinary course of business, we evaluate possible
acquisitions of, or investments in, businesses, products and technologies that
are complementary to our business. A portion of the net proceeds may be used to
fund acquisitions or investments. We currently have no arrangements, agreements
or understandings, and are not engaged in active negotiations with respect to
such acquisitions or investments.
DIVIDEND POLICY
We have never declared nor paid cash dividends on our capital stock. We
currently intend to retain all available funds for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Any future determination to pay dividends will be at the
discretion of our Board of Directors and will depend on our results of
operations, financial conditions, contractual and legal restrictions and other
factors it deems relevant. We expect that any lease financing or credit
agreements we enter into will prohibit the payment of dividends without the
lender's consent.
24
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999 (a)
on an actual basis, (b) on a pro forma basis to reflect the automatic conversion
of all outstanding shares of preferred stock into shares of common stock upon
the closing of this offering, the planned reincorporation into Delaware and the
$33.3 million in proceeds from our May 1999 Series D convertible preferred stock
offering and (c) the pro forma information on an as adjusted basis to give
effect to the receipt of the estimated net proceeds from the sale of
shares of common stock at an assumed initial public offering price of $ per
share.
<TABLE>
<CAPTION>
MARCH 31, 1999
-------------------------------------
<S> <C> <C> <C>
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................................... $ 6,715 $ 39,986 $
--------- ----------- -------------
--------- ----------- -------------
Capital leases, less current portion........................................ $ 817 $ 817 $ 817
Redeemable convertible preferred stock, no-par value; actual-- 19,232,000
shares authorized, 18,105,000 shares issued and outstanding; pro forma and
pro forma as adjusted--no shares authorized, issued or outstanding........ 2,015 -- --
Stockholders' equity:
Convertible preferred stock, $0.001 par value; actual--35,181,000 shares
authorized, 27,101,000 shares issued and outstanding; pro forma and pro
forma as adjusted--10,000,000 shares authorized; no shares issued and
outstanding............................................................... 11,522 -- --
Common stock, $0.001 par value; actual--112,500,000 authorized, 25,004,000
shares issued and outstanding; pro-forma-- 500,000,000 shares authorized,
88,292,000 shares issued and outstanding (including the effect of the
conversion of 18,082,000 shares related to the May 1999 issuance of Series
D convertible preferred); pro forma as adjusted--500,000,000 shares
authorized, shares issued and outstanding............................ 755 88
Additional paid-in capital.................................................. 5,083 52,558
Note receivable from stockholder............................................ (629) (629) (629)
Deferred stock compensation................................................. (4,739) (4,739) (4,739)
Accumulated deficit......................................................... (7,132) (7,132) (7,132)
--------- -----------
Total stockholders' equity.................................................. 4,860 40,146
--------- ----------- -------------
Total capitalization........................................................ $ 7,692 $ 40,963 $
--------- ----------- -------------
--------- ----------- -------------
</TABLE>
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<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 1999 was approximately
$40.1 million, or $0.45 per share. Pro forma net tangible book value per share
represents the amount of total tangible assets less total liabilities divided by
the number of shares of common stock outstanding as of March 31, 1999 after
giving pro forma effect to the automatic conversion of all outstanding shares of
preferred stock and our May 1999 convertible preferred stock offering. After
giving effect to our sale of shares of common stock offered by this
prospectus at an assumed initial public offering price of $ per
share and after deducting estimated underwriting discounts and commissions and
estimated offering expenses, the pro forma net tangible book value of as of
March 31, 1999 would have been $ million, or $ per share. This
represents an immediate increase in pro forma net tangible book value of
$ per share to existing stockholders and an immediate dilution in
pro forma net tangible book value of $ per share to investors
purchasing common stock in this offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................... $
Pro forma net tangible book value per share as of March 31, 1999.... $ 0.45
Increase per share attributable to new investors....................
---------
Pro forma net tangible book value per share after this offering.......
---------
Dilution per share to new investors................................... $
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1999,
the difference between the number of shares of common stock purchased from us,
the total consideration paid and the average price per share paid by existing
stockholders and by new investors, assuming an initial public offering price of
$ per share and before deducting estimated underwriting discounts
and commissions and estimated offering expenses payable by us:
<TABLE>
<CAPTION>
TOTAL CONSIDERATION
SHARES PURCHASED AVERAGE
------------------------ ------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................................ % $ % $
New investors................................................
----- --- ----- ---
Total........................................................ 100% $ 100%
----- --- ----- ---
----- --- ----- ---
</TABLE>
The foregoing table gives pro forma effect to the automatic conversion of
all outstanding shares of preferred stock and our May 1999 convertible preferred
stock offering, each as if they had occurred at March 31, 1999, and assumes no
exercise of the underwriters' over-allotment option or shares underlying
outstanding options. As of March 31, 1999, options to purchase 3,455,000 shares
of common stock were outstanding at a weighted average exercise price of $0.06
per share. To the extent that these options are exercised, new investors will
experience further dilution. See "Description of Capital Stock" and note 6 of
the notes to our financial statements.
26
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
You should read the following selected financial data in conjunction with
the financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this prospectus. The statement of operations data for the period from July
21, 1997 (inception) through June 30, 1998 and the balance sheet data as of June
30, 1998 are derived from the audited financial statements of NetZero, Inc.
included elsewhere in this prospectus. The statement of operations data for the
three months ended September 30, 1998, December 31, 1998 and March 31, 1999, and
the nine months ended March 31, 1999, and the balance sheet data as of March 31,
1999 have been derived from our unaudited financial statements. The unaudited
financial statements have been prepared on the same basis as the audited
financial statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of the financial position and results of operations for the
period.
<TABLE>
<CAPTION>
NINE
JULY 21, 1997 THREE MONTHS ENDED MONTHS
(INCEPTION) ------------------------------------------- ENDED
THROUGH SEPTEMBER 30, DECEMBER 31, MARCH 31, MARCH 31,
JUNE 30, 1998 1998 1998 1999 1999
------------- -------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................. $ -- $ -- $ 122 $ 781 $ 903
Cost of revenues......................... -- 6 1,064 3,979 5,049
------------- -------------- -------------- ----------- -----------
Gross loss............................... -- (6) (942) (3,198) (4,146)
Operating expenses:
Sales and marketing.................... -- 11 138 290 439
Product development.................... -- 8 210 292 510
General and administrative............. 19 77 429 1,114 1,620
Stock-based charges.................... -- 110 46 188 344
Depreciation and amortization.......... -- 5 24 43 72
------------- -------------- -------------- ----------- -----------
Total operating expenses........... 19 211 847 1,927 2,985
Loss from operations..................... (19) (217) (1,789) (5,125) (7,131)
Interest and other income (expense),
net.................................... (6) -- (6) 30 24
------------- -------------- -------------- ----------- -----------
Net loss................................. $ (25) $ (217) $ (1,795) $ (5,095) $ (7,107)
------------- -------------- -------------- ----------- -----------
------------- -------------- -------------- ----------- -----------
Basic and diluted net loss per share..... $ -- $ (0.02) $ (0.22) $ (0.50) $ (0.67)
Shares used to calculate basic and
diluted net loss per share............. 15,000 13,451 8,025 10,277 10,587
Pro forma basic and diluted net loss per
share.................................. $ (0.28)
Shares outstanding used in pro forma
basic and diluted net loss per share
calculation............................ 25,088
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF JUNE MARCH 31,
30, 1998 1999
----------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................................. $ 1 $ 6,715
Working capital (deficit).................................................................. (23) 4,845
Total assets............................................................................... 1 10,088
Capital leases, less current portion....................................................... -- 817
Redeemable convertible preferred stock..................................................... -- 2,015
Total stockholders' equity (deficit)....................................................... (23) 4,860
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THOSE
INDICATED IN SUCH FORWARD-LOOKING STATEMENTS. SEE "INFORMATION REGARDING
FORWARD-LOOKING STATEMENTS". THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ALSO SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
NetZero is pioneering a new Internet service model that provides consumers
with free and unlimited Internet access while offering online advertisers a
highly effective way to reach those users through precise targeting technology.
We were incorporated in July 1997 and launched our service in October 1998.
For the period from inception until October 1998, we had no revenues and our
operating activities related primarily to the development of our proprietary
zCast software. Since launching our service, we have continued these operating
activities and have also focused on developing changes to The ZeroPort to
enhance its features and functionality; implementing the zCast Server network
cell infrastructure; hiring personnel; contracting with third-party
communications providers; selling advertising; marketing our service to
potential sponsors of placements on The ZeroPort and pursuing distribution
arrangements such as those with Compaq and Xerox. We have spent, and will
continue to spend, significant resources on these activities.
REVENUES. We intend to generate revenues through banner advertisements,
referrals of our users to other Web-sites, sponsorships on The ZeroPort,
performance-based agreements and distribution arrangements. Historically, The
ZeroPort has been limited in its capabilities and our revenue has been generated
primarily from non-targeted banner advertising. We anticipate that a significant
portion of our banner inventory will be sold in a similar manner in the future.
We have recently begun generating revenues from selling targeted banner
advertisements and by automatically referring our users to specified Web-sites
when they log on. We expect to release a substantially upgraded version of The
ZeroPort in the near future that will expand The ZeroPort features and offer a
number of additional ways to generate revenues, including selling exclusive and
non-exclusive sponsorships of various buttons and a marquee space on The
ZeroPort as well as sponsorships of a customizable ticker tape and browse window
on The ZeroPort. Our advertising revenues could be derived from a variety of fee
arrangements, including fixed fees or fees based on the number of users referred
to the advertiser's Web-site, the number of ads delivered, other performance
criteria, or any combination of the foregoing.
We anticipate that we will receive higher advertising rates for targeted
advertisements and sponsorships than for non-targeted banner advertisements.
However, we have limited experience in selling and managing these types of
arrangements and there can be no assurance that we will successfully sell all of
the various advertising services we intend to offer or that such arrangements
will generate significant revenues or higher advertising rates. Our success with
performance-based fee arrangements may depend on our ability to effectively
target users. We are in the early stages of that process and may encounter
technical and other limitations on our ability to successfully target users
based on their demographic information, including limitations associated with
privacy concerns. We cannot assure you that we will be able to achieve
anticipated revenues. In addition, while we believe that the growth of our user
base will enhance the value of our services to our advertising customers, there
can be no assurance that we will adequately perform under these arrangements or
that we will be able to replace such arrangements on comparable terms, if at
all. The failure to generate significant sponsorships on The ZeroPort or the
failure to replace significant contracts when they expire could adversely affect
our revenues and results of operations.
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<PAGE>
Banner advertising, sponsorship and performance-based revenues are
recognized ratably in the periods in which the advertisement or sponsorship
placement is displayed or in which the performance criteria are achieved,
provided that no significant NetZero obligations remain and collection of the
resulting receivable is probable. To the extent banner delivery commitments or
performance criteria are not met, NetZero either loses the right to such
revenues or defers the corresponding revenues until the remaining ads are
delivered or performance criteria are achieved.
Our advertising revenues are subject to the effects of seasonality.
Advertisers typically purchase impressions on a forward basis. If purchasing
patterns or timing of purchasing by advertisers were to change, our operations
could be materially affected.
Our revenues will be significantly affected by our ability to grow our user
base. If we are unable to grow our user base and maintain a favorable
demographic profile of users, we may be unable to attract significant
commitments from advertisers or satisfy our agreements with our advertisers
relating to performance criteria.
The Company does not currently anticipate that inflation will have a
material impact on its results of operations.
COST OF REVENUES. Cost of revenues consists of telecommunications costs,
allocated depreciation of our network equipment, allocated occupancy costs and
personnel and related expenses of our network. We intend to expend significant
amounts of capital and to make significant commitments to future
telecommunications capabilities with the expectation of a rapidly increasing
subscriber base and anticipated usage patterns. Our failure to accurately
forecast our users' needs could result in significant overcapacity which would
adversely impact our result of operations. Conversely, underforecasting usage
could adversely impact the ability of our users to receive adequate service and
adversely impact our reputation and our ability to maintain or increase our
subscriber base. We have a limited history in forecasting our users'
requirements and there can be no assurance that we will be able to accurately
forecast such requirements in the future.
SALES AND MARKETING. Sales and marketing expenses include salaries, sales
commissions, benefits, travel and related expenses for our direct sales force,
fees paid to third-party advertising sales agents, marketing, and sales support
functions. In an effort to increase our revenues, user base and brand awareness,
we expect to increase significantly the amount of spending on sales and
marketing over the next year. Marketing costs associated with increasing our
user base, which to date have been minimal, are expensed in the period incurred.
PRODUCT DEVELOPMENT. Product development costs include expenses for the
development of new or improved technologies designed to enhance the performance
of our service, including the salaries and related expenses for our software
engineering department, as well as costs for contracted services, content,
facilities and equipment. We believe that a significant level of product
development activity is necessary for our business and intend to increase
significantly the amount of spending to fund this activity.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
salaries, benefits and expenses for our executive, finance, legal and human
resources personnel. In addition, general and administrative expenses include
fees for professional services, occupancy costs. We expect general and
administrative expenses to increase in absolute dollars as we continue to expand
our administrative infrastructure to support the anticipated growth of our
business, including costs associated with being a public company.
STOCK-BASED CHARGES. In connection with the grant of stock options to
employees and the imposition of restrictions on shares of stock held by certain
founders during the nine months ended March 31, 1999, we recorded aggregate
deferred compensation of approximately $5.0 million. This
29
<PAGE>
deferred compensation represented the difference between the deemed fair value
of our common stock for accounting purposes and the exercise price of these
options or shares at the date of grant. Deferred compensation is presented as a
reduction of stockholders' equity and amortized over the vesting period of
applicable options, generally four years.
RESULTS OF OPERATIONS
PERIOD FROM JULY 21, 1997 (INCEPTION) THROUGH JUNE 30, 1998
NetZero began its business operations in October 1998, and as a result,
operating results for the year ended June 30, 1998 are not meaningful or
material.
THREE MONTHS ENDED DECEMBER 31, 1998 AND MARCH 31, 1999 AND NINE MONTHS
ENDED MARCH 31, 1999
The following table sets forth selected statement of operations data as a
percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------- NINE MONTHS
DECEMBER 31, MARCH 31, ENDED MARCH 31,
1998 1999 1999
-------------- ----------- ---------------
<S> <C> <C> <C>
AS A PERCENTAGE OF REVENUES
Revenues............................................................... 100% 100% 100%
Cost of revenues....................................................... 872 509 559
------- ----- -----
Gross loss............................................................. (772) (409) (459)
Operating expenses:
Sales and marketing.................................................... 113 37 49
Product development.................................................... 172 37 56
General and administrative............................................. 351 142 179
Stock-based charges.................................................... 38 24 38
Depreciation and amortization.......................................... 20 6 8
------- ----- -----
Total operating expenses........................................... 694 247 331
Loss from operations................................................... (1,466) (656) (790)
Interest and other income (expense), net............................... (5) 4 3
------- ----- -----
Net loss............................................................... (1,471)% (652)% (787)%
------- ----- -----
------- ----- -----
</TABLE>
REVENUES. Revenues for the quarter ended March 31, 1999 were $781,000,
which represented an increase of $659,000, or 540%, from $122,000 for the
quarter ended December 31, 1998. The increase was primarily attributable to
increased sales of banner advertisements.
COST OF REVENUES. Cost of revenues for the quarter ended March 31, 1999 was
$4.0 million, which represented an increase of $2.9 million, or 274%, from $1.1
million for the quarter ended December 31, 1998. The increase was primarily
attributable to increased telecommunications expense related to the growth in
our user base.
SALES AND MARKETING. Sales and marketing expenses for the quarter ended
March 31, 1999 were $290,000, which represented an increase of $152,000, or
110%, from $138,000 for the quarter ended December 31, 1998. The increase was
due to the hiring of four new salespeople into our direct sales force.
PRODUCT DEVELOPMENT. Product development expenses for the quarter ended
March 31, 1999 were $292,000, which represented an increase of $82,000, or 39%,
from $210,000 for the quarter ended December 31, 1998. The increase was due to
the hiring of seven new software engineers.
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GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
quarter ended March 31, 1999 were $1.1 million, which represented an increase of
$685,000, or 160%, from $429,000 for the quarter ended December 31, 1998. The
increase was due to the hiring of several key employees, including Mark
Goldston, our Chief Executive Officer.
STOCK-BASED CHARGES. In the nine months ended March 31, 1999, we recorded
total deferred compensation of $5.0 million in connection with stock option
grants and restricted founders' shares. We are amortizing this amount over the
vesting periods of the applicable options or shares, resulting in expense of
$277,000 for the nine months ended March 31, 1999. Stock-based charges in the
nine months ended March 31, 1999 also include a charge for $67,000 related to
the issuance of options on the Series A and B redeemable convertible preferred
stock.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
quarter ended March 31, 1999 was $43,000, which represented an increase of
$19,000 or 79%, from $24,000 for the quarter ended December 31, 1998. The
increase was due primarily to the purchase of fixed assets to be used in the
business.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income consists of
earnings on our cash and cash equivalents. Interest expense consists primarily
of interest expense on capital equipment leases. Interest income, net, for the
quarter ended March 31, 1999 was $30,000, which represented an increase of
$36,000 from net interest expense of $6,000 in the quarter ended December 31,
1998. The increase was primarily attributable to the signing of our Series C
equity investment agreement, which provided our company with $11.4 million in
cash.
INCOME TAXES. As a result of operating losses and our inability to
recognize a benefit from our deferred tax assets, we have not recorded a
provision for income tax for the nine months ended March 31, 1999. We have
provided a full valuation allowance on our deferred tax assets, consisting
primarily of net operating loss carry-forwards, because of uncertainty regarding
their realizability.
Our operating results may fluctuate substantially in the future as a result
of a variety of factors, many of which are outside of our control, including
those discussed elsewhere in this prospectus. We plan to significantly increase
our operating expenses and capital expenditures to expand our sales and
marketing efforts, promote the NetZero brand, continue to enhance the features
and functionality of The ZeroPort, upgrade our internal network infrastructure,
pursue new distribution channels and hire new personnel across all levels of our
organization. We determine our operating expenses largely on the basis of
anticipated growth in our revenues and certain of our expenses are fixed in the
short term. There are risks associated with the timing and achievement of
revenue targets due to a variety of factors, and there can be no assurance that
revenues will increase commensurately with expenses. As a result of these and
other factors, our operating results may vary substantially from quarter to
quarter. See "Risk Factors" for a discussion of some of the factors which could
lead to substantial operating losses.
In addition, seasonal trends could affect the revenues we generate. To the
extent that our revenues depend on the amount of usage by our users, any
seasonal fluctuations in Internet usage could affect our revenues during such
periods of fluctuation. Moreover, the rate at which new users sign up for our
services may be lower during certain seasons and holiday periods. Because our
operating history is so limited, it is difficult for us to accurately predict
these trends and plan accordingly. Since our operating expenses are based on our
expectations of future revenues, it is possible that seasonal fluctuations could
materially and adversely affect our business, results of operations and
financial condition.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of operating results are not necessarily a good indication of future
performance.
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LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through the
private placement of equity securities, raising $13.7 million through March 1999
and an additional $33.3 million in May of 1999. At May 31, 1999 we had $36.6
million in cash and cash equivalents.
Net cash used for our operating activities was $5.9 million for the nine
months ended March 31, 1999. Net cash used for operating activities consisted
primarily of net operating losses and increases in accounts receivable and
restricted cash balances, which were partially offset by increases in accounts
payable.
Net cash used for our investing activities was $951,000 for the nine months
ended March 31, 1999. Net cash used for investing activities consisted primarily
of capital expenditures for computer equipment, purchased software and office
equipment. As our operations expand, we anticipate that our planned purchases of
capital equipment will require significant additional expenditures over the next
12 months.
Net cash provided by our financing activities was $13.6 million for the nine
months ended March 31, 1999. Net cash provided by financing activities was
principally attributable to the private sale of convertible preferred stock.
As of March 31, 1999, our principal commitments consisted of office and
equipment leases. Future minimum cash payments under these non-cancelable
commitments are $13.7 million through the year 2009.
As of March 31, 1999, we had $6.7 million in cash and cash equivalents. We
currently anticipate that our existing cash and cash equivalents, the net
proceeds from our May 1999 Series D preferred stock financing and this offering,
proceeds from equipment leases and any cash generated from operations will be
sufficient to fund our operating activities, capital expenditures and other
obligations through at least the next 12 months. However, we may need to raise
additional funds in order to fund more rapid expansion, to expand our marketing
activities, to develop new or enhance existing services or products, to respond
to competitive pressures or to acquire complementary services, businesses or
technologies. If we are not successful in generating sufficient cash flow from
operations, we may need to raise additional capital through public or private
financings, strategic relationships or other arrangements. This additional
funding, if needed, might not be available on terms acceptable to us, or at all.
Our failure to raise sufficient capital when needed could have a material
adverse effect on our business, results of operations and financial condition.
If additional funds were raised through the issuance of equity securities, the
percentage of stock owned by our then-current stockholders would be reduced.
Furthermore, such equity securities might have rights, preferences or privileges
senior to those of our common stock.
YEAR 2000
Many existing computer systems and software are coded to accept only two
digit entries in the date code field and cannot distinguish 21st century dates
from 20th century dates. If not corrected, there could be system failures or
miscalculations causing disruptions of operations, including, among other
things, an inability to process transactions or engage in normal business
activities. As a result, many companies' software and computer systems may need
to be upgraded or replaced to comply with these "Year 2000" requirements.
OUR STATE OF READINESS
We have not assessed the impact that the Year 2000 problem may have on our
operations. We plan to implement the following process to assess and remedy any
Year 2000 problems with our operations:
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Phase I: Assessment Operations (estimated completion in August 1999);
Phase II: Prepare Formal Test Plan (estimated completion in September 1999);
Phase III: Implement Test (estimated completion in October 1999); and
Phase IV: Remediation of Year 2000 issues (estimated completion in November
1999).
While we have not formally assessed the impact that the Year 2000 problem
may have on our operations, we believe the following four distinct areas of our
operations may be affected by the Year 2000 problem:
INTERNALLY DEVELOPED SOFTWARE. We have internally developed a substantial
portion of the systems and software that we use to operate and monitor our
online operations. While we have not assessed the Year 2000 readiness of our
internally-developed systems and software, we believe that they are Year 2000
compliant because we attempted to construct them to avoid the Year 2000 problem.
THIRD-PARTY HARDWARE AND SOFTWARE SUPPLIERS. We use third-party equipment
and software that may or may not be Year 2000 compliant. As a result, our
ability to address Year 2000 issues is to a large extent dependent upon the Year
2000 readiness of these third parties' hardware and software products. These
products include servers manufactured by Sun Microsystems, Network equipment
manufactured by Cisco, database management, financial application and other
software licensed from Oracle, our advertisement server software from
NetGravity, and JAVA, a programming language licensed from Sun Microsystems that
we use to implement most of our internally developed software. We are contacting
the third parties from whom we have purchased any hardware and software products
to validate that such products are Year 2000 compliant. We intend to complete
our assessment of these parties' products by the end of August 1999. However,
since we purchased the most current product versions available from these third
parties, we believe these applications are Year 2000 compliant.
TELECOMMUNICATIONS CARRIERS. We are entirely dependent on our
telecommunications carriers to provide access between their POPs and our
network. We are initiating discussions with all of our telecommunications
carriers to determine the extent to which we are vulnerable to those third
parties' Year 2000 issues. We intend to obtain Year 2000 readiness disclosure
statements from each of these partners by the end of August 1999 to confirm that
their systems are Year 2000 compliant. In addition, we believe that several of
our telecommunications carriers have conducted Year 2000 compliance checks as a
part of their standard disaster recovery simulations. We expect to resolve any
significant Year 2000 issues with our telecommunications carriers; however, in
the event they do not achieve Year 2000 compliance, we may have to seek
alternative suppliers of telecommunications services.
NON-IT SYSTEMS. Our non-information technology systems, such as heating and
air conditioning, security systems and other embedded technology may be subject
to Year 2000 risks. If our air conditioning unit were to fail, our servers and
other electrical equipment could overheat and be seriously damaged or lost. If
our security systems were to fail, we would be exposed to a significant risk of
property loss and damage and personal injury.
THE COSTS OF ADDRESSING OUR YEAR 2000 ISSUES
To date, we have not incurred any material expense in connection with
identifying, evaluating and remediating Year 2000 compliance issues. We believe
that substantially all of the expense that we will incur in the future relating
to the Year 2000 problem will be costs associated with time spent by our
employees in the evaluation process and Year 2000 compliance in general. We do
not expect the total costs of our Year 2000 compliance efforts to be material.
However, if these costs
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are substantially higher than we anticipate, they could have a material adverse
effect on our business.
THE RISKS ASSOCIATED WITH OUR YEAR 2000 ISSUES
If Year 2000 issues prevent our users from accessing the Internet, our
business and operations will suffer. Any failure of our systems and our
communications infrastructure with respect to the Year 2000 problem could result
in:
- increased user turnover and corresponding loss of advertising revenues
resulting from decreased impressions; or
- increased allocation of our resources to address Year 2000 problems
without additional revenues commensurate with such dedication of
resources.
OUR CONTINGENCY PLANS
We have not developed a contingency plan with respect to Year 2000 risks.
However, we believe our worst case scenario is the interruption of our business
resulting from Year 2000 failure of our third party systems which provide access
between their POPs and our internal network. We plan on developing a contingency
plan in the future, but have not determined the scope of such plan, or the
timetable by which such a plan would be developed.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Software for Internal
Use", which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. We expect that the adoption of SOP 98-1
will not have a material impact on our financial position, results of operations
or cash flows. We will be required to implement SOP No. 98-1 in the first
quarter of fiscal 2000.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities". SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, start-up costs that
were capitalized in the past must be written off when SOP No. 98-5 is adopted.
We expect that the adoption of SOP No. 98-5 will not have a material impact on
our financial position, results of operations or cash flows. We will be required
to implement SOP No. 98-1 in the first quarter of fiscal 2000.
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". The statement
requires the recognition of all derivatives as either assets or liabilities in
the balance sheet and the measurement of those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the planned
use of the derivative and the resulting designation. Because we do not currently
hold any derivative instruments or engage in hedging activities, the impact of
the adoption of SFAS No. 133 is not currently expected to have a material impact
on our business, results of operations or financial condition. We will be
required to implement SFAS No. 133 in the first quarter of fiscal 2001.
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BUSINESS
NETZERO
NetZero is pioneering a new Internet service model that provides consumers
with free and easy access to the Internet while offering online advertisers a
highly effective way to reach those users through our proprietary targeting
technology. We offer users a simple and compelling proposition--free and
unlimited Internet access, as well as free e-mail and navigational tools to
enhance their online experience. The value of NetZero's proposition is evidenced
by our growth; between our October 1998 launch and June 30, 1999, approximately
1.17 million users registered for our service. During June 1999, approximately
613,000 of these users accessed our service and were delivered over 830 million
advertising impressions. Our services are offered in over 1,100 cities
nationwide.
When users access the Internet through our service, we display a small
window on their computer screen called The ZeroPort which is always visible
while they are online, regardless of where they navigate. Users can move The
ZeroPort to different locations on their screens but cannot close it or reduce
its size. The ZeroPort displays advertisements, advertiser-sponsored buttons,
icons and drop-down menus. By clicking on The ZeroPort, users can navigate
directly to sites and services such as news, sports, finance and shopping. We
generate revenues by selling advertisements and sponsorships on The ZeroPort. We
plan to expand our revenue sources to include fees from advertisers and
merchants when our users subscribe for services, purchase products or satisfy
other performance criteria.
Our service is based on two key principles. First, we provide users free
Internet access and other free services. We obtain demographic information when
users register for our services which we supplement with our ability to track
their online activity. Second, we offer advertisers access to a large audience
and enable them to target messages, based on user demographics and online
behavior, for extended periods of time. Our model combines certain of the
characteristics of network television--where a mass audience has free access to
an advertising-supported medium-- with the targeting advantages of direct
marketing. We believe NetZero is positioned to redefine the Internet access
model and the way products and services are marketed online.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET
The emergence and wide acceptance of the Internet has fundamentally changed
how millions of people worldwide share information, communicate and conduct
business. International Data Corporation (IDC) estimates that the number of
Internet users in the United States will increase from approximately 63 million
in 1998 to approximately 177 million by the end of 2003. The growth in Internet
usage is being driven by a number of factors, including:
- a large and growing installed base of personal computers;
- easier, faster, and more reliable access to the Internet;
- improvements in network security, infrastructure and bandwidth;
- the rapidly expanding availability of online content and commerce
sites; and
- an increasing amount of offline advertising promoting the Internet.
TRADITIONAL INTERNET ACCESS
There are more than 6,000 ISPs in the United States today, varying widely in
geographic coverage, user focus and the nature and quality of services provided
to users. With the exception of
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a few large providers, the vast majority of ISPs do not offer branded nationwide
coverage. A number of ISPs are beginning to supplement their basic access with
services such as e-commerce and telecommunications.
ISPs generally charge users monthly access fees and fees for additional
services, such as Web hosting. IDC estimates that users spend an average of
approximately $250 per year for Internet access. Telecommunications costs
associated with providing dial-up Internet access have declined in recent years
with the emergence of wholesale providers that resell capacity to ISPs. These
providers have built and continue to build networks on a large scale and are
able to spread the cost of their networks over multiple ISPs. Though access fees
charged to users have declined over time, they have not fallen as quickly as the
costs of personal computers or telecommunications. We believe that while users
are generally focused on speed and reliability as they evaluate Internet access
services, they are also increasingly focusing on cost, particularly as their
other computing costs decline and since the rest of their online experience is
generally free.
GROWTH OF INTERNET ADVERTISING
Traditional television, radio and print advertising has focused on building
awareness-- repeating a branded message with high frequency to a large
audience--rather than targeting individual users based on demographics or
behavior. The Internet has emerged as an attractive new medium for advertising
because it offers features that are unavailable in traditional media. For
example, the Internet enables advertisers to target specific types of users,
receive direct feedback on their advertisements, and capture valuable data on
user preferences while reaching a broad, global audience.
The Internet also represents an attractive medium for direct marketing,
which has traditionally been conducted through direct mail and telemarketing.
The interactive nature of the Internet enables direct marketers to deliver
targeted promotions to users. The success of any direct marketing campaign is
generally measured by the response rate of users. The Internet has the potential
to enable direct marketers to increase user response rates and decrease costs
per transaction by targeting campaigns to particular users based on their
demographic profile, interests and online behavior. Jupiter Communications
estimates that the amount spent on consumer Internet advertising in the United
States will grow from $1.9 billion in 1998 to $7.7 billion in 2002.
LIMITATIONS OF CURRENT INTERNET ADVERTISING
While the Internet offers advertisers and direct marketers a number of
advantages over traditional media, there remain significant challenges to
realizing the full potential of online advertising. To date, online advertising
has generally consisted of banner advertisements and sponsorships on heavily
trafficked portals and other Web content sites. We believe that users who visit
those sites tend not to spend a great deal of time on any one page and can
generally scroll traditional banner advertisements off of their screens, leading
advertisers to increasingly question the effectiveness of these advertisements.
In addition, most online advertisers are unable to successfully target their
audiences, largely due to a lack of precise demographic and navigation data on
users. As advertisers and direct marketers continue to increase their online
spending, they are seeking solutions and technologies which will enable them to
deliver highly-targeted messages, receive real-time feedback and capitalize on
other potential advantages of online advertising.
THE NETZERO SOLUTION
We have created a business model that provides free, unlimited Internet
access to users and a powerful direct marketing tool for advertisers and
sponsors.
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OUR VALUE PROPOSITION TO USERS
FREE, UNLIMITED INTERNET ACCESS AND E-MAIL. We offer users free unlimited
access to the Internet and navigational tools to enhance their online
experience. We also provide each of our users with a free e-mail account. Users
can access our services with a computer running Windows 95, Windows 98 or
Windows NT 4.x and with at least 16 MB of RAM, a 14.4 kbps or faster dial-up
modem and any standard Internet browser.
THE ZEROPORT. We combine navigational tools with our other service to
enhance our users' online experience. The ZeroPort contains buttons conveniently
displayed in a dashboard-like setting around the advertising window. These
buttons enable users to go directly to specific Web-sites across a variety of
categories. For example, The ZeroPort has a button that allows users to search
the Internet through LookSmart, an Internet services directory that currently
appears as the start page for our service. We plan to add significant
functionality to The ZeroPort, including advertiser-sponsored buttons that can
link directly to various popular Internet services and sites, as well as a
customizable ticker which can display the latest news headlines, sports scores
and stock market quotes, among other new features. Our user data enables us to
deliver information and advertising intended to be tailored to our users'
interests.
The following schematic illustrates the ZeroPort, including the features and
functions that we expect to add to the next release:
[Graphic depiction of The Zero Port, including an advertising window,
sponsorship buttons and information ticker appears here]
OUR VALUE PROPOSITION TO ADVERTISERS AND DIRECT MARKETERS
PROMINENT AND SUSTAINED ADVERTISING MEDIUM. In contrast to most portal and
content sites which display advertising, NetZero remains with users the entire
time they are online. Once users are logged on through NetZero, The ZeroPort
remains in full view throughout the session, including when they are waiting for
pages to download, navigating the Internet and even engaging in non-browsing
activities such as sending or receiving e-mail. The constant visibility of The
ZeroPort allows advertisements to be displayed for a specified period of time,
typically from 20 to 30 seconds.
DYNAMIC TARGETING AND INFORMATION GATHERING. Our users provide demographic
information when they register for our service. Utilizing our proprietary zCast
technology, we can track our users' behavior the entire time they are online
through our service. As a result, we are able to deliver targeted advertisements
and measure their effectiveness. For example, our users can receive ads from a
brokerage firm when they are viewing sites containing stock quotes or financial
news, or receive promotions from a bookseller when browsing sites containing
book reviews. We also offer advertisers the ability to display ads in The
ZeroPort while users are viewing a competitor's Web-site or when viewing the
advertisers' own Web-site, thereby complementing their site and precluding
competitive ads from being displayed at that time.
PERFORMANCE-BASED ADVERTISING. While the Internet has emerged as an
important mass advertising medium, advertisers are increasingly seeking
solutions to ensure that they maximize
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their return on investment. To meet the demands of advertisers who value
specific results from their online marketing campaigns, we intend to offer
pricing alternatives where we are paid only if our users link to an advertiser's
site and subscribe for services, purchase products or satisfy some other
performance criteria.
THE NETZERO STRATEGY
Our objective is to redefine the Internet access model and the way products
and services are marketed online. The key elements of our strategy are:
BUILD A PREMIER BRAND. We believe that establishing brand awareness is
critical to attracting and retaining users and advertisers and intend to make
brand building prominent in our marketing efforts. Our strategy is to promote
the perception of the NetZero brand among users as a premier provider of
Internet services and among advertisers as the most effective means of targeting
potential customers. To achieve this objective, we plan to advertise the NetZero
brand extensively online, as well as through traditional media, including
television, radio and print advertising. We plan to support the quality brand
image conveyed through our marketing campaign by establishing sponsorship
relationships with leading online and offline consumer brands as advertisers.
INCREASE USER BASE. We intend to continue to rapidly increase our user
base. Aggregating a large audience will provide economies of scale, increase our
attractiveness to advertisers and enhance our ability to enter into strategic
marketing arrangements. To date, our user base has grown almost exclusively
through word-of-mouth referrals by existing users. We plan to expand our
audience through more aggressive user-acquisition programs, including
co-branding, distribution of CDs to install our service, bundling and retail
distribution relationships, and television, radio and print advertising.
IMPROVE USER EXPERIENCE. We will continue efforts to improve the experience
of users and maximize their retention by enhancing the technical capabilities
and ease of use of our service, making our users' online experience more
relevant and personal, providing additional user support options and adding new
services.
PURSUE DIVERSE REVENUE SOURCES. Our service enables us to pursue revenues
from diverse sources, including banner advertising, sponsorships and e-commerce.
To date, advertisers and merchants have paid us for placements of ads and
sponsorships on The ZeroPort and for referrals to their Web-sites. We also plan
to offer advertisers enhanced advertising and tracking tools and to generate
fees through referrals and other arrangements when our users open accounts with,
or purchase products or services from, our advertisers.
MAXIMIZE SALES AND MARKETING EFFICIENCY. We intend to continue to pursue a
two-pronged strategy to sell and market advertising and sponsorship on The
ZeroPort. First, our internal sales and marketing organization will focus on
developing innovative sponsor relationships with leading brand marketers in
addition to selling banner advertisements on The ZeroPort. We believe sponsoring
arrangements will tend to have longer terms, elements of exclusivity and higher
rates than typical banner advertising. Second, we will leverage the resources of
outside sales organizations to enhance our ability to sell large quantities of
ad inventory within a short period of time. We have entered into agreements with
Adsmart, 24/7 Media and ValueClick to augment our efforts to sell traditional
banner advertising as we continue to expand our internal sales organization.
MINIMIZE NETWORK COSTS. Network costs associated with providing our service
are a major component of our cost structure. Our strategy of purchasing
telecommunications capacity from third-party wholesale providers, rather than
building and managing our own network, has enabled
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us to rapidly expand the geographic scope of our service and accommodate user
growth while reducing capital expenditures. Although we may at some point
consider investing in various forms of networking infrastructure, particularly
in cases where a given type of access would otherwise be difficult or
prohibitively costly to obtain, we currently intend to continue using wholesale
providers and to negotiate volume discounts as our purchasing power increases.
We believe this will enable us to reduce costs, continue to rapidly expand our
service coverage and to ensure reliable service through multiple wholesale
providers.
We also believe that our strategy of using wholesale providers will enable
us to remain network-independent and to switch providers or technologies as cost
or performance improvements become available. As a result, we believe we can be
flexible in responding to user demand for higher-speed access and other types of
improved service such as DSL, cable modems, high-speed wireless access and other
broadband technologies.
SOURCES OF REVENUE
We generate, or plan to generate, revenues from the following services. An
agreement with a significant customer typically involves a number of the
services offered to maximize the effectiveness of the customer's advertising or
sponsorship campaigns.
BANNER ADVERTISING. Our advertisers can currently purchase standard banner
advertising on The ZeroPort at rates comparable to those generally available for
banner advertising. Advertisers can also purchase targeted advertising on The
ZeroPort so that their advertisements are displayed only to users satisfying
certain criteria specified by our advertisers, such as gender, interests,
language preferences and geographic location. We also offer advertisers the
opportunity to target specific Web-sites so that their ads are displayed on The
ZeroPort when users are viewing such Web-sites, including those of competitors
of the advertisers. They can also purchase advertising space on TheZeroPort when
users are viewing the advertisers' own Web-sites, thereby complementing the site
and precluding competitors from displaying their advertisements on The ZeroPort
at that time. We charge our advertisers premium rates for targeted advertising
services. Direct advertisers that have placed banner advertisements on The
ZeroPort include Bell South, eBay, Microsoft, Netscape and theglobe.com.
SPONSORSHIP. The ZeroPort contains a number of buttons and, in the future,
will contain additional buttons, drop-down menus, a marquee space and a
customizable ticker tape and browse window which are or will be available for
sponsorship by advertisers. The buttons and drop-down menus will be organized
into categories such as news, sports, finance and shopping. This allows
advertisers to purchase exclusive or non-exclusive sponsorships for a specific
category, and helps direct interested users to their sites. The ticker tape will
display sports, news and stock market quotes.
WEB-REFERRALS AND E-COMMERCE. We enter into arrangements with e-commerce
merchants and service providers where we receive fees based on the number of
users who are referred to their Web-site, subscribe for their services, purchase
their products, or satisfy other performance criteria. These arrangements can be
based on our ability to direct users to specific Web-sites, on advertisements
and sponsorships on The ZeroPort, as well as on targeted e-mail messages sent
directly by advertisers to users who elect to receive such messages via their
free e-mail accounts.
OTHER. We have also received revenues from co-branding and distribution
arrangements and intend to pursue other diverse revenue opportunities.
Our revenues from any of the above sources could include a variety of fee
arrangements, including fixed fees or fees based on the number of users referred
to the advertiser, the number of ads delivered, other performance criteria, or
any combination of the foregoing.
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SALES AND MARKETING
ADVERTISING SALES
We sell and market advertising and sponsorship on The ZeroPort through our
direct sales force, which comprised 12 people as of June 30, 1999. Our sales
force is structured as a multi-region organization with regional managers, key
account managers and a national planning group. Our sales personnel operate out
of our headquarters in Westlake Village, California and our offices in New York
and San Francisco. We also have agreements with Adsmart, 24/7 Media and
ValueClick to sell traditional banner advertising as we continue to expand our
internal sales organization.
We recently started selling sponsorships for placements on, and links from,
The ZeroPort. For example, we granted eBay the sponsorship for person-to-person
auctions, linking eBay to the "Auction" button or a drop-down menu on The
ZeroPort. We expect our sponsorship arrangements could involve some level of
exclusivity and will command higher prices than traditional online advertising.
Sponsorship advertising involves a greater degree of integration and
consultation between NetZero and the marketer. We intend to focus our sales and
marketing organization on building and sustaining these relationships, including
working to select the appropriate media strategy based on the sponsor's
requirements for timing, number of impressions and desired response rate.
USER ACQUISITION
To date, we have relied extensively on word-of-mouth marketing to attract
the vast majority of our users. We plan to increase our user marketing efforts,
including television, radio and print media advertising, direct marketing
campaigns such as widespread direct mailing and distribution of CDs to install
our software, and bundling, co-branding, and retail distribution arrangements.
For instance, we have entered into the following distribution arrangements to
build our brand, acquire users and generate revenues:
COMPAQ. In April 1999, we entered into a twelve-month agreement with Compaq
under which Compaq will bundle and distribute our NetZero software with its
Presario products. Compaq will pay for substantially all of the marketing,
distribution and advertising costs of the bundled product in exchange for up to
10% of The ZeroPort's banner advertising inventory on NetZero sessions initiated
from the bundled Presario products. In addition, all users who sign up for
NetZero's service through software installed on the bundled product will be
directed to AltaVista's start page each time they log-on to NetZero's service
for the term of the agreement. With certain exceptions, through February 2000,
Compaq will not offer any other free Internet access services on its Presario
products and we will not bundle our service with the personal computers of any
other manufacturer or enter into any agreements with Compaq's retailers for the
distribution of our services.
XEROX. In July 1999, we entered into a non-exclusive arrangement with Xerox
under which Xerox agreed to bundle and distribute CDs for installing our
software with its computer peripheral products. Xerox has agreed to pay us a fee
per CD and purchase advertising from us through December 1999.
USER SUPPORT
Our user service strategy is to build programs designed to increase user
satisfaction and retention, while controlling costs and accommodating our rapid
growth. To date, our user service has been handled in-house, but we plan to
engage in selective outsourcing of certain aspects of our user service to
vendors to provide us with greater efficiency and scalability for future growth.
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We provide online and offline "self-help" services that provide a variety of
support options to our users, including our SPEEDY Assistant offline software
which is loaded onto the user's computer when the service is initially installed
from the CD and can also be downloaded from our Web-site. This offline tool
assists users in loading and operating our software, provides answers to common
questions and helps users set up their e-mail account through step-by-step
instructions. We also provide comprehensive help, tutorials, advisories, answers
to frequently asked questions and tips via our Web-site, fax back support and
e-mail. We intend to provide the same support via real-time chat and message
boards. We also provide telephone support between 8:00 a.m. and 9:00 p.m.
(Pacific time), Monday through Saturday. We have entered into an agreement with
a third party to develop and outsource a "pay for what you need" program which
will provide our users with toll-free telephone access, 24 hours per day, 7 days
per week, to a support representative for a per-incident basis charge.
Our user service organization continually monitors quantitative metrics such
as average wait time, first call resolution rate and abandon rate. We plan to
implement a problem tracking system that will allow recurring problems to be
identified and communicated to the appropriate user service function for
resolution. We are also in the process of enhancing our in-house support system
through the addition of an e-mail distribution system and a dynamic Web-based
database. The database will be accessible by our outsourcing partners, in-house
user service representatives and our customers on a real-time basis to provide
answers to frequently asked questions and to ensure delivery of user service in
a consistent manner.
TECHNOLOGY
We have developed and continue to expand a proprietary software system
called zCast that enables us to track our users' navigational activities and to
deliver highly-targeted advertising. zCast has two major components:
THE ZCAST CLIENT SOFTWARE
The zCast Client application is the software product that includes The
ZeroPort which is installed on all of our users' personal computers. The
ZeroPort is visible and appears on top of other windows while a connection to
NetZero's service is maintained. The zCast Client performs multiple tasks,
including:
- establishing a connection to the NetZero service;
- capturing demographic information;
- authenticating a user via a user ID and password;
- tracking URLs visited;
- managing the display of advertising banners;
- targeting advertising based on URL visited and on keyword search;
- logging the number of times an ad was shown and the number of times an
ad was clicked on;
- monitoring the quality of the online session (including dial-up and
network errors); and
- providing a mechanism for customer feedback.
We intend to continue to extend the functionality of The ZeroPort to enhance
our users' experience. Features under development include:
- short-cut buttons to content sites;
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- an information ticker for stocks, weather, sports and news;
- a new message indicator; and
- rich media support.
The zCast Client is a JAVA application that runs on a user's personal
computer. Using JAVA affords us the ability to run on multiple operating systems
with minimal code changes. In addition to JAVA, native Microsoft Windows
applications and system files are used to extend the functionality of the zCast
Client. The zCast Client currently operates on the Windows 95, Windows 98 and
Windows NT 4.x operating systems. We also plan to operate on the Apple Macintosh
operating system in the future.
THE ZCAST SERVER NETWORK
The zCast Server network is a group of back-end software applications
running on multiple servers that manage and collect important data relating to
each user's online session. The servers consist of the following components:
APPLICATION SERVER. The application server software interacts with The
ZeroPort to send and receive information such as authentication, playlists of
advertisements and impression and click counts. This proprietary software is
written in JAVA, which helps make interaction between The ZeroPort and the
server seamless and robust. The application server also takes advantage of
software and hardware load balancing, both of which enhance the scalability of
the system.
DATABASE SERVER. The database server stores session information, user
information and ad display and click counts. This server is based on Oracle
database technology and is designed by NetZero to handle very large volumes of
data.
AD SERVER. The ad server manages the ad inventory and determines which ads
users will view during their online session. This server is based on NetGravity
technology and has been customized by NetZero to create a playlist of
advertising banners for each online session. The implementation of the
NetGravity ad server has been further customized to significantly improve its
performance and scalability.
All of the above components run on Sun Microsystems' servers and are
connected to disk arrays. These provide NetZero with the ability to quickly
scale and improve overall system performance.
We are in the process of implementing a multiple "cell" architecture to
enhance the scalability of the zCast Server network. Each cell, which will
operate independently of other cells, will consist of application servers,
database servers and ad servers and is being designed to handle two to three
million users, based on current average usage. Once implemented, we intend to
balance traffic across different cells based on capacity, providing us with a
fault-tolerant infrastructure.
As part of our free Internet service, we provide industry standard POP3
e-mail accounts for our registered users. POP3 e-mail can be accessed by most
popular e-mail client software applications such as Microsoft Outlook Express.
Our e-mail servers run Qmail software in a Sun Sparc Solaris environment. We
have modified and continue to modify the Qmail server software to provide the
capacity to service millions of users. We have placed rigorous anti-spamming
mechanisms in place on our e-mail servers to limit abuses of our free e-mail
service.
COMMUNICATIONS NETWORK
To use our services, users initiate telephone connections between their
personal computers and computer hardware in local or regional telecommunications
facilities known as POPs. We contract for the use of POPs around the country
from various wholesale providers, including GTE
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Internetworking, Level 3 Communications, NaviNet and Apex Global Information
Systems. These providers also carry our data between their POPs and our central
computers in Los Angeles, California. Through our network providers, we are able
to offer local dial-up phone numbers in over 1,100 cities across the United
States. Thus, our users typically bear no expenses for communication beyond the
cost, if any, of an ordinary local or regional phone call. Our service provides
full Point-to-Point Protocol (PPP) access to the Internet, and supports the v.90
standard for 56 kbps connections and ISDN in certain areas. We continuously
monitor network service levels around the country and work with our partners to
help maintain high levels of network availability and throughput for our users.
Our zCast and e-mail servers reside at a co-location facility provided by
Level 3 Communications in Los Angeles, California. We are in the process of
building our own data center at our offices in Westlake Village, California,
which will be equipped with battery and generator power backup systems to
prevent outages from interruption of utility power to the building. When the
data center is complete, we will also install zCast and e-mail servers at that
facility.
COMPETITION
We compete for users and advertising customers.
COMPETITION FOR USERS
We believe that the primary competitive factors determining success in the
market for Internet users include a reputation for reliability of service,
effective customer support, pricing, easy-to-use software, geographic coverage
and scope of services. Other important factors include the timing and
introduction of new products and services and industry as well as general
economic trends. While we believe that we compete favorably with respect to
these factors, numerous of our competitors may have an advantage over us with
respect to specific factors. We currently compete with established online
service and content providers, such as America Online and The Microsoft Network,
independent national ISPs such as EarthLink, MindSpring and Prodigy, and
numerous regional and local commercial ISPs. Certain of these providers offer
significantly greater customer support and scope of services than we currently
offer. We also compete against other companies that offer free Internet access
services or free products, such as PCs, bundled with, or as promotions for,
access services, and expect that more companies will begin to offer such
services or products in the future. We also compete with, and expect increased
competition from, telecommunications service providers, such as AT&T, GTE and
MCI WorldCom. These companies generally have far greater resources, distribution
channels and brand awareness as well as lower costs because they control the
telecommunications services we are required to purchase. This cost advantage,
which could result in significant discounts to the user, could significantly
increase competitive pressures on us. We also believe that new competitors,
including large computer hardware and software, media and telecommunications
companies, will continue to enter the Internet access market and that our
competition will increase as large diversified telecommunications and media
companies acquire ISPs and as ISPs consolidate into larger, more competitive
companies. Diversified competitors may also bundle other services and products
with Internet connectivity services, potentially placing us at a significant
competitive disadvantage.
We also face competition from companies that provide broadband connections
to users' homes, including local and long-distance telephone companies, cable
television companies, electric utility companies, and wireless communications
companies. These companies may use broadband technologies to include Internet
access or business services such as Web hosting in their basic bundle of
services or may offer Internet access or business services for little or no
additional charge. Broadband technologies enable users to access the Internet at
much faster speeds than the dial-up service we currently offer. While the market
for such broadband technologies is still
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emerging, we believe it will continue to grow and pose an increasingly
significant source of competition.
COMPETITION FOR ADVERTISING CUSTOMERS
We believe that the primary competitive factors determining success in the
market for advertising customers include the size and demographic profile of a
user base, the ability to target users based on specific demographic criteria,
pricing and geographic coverage. While we believe that we compete favorably with
respect to these factors, numerous of our competitors may have an advantage over
us with respect to specific factors. We compete for Internet advertising and
sponsorship revenues with certain major ISPs, content providers, large Web
publishers, Web search engine and portal companies, Internet advertising
providers, content aggregation companies, and various other companies which
facilitate Internet advertising. Many of these companies have longer operating
histories, greater name recognition, larger user bases and significantly greater
financial, technical and marketing resources than we do. This may allow them to
respond more quickly than we can to new or emerging technologies and changes in
advertiser requirements. It may also allow them to devote greater resources than
we can to the development, promotion and sale of their products and services.
Such competitors may also engage in more extensive research and development,
undertake more far-reaching marketing campaigns, adopt more aggressive pricing
policies and make more attractive offers to existing and potential employees,
strategic partners, advertisers and Web publishers. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products or services to address the needs of our prospective advertising
and sponsorship customers. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share. We also compete with
television, radio, cable and print media for a share of advertisers' total
advertising budgets.
INTELLECTUAL PROPERTY
Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks, which we protect through a
combination of patent, copyright, trade secret and trademark law. We have filed
four patent applications relating to NetZero's techniques for delivering
advertisements on computer desktops.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to
and distribution of our technologies, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights from
unauthorized use or disclosure, parties may attempt to disclose, obtain or use
NetZero's solutions or technologies. We cannot be certain that the steps we have
taken will prevent misappropriation of our solutions or technologies,
particularly in foreign countries where the laws or law enforcement may not
protect our proprietary rights as fully as in the United States. We have
licensed, and may license in the future, elements of our trademarks, trade dress
and similar proprietary right to third parties. While we attempt to ensure that
the quality of our brand is maintained by such business partners, such partners
may take actions that could materially and adversely affect the value of our
proprietary rights or reputation.
Our zCast technology collects and utilizes data derived from our user
activity. This data is used for ad targeting and measuring ad performance.
Although we believe that we have the right to use such data, there can be no
assurance that third parties will not assert claims against us for using such
information. In addition, others may claim rights to such information. We may
also be required, upon request, to delete "identifying information" of users
under the age of 18.
We cannot be certain that any of our proprietary rights will be viable or of
value in the future since the validity, enforceability and scope of protection
of certain proprietary rights in Internet-
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related industries is uncertain and still evolving. In particular, there can be
no assurance that any of our patent, copyright or trademark applications, now
pending or to be filed in the future, will be approved. Even if they are
approved, such patents, trademarks or copyrights may be successfully challenged
by others or invalidated. If our trademark registrations are not approved
because third parties own such trademarks, our use of the trademarks will be
restricted unless we enter into arrangements with such third parties. These
arrangements may not be available on commercially reasonable terms.
Furthermore, third parties may assert infringement claims against us. From
time to time we may be subject to claims in the ordinary course of our business,
including claims of alleged infringement of the trademarks, patents and other
intellectual property rights of third parties by us or our users. Any such
claims, or any resultant litigation, should it occur, could subject us to
significant liability for damages and could result in the invalidation of our
proprietary rights. In addition, even if we were to win any such litigation,
such litigation could be time-consuming and expensive to defend, and could
result in the diversion of our time and attention, any of which could materially
and adversely affect our business, results of operations and financial
condition. Any claims or litigation may also result in limitations on our
ability to use such trademarks, patents and other intellectual property unless
we enter into arrangement with such third parties, which may be unavailable on
commercially reasonable terms.
PRIVACY POLICY
We believe that issues relating to the privacy of Internet users and the use
of personal information about these users are critically important as the
Internet and its commercial use grow. We have adopted and disclosed to our users
a detailed policy outlining the permissible uses of information about users and
the extent to which such information may be shared with others. Our users must
acknowledge and agree to this policy when registering to use our service. We do
not sell or license to third parties any personally identifiable information
about users unless they specifically authorize us to do so. However, we do use
information about users to improve the effectiveness of advertising by our
advertising customers. We are a member of the TRUSTe program, an independent
non-profit organization that audits the privacy statements of Web-sites and
their adherence to those privacy statements.
EMPLOYEES
As of June 30, 1999, we employed 116 persons, including 22 in sales and
marketing, 20 in customer care, 33 in product development, 15 in information
systems and 26 in finance, accounting and administration. None of our employees
are subject to any collective bargaining agreement.
FACILITIES
Our principal executive offices are located in a 48,000 square feet facility
in Westlake Village, California under a lease expiring in March 2009. We also
have leased space for our sales and marketing efforts in San Francisco and New
York. We are continually evaluating our facilities requirements.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding our directors,
executive officers and key employees as of June 30, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---------------------------- --- -----------------------------------------------------
<S> <C> <C>
Mark R. Goldston............ 44 Chairman, Chief Executive Officer and Director
Ronald T. Burr.............. 34 President, Chief Technology Officer, Co-founder and
Director
Charles S. Hilliard......... 35 Senior Vice President, Finance and Chief Financial
Officer
Frederic A. Randall, Jr..... 42 Senior Vice President, General Counsel and Secretary
Perri S. Procida............ 42 Senior Vice President, Sales
Stacy A. Haitsuka........... 33 Senior Vice President, Technology and Co-Founder
Harold R. MacKenzie......... 33 Vice President, Software Development and Co-Founder
Marwan A. Zebian............ 39 Vice President, Networking and Communications and Co-
Founder
Janet C. Daly............... 38 Vice President, Marketing
David J. Dowling............ 32 Vice President, Business Development
Dennis L. Gordon............ 49 Vice President, Information Systems and Customer Care
James T. Armstrong(1)(2).... 33 Director
David C. Bohnett(1)......... 43 Director
Jennifer S. Fonstad(1)...... 33 Director
Bill Gross(2)............... 41 Director
Paul G. Koontz(2)........... 39 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
MARK R. GOLDSTON has been our Chairman and Chief Executive Officer and a
director since March 1999. Prior to joining NetZero, Mr. Goldston served as
Chairman and Chief Executive Officer of The Goldston Group, a strategic advisory
firm, from December 1997 to March 1999. From April 1996 to December 1997, he
served as President, Chief Executive Officer and a director of Einstein/Noah
Bagel Corp. after founding and serving his initial term with The Goldston Group
from June 1994 to April 1996. Mr. Goldston also served as President and Chief
Operating Officer of L.A. Gear from September 1991 to June 1994 and as a
principal of Odyssey Partners, L.P., a private equity firm, from September 1989
to September 1991. Mr. Goldston received his M.B.A. (M.M.) from the J.L. Kellogg
School at Northwestern University and his B.S.B.A. in Marketing and Finance from
Ohio State University.
RONALD T. BURR is a co-founder of NetZero and has been our President and a
director since July 1997, and our Chief Technology Officer since March 1999. Mr.
Burr was also our Chief Executive Officer from July 1997 to March 1999. From
1991 to 1998, Mr. Burr was President of Impact Software, a software consulting
firm which he co-founded. From 1989 to 1991, Mr. Burr held a senior position as
a consulting technical team leader on a development project jointly produced by
IBM and Security Pacific Automation Company. From 1983 to 1989, Mr. Burr held
various management positions, including vice president of software development
with Vault Corporation, an Allen & Co. venture-funded software startup.
CHARLES S. HILLIARD has been our Senior Vice President, Finance and Chief
Financial Officer since April 1999. Prior to joining NetZero, Mr. Hilliard
served as an investment banker with Morgan Stanley Dean Witter & Co. from May
1994 to April 1999, most recently as a Principal in the
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Corporate Finance Department. From August 1990 to May 1994, he served in the
Mergers & Acquisitions and Corporate Finance departments of Merrill Lynch & Co.
Mr. Hilliard served as a tax accountant with Arthur Andersen & Co. from
September 1985 to July 1988 and was licensed as a Certified Public Accountant in
January 1988. Mr. Hilliard received his B.S. in Business Administration from the
University of Southern California and his M.B.A. with distinction from the
University of Michigan.
FREDERIC A. RANDALL, JR. has been our Senior Vice President and General
Counsel since March 1999. Mr. Randall was appointed Secretary in May 1999. Prior
to joining NetZero, Mr. Randall was a partner at Brobeck, Phleger & Harrison LLP
from January 1991, and an associate from 1984 to December 1990. Mr. Randall
received his B.A. in English Literature with distinction from the University of
Michigan and his J.D., CUM LAUDE, from the University of San Francisco School of
Law.
PERRI S. PROCIDA has been our Senior Vice President, Sales since May 1999.
From October 1998 to April 1999, Ms. Procida acted as an independent consultant
for various Internet companies. From September 1996 to September 1998, Ms.
Procida was the Senior Vice President, Network Sales of the UPN Television
Network. From October 1979 to September 1996, she held various positions at NBC
Television Network, including Vice President of News Sales. Ms. Procida received
her B.S. from Syracuse University, majoring in Radio/Television and English.
STACY A. HAITSUKA is a co-founder of NetZero and has been our Senior Vice
President, Technology since March 1999. From July 1997 to March 1999, Mr.
Haitsuka was our Chief Technology Officer and a member of our board of
directors. Mr. Haitsuka also served as our Secretary from July 1997 to May 1999.
From May 1991 to September 1998, Mr. Haitsuka was the vice-president of Impact
Software, a software consulting company which he co-founded. Prior to May 1991,
Mr. Haitsuka held various positions at Security Pacific Automation Company. Mr.
Haitsuka received his B.S. in Computer Science from California State University
at Dominguez Hills.
HAROLD R. MACKENZIE is a co-founder of NetZero and has been our Vice
President, Software since July 1997. Prior to joining NetZero, he was a manager
with Impact Software from September 1996 to August 1998. From December 1995 to
September 1996, Mr. MacKenzie was an independent consultant focusing on custom
computer applications. From February 1992 to December 1995, Mr. MacKenzie was a
senior consultant for Andersen Consulting. From 1989 to 1992, he worked for the
Robotics Division of Seiko Instruments, Inc. Mr. MacKenzie received his B.S. in
Computer Science from California State University, Northridge.
MARWAN A. ZEBIAN is a co-founder of NetZero and has been our Vice President,
Networking and Communications since July 1997. Prior to joining NetZero, Mr.
Zebian was a technical expert with Impact Software from 1994 to 1998. From 1990
to 1994, Mr. Zebian founded and operated Megasoftware Engineering. From 1989 to
1991, Mr. Zebian held various technical positions at Security Pacific Automation
Company.
JANET C. DALY has been our Vice President of Marketing since December 1998.
Prior to joining NetZero, Ms. Daly was the Vice President of Marketing of
Quarterdeck from November 1997 to August 1998. From March 1996 to November 1997,
she was the Director of Marketing of CyberMedia. From September 1994 through
March 1996, Ms. Daly was the Senior Brand Manager and the Product Marketing
Manager, Consumer Division at Davidson and Associates. From November 1991 to
August 1994, Ms. Daly was the Senior Marketing Manager at Symantec-Peter Norton
Group. Ms. Daly received her B.A. from the University of California at Santa
Barbara.
DAVID J. DOWLING has been our Vice President of Business Development since
April 1999. From March 1997 to March 1999, he was President of media.com, the
interactive media and marketing communications affiliate of Grey Advertising.
From January 1996 to March 1997,
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Mr. Dowling served as the Director of Media for Grey Interactive. From September
1994 through January 1996, Mr. Dowling served as the Director of Media
Connections, another affiliate of Grey Advertising. Mr. Dowling received his
B.S., CUM LAUDE, in Marketing from the University of Connecticut.
DENNIS L. GORDON has been our Vice President, Customer Care since April 1998
and also our Vice President of Information Systems since March 1999. Prior to
joining NetZero, Mr. Gordon held various information technology management and
technical positions with the Southern California Gas Company, a subsidiary of
Pacific Enterprises, from 1977 to 1998.
JAMES T. ARMSTRONG has been a director since September 1998. Mr. Armstrong
has been a principal with idealab! Capital Partners since August 1998. From May
1995 to August 1998, Mr. Armstrong was a senior associate with Austin Ventures.
From September 1989 to March 1992, Mr. Armstrong was a senior auditor with Ernst
& Young. Mr. Armstrong serves on the board of directors of several private
companies including CarsDirect.com, Aveo, OpenSales.com, and Jobs.com. Mr.
Armstrong received his B.A. in Economics from the University of California at
Los Angeles and his M.B.A. with honors from the University of Texas.
DAVID C. BOHNETT has been a director since December 1998. Mr. Bohnett served
as Chairman of the Board and Secretary of GeoCities, which he founded, from
November 1994 until May 1999, when GeoCities merged with Yahoo!. From November
1994 to April 1998, Mr. Bohnett also served as GeoCities' Chief Executive
Officer and President. From November 1994 to November 1997, Mr. Bohnett also
served as GeoCities' Chief Financial Officer. Mr. Bohnett also serves on the
Board of Directors of Stamps.com. Inc. and several other private companies. Mr.
Bohnett received his B.S. degree in Business Administration from the University
of Southern California and his M.B.A. degree in Finance from the University of
Michigan.
JENNIFER S. FONSTAD has been a director since January 1999. Ms. Fonstad is a
partner with Draper Fisher Jurvetson. Ms. Fonstad also serves on the board of
directors of several private companies including iShip.com, Conduit,
Saltare.com, Global Sight and Troika Networks. From January 1997 to May 1997,
she worked with SensAble Technologies. She held management positions with the
Planning Technologies Group, now part of the Nextera Group, from January 1995 to
May 1996 and a start-up based in Central Europe from September 1991 to May 1993.
Ms. Fonstad began her career as an Associate Consultant with Bain & Company. Ms.
Fonstad received her B.S. CUM LAUDE in Economics from Georgetown University and
her M.B.A. with distinction from Harvard.
BILL GROSS has been a director since September 1998. Since March 1996, Mr.
Gross has served as Chairman of the Board, Chief Executive Officer and President
of Bill Gross' idealab!, an incubator and venture capital firm which he founded
that specializes in Internet companies. He also has served as a Managing
Director of idealab! Capital Management I, LLC, a venture capital firm, since
March 1998. From June 1991 to January 1997, he served as Chairman of Knowledge
Adventure, Inc., an educational software developer of multimedia CD-ROMs for
children, which was founded by Mr. Gross. From February 1986 to March 1991, he
was a developer at Lotus Development Corporation. Mr. Gross serves on the board
of directors of Ticketmaster Online-CitySearch, Inc. (formerly CitySearch, Inc.)
and GoTo.com, Inc. He also serves on the board of directors of several private
companies. Mr. Gross received his B.S. in Mechanical Engineering from the
California Institute of Technology.
PAUL G. KOONTZ has been a director since January 1999. Since 1996, Mr.
Koontz has been a member of Foundation Capital Management II L.L.C., the general
partner of Foundation Capital II, L.P. From 1995 to 1996, he was with Sutter
Hill Ventures and in 1994 he was the initial Vice President of Marketing of
Netscape Communications Corporation. From 1987 to 1994, Mr. Koontz was with
Silicon Graphics, Inc., where he held a number of positions, including Director
of
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Marketing. Mr. Koontz serves on the boards of directors of Onyx Software
Corporation and several privately held companies. Mr. Koontz received his B.S.
in mechanical engineering from Princeton University and his Masters in
engineering management from Stanford University.
BOARD OF DIRECTORS
Our board of directors currently comprises seven directors. Directors are
elected by the stockholders at each annual meeting of stockholders and serve for
one year or until their successors are duly elected and qualified. However, our
certificate of incorporation provides that, following the offering, our board of
directors will be divided into three classes as nearly equal in size as possible
with staggered, three-year terms. The term of office of our Class I directors
will expire at the annual meeting of stockholders to be held in 2000; the term
of office of our Class II directors will expire at the annual meeting of
stockholders to be held in 2001; and the term of office of our Class III
directors will expire at the annual meeting of the stockholders to be held in
2002. At each annual meeting of the stockholders, beginning with the 2000 annual
meeting, the successors to the directors whose terms will then expire will be
elected to serve from the time of their election and qualification until the
third annual meeting following their election or until their successors have
been duly elected and qualified, or until their earlier resignation or removal,
if any. Messrs. Bohnett and Koontz have been designated as Class I directors;
Mr. Burr and Ms. Fonstad have been designated as Class II directors; and Messrs.
Armstrong, Goldston and Gross have been designated as Class III directors. The
classification of our board of directors could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of NetZero.
BOARD COMMITTEES
The board has established an audit committee to meet with and consider
suggestions from members of management and our internal accounting personnel, as
well as our independent accountants, concerning our financial operations. The
audit committee also has the responsibility to review our audited financial
statements and consider and recommend the employment of, and approve the fee
arrangements with, independent accountants for both audit functions and for
advisory and other consulting services. The audit committee is currently
comprised of Messrs. Armstrong and Bohnett and Ms. Fonstad. The board has also
established a compensation committee to review and make recommendations to the
board regarding the compensation and benefits for our key executive officers,
administer our stock purchase, equity incentive and stock option plans. The
compensation committee is currently comprised of Messrs. Armstrong, Gross and
Koontz.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee is or has been an employee
of ours at any time since our formation. None of our executive officers serves
as a member of the board of directors or compensation committee of any entity
that has one or more executive officers serving as a member of our board of
directors or compensation committee.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
Our directors receive no cash remuneration for serving on the board of
directors or any board committee; however, directors are reimbursed for all
reasonable expenses incurred by them in attending board and committee meetings.
In December 1998, David C. Bohnett was granted an option to purchase 225,000
shares of Series C preferred stock at an exercise price of $0.4297. The
50
<PAGE>
options vest ratably over a four year period. Mr. Bohnett also purchased 101,260
shares of NetZero's Series B preferred stock in January 1999 for an aggregate
purchase price of $15,000.
Certain non-employee directors may also receive option grants and other
equity incentives under our new 1999 Stock Incentive Plan, including the
director fee option grant programs in effect under that plan. See "--1999 Stock
Incentive Plan" below.
Employee directors are also eligible to receive stock option grants and
direct issuances of common stock under our 1999 Stock Incentive Plan. See
"--1999 Stock Incentive Plan".
EXECUTIVE COMPENSATION
The following summary compensation table sets forth information concerning
cash and non-cash compensation earned during the fiscal year ended June 30, 1999
by our current Chief Executive Officer, and one other executive officer who
acted as our chief executive officer during the fiscal year ended June 30, 1999
prior to the current Chief Executive Officer. None of our other executive
officers received total compensation in excess of $100,000 during the fiscal
year ended June 30, 1999. Since the close of our June 30, 1999 fiscal year, we
have added several additional officers. For a list of our current executive
officers and certain members of our senior management, see "--Directors and
Executive Officers".
SUMMARY COMPENSATION TABLE FOR FISCAL YEAR 1999
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
--------------
ANNUAL COMPENSATION SECURITIES
------------------------ OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) COMPENSATION($)
- --------------------------------- ----------- ----------- ----------------------- -------------- ---------------------
<S> <C> <C> <C> <C> <C>
Mark R. Goldston(1) ............. 56,154 70,383 -- 6,286,383 --
Chairman and Chief Executive
Officer
Ronald T. Burr .................. 102,542 25,000 -- -- --
President, Chief Technology
Officer, Co-Founder and
director
</TABLE>
- ------------------------
(1) Mr. Goldston was hired as NetZero's Chief Executive Officer in March 1999.
In addition to the above named executive officers for the fiscal year ended
June 30, 1999, NetZero currently employs certain other executive officers who it
anticipates will qualify as named executive officers in future years. Those
executives include Charles S. Hilliard, Senior Vice President, Finance and Chief
Financial Officer (annual salary of $140,000), Perri S. Procida, Senior Vice
President, Sales (annual salary of $135,000) and Frederic A. Randall, Jr.,
Senior Vice President, General Counsel and Secretary (annual salary of
$135,000).
STOCK OPTIONS GRANTED DURING FISCAL YEAR 1999
The following table sets forth certain information regarding options to
purchase common stock granted to named executive officers during the fiscal year
ended June 30, 1999 including the potential realizable value over the ten-year
term of the options, based on assumed, annually compounded rates of stock value
appreciation. These assumed rates of appreciation comply with the rules of the
Securities and Exchange Commission and do not represent our estimate of future
stock price. Actual gains, if any, on stock option exercises will be dependent
on the future performance of our common stock. No stock appreciation rights were
granted to such individuals during such year.
51
<PAGE>
The option for Mark Goldston was granted under our 1999 Stock Option/Stock
Issuance Plan. See "Employment Agreements and Change in Control Arrangements"
for more information on the vesting of the option shares.
During the fiscal year ended June 30, 1999, we granted options to purchase
an aggregate of 17,128,182 shares of common stock. The total options include Mr.
Hilliard's option to purchase 1,200,000 shares of our common stock and Mr.
Randall's option to purchase 1,050,000 shares of our common stock. Please see
"--Employment Agreements and Change in Control Arrangements" for specific option
information for Mr. Goldston, Mr. Hilliard and Mr. Randall.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENTAGE OF RATES OF STOCK
SECURITIES TOTAL OPTIONS MARKET APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE VALUE AT TERM
OPTIONS EMPLOYEES IN PRICE PER DATE OF EXPIRATION --------------------------------
NAME GRANTED(#) 1999(#) SHARE GRANT(1) DATE 0% 5% 10%
- ------------------------ ----------- --------------- ----------- ----------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark R. Goldston........ 6,286,383 36.7% $ 0.10 $ 0.70 3/19/09 3,771,830 6,539,261 10,785,043
Ronald T. Burr.......... 0 -- -- -- -- --
</TABLE>
- ------------------------
(1) All options were granted at an exercise price which our board of directors
believed to be equal to the fair market value of our common stock on the
date of grant. Based upon a subsequent review, we determined the deemed fair
value of the common stock for financial accounting purposes to be as
reflected in the "Market Value at Date of Grant" column. The amount shown in
the "0%" column reflects the difference between the exercise price and the
deemed fair market value as of the date of option grant, as determined in
our subsequent review.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED JUNE 30, 1999 AND YEAR-END
OPTION VALUES
The following table sets forth certain information concerning options to
purchase common stock exercised by the named executive officers during the
fiscal year ended June 30, 1999. None of the named executive officers held any
unexercised stock options or stock appreciation rights on June 30, 1999.
<TABLE>
<CAPTION>
SHARES ACQUIRED ON VALUE
NAME EXERCISE REALIZED
- ----------------------------------------------------------------------------- -------------------- -------------
<S> <C> <C>
Mark R. Goldston............................................................. 6,286,383 $ 3,771,830
Ronald T. Burr............................................................... -- --
</TABLE>
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
Mark R. Goldston entered into a four-year employment agreement, effective as
of March 20, 1999, pursuant to which Mr. Goldston serves as our Chief Executive
Officer and Chairman. Pursuant to this agreement, Mr. Goldston receives a base
salary of $200,000 per year and during the first two years of the agreement, Mr.
Goldston receives a guaranteed bonus of $200,000 per year, payable in four
quarterly installments. Mr. Goldston is also entitled to receive a signing bonus
of $300,000 payable on January 1, 2000 so long as he is employed by us on such
date. In addition, we gave Mr. Goldston benefits that we make available to our
employees in comparable positions, and we granted Mr. Goldston an immediately
exercisable option to purchase 6,286,383 shares of our common stock. Mr.
Goldston exercised his option to purchase common stock in full, however, the
option shares are subject to repurchase by us at the price paid for such shares.
Our repurchase right lapses pursuant to a forty-eight equal monthly vesting
schedule. If Mr. Goldston's employment is terminated by us without cause, or if
following a change in control of NetZero, Mr. Goldston resigns for certain
specified reasons, he will be entitled to receive a $1,000,000 lump sum
severance payment. In addition, if Mr. Goldston's employment is terminated by us
without cause within the first year of his employment, an additional 25% of his
option shares of common stock will
52
<PAGE>
vest, and if his employment is terminated by us without cause following the
first year of his employment, all of his shares will vest. Mr. Goldston will
also be credited with an additional twenty-four months of vesting on his option
shares in the event his employment is terminated by reason of death or permanent
disability. Further, Mr. Goldston's option shares automatically vest upon a
change in control of NetZero.
Charles S. Hilliard entered into a four-year employment agreement, effective
as of April 17, 1999, pursuant to which Mr. Hilliard serves as Senior Vice
President, Finance and Chief Financial Officer. Pursuant to this agreement, Mr.
Hilliard receives a base salary of $140,000 plus a performance-based bonus of up
to 50% of his base salary. In addition, we gave Mr. Hilliard benefits that we
make available to our employees in comparable positions, and we granted Mr.
Hilliard an immediately exercisable option to purchase 1,200,000 shares of our
common stock at a price per share of $0.33. Mr. Hilliard exercised his option to
purchase common stock in full, however, such option shares are subject to
repurchase by us at the price paid for such shares. Our repurchase right lapses
with respect to 25% of the option shares upon the one-year anniversary of Mr.
Hilliard's employment and with respect to the remaining 75% of the option shares
over 36 equal monthly installments thereafter. We also agreed to sell 225,000
shares of our Series D preferred stock to Mr. Hilliard at a price per share of
$1.84. Mr. Hilliard's employment is subject to termination at any time by him or
by us. If Mr. Hilliard's employment is terminated without cause, he will be
entitled to receive a lump sum payment of $280,000 and shall be credited with an
additional twelve months of vesting on his option shares. Mr. Hilliard will also
be credited with an additional twelve months of vesting on his option shares in
the event his employment is terminated by reason of death or permanent
disability. If, following a change in control, Mr. Hilliard's employment is
terminated without cause or is constructively terminated, all of the option
shares shall vest immediately; provided, if such change in control occurs on or
prior to January 17, 2000, only 75% of the option shares shall vest.
Frederic A. Randall, Jr. entered into a four-year employment agreement,
effective as of March 20, 1999, pursuant to which Mr. Randall serves as a Senior
Vice President and our General Counsel. Pursuant to this Agreement, Mr. Randall
receives a base salary of $135,000 plus a performance-based bonus of up to 50%
of his base salary. In addition, we gave Mr. Randall benefits that we make
available to our employees in comparable positions, and we granted Mr. Randall
an immediately exercisable option to purchase 1,050,000 shares of our common
stock at a price per share of $0.10. Mr. Randall exercised his option to
purchase common stock in full, however, the option shares are subject to
repurchase by us at the price paid for such shares. Our repurchase right lapses
with respect to 25% of the option shares upon the one-year anniversary of Mr.
Randall's employment and with respect to the remaining 75% of the option shares
over 36 equal monthly installments thereafter. Mr. Randall's employment is
subject to termination at any time by him or by us. If Mr. Randall's employment
is terminated without cause, he will be entitled to receive a lump sum payment
of $270,000 and shall be credited with an additional twelve months of vesting on
his option shares. Mr. Randall will also be credited with an additional twelve
months of vesting on his option shares in the event his employment is terminated
by reason of death or permanent disability. If, following a change in control,
Mr. Randall's employment is terminated without cause or is constructively
terminated, all of the option shares shall vest immediately; provided, if such
change in control occurs on or prior to December 19, 1999, only 75% of the
option shares shall vest.
Our 1999 Stock Incentive Plan includes change in control provisions which
may result in the accelerated vesting of outstanding option grants and stock
issuances. See "--1999 Stock Incentive Plan--Change in Control".
53
<PAGE>
1999 STOCK INCENTIVE PLAN
The 1999 Stock Incentive Plan is the successor program to our existing stock
option/stock issuance plans. The new 1999 Stock Incentive Plan was adopted by
the board in July 1999 and we expect that it will be submitted to the
stockholders for their approval prior to the closing of this offering. If
approved by the stockholders, the 1999 Stock Incentive Plan will become
effective upon the closing of this offering. At that time, all outstanding
options under our existing stock option/ stock issuance plan will be transferred
to the 1999 Stock Incentive Plan, and no further option grants will be made
under that plan. The transferred options will continue to be governed by their
existing terms, unless our compensation committee decides to extend one or more
features of the 1999 Stock Incentive Plan to those options. Except as otherwise
noted below, the transferred options have substantially the same terms as will
be in effect for grants made under the discretionary option grant program or our
1999 Stock Incentive Plan.
SHARE RESERVE. Under the 1999 Stock Incentive Plan, 21.9 million shares of
our common stock have been authorized for issuance. This share reserve consists
of the shares that will be carried over from our existing stock option/stock
issuance plans, including the shares subject to outstanding options under these
plans, plus an additional increase of approximately 2.4 million shares. The
share reserve under our 1999 Stock Incentive Plan will automatically increase on
the first trading day in January of each year, beginning with calendar year
2000, by an amount equal to 3% of the total number of shares of our common stock
outstanding on the last trading day in December in the prior year. In addition,
no participant in the 1999 Stock Incentive Plan may be granted stock options or
direct stock issuances for more than 2 million shares of common stock in total
in any calendar year.
PROGRAMS. Our 1999 Stock Incentive Plan has four separate programs:
- the discretionary option grant program, under which eligible
individuals in our employ may be granted options to purchase shares of
our common stock at an exercise price not less than the fair market
value of those shares on the grant date;
- the stock issuance program, under which eligible individuals may be
issued shares of common stock directly, upon the attainment of
performance milestones or the completion of a specified service period
or as a bonus for past services;
- the salary investment option grant program, under which our executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary each year to the
acquisition of special below market stock option grants; and
- the director fee option grant program, under which our non-employee
board members may be given the opportunity to apply a portion of any
retainer fee otherwise payable to them in cash for the year to the
acquisition of special below-market option grants.
ELIGIBILITY. The individuals eligible to participate in our 1999 Stock
Incentive Plan include our officers and other employees, our board members and
any consultants we hire.
ADMINISTRATION. The discretionary option grant and stock issuance programs
will be administered by our compensation committee. This committee will
determine which eligible individuals are to receive option grants or stock
issuances under those programs, the time or times when the grants or issuances
are to be made, the number of shares subject to each grant or issuance, the
status of any granted option as either an incentive stock option or a
nonstatutory stock option under the federal tax laws, the vesting schedule to be
in effect for the option grant or stock issuance and the maximum term for which
any granted option is to remain outstanding. The compensation committee will
also have the authority to select the executive officers and other
54
<PAGE>
highly compensated employees who may participate in the salary investment option
grant program in the event that program is put into effect for one or more
calendar years.
PLAN FEATURES. Our 1999 Stock Incentive Plan will include the following
features:
- The exercise price for any options granted pursuant to the plan may be
paid in cash or in shares of our common stock valued at fair market
value on the exercise date. The option may also be exercised through a
same-day sale program without any cash outlay by the optionee.
- The compensation committee will have the authority to cancel
outstanding options under the discretionary option grant program,
including any transferred options from our existing stock option/stock
issuance plan, in return for the grant of new options for the same or
different number of option shares with an exercise price per share
based upon the fair market value of our common stock on the new grant
date.
- Stock appreciation rights may be issued under the discretionary option
grant program. These rights will provide the holders with the election
to surrender their outstanding options for a payment from us equal to
the fair market value of the shares subject to the surrendered options
less the exercise price payable for those shares. We may make the
payment in cash or in shares of our common stock. None of the
outstanding options under our existing stock option/stock issuance plan
have any stock appreciation rights.
CHANGE IN CONTROL. The 1999 Stock Incentive Plan will include the following
change in control provisions which may result in the accelerated vesting of
outstanding option grants and stock issuances:
- In the event that we are acquired by merger or asset sale, each
outstanding option under the discretionary option grant program which
is not to be assumed by the successor corporation will immediately
become exercisable for all the option shares, and all outstanding
unvested shares will immediately vest, except to the extent our
repurchase rights with respect to those shares are to be assigned to
the successor corporation.
- The compensation committee will have complete discretion to grant one
or more options which will become exercisable for all the option shares
in the event those options are assumed in the acquisition but the
optionee's service with us or the acquiring entity is subsequently
terminated. The vesting of any outstanding shares under our 1999 Stock
Incentive Plan may be accelerated upon similar terms and conditions.
- The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than fifty percent of our outstanding voting stock or a change in
the majority of our board through one or more contested elections. Such
accelerated vesting may occur either at the time of such transaction or
upon the subsequent termination of the individual's service.
- The options outstanding under our existing stock option/stock issuance
plan will immediately vest in the event we are acquired and the
acquiring company does not assume those options. In addition, any
options which are so assumed will vest in whole or in part on an
accelerated basis upon an involuntary termination of the optionee's
employment within 12 months after the acquisition. In general, the
terminated optionees shall vest in the greater of (a) 25% of their
option grant or (b) the
55
<PAGE>
number of option shares which they would have vested in had their
employment been for twice their actual period of service prior to the
time of such involuntary termination.
SALARY INVESTMENT OPTION GRANT PROGRAM. In the event the compensation
committee decides to put this program into effect for one or more calendar
years, each of our executive officers and other highly compensated employees may
elect to reduce his or her base salary for the calendar year by an amount not
less than $10,000 nor more than $50,000. Each selected individual who makes such
an election will automatically be granted, on the first trading day in January
of the calendar year for which his or her salary reduction is to be in effect,
an option to purchase that number of shares of common stock determined by
dividing the salary reduction amount by two-thirds of the fair market value per
share of our common stock on the grant date. The option will have an exercise
price per share equal to one-third of the fair market value of the option shares
on the grant date. As a result, the option will be structured so that the fair
market value of the option shares on the grant date less the exercise price
payable for those shares will be equal to the amount of the salary reduction.
The option will become exercisable in a series of twelve equal monthly
installments over the calendar year for which the salary reduction is to be in
effect.
DIRECTOR FEE OPTION GRANT PROGRAM. If this program is put into effect in
the future, then each non-employee board member may elect to apply all or a
portion of any cash retainer fee for the year to the acquisition of a
below-market option grant. The option grant will automatically be made on the
first trading day in January in the year for which the non-employee board member
would otherwise be paid the cash retainer fee in the absence of his or her
election. The option will have an exercise price per share equal to one-third of
the fair market value of the option shares on the grant date, and the number of
shares subject to the option will be determined by dividing the amount of the
retainer fee applied to the program by two-thirds of the fair market value per
share of our common stock on the grant date. As a result, the option will be
structured so that the fair market value of the option shares on the grant date
less the exercise price payable for those shares will be equal to the portion of
the retainer fee applied to that option. The option will become exercisable in a
series of twelve equal monthly installments over the calendar year for which the
election is in effect. However, the option will become immediately exercisable
for all the option shares upon the death or disability of the optionee while
serving as a board member.
ADDITIONAL PROGRAM FEATURES. Our 1999 Stock Incentive Plan will also have
the following features:
- Outstanding options under the salary investment option grant and
director fee option grant programs will immediately vest if we are
acquired by a merger or asset sale or if there is a successful tender
offer for more than 50% of our outstanding voting stock or a change in
the majority of our board through one or more contested elections.
- Limited stock appreciation rights will automatically be included as
part of each grant made under the salary investment option grant and
the director fee option grant programs, and these rights may also be
granted to one or more officers as part of their option grants under
the discretionary option grant program. Options with this feature may
be surrendered to us upon the successful completion of a hostile tender
offer for more than 50% of our outstanding voting stock. In return for
the surrendered option, the optionee will be entitled to a cash
distribution from us in an amount per surrendered option share based
upon the highest price per share of our common stock paid in that
tender offer.
- The board may amend or modify the 1999 Stock Incentive Plan at any
time, subject to any required stockholder approval. The 1999 Stock
Incentive Plan will terminate no later than July 12, 2009.
56
<PAGE>
1999 EMPLOYEE STOCK PURCHASE PLAN.
Our 1999 Employee Stock Purchase Plan was adopted by the board in July 1999
and submitted to the stockholders for their approval in July, 1999. We expect
the plan to become effective immediately upon the signing of the underwriting
agreement for this offering. The plan is designed to allow our eligible
employees and the eligible employees of our participating subsidiaries to
purchase shares of common stock, at semi-annual intervals, with their
accumulated payroll deductions.
SHARE RESERVE. 500,000 shares of our common stock will initially be
reserved for issuance. The reserve will automatically increase on the first
trading day in January each year, beginning in calendar year 2000, by an amount
equal to the lower of (a) one and one half percent (1.5%) of the total number of
outstanding shares of our common stock on the last trading day in December in
the prior year and (b) the number of shares approved by the board for each
calendar year.
OFFERING PERIODS. The plan will have a series of successive offering
periods, each with a maximum duration of 24 months. The initial offering period
will start on the date the underwriting agreement for the offering is signed and
will end on the last business day in October 2001. The next offering period will
start on the first business day in November 2001, and subsequent offering
periods will be set by our compensation committee.
ELIGIBLE EMPLOYEES. Individuals scheduled to work more than 20 hours per
week for more than 5 calendar months per year may join an offering period on the
start date or any semi-annual entry date within that period. Semi-annual entry
dates will occur on the first business day of May and November each year.
Individuals who become eligible employees after the start date of an offering
period may join the plan on any subsequent semi-annual entry date within that
offering period.
PAYROLL DEDUCTIONS. A participant may contribute up to 15% of his or her
cash earnings through payroll deductions, and the accumulated deductions will be
applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per share
on the participant's entry date into the offering period or, if lower, 85% of
the fair market value per share on the semi-annual purchase date. Semi-annual
purchase dates will occur on the last business day of April and October each
year. In no event, however, may any participant purchase more than 5,000 shares
on any purchase date, and not more than 250,000 shares may be purchased in total
by all participants on any purchase date. Our compensation committee may
increase or decrease these limits prior to the start of any new offering period
under the plan.
RESET FEATURE. If the fair market value per share of our common stock on
any purchase date is less than the fair market value per share on the start date
of the two-year offering period, then that offering period will automatically
terminate, and a new two-year offering period will begin on the next business
day. All participants in the terminated offering will be transferred to the new
offering period.
CHANGE IN CONTROL. Should we be acquired by merger or sale of substantially
all of our assets or more than fifty percent of our voting securities, then all
outstanding purchase rights will automatically be exercised immediately prior to
the effective date of the acquisition. The purchase price will be equal to 85%
of the market value per share on the participant's entry date into the offering
period in which an acquisition occurs or, if lower, 85% of the fair market value
per share immediately prior to the acquisition.
PLAN PROVISIONS. The following provisions will also be in effect under the
plan:
- The plan will terminate no later than the last business day of October
2009.
57
<PAGE>
- The board may at any time amend, suspend or discontinue the plan.
However, certain amendments may require stockholder approval.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The certificate of incorporation that we will adopt immediately prior to the
closing of this offering provides that, except to the extent prohibited by the
Delaware General Corporation Law, our directors will not be personally liable to
us or our stockholders for monetary damages for any breach of fiduciary duty as
directors. Under the Delaware General Corporation Law, the directors have a
fiduciary duty to NetZero which is not eliminated by this provision of the
certificate of incorporation and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of nonmonetary relief will remain
available. In addition, each director will continue to be subject to liability
under the Delaware law for breach of the director's duty of loyalty, for acts or
omissions which are found by a court of competent jurisdiction to be not in good
faith or which involve intentional misconduct, or knowing violations of law, for
actions leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are prohibited by
Delaware law. This provision also does not affect the director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws. We have obtained liability insurance for
our officers and directors.
Section 145 of the Delaware law empowers a corporation to indemnify its
directors and officers and to purchase insurance with respect to liability
arising out of their capacity or status as directors and officers, provided that
this provision shall not eliminate or limit the liability of a director: (a) for
any breach of the director's duty of loyalty to the corporation or its
stockholders, (b) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (c) arising under Section
174 of the Delaware law, or (d) for any transaction from which the director
derived an improper personal benefit. The Delaware law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of stockholders or otherwise. The
certificate of incorporation provides that we shall, to the fullest extent
permitted by the Delaware law, indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (whether civil, criminal, administrative or investigative) by
reason of the fact that such person is or was a director or officer, or is or
was serving at our request as a director or officer of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including attorneys' fees), judgements, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding.
We have entered into indemnification agreements with our directors and
certain of our officers containing provisions that may require us, among other
things, to indemnify such directors and officers against certain liabilities
that may arise by reason of their status or service as directors or officers
(other than liabilities arising from willful misconduct of a culpable nature),
to advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified, and to obtain directors' and officers'
liability insurance if maintained for other directors or officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for such indemnification.
58
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of June 30, 1999:
- each stockholder whom we know to beneficially own 5% or more of the
outstanding shares of common stock;
- each of our directors and named executive officers; and
- all of our directors and executive officers as a group.
The information set forth in the table below gives effect to the conversion of
all issued and outstanding convertible preferred stock. Unless otherwise
indicated, the address of each beneficial owner listed below is c/o NetZero,
Inc., 2555 Townsgate Road, Westlake Village, California.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by the footnotes below, we
believe, based on information furnished to us, that the persons and entities
named in the table below have sole voting and investment power with respect to
all shares of common stock shown as beneficially owned by them. Percentage of
beneficial ownership is based on 93,036,410 shares of common stock outstanding
as of June 30, 1999, and shares of common stock outstanding after the
completion of this offering. In computing the number of shares of common stock
subject to options held by that person that are exercisable within 60 days of
June 30, 1999, these shares are deemed outstanding for the purpose of
determining the percentage ownership of the optionee. These shares, however, are
not deemed outstanding for the purpose of computing the percentage ownership of
any other stockholder.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
------------------------------
NUMBER OF SHARES AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING OFFERING
- ------------------------------------------------------------ ------------------- --------------- -------------
<S> <C> <C> <C>
Named Executive Officers and Directors:
Mark R. Goldston(1)....................................... 6,040,731 6.5% %
Ronald T. Burr............................................ 3,707,500 4.0%
Bill Gross(2)............................................. 28,917,104 31.1%
James T. Armstrong(3)..................................... 23,949,278 25.6%
Jennifer S. Fonstad(4).................................... 15,050,677 16.2%
Paul G. Koontz(5)......................................... 10,899,406 11.7%
David C. Bohnett.......................................... 326,260 *
OTHER 5% STOCKHOLDERS:
Entities affiliated with Bill Gross(6)...................... 28,917,104 31.1% %
130 West Union Street
Pasadena, CA 91103
Entities affiliated with Draper Fisher Jurvetson Management
Company V, LLC(7)......................................... 15,050,677 16.2% %
400 Seaport Court, Suite 350
Redwood City, CA 94063
Entities affiliated with Foundation Capital Management II,
LLC(8).................................................... 10,899,406 11.7% %
70 Willow Road, Suite 200
Menlo Park, CA 94025
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
------------------------------
NUMBER OF SHARES AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING OFFERING
- ------------------------------------------------------------ ------------------- --------------- -------------
<S> <C> <C> <C>
CPQ Holdings, Inc.(9)....................................... 8,125,000 8.7% %
20555 State Highway 249
Houston, TX 77070
All directors and executive officers as a group (11
people)(10)............................................... 72,055,813 77.4% %
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares of
common stock.
(1) Includes (i) 5,926,383 shares held by the Mark and Nancy Jane Goldston
Family Trust dated November 8, 1997, over which Mr. Goldston exercises
voting power, as trustee, and (ii) 60,000 shares held by the Kogan Family
Irrevocable Trust, over which Mr. Goldston exercises voting power, as
trustee.
(2) Includes 28,917,104 shares held by affiliates of idealab! Capital Management
I, LLC and idealab! Holdings, L.L.C. Mr. Gross is a managing member of both
idealab! Capital Management I, LLC and idealab! Holdings, L.L.C., and as
such may be deemed to exercise voting and investment power over such shares.
Mr. Gross disclaims beneficial ownership of such shares, except to the
extent of his proportionate interest therein.
(3) Includes 23,949,278 shares held by idealab! Capital Partners I-A, L.P. and
idealab! Capital Partners I-B, L.P. Mr. Armstrong is a principal of each of
these entities and disclaims beneficial ownership of such shares, except to
the extent of his proportionate interest therein.
(4) Includes 15,050,677 shares held by entities affiliated with Draper Fisher
Jurvetson, as set forth in note (7) below. Ms. Fonstad is a partner of
Draper Fisher Jurvetson and disclaims beneficial ownership of such shares,
except to the extent of her proportionate interest therein.
(5) Includes 10,899,406 shares held by entities affiliated with Foundation
Capital Management II, LLC, as set forth in note (8) below. Mr. Koontz
disclaims beneficial ownership of such shares, except to the extent of his
proportionate interest therein.
(6) Includes (i) 10,215,281 shares owned by idealab! Capital Partners I-A, L.P.,
(ii) 13,733,997 shares owned by idealab! Capital Partners I-B, L.P., and
(iii) 4,967,826 shares owned by idealab! Holdings, L.L.C. idealab! Capital
Management I, LLC is the general partner of both idealab! Capital Partners
I-A, L.P. and idealab! Capital Partners I-B, L.P. In addition, Bill Gross is
a managing member of both idealab! Capital Management I, LLC and idealab!
Holdings, L.L.C. and is therefore deemed to exercise voting and investment
power over such shares.
(7) Includes 13,921,876 shares owned by Draper Fisher Jurvetson Fund V, L.P. and
1,128,801 shares owned by Draper Fisher Jurvetson Partners V, LLC. Draper
Fisher Jurvetson Management Company V, LLC is the general partner of Draper
Fisher Jurvetson Fund V, L.P. and the manager of Draper Fisher Jurvetson
Partners V, LLC and is therefore deemed to exercise voting and investment
power over such shares.
(8) Includes 9,264,496 shares owned by Foundation Capital II, L.P., 1,089,940
shares owned by Foundation Capital II Entrepreneurs Fund, LLC, and 544,970
shares owned by Foundation Capital II Principals Fund, LLC. Foundation
Capital Management II, LLC is the general partner of Foundation Capital II,
L.P. and the manager of both Foundation Capital II Entrepreneurs Fund, LLC
and Foundation Capital II Principals Fund, LLC and is thus deemed to
exercise voting and investment power over such shares.
(9) Includes 8,125,000 shares owned by CPQ Holdings, Inc., an affiliate of
Compaq Computer Corporation.
(10) Includes 900,000 shares subject to options, all of which are immediately
exercisable. Also includes 14,446,518 shares subject to our right of
repurchase. Of such shares, 547,452 shall be released from such right of
repurchase within 60 days of June 30, 1999.
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<PAGE>
CERTAIN TRANSACTIONS
Since our founding in July 1997, there has not been any transaction to which
we are a party in which the amount involved exceeded $60,000 and in which any
director, executive officer, holder of more than 5% of our common stock or any
member of the immediate family of any of the foregoing persons had or will have
a direct or indirect material interest, other than (i) compensation agreements
and other agreements which are described where required in "Management", and
(ii) the transactions described below:
The following table summarizes the shares of common stock and preferred
stock purchased by executive officers, directors and 5% stockholders of NetZero
and persons associated with them since July 1997. All share numbers (a) reflect
the number of shares of common stock purchased by the respective party on an
as-converted basis and (b) reflect the 3-2 stock split that we expect to occur
in July 1999.
<TABLE>
<CAPTION>
PREFERRED STOCK
EXECUTIVE OFFICERS, DIRECTORS AND 5% COMMON ------------------------------------------------------
STOCKHOLDERS STOCK SERIES A SERIES B SERIES C SERIES D
- -------------------------------------- --------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Entities affiliated with Bill
Gross(1)............................ -- 11,956,121 7,172,593 4,630,783 5,157,607
Entities affiliated with Draper,
Fisher, Jurvetson Management Company
V, LLC(2)........................... -- -- -- 12,798,634 2,252,043
Entities affiliated with Foundation
Capital Management II, LLC(3)....... -- -- -- 9,261,557 1,637,849
CPQ Holdings, Inc.(4)................. -- -- -- -- 8,125,000
David C. Bohnett...................... -- -- 101,260 225,000
Mark R. Goldston...................... 6,286,383 -- -- -- 54,348
Ronald T. Burr........................ 3,975,000 -- -- -- --
Stacy A. Haitsuka..................... 3,975,000 -- -- -- --
Charles S. Hilliard................... 1,200,000 -- -- -- 225,000
Frederic A. Randall, Jr............... 1,050,000 -- -- 11,635 --
</TABLE>
- ------------------------
(1) Bill Gross is (a) a managing member of idealab! Capital Management I, LLC,
which is the general partner of both idealab! Capital Partners I-A, L.P. and
idealab! Capital Partners I-B, L.P., and (b) the managing member of idealab!
Holdings, L.L.C., and therefore is deemed to exercise voting and investment
power over all of the shares held by idealab! Holdings, L.L.C., idealab!
Capital Partners I-A, L.P., and idealab! Capital Partners I-B, L.P.
(2) Draper Fisher Jurvetson Management Company V, LLC is (a) the general partner
of Draper Fisher Jurvetson Fund V, L.P. and (b) the manager of Draper Fisher
Jurvetson Partners V, LLC, and therefore is deemed to exercise voting and
investment power of all of the shares held by Draper Fisher Jurvetson Fund
V, L.P. and Draper Fisher Jurvetson Partners V, LLC.
(3) Foundation Capital Management II, LLC is (a) the general partner of
Foundation Capital II, L.P. and (b) the manager of both Foundation Capital
II Entrepreneurs Fund, LLC and Foundation Capital II Principals Fund, LLC,
and therefore is deemed to exercise voting and investment power over all of
the shares held by Foundation Capital II, L.P., Foundation Capital II
Entrepreneurs Fund, LLC, and Foundation Capital II Principals Fund, LLC.
(4) CPQ Holdings, Inc. is an affiliate of Compaq Computer Corporation.
ISSUANCE OF FOUNDERS STOCK
In July 1997, we sold an aggregate of 15,000,000 shares of our common stock
to Ronald T. Burr, Stacy Haitsuka, Marwan Zebian and Harold MacKenzie. The
shares were issued at a price per
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<PAGE>
share of $0.00013. As a condition to the September 1998 issuance of Series A
preferred stock described below, each of the foregoing individuals entered into
a stock restriction agreement with NetZero, pursuant to which each such
individual agreed to subject half of his shares of common stock to vesting over
a four-year period. The stock restriction agreements were amended in April 1999
to provide for accelerated vesting in the event of termination in connection
with or following a change in control.
ISSUANCE OF SERIES A AND SERIES B PREFERRED STOCK
In September, October and November 1998, and March and June 1999, we sold an
aggregate of 11,956,121 shares of Series A preferred stock at $0.0889 per share
to Bill Gross' idealab!, idealab! Holdings, L.L.C., idealab! Capital Partners
I-A, L.P., and idealab! Capital Partners I-B, L.P. In December 1998, and
January, March and June 1999, we sold an aggregate of 7,172,593 shares of Series
B preferred stock at $0.1481 per share to Bill Gross' idealab!, idealab!
Holdings, L.L.C., idealab! Capital Partners I-A, L.P., and idealab! Capital
Partners I-B, L.P.
In January 1999, David C. Bohnett, a director of NetZero, purchased 101,260
shares of our Series B preferred stock for a purchase price of $15,000.
ISSUANCE OF WARRANTS FOR SERIES C PREFERRED STOCK
In January 1999, we issued warrants to purchase an aggregate of 23,271
shares of Series C preferred stock to idealab! Capital Partners I-A, L.P. and
idealab! Capital Partners I-B, L.P. in connection with a $100,000 bridge loan
from such entities. The warrants were exercised immediately after the closing of
our Series C preferred stock financing in February 1999.
ISSUANCE OF SERIES C PREFERRED STOCK
In February 1999, we sold an aggregate of 26,851,533 shares of Series C
preferred stock at $0.4297 per share to several investors pursuant to a stock
purchase agreement, including (a) idealab! Capital Partners I-A, L.P. and
idealab! Capital Partners I-B, L.P. who purchased an aggregate of 4,607,512
shares of Series C preferred stock for an aggregate purchase price of
$1,980,002, (b) two affiliates of Draper Fisher Jurvetson who purchased an
aggregate of 12,798,634 shares of Series C preferred stock for an aggregate
purchase price of $5,500,000, (c) several affiliates of Foundation Capital who
purchased an aggregate of 9,261,557 shares of Series C preferred stock for an
aggregate purchase price of $3,980,000, and (d) Frederic A. Randall, Jr., who
purchased 11,635 shares of Series C preferred stock for a purchase price of
$5,000.
ISSUANCE OF OPTION TO PURCHASE SERIES C PREFERRED STOCK
In March 1999, David C. Bohnett purchased 225,000 shares of our Series C
preferred stock for a purchase price of $96,690, in connection with the exercise
of the option to purchase such shares which was granted to Mr. Bohnett in
December 1998 in connection with his joining our board of directors. The option
shares are subject to NetZero's right of repurchase at the price paid per share.
The repurchase right lapses in a series of 48 equal monthly installments which
began December 1, 1998.
ISSUANCE OF SERIES D PREFERRED STOCK
In May 1999, we sold an aggregate of 18,082,283 shares of Series D preferred
stock at $1.84 per share to several investors, including (a) idealab! Capital
Partners I-A, L.P., idealab! Capital Partners, I-B, L.P. and idealab! Holdings,
L.L.C., who purchased an aggregate of 5,157,607 shares of Series D preferred
stock for an aggregate purchase price of $9,489,998, (b) two affiliates of
Draper Fisher Jurvetson who purchased an aggregate of 2,252,043 shares of Series
D preferred
62
<PAGE>
stock at an aggregate purchase price of $4,143,759, (c) several affiliates of
Foundation Capital Management II, LLC, who purchased an aggregate of 1,637,849
shares of Series D preferred stock for an aggregate purchase price of
$3,013,644, (d) Mark R. Goldston, who purchased 54,348 shares of Series D
preferred stock for a purchase price of $100,000, and (e) Charles S. Hilliard,
who purchased 225,000 shares of Series D preferred stock for a purchase price of
$414,000.
ISSUANCE OF OPTIONS TO PURCHASE COMMON STOCK
In March 1999, Mark R. Goldston purchased 6,286,383 shares of our common
stock for a purchase price of $628,638 in connection with the exercise of an
option granted to Mr. Goldston in connection with his employment. The purchase
price for such common stock was paid with a note payable to NetZero for the
entire amount.
In April 1999, Frederic A. Randall, Jr. purchased 1,050,000 shares of our
common stock for a purchase price of $105,000 in connection with the exercise of
an option granted to him in connection with his employment.
In April 1999, Charles S. Hilliard purchased 1,200,000 shares of our common
stock for a purchase price of $400,000, in connection with the exercise of an
option granted to Mr. Hilliard in connection with his employment. The purchase
price for such common stock was paid with a note payable to NetZero for the
entire amount.
TECHNOLOGY ASSIGNMENT AGREEMENT WITH IMPACT SOFTWARE, INC.
During the nine months ended March 31, 1999, we paid an aggregate of
$100,000 to Impact Software, Inc. pursuant to a Technology Assignment Agreement
to purchase certain technology and repay certain indebtedness. Messrs. Burr,
Haitsuka, MacKenzie and Zebian are directors, officers and/or employees of
NetZero and were shareholders and officers of Impact Software at the time such
agreement was executed.
INVESTORS' RIGHTS AGREEMENT
In May 1999, we entered into an Amended and Restated Investors' Rights
Agreement with certain of our stockholders, which provides such stockholders
certain rights to require us to register their shares of NetZero common stock.
DISTRIBUTION AGREEMENT WITH COMPAQ
In April 1999, we entered into a Distribution, License and Alliance
Agreement with Compaq Computer Corporation, pursuant to which Compaq will
distribute our NetZero software with its Presario products over a twelve month
period. Immediately after the offering, Compaq, through its affiliate CPQ
Holdings, Inc., will own approximately % of our outstanding capital stock.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
We are authorized to issue 500,000,000 shares of common stock, par value
$0.001, and 10,000,000 shares of undesignated preferred stock, par value $0.001.
The following description of our securities and certain provisions of our
certificate of incorporation and bylaws are summaries. Statements contained in
this prospectus relating to such provisions are not necessarily complete. Copies
of our certificate of incorporation and bylaws have been filed with the
Commission as exhibits to our registration statement, of which this prospectus
forms a part. The descriptions of common stock and preferred stock reflect
changes to our capital structure that will occur upon the closing of this
offering in accordance with the terms of the certificates that will be adopted
by us immediately prior to the closing of this offering.
COMMON STOCK
As of June 30, 1999, there were 93,036,410 shares of common stock
outstanding and held of record by 163 stockholders (assuming conversion of all
shares of preferred stock into common stock). Based on the number of shares
outstanding as of that date and giving effect to the issuance of the
shares of common stock offered by us hereby, there will be shares
of common stock outstanding (assuming no exercise of the underwriters'
over-allotment option) upon the closing of the offering.
Holders of the common stock are entitled to one vote for each share held on
all matters submitted to a vote of the stockholders. Holders of common stock are
entitled to receive ratably any dividends that may be declared by the Board of
Directors out of legally available funds, subject to any preferential dividend
rights of any outstanding preferred stock. Upon our liquidation, dissolution or
winding up, the holders of common stock are entitled to receive ratably our net
assets available after the payment of all debts and other liabilities and
subject to the prior rights of any outstanding preferred stock. Holders of
common stock have no preemptive, subscription, redemption or conversion rights.
The outstanding shares of common stock are, and the shares offered by us in this
offering will be upon receipt of payment for such shares, fully paid and
nonassessable. The rights, preferences and privileges of holders of common stock
are subject to, and may be adversely affected by, the rights of holders of
shares of any series of preferred stock which we may designate and issue in the
future without further stockholder approval. Upon the closing of the offering,
there will be no shares of preferred stock outstanding.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of our Series A,
Series B, Series C and Series D preferred stock will convert into shares of
common stock. Thereafter, the board of directors will be authorized without
further stockholder approval to issue from time to time up to an aggregate of
10,000,000 shares of preferred stock in one or more series and to fix or alter
the designations, preferences, rights, qualifications, limitations or
restrictions of the shares of each such series, including the dividend rights,
dividend rates, conversion rights, voting rights, term of redemption (including
sinking fund provisions), redemption price or prices, liquidation preferences
and the number of shares constituting any series or designations of such series
without further vote or action by the stockholders. The issuance of preferred
stock may have the effect of delaying, deferring or preventing a change in
control of our management without further action by the stockholders and may
adversely affect the voting and other rights of the holders of common stock. The
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of common stock, including the loss of
voting control to others. We have no present plans to issue any shares of
preferred stock.
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<PAGE>
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF
INCORPORATION AND BYLAWS
Certain provisions of our certificate of incorporation and bylaws, which
will become effective upon the closing of this offering, may make it more
difficult to acquire control of NetZero by various means. These provisions could
deprive the stockholders of opportunities to realize a premium on the shares of
common stock owned by them. In addition, these provisions may adversely affect
the prevailing market price of the stock. These provisions are intended to (a)
enhance the likelihood of continuity and stability in the composition of the
board and in the policies formulated by the board, (b) discourage certain types
of transactions which may involve an actual or threatened change in control of
NetZero, (c) discourage certain tactics that may be used in proxy fights, (d)
encourage persons seeking to acquire control of NetZero to consult first with
the board of directors to negotiate the terms of any proposed business
combination or offer, and (e) reduce our vulnerability to an unsolicited
proposal for a takeover that does not contemplate the acquisition of all
outstanding shares of NetZero or that is otherwise unfair to our stockholders.
CLASSIFIED BOARD OF DIRECTORS; REMOVAL; FILLING VACANCIES AND
AMENDMENT. The certificate and bylaws provide that upon the closing of this
offering the board shall be divided into three classes of directors serving
staggered, three-year terms. The classification of the board has the effect of
requiring at least two annual stockholder meetings, instead of one, to replace a
majority of members of the board. Subject to the rights of the holders of any
outstanding series of preferred stock, the certificate authorizes only the board
to fill vacancies, including newly created directorships. Accordingly, this
provision could prevent a stockholder from obtaining majority representation on
the board by enlarging the board of directors and filling the new directorships
with its own nominees. The certificate also provides that directors may be
removed by stockholders only for cause and only by the affirmative vote of
holders of two-thirds of the outstanding shares of voting stock.
STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS. The certificate
provides that stockholders may not take action by written consent, but may only
take action at duly called annual or special meetings of stockholders. The
certificate further provides that special meetings of our stockholders may be
called only by the chairman of the board of directors or a majority of the board
of directors. A special meeting may not be held absent such a written request.
The request shall state the purpose or purposes of the proposed meeting. This
limitation on the right of stockholders to call a special meeting could make it
more difficult for stockholders to initiate actions that are opposed by the
board of directors. These actions could include the removal of an incumbent
director or the election of a stockholder nominee as a director. They could also
include the implementation of a rule requiring stockholder ratification of
specific defensive strategies that have been adopted by the board of directors
with respect to unsolicited takeover bids. In addition, the limited ability of
the stockholders to call a special meeting of stockholders may make it more
difficult to change the existing board and management.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual meeting of stockholders, must provide timely notice
thereof in writing. To be timely, a stockholder's notice must be delivered to or
mailed and received at our principal executive offices not less than 120 days
prior to the date of our annual meeting. The bylaws also specify certain
requirements as to the form and content of a stockholder's notice. These
provisions may preclude stockholders from bringing matters before an annual
meeting of stockholders or from making nominations for directors at an annual
meeting of stockholders.
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<PAGE>
AUTHORIZED BUT UNISSUED SHARES. The authorized but unissued shares of
common stock and preferred stock are available for future issuance without
stockholder approval. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued shares of common stock and preferred stock could render
more difficult or discourage an attempt to obtain control of us by means of a
proxy contest, tender offer, merger or otherwise.
SUPERMAJORITY VOTE TO AMEND CHARTER AND BYLAWS. The Delaware General
Corporation Law provides generally that the affirmative vote of a majority of
the shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless a corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage. Our
amended and restated certificate of incorporation imposes supermajority vote
requirements in connection with business combination transactions and the
amendment of certain provisions of our certificate of incorporation and bylaws,
including those provisions relating to the classified board of directors, action
by written consent, the ability of stockholders to call special meetings and the
ability of stockholders to bring business before an annual meeting or to
nominate directors. Following the completion of this offering, our present
directors and executive officers and their respective affiliates will
beneficially own approximately % of our common stock. This gives them veto
power with respect to any stockholder action or approval requiring either a
two-thirds vote or a simple majority.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW. We are subject to the
provisions of Section 203 of the Delaware General Corporation Law, as amended
from time to time. Subject to certain exceptions, Section 203 prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years from the date of
the transaction in which the person became an interested stockholder, unless the
interested stockholder attained such status with the approval of the board of
directors or unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, fifteen percent
(15%) or more of the corporation's voting stock. This statute could prohibit or
delay the accomplishment of mergers or other takeover or change in control in
attempts with respect to us and, accordingly, may discourage attempts to acquire
us.
REGISTRATION RIGHTS
Under the Amended and Restated Investor Rights Agreement dated as of May 10,
1999, among NetZero and certain holders of its securities, the holders of
approximately 85,698,000 shares of common stock, or Registrable Securities,
after this offering will be entitled to certain rights with respect to the
registration of the Registrable Securities under the Securities Act. Under the
Investors Rights Agreement, if NetZero proposes to register any of its
securities under the Securities Act, either for its own account or the account
of other stockholders, the holders of Registrable Securities are entitled to
notice of such registration and are entitled to include their Registrable
Securities in the registration. Of the approximately 85,698,000 shares of
Registrable Securities, approximately 21,286,000 shares are only entitled to
these "piggy back" registration rights.
In addition, if at any time after August 15, 2000, NetZero receives a
request from certain holders of at least 20% of the Registrable Securities,
NetZero is obligated to cause these shares to be registered under the Securities
Act, provided that the offering size would exceed $5,000,000. Certain holders of
Registrable Securities have the right to cause two demand registrations.
Further, holders of Registrable Securities may require NetZero to register all
or a portion of their Registrable
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<PAGE>
Securities on Form S-2 or Form S-3 under the Securities Act, provided that the
offering size would exceed $1,000,000, when these forms become available for use
by NetZero, and subject to certain other conditions and limitations. The
holders' rights with respect to all these registrations are subject to certain
conditions, including the right of the underwriters of any of these offerings to
limit the number of shares included in any of these registrations. NetZero has
agreed to pay all expenses related to certain of these registrations, except for
underwriting discounts and commissions, to effect the registration and sale of
the Registrable Securities. Upon registration, such shares are freely tradeable
in the public market without restriction.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock will be U.S. Stock
Transfer Corporation.
LISTING
Application has been made for listing the common stock on The Nasdaq
National Market under the trading symbol "NZRO".
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have shares of common
stock outstanding ( shares if the underwriters' over-allotment
option is exercised in full), assuming no exercise of options after
, 1999. Of this amount, the shares offered by this
prospectus will be available for immediate sale in the public market as of the
date of this prospectus. An additional shares are not subject to a
180-day lock-up and will be available for sale in the public market 90 days
following the date of this prospectus pursuant to Rule 701. Approximately
additional shares will be available for sale in the public market
following the expiration of 180-day lock-up agreements with the representatives
of our underwriters, subject in some cases to compliance with the volume and
other limitations of Rule 144.
<TABLE>
<CAPTION>
APPROXIMATE SHARES
DAYS AFTER THE DATE OF THIS ELIGIBLE FOR FUTURE
PROSPECTUS SALE(1) COMMENT
- ---------------------------------- ------------------------- ----------------------------------
<S> <C> <C>
Upon Effectiveness................ Freely tradeable shares sold in
offering and shares saleable under
Rule 144(k) that are not subject
to 180-day lock-up
90 days........................... Shares saleable under Rule 144,
144(k) or 701 that are not subject
to 180-day lock-up
180 days.......................... Lock-up released; shares saleable
under Rule 144, 144(k) or 701
Over 180 days..................... Restricted securities held for one
year or less
</TABLE>
- ------------------------
(1) If the underwriters waive the 180-day lock-up agreements within the first 90
days after the date of this prospectus, an additional shares
will be available for sale in the public market 90 days following the date
of this prospectus, subject in some cases to compliance with the volume and
other limitations of Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year is entitled to sell within any three-month period commencing 90 days after
the date of this prospectus a number of shares that does not exceed the greater
of (a) 1% of the then outstanding shares of common stock (approximately
shares immediately after the offering) or (b) the average weekly trading volume
during the four calendar weeks preceding such sale, subject to the filing of a
Form 144 with respect to such sale. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of NetZero at any time
during the 90 days immediately preceding the sale and who has beneficially owned
his or her shares for at least two years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.
Persons deemed to be affiliates must always sell pursuant to Rule 144, even
after the applicable holding periods have been satisfied.
We are unable to estimate the number of shares that will be sold under Rule
144, since this will depend on the market price for our common stock, the
personal circumstances of the sellers and other factors. Prior to the offering,
there has been no public market for the common stock, and there can be no
assurance that a significant public market for the common stock will develop or
be
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<PAGE>
sustained after the offering. Any future sale of substantial amounts of the
common stock in the open market may adversely affect the market price of the
common stock offered hereby.
Our directors, executive officers, stockholders with registration rights and
certain other stockholder and optionholders have agreed pursuant to the
underwriting agreement and other agreements that they will not sell any common
stock without the prior written consent of Goldman, Sachs & Co. for a period of
180 days from the date of this prospectus. We have also agreed not to issue any
shares during the lock-up period without the consent of Goldman, Sachs & Co.,
except that we may, without such consent, grant options and sell shares pursuant
to our stock incentive and purchase plans.
Any of our employees or consultants who purchased his or her shares pursuant
to a written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701, which permits nonaffiliates to sell their Rule 701
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
prospectus. As of , the holders of options to purchase
approximately shares of common stock will be eligible to sell their
shares upon the expiration of the lock-up period, subject in certain cases to
vesting of such options.
We intend to file a registration statement on Form S-8 under the Securities
Act within days after the completion of the offering to register
shares of common stock subject to outstanding stock options reserved for
issuance under our 1999 Stock Incentive Plan, thus permitting the resale of such
shares by nonaffiliates in the public market without restriction under the
Securities Act.
In addition, certain stockholders have registration rights with respect to
85,698,444 shares of common stock and common stock equivalents. Registration of
the registrable securities under the Securities Act would result in such shares
becoming freely tradeable without restriction under the Securities Act.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Brobeck, Phleger & Harrison LLP, Irvine, California. As of June 30, 1999,
Brobeck, Phleger & Harrison LLP and certain entities and individuals affiliated
with Brobeck, Phleger & Harrison LLP beneficially owned an aggregate of 46,540
shares of our Series C preferred stock and an aggregate of 40,761 shares of our
Series D preferred stock, all of which will convert to common stock in the
offering. Certain legal matters relating to the sale of common stock in this
offering will be passed upon for the underwriters by Wilson, Sonsini, Goodrich &
Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The financial statements of NetZero, Inc. as of June 30, 1998 and for the
period from July 21, 1997 (inception) through June 30, 1998 included in this
prospectus and Registration Statement have been audited by
PricewaterhouseCoopers LLP, independent accountants, as set forth in their
report appearing elsewhere in this prospectus, and are included in reliance upon
their report given on the authority of said firm as experts in accounting and
auditing.
69
<PAGE>
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission (the "Commission")
a registration statement on Form S-1 (including the exhibits and schedules
thereto) under the Securities Act with respect to the shares to be sold in the
offering. This prospectus does not contain all the information set forth in the
registration statement. For further information with respect to us and the
shares to be sold in the offering, reference is made to the registration
statement. Statements contained in this prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete,
and in each instance reference is made to the copy of such contract, agreement
or other document filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference. In addition, we
intend to file annual, quarterly and current reports, proxy statements and other
information with the Commission.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information that we file at the Commission's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the Commission. Please call the Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Our Commission
filings, including the registration statement, are also available to you on the
Commission's Web-site (http://www.sec.gov).
70
<PAGE>
NETZERO, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants.................................................... F-2
Balance Sheets....................................................................... F-3
Statements of Operations............................................................. F-4
Statements of Stockholders' Equity (Deficit)......................................... F-5
Statements of Cash Flows............................................................. F-6
Notes to Financial Statements........................................................ F-7
</TABLE>
F-1
<PAGE>
The following report is in the form that will be signed upon the completion
of the three-for-two forward stock split and reincorporation into Delaware as
described in Note 12 of the notes to the financial statements.
/s/ PricewaterhouseCoopers LLP
Woodland Hills, California
July 12, 1999
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
NetZero, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, stockholders' equity (deficit) and cash flows present fairly, in all
material respects, the financial position of NetZero, Inc. (the "Company") as of
June 30, 1998 and the results of its operations and its cash flows for the
period from July 21, 1997 (Inception) through June 30, 1998 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
Woodland Hills, California
May 21, 1999, except for Note 7
as to which the date is
June 30, 1999 and Note 12 as
to which the date is July , 1999
F-2
<PAGE>
NETZERO, INC.
BALANCE SHEETS
(ALL INFORMATION AS OF MARCH 31, 1999 IS UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1998
----------- MARCH 31, PRO FORMA
1999 STOCKHOLDERS'
------------- EQUITY
MARCH 31,
(UNAUDITED) 1999
--------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 1,000 $ 6,715,000
Accounts receivable, net of allowance for doubtful accounts of
$50,000 at March 31, 1999........................................ -- 497,000
Other current assets............................................... -- 29,000
----------- -------------
Total current assets........................................... 1,000 7,241,000
Property and equipment, net.......................................... -- 1,753,000
Restricted cash...................................................... -- 794,000
Deposits............................................................. -- 300,000
----------- -------------
Total assets................................................... $ 1,000 $ 10,088,000
----------- -------------
----------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................... $ 4,000 $ 2,012,000
Due to related party............................................... 19,000 --
Accrued liabilities................................................ 1,000 300,000
Deferred revenue................................................... -- 17,000
Current portion of capital leases.................................. -- 67,000
----------- -------------
Total current liabilities...................................... 24,000 2,396,000
Capital leases less current portion.................................. -- 817,000
Commitments and contingencies (Note 11)..............................
Redeemable convertible preferred stock, no-par value; 19,232,000
shares authorized; 18,105,000 issued and outstanding at March 31,
1999; liquidation preference and redemption value of $2,015,000.... -- 2,015,000
----------- -------------
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value; 35,181,000 shares
authorized; 27,101,000 shares issued and outstanding at March 31,
1999; liquidation preference of $11,646,000;
Pro forma--10,000,000 shares authorized; no shares issued and
outstanding........................................................ -- 11,522,000 --
Common stock, $0.001 par value; 30,000,000 and 112,500,000 shares
authorized at June 30, 1998 and March 31, 1999, respectively;
15,000,000 and 25,004,000 shares issued and outstanding at June 30,
1998 and March 31, 1999, respectively; Pro forma--500,000,000
authorized; 70,210,000 shares issued and outstanding............... 2,000 755,000 70,000
Additional paid-in capital........................................... 5,083,000 19,305,000
Note receivable from stockholder..................................... -- (629,000) (629,000)
Deferred stock compensation.......................................... (4,739,000) (4,739,000)
Accumulated deficit.................................................. (25,000) (7,132,000) (7,132,000)
----------- ------------- --------------
Total stockholders' equity (deficit)........................... (23,000) 4,860,000 $ 6,875,000
----------- ------------- --------------
--------------
Total liabilities and stockholders' equity..................... $ 1,000 $ 10,088,000
----------- -------------
----------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
NETZERO, INC.
STATEMENTS OF OPERATIONS
(INFORMATION WITH RESPECT TO THE PERIOD FROM JULY 21, 1997 (INCEPTION)
THROUGH MARCH 31, 1998 AND FOR THE NINE MONTHS ENDED MARCH 31, 1999 IS
UNAUDITED)
<TABLE>
<CAPTION>
JULY 21, 1997
(INCEPTION) THROUGH
JUNE 30, 1998
------------------- JULY 21, 1997 NINE MONTHS
(INCEPTION) THROUGH ENDED
MARCH 31, 1998 MARCH 31, 1999
------------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net revenues.......................................... $ -- $ -- $ 903,000
Cost of revenues (Including $72,000 of depreciation
expense)............................................ -- -- 5,049,000
------------------- ------------------- ---------------
Gross loss............................................ -- -- (4,146,000)
------------------- ------------------- ---------------
Operating expenses:
Sales and marketing................................. -- -- 439,000
Product development................................. -- -- 510,000
General and administrative.......................... 19,000 9,000 1,616,000
Stock-based charges................................. -- -- 344,000
Depreciation and amortization....................... -- -- 76,000
------------------- ------------------- ---------------
Total operating expenses.............................. 19,000 9,000 2,985,000
------------------- ------------------- ---------------
Loss from operations.................................. (19,000) (9,000) (7,131,000)
------------------- ------------------- ---------------
Interest income....................................... -- -- 50,000
Interest expense...................................... -- -- (26,000)
Other expense......................................... (6,000) (4,000) --
------------------- ------------------- ---------------
Net loss.............................................. $ (25,000) $ (13,000) $ (7,107,000)
------------------- ------------------- ---------------
------------------- ------------------- ---------------
Basic and diluted net loss per share.................. $ -- $ -- $ (0.67)
------------------- ------------------- ---------------
------------------- ------------------- ---------------
Shares used to calculate basic and diluted net loss
per share........................................... 15,000,000 15,000,000 10,587,000
------------------- ------------------- ---------------
------------------- ------------------- ---------------
Unaudited pro forma basic and diluted net loss per
share............................................... $ (0.28)
---------------
---------------
Unaudited shares used to calculate pro forma basic and
diluted net loss per share.......................... 25,088,000
---------------
---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
NETZERO, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE NOTE
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED
------------------------- ------------------------ PAID-IN FROM STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDER COMPENSATION
----------- ------------ ----------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 21,
1997 (Inception)..... -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common
stock.............. -- -- 15,000,000 2,000 -- -- --
Net loss............. -- -- -- -- -- -- --
----------- ------------ ----------- ----------- ----------- ------------ --------------
Balance at June 30,
1998................. -- -- 15,000,000 2,000 -- -- --
Issuance of Series C
convertible
preferred stock,
net................ 27,078,000 11,512,000 -- -- -- -- --
Exercise of warrants
for Series C
convertible
preferred stock.... 23,000 10,000 -- -- -- -- --
Exercise of stock
options............ -- -- 3,717,000 124,000 -- -- --
Exercise of options
for a note
receivable......... -- -- 6,287,000 629,000 -- (629,000) --
Deferred stock
compensation....... -- -- -- -- 5,016,000 -- (5,016,000)
Amortization of
deferred stock-
based
compensation....... -- -- -- -- -- -- 277,000
Charge for issuance
of Series A and B
options............ -- -- -- -- 67,000 -- --
Net loss............. -- -- -- -- -- -- --
----------- ------------ ----------- ----------- ----------- ------------ --------------
Balance at March 31,
1999 (unaudited)..... 27,101,000 11,522,000 25,004,000 755,000 5,083,000 (629,000) (4,739,000)
Assumed conversion of
convertible
preferred stock.... (27,101,000) (11,522,000) 27,101,000 11,522,000 -- -- --
Assumed conversion of
redeemable
convertible
preferred stock.... -- -- 18,105,000 2,015,000 -- -- --
Reincorporation into
Delaware and change
in par value of
common stock......... -- -- -- (14,222,000) 14,222,000 -- --
----------- ------------ ----------- ----------- ----------- ------------ --------------
Balance at March 31,
1999, pro forma
(unaudited).......... -- $ -- 70,210,000 $ 70,000 $19,305,000 $ (629,000) $ (4,739,000)
----------- ------------ ----------- ----------- ----------- ------------ --------------
----------- ------------ ----------- ----------- ----------- ------------ --------------
<CAPTION>
TOTAL
STOCKHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIT)
------------- --------------
<S> <C> <C>
Balance at July 21,
1997 (Inception)..... $ -- $ --
Issuance of common
stock.............. -- 2,000
Net loss............. (25,000) (25,000)
------------- --------------
Balance at June 30,
1998................. (25,000) (23,000)
Issuance of Series C
convertible
preferred stock,
net................ -- 11,512,000
Exercise of warrants
for Series C
convertible
preferred stock.... -- 10,000
Exercise of stock
options............ -- 124,000
Exercise of options
for a note
receivable......... -- --
Deferred stock
compensation....... -- --
Amortization of
deferred stock-
based
compensation....... -- 277,000
Charge for issuance
of Series A and B
options............ -- 67,000
Net loss............. (7,107,000) (7,107,000)
------------- --------------
Balance at March 31,
1999 (unaudited)..... (7,132,000) 4,860,000
Assumed conversion of
convertible
preferred stock.... -- --
Assumed conversion of
redeemable
convertible
preferred stock.... -- 2,015,000
Reincorporation into
Delaware and change
in par value of
common stock......... -- --
------------- --------------
Balance at March 31,
1999, pro forma
(unaudited).......... $(7,132,000) $ 6,875,000
------------- --------------
------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
NETZERO, INC.
STATEMENTS OF CASH FLOWS
(INFORMATION WITH RESPECT TO THE PERIOD FROM JULY 21, 1997 (INCEPTION)
THROUGH MARCH 31, 1998 AND FOR THE NINE MONTHS ENDED MARCH 31, 1999 IS
UNAUDITED)
<TABLE>
<CAPTION>
JULY 21, 1997
(INCEPTION) THROUGH
JUNE 30, 1998
------------------- JULY 21, 1997 NINE MONTHS
(INCEPTION) THROUGH ENDED
MARCH 31, 1998 MARCH 31, 1999
------------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $ (25,000) $ (13,000) $ (7,107,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization..................... -- -- 148,000
Provision for doubtful accounts................... -- -- 50,000
Stock-based charges............................... -- -- 344,000
Changes in operating assets and liabilities:
Accounts receivable............................. -- -- (547,000)
Deposits........................................ -- -- (300,000)
Other current assets............................ -- -- (29,000)
Restricted cash................................. -- -- (794,000)
Accounts payable................................ 4,000 -- 2,008,000
Accrued liabilities............................. 1,000 -- 299,000
Due to related party............................ 19,000 12,000 (19,000)
Deferred revenue................................ -- -- 17,000
---------- ---------- ---------------
Net cash used for operating activities........ (1,000) (1,000) (5,930,000)
---------- ---------- ---------------
Cash flows from investing activities:
Purchases of property and equipment................. -- -- (1,171,000)
Proceeds from the sale of fixed assets.............. -- -- 220,000
---------- ---------- ---------------
Net cash used for investing activities........ -- -- (951,000)
---------- ---------- ---------------
Cash flows from financing activities:
Payments on capital leases.......................... -- -- (66,000)
Proceeds from bridge loan........................... -- -- 100,000
Proceeds from exercise of stock options............. -- -- 124,000
Net proceeds from issuance of common stock.......... 2,000 2,000
Net proceeds from issuance of redeemable convertible
preferred stock................................... -- -- 2,015,000
Net proceeds from issuance of convertible preferred
stock............................................. -- -- 11,422,000
---------- ---------- ---------------
Net cash provided by financing activities..... 2,000 2,000 13,595,000
---------- ---------- ---------------
Change in cash and cash equivalents........... 1,000 1,000 6,714,000
Cash and cash equivalents, beginning of period........ -- -- 1,000
---------- ---------- ---------------
Cash and cash equivalents, end of period.............. $ 1,000 $ 1,000 $ 6,715,000
---------- ---------- ---------------
---------- ---------- ---------------
Supplemental disclosure of cash flow activities:
Cash paid during the year for interest................ $ -- $ -- $ 26,000
---------- ---------- ---------------
---------- ---------- ---------------
Note receivable from a stockholder in connection with
the exercise of stock options....................... $ -- $ -- $ 629,000
---------- ---------- ---------------
---------- ---------- ---------------
Bridge loan repayment in exchange for issuance of
convertible preferred stock......................... $ -- $ -- $ 100,000
---------- ---------- ---------------
---------- ---------- ---------------
Equipment obtained under capital leases............... $ -- $ -- $ 950,000
---------- ---------- ---------------
---------- ---------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO MARCH 31, 1999 IS UNAUDITED)
1. BUSINESS:
NetZero, Inc. ("NetZero" or the "Company") was incorporated in July 1997 and
launched its service in October 1998. NetZero provides consumers with free
access to the Internet while offering online advertisers a highly effective way
to reach those consumers. The Company offers its users free and unlimited
Internet access as well as free e-mail and navigational tools to enhance the
users online experience. For advertisers, the Company offers an online direct
marketing tool with features and functionality that have distinct advantages
over traditional forms of online advertising.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of March 31, 1999 and for
the periods from July 21, 1997 (inception) through March 31, 1998 and for the
nine months ended March 31, 1999, are unaudited. The unaudited interim financial
statements have been prepared on the same basis as the annual financial
statements and, in the opinion of management, reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position, results of operations and cash flows at March 31, 1999 and
for the period from July 21, 1997 (Inception) through March 31, 1998 and for the
nine months ended March 31, 1999, respectively.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities and the reported amounts of revenues and
expenses. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents
consist of deposits in money market funds.
CONCENTRATION OF RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are deposited with major financial
institutions; at times, such balances with any one financial institution may be
in excess of FDIC insurance limits. The Company's accounts receivable are
derived primarily from revenue earned from customers located in the United
States. The Company extends credit based upon an evaluation of the customer's
financial condition and generally collateral is not required. The Company
maintains an allowance for doubtful accounts based upon the expected
collectibility of accounts receivable; to date such losses, if any, have been
within management's expectations.
Two customers comprised 34% and 11% of the accounts receivable balance at
March 31, 1999, and for the nine months ended March 31, 1999, two customers
comprised 20% and 24% of revenues.
F-7
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION WITH RESPECT TO MARCH 31, 1999 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
SOURCES OF SUPPLIES
The Company relies on third-party networks, local telephone companies and
other companies to provide data communications capacity. Although management
believes that alternate telecommunications facilities could be found in a timely
manner, any disruption of these services could have an adverse effect on the
Company's financial position and results of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, and lease obligations are carried at
historical cost, which approximates their fair value because of the short-term
maturity of these instruments and the relatively stable interest rate
environment.
PROPERTY AND EQUIPMENT
Property and equipment are stated at historical cost. Depreciation and
amortization is computed using the straight-line method over the estimated
useful lives of the assets, generally three to five years, or the shorter of the
lease term or the estimated useful lives of the assets, if applicable.
LONG-LIVED ASSETS
The Company identifies and records impairment losses on long-lived assets
when events and circumstances indicate that such assets might be impaired. In
the event the expected undiscounted future cash flows attributable to the asset
is less than the carrying amount of the asset, an impairment loss equal to the
excess of the asset's carrying value over its fair value is recorded. To date,
no such impairment has been recorded.
REVENUE RECOGNITION
The Company's revenues are derived principally from the sale of banner
advertisements, sponsorships, referrals of our users to other web-sites,
performance based agreements, and distribution arrangements. To date most of the
Company's revenues have been generated from banner advertisements. Advertising
rates are dependent on whether the advertisement impressions are displayed on
the Company's banner window on a general rotation or targeted to specific
audiences. The Company's obligations typically include the guarantee of a
minimum number of impressions or the satisfaction of other performance criteria.
Advertising revenue is recognized as the impressions are displayed or as
click-throughs occur, depending on the contract terms, provided that no
significant company obligations remain and collection of the related receivable
is probable. To date, the duration of the Company's advertising commitments have
generally averaged from one to two months. To the extent minimum guaranteed
impressions or other performance criteria are not met, the Company defers
recognition of the corresponding revenues until the remaining guaranteed
impressions or other performance criteria are met.
F-8
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION WITH RESPECT TO MARCH 31, 1999 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PRODUCT DEVELOPMENT COSTS
Product development costs incurred by the Company to develop, enhance,
manage, monitor and operate the Company's Web-sites and related technologies are
expensed as incurred.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred and totalled $0 and $78,000 for
the period from July 21, 1997 (Inception) through June 30, 1998 and for the nine
months ended March 31, 1999, respectively.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." Under APB 25, compensation
expense is recognized over the vesting period based on the difference, if any,
on the date of grant between the deemed fair value of the Company's stock for
accounting purposes and the exercise price. The Company accounts for stock
issued to non-employees in accordance with the provisions of SFAS No. 123 and
Emerging Issues Task Force 96-18.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes.
Under this method, deferred tax liabilities and assets are determined based on
the difference between the financial statement and the tax bases of assets and
liabilities using enacted tax rates in effect for the period in which the
differences are expected to reverse. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
NET LOSS PER SHARE
Basic and diluted net loss per share is computed by dividing the net loss
for the period by the weighted average number of common shares outstanding
during the period. Shares associated with stock options, warrants and
convertible preferred stock are not included to the extent they are
antidilutive.
UNAUDITED PRO FORMA NET LOSS PER SHARE
Unaudited pro forma net loss per share is computed by dividing the net loss
for the period by the weighted average number of common shares outstanding,
including the pro forma effects of the automatic conversion of the Company's
convertible preferred stock into shares of the Company's common stock effective
upon the closing of the Company's initial public offering as if such conversion
occurred on July 1, 1998 or at the date of original issuance, if later. The
resulting pro forma adjustment includes an increase in weighted average shares
used to compute basic and diluted net loss per share of 14,501,000 for the nine
months ended March 31, 1999.
F-9
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION WITH RESPECT TO MARCH 31, 1999 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
COMPREHENSIVE INCOME
Effective July 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income.
SEGMENTS
Effective July 1, 1998, the Company adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The Company has determined that it does not have any separately
reportable business segments as of June 30, 1998 and March 31, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Software for Internal
Use," which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. The Company expects that the adoption of
SOP 98-1 will not have a material impact on its financial position, results of
operations or cash flows. The Company will be required to implement SOP No. 98-1
in the first quarter of fiscal 2000.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, start-up costs that
were capitalized in the past must be written off when SOP No. 98-5 is adopted.
The Company expects that the adoption of SOP No. 98-5 will not have a material
impact on its financial position, results of operations or cash flows. The
Company will be required to implement SOP No. 98-1 in the first quarter of
fiscal 2000.
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." The statement
requires the recognition of all derivatives as either assets or liabilities in
the balance sheet and the measurement of those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the planned
use of the derivative and the resulting designation. Because the Company does
not currently hold any derivative instruments and does not engage in hedging
activities, the impact of the adoption of SFAS No. 133 is not currently expected
to have a material impact on financial position, results of operations or cash
flows. The Company will be required to implement SFAS No. 133 in the first
quarter of fiscal 2001.
F-10
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION WITH RESPECT TO MARCH 31, 1999 IS UNAUDITED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30, 1998 MARCH 31, 1999
-------------- ---------------
<S> <C> <C>
Computer software and equipment............................. $ -- $ 780,000
Furniture and fixtures...................................... -- 171,000
Assets under capital leases................................. -- 950,000
-------------- ---------------
Total....................................................... -- 1,901,000
Less: accumulated depreciation, including accumulated
capital lease amortization of $0 and $76,000 at June 30,
1998 and March 31, 1999, respectively..................... -- (148,000)
-------------- ---------------
$ -- $ 1,753,000
-------------- ---------------
-------------- ---------------
</TABLE>
Depreciation expense for the period from July 21, 1997 (Inception) through
June 30, 1998 and for the nine months ended March 31, 1999 was $0 and $148,000,
respectively.
4. ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30, 1998 MARCH 31, 1999
-------------- ---------------
<S> <C> <C>
Accrued payroll............................................. $ -- $ 180,000
Sales tax payable........................................... -- 57,000
Accrued expenses............................................ 1,000 63,000
-------------- ---------------
$ 1,000 $ 300,000
-------------- ---------------
-------------- ---------------
</TABLE>
5. RELATED-PARTY TRANSACTIONS:
In September 1998, the Company purchased certain software technology for
$80,000 in cash from a related party.
At March 31, 1999, the Company held a note receivable from an employee for
$629,000 for the exercise of stock options. The note bears interest at 4.83% per
annum and is due on March 20, 2004 unless paid earlier. The note, which is
classified as a component of stockholders' equity, has recourse provisions and
is collateralized by the shares of common stock issued upon exercise.
6. STOCK OPTIONS:
The Company's 1998 and 1999 Stock Option and Stock Issuance Plans (the
"Plans") provide for the issuance of stock and stock options at prices not less
than 85% (110% if the award is issued to a 10% stockholder) of the fair market
value at the date of issue. An aggregate of 15,000,000 shares were reserved
under the Plans, of which 1,541,000 shares were available for future grant at
March 31, 1999 and 3,455,000 options were outstanding at March 31, 1999.
F-11
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION WITH RESPECT TO MARCH 31, 1999 IS UNAUDITED)
6. STOCK OPTIONS: (CONTINUED)
The Plans provide for the grant of nonstatutory and incentive stock options
to employees, officers, directors and consultants of the Company. Options
granted are generally immediately exercisable for unvested shares of common
stock, with the unvested portion of the shares remaining subject to repurchase
by the Company at the exercise price until the vesting period is complete. The
Company had 8,407,000 unvested shares of common stock outstanding at March 31,
1999 (Note 7).
The Stock Issuance Equity Program provides for the issuance of common stock
directly to participants and may vest immediately or in one or more installments
over the service period but at not less than 20% per year vesting. Unvested
shares of common stock remain subject to repurchase by the Company at the
original issuance price. There were no shares issued under the Stock Issuance
program as of March 31, 1999.
The following table summarizes activity under the Plan for the period from
July 21, 1997 (Inception) through June 30, 1998 and for the nine months ended
March 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER PRICE EXERCISE
OF SHARES PER SHARE PRICE
-------------- ----------- -----------
<S> <C> <C> <C>
OPTIONS OUTSTANDING AT JULY 21, 1997 (INCEPTION)......................... -- $ -- $ --
Granted................................................................ 4,316,000 .03 .03
--------------
OPTIONS OUTSTANDING AT JUNE 30, 1998..................................... 4,316,000 .03 .03
Granted................................................................ 10,139,000 .03-.10 .09
Exercised.............................................................. (10,004,000) .03-.10 .07
Canceled............................................................... (996,000) .03 .03
--------------
OPTIONS OUTSTANDING AT MARCH 31, 1999.................................... 3,455,000 $ .03-.10 $ .06
--------------
--------------
</TABLE>
Options granted during the nine months ended March 31, 1999 resulted in a
total deferred compensation amount of $4,683,000 and was included in deferred
stock compensation in stockholders' equity. The deferred compensation amount
will be recognized as compensation expense over the vesting period. During the
nine months ended March 31, 1999, such compensation expense included in
stock-based charges in the statement of operations amounted to $147,000.
F-12
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION WITH RESPECT TO MARCH 31, 1999 IS UNAUDITED)
6. STOCK OPTIONS: (CONTINUED)
Additional information with respect to the outstanding options as of March
31, 1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISED
------------------------------------ SUBJECT TO
AVERAGE OPTIONS EXERCISABLE REPURCHASE
REMAINING --------------------- ------------------------
CONTRACTUAL AVERAGE AVERAGE AVERAGE
NUMBER OF LIFE (IN EXERCISE NUMBER OF EXERCISE NUMBER OF REPURCHASE
PRICES SHARES YEARS) PRICE SHARES PRICE SHARES PRICE
- ------ --------- ----------- -------- --------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
$.03 1,958,000 9.54 $ .03 1,958,000 $ .03 2,119,000 $ .03
.10 1,497,000 9.94 .10 1,497,000 .10 6,288,000 .10
--------- --------- ---------
3,455,000 3,455,000 8,407,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company calculated the minimum fair value of each option grant on the
date of the grant using the minimum value option pricing model as prescribed by
SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
JULY 21, 1997
(INCEPTION) NINE MONTHS
THROUGH ENDED
JUNE 30, 1998 MARCH 31, 1999
----------------- ---------------------
<S> <C> <C>
Risk-free interest rates........................................................... 6% 5%
Expected lives (in years).......................................................... 4 4
Dividend yield..................................................................... 0% 0%
Expected volatility................................................................ 0% 0%
</TABLE>
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
-------------- --------------
<S> <C> <C>
Nine Months Ended March 31, 1999:
Net loss.......................................................................... $ (7,107,000) $ (7,124,000)
Basic and diluted net loss per share.............................................. (.67) (.67)
Period from July 21, 1997 (Inception) through March 31, 1998:
Net loss.......................................................................... $ (13,000) $ (13,000)
Basic and diluted net loss per share.............................................. -- --
Period from July 21, 1997 (Inception) through June 30, 1998:
Net loss.......................................................................... $ (25,000) $ (25,000)
Basic and diluted net loss per share.............................................. -- --
</TABLE>
In September 1998, the Company issued options to a non employee investor to
purchase 704,000 and 422,000 shares of Series A and Series B redeemable
convertible preferred stock, respectively, at exercise prices equal to the
respective Series A and Series B issuance prices. The Company incurred a charge
of $67,000 relating to these options which is included in the
F-13
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION WITH RESPECT TO MARCH 31, 1999 IS UNAUDITED)
6. STOCK OPTIONS: (CONTINUED)
stock-based charges in the accompanying statement of operations. The options
were exercised and the preferred shares issued in March 1999.
In December 1998, the Company issued, to a non-employee director, 225,000
options to purchase Series C convertible preferred stock at $.4297 per share.
These options, which have a 48-month vesting period from the date of grant, were
exercised in March 1999. The unvested portion remains subject to repurchase by
the Company at the original issue price.
7. CAPITALIZATION:
PREFERRED STOCK
Convertible and redeemable convertible preferred stock ("preferred stock")
at March 31, 1999 consist of the following:
<TABLE>
<CAPTION>
SHARES
---------------------------- LIQUIDATION REDEMPTION
AUTHORIZED OUTSTANDING AMOUNT AMOUNT
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Series A redeemable convertible..................... 11,957,000 11,253,000 $ 1,000,000 $ 1,000,000
Series B redeemable convertible..................... 7,275,000 6,852,000 1,015,000 1,015,000
Series C convertible................................ 27,681,000 27,101,000 11,646,000 --
Undesignated........................................ 7,500,000 -- -- --
------------- ------------- -------------- -------------
54,413,000 45,206,000 $ 13,661,000 $ 2,015,000
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
</TABLE>
The outstanding Series A and Series B redeemable convertible preferred
shares ("Series A" and "Series B") above exclude 704,000 and 422,000 shares,
respectively, which the Company is obligated to issue at $.0889 and $.1481 per
share, respectively, as part of the Series A and Series B financing in 1998.
These shares were issued on June 30, 1999 in exchange for cash.
VOTING. Each share of preferred stock has a number of votes equal to the
number of shares of common stock then issuable upon its conversion. The
preferred stock generally votes together with the common stock and not as a
separate class.
DIVIDENDS. The holders of each series of preferred stock are entitled to
receive noncumulative dividends when, as and if declared by the Board of
Directors at a rate of 8% of the respective issuance price per share per annum.
No dividends have been declared or paid from inception.
LIQUIDATION. In the event of any liquidation or winding up of the Company,
the holders of each series of preferred stock will be entitled to receive, in
preference to the holders of common stock, any distribution of assets of the
Company equal to the sum of the respective issuance price of such shares plus
any accrued and unpaid dividends.
After the full liquidation preference on all outstanding shares of preferred
stock has been paid, any remaining funds and assets of the Company will be
distributed pro rata among the holders of the preferred stock and common stock,
assuming conversion of each series of the preferred shares until the holders of
the Series A, Series B and Series C shares have received an aggregate of five
F-14
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION WITH RESPECT TO MARCH 31, 1999 IS UNAUDITED)
7. CAPITALIZATION: (CONTINUED)
times the then-existing conversion price which would result in maximum per share
distribution amounts of $0.44, $0.74 and $2.15, respectively. The conversion
price is considered the original issuance price adjusted for certain dilutive
issuances, stock splits and combinations, if any.
REDEMPTION. If a liquidation or initial public offering has not occurred by
September 9, 2003, the holders of Series A and B redeemable convertible
preferred stock are entitled to a redemption out of the assets of the Company
equal to the issue price per share and any declared but unpaid dividends at the
date of redemption.
CONVERSION. Each share of preferred stock is convertible at the holder's
option at any time into common stock, according to a ratio which is one-for-one,
subject to adjustment for dilution. Each share of preferred stock automatically
converts into common stock at the then applicable conversion rate upon (i) the
closing of an underwritten public offering pursuant to which the post-closing
enterprise value is at least $50,000,000 and the Company receives proceeds of
not less than $10,000,000, or (ii) the consent of a majority of the then
outstanding preferred stockholders. As of March 31, 1999, the Company was
required to keep available, out of its authorized but unissued shares of common
stock, 45,206,000 shares for conversion of preferred stock.
COMMON STOCK
As a condition to the issuance of Series A redeemable convertible preferred
stock in September 1998, the employee founding stockholders of all of the then
15 million outstanding common shares entered into stock restriction agreements
with the Company pursuant to which 7.5 million of the outstanding common shares
were restricted and were made subject to monthly vesting over a four-year period
based on the founders continued employment with the Company. Under the terms of
the restricted stock agreements, the Company has the right to repurchase the
unvested shares at the original issue price in the event a founder ceases to be
an employee or service provider to the Company. The repurchase right shall
automatically lapse with respect to the unvested shares in the event the founder
is terminated without cause following a corporate transaction, defined as a (i)
merger or consolidation with more than a 50% change of control or (ii) sale,
transfer or disposition of substantially all the Company's assets in a
dissolution. The Company recorded deferred stock compensation amounting to
$333,000 for the shares covered under the restricted stock agreements. The
deferred amount will be recognized as compensation expense over the vesting
period. During the nine months ended March 31, 1999, such compensation expense
included in stock-based charges in the statement of operations amounted to
$130,000.
At March 31, 1999, 14,970,000 shares of common stock were subject to
repurchase, of which 6,563,000 shares related to unvested shares under the
restricted stock agreements and 8,407,000 shares related to unvested stock
options exercised.
WARRANTS
Under the terms of a loan outstanding during the third quarter of 1999, the
Company issued fully vested and exercisable warrants to purchase 23,000 shares
of its Series C convertible
F-15
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION WITH RESPECT TO MARCH 31, 1999 IS UNAUDITED)
7. CAPITALIZATION: (CONTINUED)
preferred stock at an exercise price of $.4297 per share. The Company determined
the fair value of the warrants to be immaterial at the date of issuance.
8. NET LOSS PER SHARE:
The following table sets forth the computation of basic, diluted and pro
forma net loss per share for the periods indicated:
<TABLE>
<CAPTION>
JULY 21, 1997 NINE MONTHS
(INCEPTION) ENDED MARCH 31,
THROUGH -----------------------------
JUNE 30, 1998 1998 1999
------------- ------------- --------------
<S> <C> <C> <C>
HISTORICAL PRESENTATION
Numerator:
Net loss......................................................... $ (25,000) $ (13,000) $ (7,107,000)
------------- ------------- --------------
Denominator:
Weighted average shares.......................................... 15,000,000 15,000,000 10,587,000
------------- ------------- --------------
------------- ------------- --------------
Basic and diluted net loss per share............................... $ -- $ -- $ (.67)
------------- ------------- --------------
</TABLE>
<TABLE>
<S> <C>
PRO FORMA PRESENTATION
Denominator:
Shares used above............................................................ 10,587,000
Weighted average effect of convertible securities:
Series A redeemable convertible preferred stock............................ 6,684,000
Series B redeemable convertible preferred stock............................ 2,406,000
Series C convertible preferred stock....................................... 5,411,000
----------
Denominator for pro forma calculation.......................................... 25,088,000
----------
----------
Unaudited pro forma basic and diluted net loss per share....................... $ (.28)
----------
----------
</TABLE>
The diluted per share computations exclude convertible preferred stock and
options which were antidilutive. The number of shares excluded from the diluted
net loss per share computation were 4,316,000 and 63,132,000 for the period from
July 21, 1997 (Inception) through June 30, 1998 and for the nine months ended
March 31, 1999, respectively. The number of such shares excluded from the pro
forma diluted net loss per share computation was 17,926,000 for the nine months
ended March 31, 1999.
9. EMPLOYEE BENEFIT PLAN:
The Company has a 401(k) Profit Sharing Plan ("the Plan") available to all
employees who meet the Plan's eligibility requirements. Under the Plan,
participating employees may defer a percentage (not to exceed 15%) of their
eligible pretax earnings up to the Internal Revenue Service's annual
contribution limit. Company matching and profit sharing contributions are
discretionary. To date, the Company has not made any contributions to the Plan
as of March 31, 1999.
F-16
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION WITH RESPECT TO MARCH 31, 1999 IS UNAUDITED)
10. INCOME TAXES:
As a result of net operating losses, the Company has not recorded a
provision for income taxes. The components of the deferred tax assets and
related valuation allowance at June 30, 1998 is as follows:
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards............................................ $ 10,000
--------------
Total deferred tax assets................................................... 10,000
Less: valuation allowance................................................... (10,000)
--------------
Net deferred taxes............................................................ $ --
--------------
--------------
</TABLE>
Due to the uncertainty surrounding the realization of the benefits in future
tax returns, the Company has placed a valuation allowance against its deferred
tax assets.
At June 30, 1998, the Company had net operating losses for federal and state
income tax purposes of approximately $25,000 which begin to expire in 2018 for
federal income tax purposes. The net operating losses can be carried forward to
offset future taxable income. Utilization of the above carryforwards may be
subject to utilization limitations, which may inhibit the Company's ability to
use carryforwards in the future.
11. COMMITMENTS AND CONTINGENCIES:
CAPITAL LEASES
During the nine months ended March 31, 1999, the Company entered into
certain noncancelable lease obligations for computer equipment. The future
minimum lease payments are discounted using interest rates of 21-29% over the
two- to five-year lease terms.
Future minimum lease payments under noncancelable capital leases for the
following fiscal years at March 31, 1999 are:
<TABLE>
<S> <C>
1999........................................................... $ 115,000
2000........................................................... 459,000
2001........................................................... 421,000
2002........................................................... 163,000
2003........................................................... 4,000
Thereafter..................................................... 2,000
----------
Total minimum obligations...................................... 1,164,000
Less amounts representing interest............................. (280,000)
----------
Present value of minimum obligations........................... 884,000
Less current portion........................................... (67,000)
----------
Total.......................................................... $ 817,000
----------
----------
</TABLE>
F-17
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION WITH RESPECT TO MARCH 31, 1999 IS UNAUDITED)
11. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
OPERATING LEASE
The Company leases its facilities under a noncancelable operating lease
expiring in 2009. The lease contains a provision that payments may be adjusted
for increases in the lessor's direct costs as well as a five-year renewal
option. The Company must maintain a letter of credit with a financial
institution as a security deposit in accordance with the facility lease
agreement. The letter of credit, which remains in effect until March 2000, is
collateralized by a certificate of deposit account which is classified as
restricted cash at March 31, 1999.
Future minimum lease payments under the facility lease for the following
fiscal years at March 31, 1999 are:
<TABLE>
<CAPTION>
<S> <C>
1999.......................................................................... $ 62,000
2000.......................................................................... 936,000
2001.......................................................................... 1,243,000
2002.......................................................................... 1,243,000
2003.......................................................................... 1,247,000
Thereafter.................................................................... 8,103,000
--------------
Total......................................................................... $ 12,834,000
--------------
--------------
</TABLE>
Total rental expense for operating leases was $0 and $59,000 for the period
from July 21, 1997 (Inception) through June 30, 1998 and for the nine months
ended March 31, 1999, respectively.
12. SUBSEQUENT EVENTS:
SALE OF SERIES D CONVERTIBLE PREFERRED STOCK
In May 1999, the Company issued 18,082,000 shares of Series D convertible
preferred stock ("Series D Preferred") for $33,271,000. All holders of Series D
preferred have voting, dividend and liquidation preferences substantially the
same as holders of Series A, B and C convertible preferred stock. There are no
redemption rights associated with the series D preferred stock offering.
INITIAL PUBLIC OFFERING AND UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY:
In July 1999, the Board of Directors authorized the filing of a registration
statement with the Securities and Exchange Commission ("SEC") that would permit
the Company to sell shares of the Company's common stock in connection with a
proposed initial public offering ("IPO"). If the IPO is consummated under the
terms presently anticipated, upon the closing of the proposed IPO, all of the
then outstanding shares of the Company's convertible preferred stock and
redeemable convertible preferred stock will automatically convert into shares of
common stock on a one-for-one basis, subject to antidilution provisions.
In July 1999, the Board of Directors approved the reincorporation of the
Company in the State of Delaware, the change in the par value of the Company's
common stock and the increase in the number of authorized shares which will be
effected prior to the closing of the IPO.
F-18
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION WITH RESPECT TO MARCH 31, 1999 IS UNAUDITED)
12. SUBSEQUENT EVENTS: (CONTINUED)
The conversion of the Series A and B redeemable convertible preferred stock
and the Series C convertible preferred stock, and the planned reincorporation of
the Company in Delaware have been reflected in the accompanying unaudited pro
forma balance sheet and statement of stockholders' equity as if these events had
occurred on March 31, 1999.
STOCK SPLIT
In July 1999, the Company authorized and implemented a three-for-two forward
stock split. The share information in the accompanying financial statements has
been retroactively restated to reflect the effect of the stock split.
F-19
<PAGE>
UNDERWRITING
NetZero, Inc. and the underwriters named below have entered into an
underwriting agreement with respect to the shares being offered. Subject to
certain conditions, each underwriter has severally agreed to purchase the number
of shares indicated in the following table. Goldman, Sachs & Co., Donaldson,
Lufkin & Jenrette Securities Corporation, Hambrecht & Quist LLC and Wit Capital
Corporation are the representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
- -------------------------------------------------------- -------------------
<S> <C>
Goldman, Sachs & Co.....................................
Donaldson, Lufkin & Jenrette Securities Corporation.....
Hambrecht & Quist LLC...................................
Wit Capital Corporation.................................
--------
Total.............................................
--------
--------
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
shares from NetZero to cover such sales. They may exercise that option for
30 days. If any shares are purchased pursuant to this option, the underwriters
will severally purchase shares in approximately the same proportion as set forth
in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by NetZero. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by NetZero
---------------------------
No Exercise Full Exercise
------------ -------------
<S> <C> <C>
Per Share...................................... $ $
Total.......................................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from
the initial public offering price. If all the shares are not sold at the initial
offering price, the representatives may change the offering price and the other
selling terms.
NetZero has agreed with the underwriters not to dispose of or hedge any of
its common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this Prospectus continuing
through the date 180 days after the date of this prospectus, except with the
prior written consent of Goldman, Sachs & Co. This agreement does not apply to
any existing employee benefit plans. See "Shares Eligible for Future Sale" for a
discussion of certain transfer restrictions.
At the request of NetZero, the underwriters have reserved for sale, at the
initial public offering price, up to % of the common stock offered hereby
for sale to certain directors, employees and associates of NetZero. There can be
no assurance that any of the reserved shares will be purchased. The number of
shares available for sale to the general public in this offering will be
U-1
<PAGE>
reduced by the number of reserved shares sold. Any reserved shares not so
purchased will be offered to the general public on the same basis as the other
shares offered hereby.
Prior to the offering, there has been no public market for the shares. The
initial public offering price will be negotiated among NetZero and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be NetZero's historical performance, estimates of the business
potential and earnings prospects of NetZero, an assessment of NetZero's
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.
Application has been made for quotation of the Common Stock on The Nasdaq
National Market under the symbol "NZRO".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offerings are in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on The Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
NetZero estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $ . NetZero
will pay all such expenses.
NetZero has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
U-2
<PAGE>
[ARTWORK]
[To Come]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 5
Information Regarding Forward-Looking
Statements......................... 23
Use of Proceeds...................... 24
Dividend Policy...................... 24
Capitalization....................... 25
Dilution............................. 26
Selected Financial Data.............. 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 28
Business............................. 35
Management........................... 47
Principal Stockholders............... 59
Certain Transactions................. 61
Description of Capital Stock......... 64
Shares Eligible For Future Sale...... 68
Legal Matters........................ 69
Experts.............................. 69
Additional Information............... 70
Index to Financial Statements........ F-1
Underwriting......................... U-1
</TABLE>
------------------
Through and including , 1999 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriter and with respect to an unsold allotment or
subscription.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Shares
NETZERO, INC.
Common Stock
-------------
[LOGO]
-------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
HAMBRECHT & QUIST
WIT CAPITAL CORPORATION
Representatives of the Underwriters
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimated
except the Securities and Exchange Commission, NASD and Nasdaq National Market
fees. All of the expenses below will be paid by NetZero.
<TABLE>
<CAPTION>
ITEM
- ---------------------------------------------------------------
<S> <C>
Registration fee...............................................
NASD filing fee................................................
Nasdaq National Market listing fee.............................
Blue sky fees and expenses.....................................
Printing and engraving expenses................................
Legal fees and expenses........................................
Accounting fees and expenses...................................
Transfer Agent and Registrar fees..............................
Miscellaneous..................................................
----------
Total....................................................
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation (the "Certificate") provides
that, except to the extent prohibited by the Delaware General Corporation Law
(the "DGCL"), the Company's directors shall not be personally liable to the
Company or its stockholders for monetary damages for any breach of fiduciary
duty as directors of the Company. Under the DGCL, the directors have a fiduciary
duty to the Company which is not eliminated by this provision of the Certificate
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of nonmonetary relief will remain available. In addition, each
director will continue to be subject to liability under the DGCL for breach of
the director's duty of loyalty to the Company, for acts or omissions which are
found by a court of competent jurisdiction to be not in good faith or involving
intentional misconduct, for knowing violations of law, for actions leading to
improper personal benefit to the director, and for payment of dividends or
approval of stock repurchases or redemptions that are prohibited by DGCL. This
provision also does not affect the directors' responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws. The Company has obtained or will obtain liability insurance for its
officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL, or (iv)
for any transaction from which the director derived an improper personal
benefit. The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's bylaws, any agreement, a vote
of stockholders or otherwise. The Certificate eliminates the personal liability
of directors to the fullest extent permitted by Section 102(b)(7) of the DGCL
and provides that the Company shall fully indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed
II-1
<PAGE>
action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the
fact that such person is or was a director or officer of the Company, or is or
was serving at the request of the Company as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
The Company, with the approval of the Board of Directors, intends to obtain
directors' and officers' liability insurance prior to the effectiveness of this
offering. In addition, the Company intends to enter into indemnification
agreements with each of its directors, a form of which is filed as Exhibit 10.27
hereto.
There is no pending litigation or proceeding involving any director,
officer, employee or agent of the Company in which indemnification will be
required or permitted. Moreover, the Company is not aware of any threatened
litigation or proceeding that might result in a claim for such indemnification.
The Company believes that the foregoing indemnification provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.
The Underwriting Agreement (the form of which is filed as Exhibit 1.1
hereto) provides for indemnification by the underwriters of NetZero and its
officers and directors, and by NetZero of the underwriters, for certain
liabilities arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following is a summary of transactions by the Company since the
Company's inception in July 1997 involving sales of the Company's securities
that were not registered under the Securities Act. All of the numbers reflect a
post-split basis.
(a) In July 1997, we issued an aggregate of 15,000,000 shares of common
stock for an aggregate purchase price of $2,000 to the founders of the Company.
(b) In September 1998, we issued an aggregate of 3,516,507 shares of Series
A preferred stock for an aggregate purchase price of $312,500 to two investors
in connection with our initial Series A closing.
(c) In October 1998, we issued an aggregate of 3,516,507 shares of Series A
preferred stock for an aggregate purchase price of $312,500 to two investors in
connection with our second Series A closing.
(d) In November 1998, we issued an aggregate of 3,516,507 shares of Series A
preferred stock for an aggregate purchase price of $312,500 to two investors in
connection with our third Series A closing.
(e) In December 1998, we issued an aggregate of 4,219,173 shares of Series B
preferred stock for an aggregate purchase price of $625,000 to two investors in
connection with our initial Series B closing and our second Series B closing.
(f) In January 1999, we issued an aggregate of 2,109,586 shares of Series B
preferred stock for an aggregate purchase price of $312,500 to two investors in
connection with our third Series B closing.
(g) In January 1999, we issued 101,260 shares of Series B Preferred for a
purchase price of $15,000 to David C. Bohnett.
(h) In January 1999, in connection with a $100,000 bridge loan, we issued
warrants to two investors to purchase up to 23,271 shares of Series C preferred
stock at $0.4297 per share. The investors exercised these warrants in full in
February 1999.
II-2
<PAGE>
(i) In February 1999, we issued an aggregate of 26,851,533 shares of Series
C preferred stock to several investors for an aggregate purchase price of
$11,539,001.
(j) In March 1999, we issued 703,300 shares of Series A preferred stock for
a purchase price of $62,500 to one investor in connection with the exercise of
an option issued in connection with our initial Series A closing in September
1998.
(k) In March 1999, we issued 421,917 shares of Series B preferred stock for
a purchase price of $62,500 to one investor in connection with the exercise of
an option granted in connection with our initial Series B closing.
(l) In March 1999, we issued 225,000 shares of Series C preferred stock for
an aggregate purchase price of $96,690 to David C. Bohnett in connection with
the exercise of an option granted to him after joining our Board of Directors.
(m) In May 1999, we issued an aggregate of 18,082,283 shares of Series D
preferred stock to several investors for an aggregate purchase price of
$33,271,405.
(n) In June 1999, we issued an aggregate of 703,300 shares of Series A
preferred stock for an aggregate consideration of $62,500 in cash and services
to one investor in connection with our fourth Series A closing.
(o) In June 1999, we issued an aggregate of 421,917 shares of Series B
preferred stock for an aggregate consideration of $62,500 in cash and services
to one investor in connection with our fourth Series B closing.
From June 16, 1998 to June 30, 1999, we granted options to purchase an
aggregate of 17,128,182 shares of common stock to our directors, executive
officers, employees and consultants at a weighted exercise price of $0.218. As
of June 30, 1999, options to purchase 5,673,699 shares at an exercise price of
$0.033 per share, options to purchase 8,132,208 shares at an exercise price of
$0.10 per share, options to purchase 1,200,000 shares at an exercise price of
$.0333 and options to purchase 1,919,925 shares at an exercise price of $0.867,
and options to purchase 202,350 shares at an exercise price of $3.333 had been
issued.
None of the foregoing transactions involved any public offering, and the
Company believes that each transaction was exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) thereof, Regulation
D promulgated thereunder or Rule 701 pursuant to compensatory benefit plans and
contracts relating to compensation as provided under such Rule 701. The
recipients in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Company.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
The following Exhibits are attached hereto and incorporated herein by
reference:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Company.
3.2* Bylaws of the Company.
4.1 See Exhibit 3.1 and 3.2 for provisions of the Company's Certificate of
Incorporation and Bylaws defining the rights of holders of the Company's common
stock. See Exhibit 10.24 for the rights of certain holders of registration
rights.
4.2* Specimen common stock certificates.
5.1* Opinion of Brobeck, Phleger and Harrison LLP.
10.1** Adserver License Agreement dated as of August 28, 1998, between the Registrant and
NetGravity, as amended.
10.2 Technology Assignment Agreement dated as of September 11, 1998, by and between the
Registrant and Impact Software, Inc.
10.3 Form of Stock Restriction Agreement between the Registrant and the founders.
10.4 Preferred Stock Purchase Agreement dated as of September 11, 1998, among the
Registrant and certain investors thereto.
10.5** Master Lease Agreement dated as of September 12, 1998, as amended, between the
Registrant and Leasing Technologies International, Inc.
10.6 Master Agreement dated as of October 13, 1998, by and between the Registrant and
GTE Internetworking Incorporated.
10.7 Series C Stock Option granted on December 4, 1998, for David Bohnett; exercised
March 8, 1999.
10.8 Series B Stock Purchase Agreement dated as of January 1, 1999, between the
Registrant and David C. Bohnett.
10.9 Convertible Subordinated Note and Warrant Purchase Agreement dated as of January
15, 1999.
10.10 Series C Preferred Stock Purchase Agreement dated as of January 27, 1999, between
the Registrant and certain investors thereto.
10.11 Standard Office Lease dated as of March 6, 1999, as amended on March 7, 1999, by
and between the Registrant and Westlake Gardens.
10.12** Service Agreement dated as of March 19, 1999, by and between the Registrant and
Level 3 Communications, LLC.
10.13 Employment Agreement dated as of March 20, 1999, by and between the Registrant and
Frederic A. Randall, Jr.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<C> <S>
10.14 Employment Agreement dated as of March 20, 1999, between the Registrant and Mark
R. Goldston.
10.15 Stock Pledge Agreement dated as of March 20, 1999, between the Registrant and Mark
R. Goldston, as amended.
10.16 Note Secured by Stock Pledge Agreement dated March 20, 1999, made by Mark R.
Goldston in favor of the Registrant, as amended.
10.17** Software License and Service Agreement dated as of April 14, 1999, between
Registrant and Oracle Corporation.
10.18 Employment Agreement dated as of April 17, 1999, by and between the Registrant and
Charles S. Hilliard.
10.19 Stock Pledge Agreement dated April 17, 1999, between the Registrant and Charles S.
Hilliard.
10.20 Note Secured by Stock Pledge Agreement dated April 17, 1999, made by Charles S.
Hilliard in favor of the Registrant.
10.21** Start Page Agreement dated as of April 20, 1999, between the Registrant and
LookSmart, Ltd.
10.22 Distributor, License and Affiliate Agreement dated as of April 30, 1999, between
the Registrant and Compaq Computer Corporation.
10.23 Series D Preferred Stock Purchase Agreement dated as of May 10, 1999, by and among
the Registrant and the investors listed on Schedule A thereto.
10.24 Amended and Restated Investors' Rights Agreement dated as of May 10, 1999, by and
among the Registrant and the investors, officers and founders listed on
schedules thereto.
10.25 1998 Stock Option/Stock Issuance Plan
10.26 1999 Stock Option/Stock Issuance Plan
10.27 Form of Indemnification Agreement between the Registrant and its directors.
10.28* 1999 Stock Incentive Plan
10.29* Employee Stock Purchase Plan
23.1* Consent of Brobeck, Phleger & Harrison LLP (Included in Exhibit 5.1 hereto).
23.2 Consent of PricewaterhouseCoopers LLP, independent accountants
24.1 Power of Attorney (Included on signature pages hereto).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
** To be filed by amendment and confidential treatment will be requested for
certain confidential portions of this exhibit pursuant to Rule 406 under the
Securities Act. In accordance with Rule 406, these confidential portions
will be omitted from this exhibit and filed separately with the Commission.
II-5
<PAGE>
** Confidential treatment has been requested for certain confidential portions
of this exhibit pursuant to Rule 406 under the Securities Act. In accordance
with Rule 406, these confidential portions have been omitted from this
exhibit and filed separately with the Commission.
(b) Financial Statement Schedules
All such Schedules have been omitted because the information required to be
set forth therein is not applicable or is shown in the financial statements or
notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Company hereby undertakes to provide to the underwriters at
the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit, or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus as filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, we have duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Westlake Village, State
of California, on the 14th day of July, 1999.
NETZERO, INC.
By: /s/ MARK R. GOLDSTON
-----------------------------------------
Mark R. Goldston
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitute and
appoint Mark R. Goldston and Charles S. Hilliard and each of them, his true and
lawful attorney-in-fact and agent, each with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, or any related registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same,
with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each of said attorneys-in-fact and agents, or
his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Chairman, Chief Executive
/s/ MARK R. GOLDSTON Officer and Director
- ------------------------------ (Principal Executive July 14, 1999
Mark R. Goldston Officer)
Senior Vice President,
/s/ CHARLES S. HILLIARD Finance and Chief
- ------------------------------ Financial Officer July 14, 1999
Charles S. Hilliard (principal financial and
accounting officer)
/s/ RONALD T. BURR President and Director
- ------------------------------ July 14, 1999
Ronald T. Burr
<PAGE>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ WILLIAM T. GROSS Director
- ------------------------------ July 14, 1999
William T. Gross
/s/ JAMES T. ARMSTRONG Director
- ------------------------------ July 14, 1999
James T. Armstrong
/s/ DAVID C. BOHNETT Director
- ------------------------------ July 14, 1999
David C. Bohnett
/s/ JENNIFER S. FONSTAD Director
- ------------------------------ July 14, 1999
Jennifer S. Fonstad
/s/ PAUL G. KOONTZ Director
- ------------------------------ July 14, 1999
Paul G. Koontz
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Company.
3.2* Bylaws of the Company.
4.1 See Exhibit 3.1 and 3.2 for provisions of the Company's Certificate of
Incorporation and Bylaws defining the rights of holders of the Company's common
stock. See Exhibit 10.24 for the rights of certain holders of registration
rights.
4.2* Specimen common stock certificates.
5.1* Opinion of Brobeck, Phleger and Harrison LLP.
10.1** Adserver License Agreement dated as of August 28, 1998, between the Registrant and
NetGravity, as amended.
10.2 Technology Assignment Agreement dated as of September 11, 1998, by and between the
Registrant and Impact Software, Inc.
10.3 Form of Stock Restriction Agreement between the Registrant and the founders.
10.4 Preferred Stock Purchase Agreement dated as of September 11, 1998, among the
Registrant and certain investors thereto.
10.5** Master Lease Agreement dated as of September 12, 1998, as amended, between the
Registrant and Leasing Technologies International, Inc.
10.6 Master Agreement dated as of October 13, 1998, by and between the Registrant and
GTE Internetworking Incorporated.
10.7 Series C Stock Option granted on December 4, 1998, for David Bohnett; exercised
March 8, 1999.
10.8 Series B Stock Purchase Agreement dated as of January 1, 1999, between the
Registrant and David C. Bohnett.
10.9 Convertible Subordinated Note and Warrant Purchase Agreement dated as of January
15, 1999.
10.10 Series C Preferred Stock Purchase Agreement dated as of January 27, 1999, between
the Registrant and certain investors thereto.
10.11 Standard Office Lease dated as of March 6, 1999, as amended on March 7, 1999, by
and between the Registrant and Westlake Gardens.
10.12** Service Agreement dated as of March 19, 1999, by and between the Registrant and
Level 3 Communications, LLC.
10.13 Employment Agreement dated as of March 20, 1999, by and between the Registrant and
Frederic A. Randall, Jr.
10.14 Employment Agreement dated as of March 20, 1999, between the Registrant and Mark
R. Goldston.
10.15 Stock Pledge Agreement dated as of March 20, 1999, between the Registrant and Mark
R. Goldston, as amended.
10.16 Note Secured by Stock Pledge Agreement dated March 20, 1999, made by Mark R.
Goldston in favor of the Registrant, as amended.
10.17** Software License and Service Agreement dated as of April 14, 1999, between
Registrant
</TABLE>
<PAGE>
<TABLE>
<C> <S>
and Oracle Corporation.
10.18 Employment Agreement dated as of April 17, 1999, by and between the Registrant and
Charles S. Hilliard.
10.19 Stock Pledge Agreement dated April 17, 1999, between the Registrant and Charles S.
Hilliard.
10.20 Note Secured by Stock Pledge Agreement dated April 17, 1999, made by Charles S.
Hilliard in favor of the Registrant.
10.21** Start Page Agreement dated as of April 20, 1999, between the Registrant and
LookSmart, Ltd.
10.22 Distributor, License and Affiliate Agreement dated as of April 30, 1999, between
the Registrant and Compaq Computer Corporation.
10.23 Series D Preferred Stock Purchase Agreement dated as of May 10, 1999, by and among
the Registrant and the investors listed on Schedule A thereto.
10.24 Amended and Restated Investors' Rights Agreement dated as of May 10, 1999, by and
among the Registrant and the investors, officers and founders listed on
schedules thereto.
10.25 1998 Stock Option/Stock Issuance Plan
10.26 1999 Stock Option/Stock Issuance Plan
10.27 Form of Indemnification Agreement between the Registrant and its directors.
10.28* 1999 Stock Incentive Plan
10.29* Employee Stock Purchase Plan
23.1* Consent of Brobeck, Phleger & Harrison LLP (Included in Exhibit 5.1 hereto).
23.2 Consent of PricewaterhouseCoopers LLP, independent accountants
24.1 Power of Attorney (Included on signature pages hereto).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
** To be filed by amendment and confidential treatment will be requested for
certain confidential portions of this exhibit pursuant to Rule 406 under the
Securities Act. In accordance with Rule 406, these confidential portions
will be omitted from this exhibit and filed separately with the Commission.
<PAGE>
TECHNOLOGY ASSIGNMENT AGREEMENT
This Technology Assignment Agreement (the "Agreement") is entered into
on this 11th day of September, 1998 by and among NetZero, Inc., a California
Corporation (the "Company"), Impact Software, Inc., a California corporation
("Impact"), and the shareholders and/or employees of Impact listed on the
signature pages hereto, who, together with Impact, shall hereinafter
collectively be referred to as the "Assignors" and individually as an
"Assignor". Capitalized terms used but not otherwise defined herein shall have
the meanings given such terms in the Purchase Agreement (as defined below).
RECITALS
WHEREAS, the Company and certain investors have entered into that
certain Preferred Stock Purchase Agreement dated as of September 11, 1998 (the
"Purchase Agreement"), pursuant to which such investors will purchase shares of
the Company's Series A and Series B Preferred Stock; and
WHEREAS, it is a condition precedent to the consummation of the
Purchase Agreement that the parties hereto enter into this Agreement.
NOW, THEREFORE, in consideration of the mutual premises and agreements
contained herein, the parties hereto mutually agree as follows:
1. ASSIGNMENT; WARRANTIES; CONSENT
1.1 In consideration of the Company's obligations hereunder,
each Assignor hereby assigns to the Company any and all rights, title, claim and
interest throughout the world each such Assignor may have in any inventions,
formulae, ideas, processes, techniques, know-how and data, whether or not
patentable, related to the NetZero zCast technology (which includes, without
limitation, software designed to deliver targeted advertisements to specific
users) made or conceived or reduced to practice or learned by such Assignor,
alone or together with others, on or prior to the date of this Agreement,
together with any and all improvements thereto (the "Technology"), including,
without limitation, any and all patents and patent rights, copyrights,
trademarks, trade secret rights and other rights in connection therewith (the
"Proprietary Rights"). The foregoing assignment may be referred to herein as the
"Assignment."
1.2 Each Assignor hereby represents, warrants and agrees that
immediately following the Initial Series A Closing such Assignor will not have,
and to the best knowledge of each such Assignor, no other Assignor will have,
any right, title or interest in or to the Technology or the Proprietary Rights
or any salary or other compensation or payment of any kind whatsoever from the
Company.
<PAGE>
1.3 Each Assignor hereby further represents, warrants and
agrees that (i) to the extent such Assignor has any rights, title, claim or
interest in or to any of the Technology or Proprietary Rights on or prior to the
date hereof, such Assignor has not assigned, transferred, licensed, pledged or
otherwise encumbered any Technology or Proprietary Right or agreed to do so,
(ii) the Assignors are the only employees or shareholders of Impact who may have
rights, title or interest in the Technology and the Proprietary Rights, (iii)
such Assignor has full power and authority to enter into this Agreement and to
make the Assignment and (iv) such is not aware of any actual or potential
violation, infringement or misappropriation of any third party's rights (or any
claim or potential claim thereof) by the Technology or the Proprietary Rights.
1.4 Each Assignor agrees to assist the Company in every proper
way to evidence and perfect the Assignment and to apply for and obtain and from
time to time enforce, maintain, and defend the Proprietary Rights in any and all
countries the Company may designate from time to time. Each Assignor will
execute all documents the Company may request for such purposes.
1.5 In the event that the Company is unable for any reason
whatsoever to secure Assignor's signature to any document Assignor is required
to execute pursuant to the foregoing, Assignor hereby irrevocably designates and
appoints the Company and its duly authorized officers and agents, as his agents
and attorneys-in-fact to act for and on his behalf and instead of Assignor, to
execute and file any such document and to do all other lawfully permitted acts
to further the purposes of the foregoing with the same legal force and effect as
if executed by the Assignor.
2. REPAYMENT OF INDEBTEDNESS. Impact hereby acknowledges and
agrees that upon delivery of the funds to Impact as contemplated by Section 4 of
this Agreement, all of the Company's indebtedness to Impact as of the date
hereof, which amounts to $18,589.11, shall have been repayed and the Company
shall be released and discharged from such liability.
3. RELEASE
2
<PAGE>
Each Assignor, for himself/herself/itself, his/her/its heirs,
executors, administrators, assigns and successors, fully and forever releases
and discharges the Company and each of its currently, former and future parents,
subsidiaries, related entities, predecessors, successors, officers, directors,
shareholders, agents, employees and assigns (collectively, "Releasees") with
respect to any and all claims, liabilities and causes of action, of every
nature, kind and description, in law, equity or otherwise, which have arisen,
occurred or existed at any time prior to the signing of this Agreement,
including, without limitation, any and all claims, liabilities and causes of
action arising out of or relating to the Technology and the Proprietary Rights.
Each Assignor understands and agrees that he/she/it is waiving any rights
he/she/it may have had, now has, or in the future may have to pursue any and all
remedies available to him/her/it under any cause of action. In addition, and in
further consideration of the foregoing, each Assignor expressly waives any and
all rights and benefits conferred upon him/her/it by the provisions of Section
1542 of the Civil Code of the State of California, which states as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM, MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
--------- ----------- ------------ ---------
Impact S. Haitsuka H. MacKenzie J. Milner
--------- ----------- -----------
R. Burr M. Zebian K. Robinson
4. PAYMENT
As the sole payment and consideration for the covenants and
agreements hereunder and repayment of the Company's indebtedness to Impact, the
Company will pay to Impact the sum of $100,000, in four equal monthly
installments payable as follows: $25,000 payable at the Initial Series A
Closing, $25,000 payable thirty (30) days following the Initial Series A
Closing, $25,000 payable sixty (60) days following the Initial Series A Closing
and $25,000 payable ninety (90) days following the Initial Series A Closing.
5. GENERAL PROVISIONS
4.1 NOTICES. Any notice required in connection with this
Agreement shall be given in writing and shall be deemed effective upon delivery
or upon deposit in the United States mail, postage prepaid and addressed to the
party entitled to such notice at the address indicated below such party's
signature line on this Agreement or at such other address as such party may
designate by ten (10) days advance written notice under this Section 3.1 to all
other parties to this Agreement.
4.2 NO WAIVER; AMENDMENT. No waiver of any breach or
condition of this Agreement shall be deemed to be a waiver of any other s
ubsequent breach or condition, whether of like or different nature. This
Agreement amy be amended or modified only by a writing executed by both parties.
3
<PAGE>
4.3 ENTIRE AGREEMENT. This Agreement constitutes the entire
contract between the parties hereto with regard to the subject matter hereof.
4
<PAGE>
TECHNOLOGY ASSIGNMENT AGREEMENT SIGNATURE PAGE
COMPANY:
NetZero, Inc., a California corporation
By:
------------------------------------------
Name:
------------------------------------
Title:
------------------------------------
ASSIGNORS:
Impact Software, Inc., a California corporation
By: /s/ RONALD BURR
------------------------------------------
Name: /s/ RONALD BURR
------------------------------------
Title: /s/ CEO
-----------------------------------
/s/ RONALD BURR
-----------------------------------------------
RONALD BURR
/s/ STACY HAITSUKA
-----------------------------------------------
STACY HAITSUKA
/s/ MARWAN ZEBIAN
-----------------------------------------------
MARWAN ZEBIAN
/s/ HAROLD MACKENZIE
-----------------------------------------------
HAROLD MACKENZIE
/s/ KURLING ROBINSON
-----------------------------------------------
KURLING ROBINSON
/s/ JAMES MILNER
-----------------------------------------------
JAMES MILNER
<PAGE>
STOCK RESTRICTION AGREEMENT
THIS AGREEMENT is made this 11th day of September, 1998, by and
between NetZero, Inc., a California corporation (the "Company") and ________
("Shareholder"). Capitalized terms used but not otherwise defined in this
Stock Restriction Agreement shall have the meaning given such terms in the
Stock Purchase Agreement (as defined below).
WHEREAS, the Shareholder is the owner of ________ shares of
the Company's Common Stock (the "Shares");
WHEREAS, as an inducement to and in consideration of the
consummation by certain investors of the transactions contemplated by that
certain Preferred Stock Purchase Agreement dated on or about the date hereof
(the "Stock Purchase Agreement"), Shareholder has agreed to subject fifty
percent (50%) of the Shares (the "Unvested Stock") to a repurchase right at
cost in favor of the Company on the terms set forth below.
NOW THEREFORE, IT IS HEREBY AGREED:
1. TRANSFER RESTRICTIONS.
(a) RESTRICTION ON TRANSFER. Shareholder shall not transfer,
assign, encumber or otherwise dispose of any of the Unvested Stock which are
subject to the Company's Repurchase Right under Section 2. Such restrictions
on transfer, however, shall not be applicable to (i) a gratuitous transfer of
Unvested Stock made to the Shareholder's spouse or issue, including adopted
children, or to a trust for the exclusive benefit of the Shareholder or the
Shareholder's spouse or issue, or (ii) a transfer of title to the Unvested
Stock effected pursuant to the Shareholder's will or the laws of intestate
succession.
(b) TRANSFEREE OBLIGATIONS. Each person to whom shares of
the Unvested Stock are transferred by means of one of the permitted transfers
specified in Section 1(a) must, as a condition precedent to the validity of
such transfer, acknowledge in writing to the Company that such person is
bound by the provisions of this Agreement and that the transferred shares are
subject to the Company's Repurchase Right granted hereunder, to the same
extent such shares would be so subject if retained by the Shareholder.
(c) DEFINITION OF OWNER. For purposes of Section 2 of this
Agreement, the term "Owner" shall include the Shareholder and all subsequent
holders of the Unvested Stock who derive their chain of ownership through a
permitted transfer from the Shareholder in accordance with Section 1(a).
2. REPURCHASE RIGHT.
(a) GRANT. The Company is hereby granted the right (the
"Repurchase Right"), exercisable at any time during the sixty (60) day period
following the date the Shareholder ceases for any reason to be a Service
Provider (as defined herein) to the Company, to repurchase, at a price per
share of $.0002 per share (the "Repurchase Price"), up to all or a
<PAGE>
portion of the Unvested Stock as set forth in Section 2(c). For purposes of
this Agreement, the Shareholder shall be deemed to be a "Service Provider" to
the Company so long as he renders services to the Company or one or more of
its parent or subsidiary corporations, whether as an employee or an
independent non-employee consultant.
(b) EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right
shall be exercisable by written notice delivered to the Owner of the shares
to be repurchased prior to the expiration of the applicable sixty (60) day
period specified in Section 2(a). The notice shall indicate the number of
shares of Unvested Stock to be repurchased and the date on which the
repurchase is to be effected, such date to be not more than thirty (30) days
after the date of notice. If the shares to be repurchased are held in escrow,
the Company may effect the repurchase by delivering to the Owner cash or cash
equivalents in an amount equal to the Repurchase Price multiplied by the
number of shares of Unvested Stock which are to be repurchased either (i)
concurrently with the notice referenced above or (ii) on the date specified
in the notice, and, upon delivery of such payment, the repurchase of such
Unvested Stock shall be deemed completed. If the Owner is in possession of
the certificate evidencing the shares to be repurchased, the Owner shall,
prior to the close of business on the date specified for the repurchase,
deliver to the Secretary of the Company the certificates representing the
Unvested Stock to be repurchased, each certificate to be properly endorsed
for transfer. The Company shall, promptly following receipt of such stock
certificates, pay to the Owner an amount equal to the Repurchase Price to be
paid for the shares which are to be repurchased.
(c) TERMINATION OF THE REPURCHASE RIGHT. The Repurchase
Right shall apply to all shares of the Unvested Stock and shall lapse with
respect to, and Shareholder shall accordingly acquire a vested interest in,
the Unvested Stock in a series of forty-eight (48) successive monthly
installments upon Shareholder's completion of each additional month as a
Service Provider to the Company over the forty-eight (48) month period
measured from September 11, 1998.
(d) ADDITIONAL SHARES OR SUBSTITUTED SECURITIES. In the
event of any stock dividend, stock split, recapitalization or other change
affecting the company's outstanding Common Stock as a class without receipt
of consideration, then any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend), which
is by reason of any such transaction distributed to the Shareholder with
respect to the Unvested Stock, shall be immediately subject to the Repurchase
Right. Appropriate adjustments to reflect the distribution of such securities
or property shall be made to the number of shares of Unvested Stock for all
purposes relating to the Repurchase Right, and the Company (or its
successors) may require the establishment of an escrow account for any
property or money (other than regular cash dividends) distributed with
respect to the shares covered by the Repurchase Right in order to facilitate
the exercise of such right. Appropriate adjustments shall also be made to the
price per share to be paid upon the exercise of the Repurchase Right in order
to reflect the effect of any such transaction upon the Company's capital
structure; provided, however, that the aggregate purchase price shall remain
the same.
3. LEGENDS. All certificates representing shares of stock of
the Company subject to the provisions of this Agreement shall have endorsed
thereon the following legend:
2
<PAGE>
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO THE TERMS AND CONDITIONS OF A CERTAIN STOCK RESTRICTION AGREEMENT
WHICH INCLUDES A REPURCHASE RIGHT. COPIES OF THE AGREEMENT MAY BE
OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF NETZERO, INC."
4. ESCROW OF SHARES.
(a) ESCROW HOLDER. The Unvested Stock shall be held in
escrow by the Secretary of the Company, as escrow holder ("Escrow Holder"),
along with an Assignment Separate from Certificate executed by Shareholder in
blank in the form attached hereto as Schedule B, until expiration of the
Company's Repurchase Right.
(b) INSTRUCTIONS TO ESCROW HOLDER. The Escrow Holder is
hereby directed to permit the transfer or repurchase of the Unvested Stock
only in accordance with this Agreement or instructions signed by the
Shareholder and an officer of the Company other than the Shareholder. If the
Company's Repurchase Right is exercised, the Escrow Holder is hereby
authorized to take all necessary and appropriate action, including, without
limitation, the completion and delivery to the Company of Schedule A hereto,
to effect the purposes of this Agreement. In the event that further
instructions are desired by the Escrow Holder, he or she shall be entitled to
rely upon directions executed by an officer of the Company other than the
Shareholder. The Escrow Holder shall have no liability for any act or
omission hereunder while acting in good faith in the exercise of his or her
own judgment. Upon lapse of the Repurchase right, the Escrow Agent shall
deliver to the Shareholder all documents, securities or other property
belonging to Shareholder, and shall be discharged of all further obligations
hereunder.
(c) RIGHTS OF SHAREHOLDER. Subject to the terms hereof, the
Shareholder shall have all the rights of a shareholder with respect to
Unvested Stock while such shares are held in escrow, including without
limitation the right to vote the Unvested Stock and receive any cash
dividends declared thereon.
5. MISCELLANEOUS.
(a) EFFECTIVENESS. This Stock Restriction Agreement shall be
effective only upon the closing of the transactions contemplated by the Stock
Purchase Agreement.
(b) FURTHER INSTRUMENTS AND ACTIONS. The parties agree to
execute such further instruments and to take such further action as may
reasonably be necessary to carry out the intent of this Agreement.
(c) NOTICES. Any notice required or permitted hereunder
shall be given in writing and shall be deemed effectively given upon personal
delivery or upon deposit in the United States Post Office, by registered or
certified mail with postage and fees prepaid, addressed to the other party
hereto at his or her address hereinafter shown below his or her signature or
at such other address as such party may designate by ten (10) days' advance
written notice to the other party hereto.
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<PAGE>
(d) GOVERNING LAW. The Agreement is governed by the internal
law of California and shall inure to the benefit of the successors and
assigns of the Company and, subject to the restriction on transfer herein set
forth, be binding upon the Shareholder, his or her heirs, executors,
administrators, guardians, successors and assigns.
(e) AMENDMENTS AND WAIVERS. This Agreement represents the
entire understanding of the parties with respect to the subject matter hereof
and supersedes all previous understandings, written or oral. This Agreement
may only be amended with the written consent of the parties hereto, and no
oral waiver or amendment shall be effective under any circumstances
whatsoever.
(f) NO WAIVER. The failure of the Company in any instance to
exercise the Repurchase Rights granted hereunder shall not constitute a
waiver of any other repurchase rights that may subsequently arise under the
provisions of this agreement or any other agreement between the Company and
Shareholder. No waiver of any breach or condition of this Agreement shall be
deemed to be a waiver of any other or subsequent breach or condition, whether
of like or different nature.
(g) ASSIGNMENT. The Company's Repurchase Right may only be
assigned if the company is legally or contractually prohibited from
exercising the Repurchase Right. In the event the Company does assign the
Repurchase Right, the Company shall use its best efforts to ensure that the
benefits of the Repurchase Right inure generally to the Company or are shared
ratably by all of the Company's shareholders. This provision is intended for
the benefit of the Company's shareholders generally and not for Shareholder
individually, and may be amended or waived without Shareholder's consent.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
NETZERO, INC.
By:
-------------------------------------
Name:
--------------------------------
Its:
--------------------------------
Address:
--------------------------------
--------------------------------
--------------------------------
SHAREHOLDER
By:
-------------------------------------
Name:
Address:
--------------------------------
--------------------------------
--------------------------------
<PAGE>
SCHEDULE A
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, I ________________, hereby sell, assign and
transfer unto __________________ (______________) shares of the Common Stock
of NETZERO, INC., standing in my name on the books of said corporation
represented by Certificate No. ___ herewith and do hereby irrevocably
constitute and appoints ______________________ to transfer said stock on the
books of the within-named corporation with full power of substitution in the
premises.
Signature:
----------------------------------------
This Assignment Separate from Certificate was executed in
conjunction with the terms of a Stock Restriction Agreement between the above
assignor and NETZERO, INC., dated September __, 1998 and shall not be used in
any manner except as provided in such Agreement.
<PAGE>
NETZERO, INC.
PREFERRED STOCK PURCHASE AGREEMENT
SEPTEMBER 11, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. PURCHASE AND SALE OF STOCK............................................... 1
1.1 RESTATED ARTICLES........................................................ 1
1.2 SALE AND ISSUANCE OF SERIES A PREFERRED STOCK............................ 1
1.3 SERIES A CLOSINGS........................................................ 1
1.4 SALE AND ISSUANCE OF SERIES B PREFERRED STOCK............................ 2
1.5 SERIES B CLOSINGS........................................................ 2
1.6 IDEALAB SERVICES......................................................... 3
1.7 IDEALAB OPTION........................................................... 3
1.8 SALE AND ISSUANCE OF ADDITIONAL CAPITAL STOCK............................ 3
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................ 4
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION............................ 4
2.2 CAPITALIZATION AND VOTING RIGHTS......................................... 4
2.3 SUBSIDIARIES............................................................. 5
2.4 AUTHORIZATION............................................................ 5
2.5 VALID ISSUANCE OF PREFERRED AND COMMON STOCK............................. 6
2.6 GOVERNMENTAL CONSENTS.................................................... 6
2.7 OFFERING................................................................. 6
2.8 LITIGATION............................................................... 6
2.9 PROPRIETARY INFORMATION AND EMPLOYEE STOCK PURCHASE AGREEMENTS........... 7
2.10 PATENTS AND TRADEMARKS................................................... 7
2.11 COMPLIANCE WITH OTHER INSTRUMENTS........................................ 7
2.12 AGREEMENTS; ACTION....................................................... 8
2.13 RELATED-PARTY TRANSACTIONS............................................... 8
2.14 PERMITS.................................................................. 9
2.15 ENVIRONMENTAL AND SAFETY LAWS............................................ 9
2.16 DISCLOSURE............................................................... 9
2.17 BUSINESS PLAN............................................................ 9
2.18 REGISTRATION RIGHTS...................................................... 9
2.19 CORPORATE DOCUMENTS...................................................... 9
2.20 TITLE TO PROPERTY AND ASSETS............................................. 9
2.21 LIABILITIES..............................................................10
2.22 CHANGES..................................................................10
2.23 EMPLOYEE BENEFIT PLANS...................................................11
2.24 TAX RETURNS, PAYMENTS AND ELECTIONS......................................11
2.25 INSURANCE................................................................11
2.26 LABOR AGREEMENTS AND ACTIONS.............................................11
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS..........................11
3.1 AUTHORIZATION............................................................12
i
<PAGE>
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT........................................12
3.3 DISCLOSURE OF INFORMATION................................................13
3.4 INVESTMENT EXPERIENCE....................................................13
3.5 ACCREDITED INVESTOR......................................................13
3.6 RESTRICTED SECURITIES....................................................13
3.7 FURTHER LIMITATIONS ON DISPOSITION.......................................13
3.8 LEGENDS..................................................................14
4. CALIFORNIA COMMISSIONER OF CORPORATIONS..................................14
4.1 CORPORATE SECURITIES LAW.................................................14
5. COVENANTS OF THE COMPANY.................................................14
5.1 VESTING..................................................................14
5.2 SALARIES.................................................................14
5.3 IMPACT SOFTWARE, INC.....................................................14
6. CONDITIONS OF INVESTOR'S OBLIGATIONS AT CLOSING..........................15
6.1 INITIAL SERIES A CLOSING.................................................15
6.2 INITIAL SERIES B CLOSING.................................................16
7. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING.......................16
7.1 INITIAL SERIES A CLOSING.................................................16
7.2 SUBSEQUENT CLOSINGS......................................................17
8. MISCELLANEOUS............................................................17
8.1 SURVIVAL OF WARRANTIES...................................................17
8.2 SUCCESSORS AND ASSIGNS...................................................17
8.3 GOVERNING LAW............................................................17
8.4 COUNTERPARTS.............................................................18
8.5 TITLES AND SUBTITLES.....................................................18
8.6 NOTICES..................................................................18
8.7 FINDER'S FEE.............................................................18
8.8 EXPENSES.................................................................18
8.9 AMENDMENTS AND WAIVERS...................................................18
8.10 DISPUTES.................................................................19
8.11 SEVERABILITY.............................................................19
8.12 AGGREGATION OF STOCK.....................................................19
8.13 ENTIRE AGREEMENT.........................................................19
</TABLE>
ii
<PAGE>
SCHEDULE 1.2 - Investors in Series A Preferred Stock
SCHEDULE 1.4 - Investors in Series B Preferred Stock
SCHEDULE 1.5 - Milestones for Series B Financing
SCHEDULE 1.8 - Milestones for Series C Financing
SCHEDULE 2.2 - Capitalization and Voting Rights
SCHEDULE 2.10 - Patents and Trademarks
SCHEDULE 5 - Salaries
EXHIBIT A - Restated Articles of Incorporation
EXHIBIT B - Investors' Rights Agreement
EXHIBIT C - Opinion of Counsel for the Company
EXHIBIT D - Voting Agreement
EXHIBIT E - Technology Assignment Agreement
EXHIBIT F - Right of First Refusal and Co-Sale Agreement
EXHIBIT G - President's Certificate
iii
<PAGE>
PREFERRED STOCK PURCHASE AGREEMENT
THIS PREFERRED STOCK PURCHASE AGREEMENT is made as of the 11th day
of September, 1998, by and among NetZero, Inc., a California corporation (the
"COMPANY"), idealab! Capital Partners I-A, LP, a Delaware limited partnership
("ICP I-A"), idealab! Capital Partners I-B, LP, a Delaware limited
partnership ("ICP I-B") and Bill Gross' idealab!, a California corporation
("IDEALAB"). ICP I-A, ICP I-B and Idealab are sometimes hereinafter referred
to collectively as the "INVESTORS" and individually as an "INVESTOR."
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF STOCK.
1.1 RESTATED ARTICLES. The Company shall adopt and file with the
Secretary of State of California on or before the Initial Series A Closing (as
defined below) the Restated Articles of Incorporation in the form attached
hereto as EXHIBIT A (the "RESTATED ARTICLES").
1.2 SALE AND ISSUANCE OF SERIES A PREFERRED STOCK. Subject to the
terms and conditions of this Agreement, each of ICP I-A and ICP I-B agrees to
purchase at the Initial Series A Closing, the Second Series A Closing (as
defined below) and the Third Series A Closing (as defined below), and the
Company agrees to sell and issue to each such Investor at each such Series A
Closing (as defined below), that number of shares of the Company's Series A
Preferred Stock (as defined below) set forth opposite each such Investor's
name on SCHEDULE 1.2 for a purchase price of $0.1333 per share. Subject to
the terms and conditions of this Agreement, Idealab agrees to purchase at the
Fourth Series A Closing (as defined below), and the Company agrees to sell
and issue to Idealab at the Fourth Series A Closing, that number of shares of
the Company's Series A Preferred Stock set forth opposite Idealab's name on
SCHEDULE 1.2 for a purchase price of $0.1333 per share.
1.3 SERIES A CLOSINGS. The initial purchase and sale of the Series A
Preferred Stock (the "INITIAL SERIES A CLOSING") shall take place at the
offices of Brobeck, Phleger & Harrison LLP ("BPH"), 38 Technology Drive,
Irvine, California, at 10:00 a.m., on _______ , 1998, or at such other time
and place as the Company and Investors acquiring in the aggregate more than
half the shares of Series A Preferred Stock sold pursuant hereto mutually
agree upon orally or in writing (the "INITIAL SERIES A CLOSING DATE"). The
second purchase and sale of the Series A Preferred Stock (the "SECOND SERIES
A CLOSING") shall take place at the offices of BPH at 10:00 a.m. on the date
which is thirty (30) days after the Initial Series A Closing (or, if such
date is not a business day, the first business day thereafter) (the "SECOND
SERIES A CLOSING DATE"). The third purchase and sale of the Series A
Preferred Stock (the "THIRD SERIES A CLOSING") shall take place at the
offices of BPH at 10:00 a.m. on the date which is sixty (60) days after the
Initial Series A Closing (or, if such date is not a business day, the first
business day thereafter) (the "THIRD SERIES A CLOSING DATE"). The fourth
purchase and sale of the Series A Preferred Stock (the "FOURTH SERIES A
CLOSING") shall take place at the offices of BPH at 10:00 a.m. on the first
anniversary of the Initial Series A Closing Date (or, if such date is not a
business day, the first business day thereafter) (the "FOURTH
<PAGE>
SERIES A CLOSING DATE"). The Initial Series A Closing, the Second Series A
Closing, the Third Series A Closing and the Fourth Series A Closing shall
sometimes hereafter be referred to collectively as the "SERIES A CLOSINGS."
At each Series A Closing the Company shall deliver to each purchasing
Investor a certificate representing the Series A Preferred Stock that such
Investor is purchasing against payment of the purchase price therefor by
check or wire transfer; provided, however, that the consideration to be
delivered at the Fourth Series A Closing by Idealab shall be services as set
forth in Section 1.6 below.
1.4 SALE AND ISSUANCE OF SERIES B PREFERRED STOCK. Subject to the
terms and conditions of this Agreement, each of ICP I-A and ICP I-B agrees to
purchase at the Initial Series B Closing (as defined below), the Second
Series B Closing (as defined below) and the Third Series B Closing (as
defined below), and the Company agrees to sell and issue to each such
Investor at each such Series B Closing (as defined below), that number of
shares of the Company's Series B Preferred Stock (as defined below) set forth
opposite each such Investor's name on Schedule 1.4 hereto for a purchase
price of $0.2222 per share. Subject to the terms and conditions of this
Agreement, Idealab agrees to purchase at the Fourth Series B Closing (as
defined below), and the Company agrees to sell and issue to Idealab at the
Fourth Series B Closing, that number of shares of the Company's Series B
Stock set forth opposite Idealab's name on Schedule 1.4 hereto for a purchase
price of $0.2222 per share.
1.5 SERIES B CLOSINGS. The initial purchase and sale of the Series B
Preferred Stock (the "INITIAL SERIES B CLOSING") shall take place at the
offices of BPH at 10:00 a.m., on the eleventh (11th) business day following
the Investors' verification of the Company's satisfaction of each of the
criteria specified on SCHEDULE 1.5, or at such other earlier time and place
as the Investors acquiring in the aggregate more than half the shares of
Series B Preferred Stock sold pursuant hereto shall determine, whether or not
the criteria specified on SCHEDULE 1.5 have been satisfied, with a written
notice of the new closing date to be delivered by the Investors to the
Company not less than three (3) business days prior to such date (the
"INITIAL SERIES B CLOSING DATE"). Investors shall reasonably determine
whether such criteria have been satisfied, if at all, within two (2) business
days following receipt by the Investors of a written notice of completion
signed by the Company's Chief Financial Officer. If the Investors reasonably
determine that such criteria have not been satisfied, the matter shall be
referred to arbitration in accordance with Section 8.10 hereof and the
Initial Series B Closing shall occur, if at all, on the second (2nd) business
day following the arbitrator's finding that the criteria specified on
SCHEDULE 1.5 have been satisfied. The second purchase and sale of the Series
B Preferred Stock (the "SECOND SERIES B CLOSING") shall take place at the
offices of BPH at 10:00 a.m. on the date which is thirty (30) days after the
Initial Series B Closing Date (or, if such date is not a business day, the
first business day thereafter) (the "SECOND SERIES B CLOSING DATE"). The
third purchase and sale of Series B Preferred Stock (the "THIRD SERIES B
CLOSING") shall take place at the offices of BPH at 10:00 a.m., on the date
which is sixty (60) days after the Initial Series B Closing Date (or, if such
date is not a business day, the first business day thereafter) (the "THIRD
SERIES B CLOSING DATE"). The fourth purchase and sale of the Series B
Preferred Stock (the "FOURTH SERIES B CLOSING") shall take place at the
offices of BPH at 10:00 a.m. on the later to occur of (i) the first
anniversary of the Initial Series A Closing (or, if such date is not a
business day, the first business day thereafter) or the Third Series B
Closing Date (the "FOURTH SERIES B CLOSING DATE"). At each Series B Closing
the Company shall deliver to each purchasing Investor a certificate
representing the Series B
2
<PAGE>
Preferred Stock that such Investor is purchasing against payment of the
purchase price therefor by check or wire transfer; provided, however, that
the consideration to be delivered by Idealab at the Fourth Series B Closing
shall be services as set forth in Section 1.6 below.
1.6 IDEALAB SERVICES. From the date hereof until the first
anniversary of this Agreement, Idealab hereby agrees to render and the
Company hereby agrees to purchase and accept $125,000 of services from
Idealab. The parties hereby agree that the cancellation of the accounts
payable for past services rendered by Idealab to the Company during such
period shall constitute consideration on a dollar-for-dollar basis (e.g. for
each dollar of services rendered, a dollar of stock is earned) for the shares
of Series A Preferred Stock and Series B Preferred Stock issued by the
Company to Idealab; provided, however, that the Company shall only be
obligated to issue to Idealab $62,500 of Series A Preferred Stock at the
Fourth Series A Closing and $62,500 of Series B Preferred Stock at the Fourth
Series B Closing. The initial $62,500 of services shall be consideration for
the Series A Preferred Stock and the next $62,500 of services shall be
consideration for the Series B Preferred Stock. Idealab shall provide to the
Company a monthly invoice for such services. The services shall be billed to
the Company at a rate which is identical to the rate Idealab charges its own
portfolio companies at the time the services are rendered. Idealab shall
remit to the Company at the Fourth Series A Closing and the Fourth Series B
Closing, as the case may be, an executed instrument of cancellation in form
and substance acceptable to the Company reflecting the cancellation of the
Company's indebtedness to Idealab for the applicable services rendered.
1.7 IDEALAB OPTION. The Company hereby grants to Idealab an option
to purchase 468,867 shares of Series A Preferred Stock (the "SERIES A
OPTION") at an exercise price of $0.1333 per share and an option to purchase
281,278 shares of Series B Preferred Stock (the "SERIES B OPTION") at an
exercise price of $0.2222 per share. Each such option shall be a
non-statutory stock option. The Series A Option shall have a maximum term of
six (6) months measured from the date of this Agreement (the "INITIAL TERM").
The Series A Option and the Series B Options shall be exercisable for all of
the option shares (or not at all) as follows: (i) if the Third Series B
Closing occurs at any time within the Initial Term, the Series A Option and
the Series B Option may be exercised at any time after the Third Series B
Closing until the expiration of the Initial Term and shall both be exercised
in full and on the same date (or not at all) during such period and (ii) if
the Third Series B Closing occurs at any time after the Initial Term, the
Series A Option shall be exercisable during the Initial Term so long as, upon
exercise, Idealab executes a written agreement obligating Idealab to exercise
the Series B Option at the Third Series B Closing. In order to exercise each
such option, Idealab shall deliver to the Company a notice of exercise and a
check for $62,500 to the Company on or before the applicable expiration date.
Each such option must be exercised in full; partial exercises are not
permitted. Within ten (10) days following exercise, Idealab shall receive a
stock certificate for that number of shares of Series A Preferred Stock or
Series B Preferred Stock, as the case may be, for which the option was
validly exercised.
1.8 SALE AND ISSUANCE OF ADDITIONAL CAPITAL STOCK. The Company hereby
agrees that it will not issue or agree to issue any Common Stock or Preferred
Stock to any individual or entity other than the Investors until the earlier to
occur of (i) eight (8) months following the Initial Series A Closing or (ii)
satisfaction of the criteria specified on SCHEDULE 1.5 and SCHEDULE 1.8;
PROVIDED, HOWEVER, that the foregoing restriction shall not apply to those
3
<PAGE>
issuances by the Company to which the right of first offer does not apply
under Section 1.4 of the Right of First Refusal and Co-Sale Agreement dated
of even date herewith (the "RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT") by
and among the Company, the Investors and certain additional shareholders of
the Company. In addition, upon the Company's satisfaction of each criterion
specified on SCHEDULE 1.5 and SCHEDULE 1.8 (or the Investors' written waiver
of the Company's obligation to satisfy any or all of such criteria), the
Company shall notify the Investors of such completion. Investors shall
reasonably determine whether such criteria have been satisfied, if at all,
within two (2) business days following receipt by the Investors of a written
notice of completion signed by the Company's Chief Financial Officer. If the
Investors reasonably determine that such criteria have not been satisfied,
the matter may be referred to arbitration in accordance with Section 8.10
hereof. If the Investors reasonably determine that such criteria have been
satisfied, the Investors shall, at the Company's sole option, use their best
efforts to secure within ninety (90) days from the completion date an
additional $3 million of financing from third party investors to purchase
shares of a yet undesignated preferred stock of the Company on substantially
the same terms and conditions as those pertaining to the purchase and sale of
Series B Preferred Stock as set forth herein and in the agreements
contemplated hereby, with the exception that the price per share shall be
determined based on at least a $10 million pre-money valuation and the
provisions pertaining to liquidation preference and anti-dilution shall
reflect such price (the "FUTURE EQUITY FINANCING"), and the Company may, at
its sole option, offer for purchase and sale such shares to such third
parties. Notwithstanding the foregoing, the Investors shall have no
obligation to invest in any Future Equity Financing. In addition, in
connection with the first Future Equity Financing the Company shall offer for
purchase and sale fifty percent (50%) of the total number of shares offered
in such Future Equity Financing to the Investors pursuant to the Right of
First Refusal and Co-Sale Agreement.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to each Investor that, except as set forth on a
Schedule of Exceptions (the "SCHEDULE OF EXCEPTIONS") furnished each Investor
and counsel for the Investors, specifically identifying the relevant
subparagraph hereof, which exceptions shall be deemed to be representations
and warranties as if made hereunder:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the State of California and has all requisite corporate power and
authority to carry on its business as now conducted and as proposed to be
conducted. The Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure to so qualify would have a
material adverse effect on its business or properties.
2.2 CAPITALIZATION AND VOTING RIGHTS. The authorized capital of the
Company consists, or will consist immediately prior to the Initial Series A
Closing, of:
(i) PREFERRED STOCK. Twenty Million (20,000,000) shares of
Preferred Stock (the "PREFERRED STOCK"), of which (A) Seven Million Nine
Hundred Seventy Thousand Seven Hundred Forty-Two (7,970,742) shares have been
designated Series A Preferred Stock (the "SERIES A PREFERRED STOCK") and up
to all of which will be sold pursuant to this Agreement and (B) Four Million
Seven Hundred Eighty-One Thousand Seven Hundred Twenty-Eight
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(4,781,728) shares have been designated Series B Preferred Stock (the "SERIES
B PREFERRED STOCK") and up to all of which will be sold pursuant to this
Agreement. The rights, privileges and preferences of the Series A Preferred
Stock and Series B Preferred Stock will be as stated in the Company's
Restated Articles.
(ii) COMMON STOCK. Twenty Million shares of common stock
("COMMON STOCK"), of which Ten Million shares are issued and outstanding.
(iii) The outstanding shares of Common Stock are owned by the
shareholders and in the numbers specified in SCHEDULE 2.2 hereto.
(iv) The outstanding shares of Common Stock are all duly and
validly authorized and issued, fully paid and nonassessable, and were issued
in accordance with the registration or qualification provisions of the
Securities Act of 1933, as amended (the "ACT") and any relevant state
securities laws or pursuant to valid exemptions therefrom.
(v) Except for (A) the conversion privileges of the Series A
Preferred Stock and Series B Preferred Stock to be issued under this
Agreement, (B) the rights provided in the Investors' Rights Agreement, (C)
currently outstanding options to purchase 3,451,800 shares of Common Stock
granted to employees pursuant to the Company's 1998 Stock Option Plan (the
"OPTION PLAN"), and (D) the options granted to Idealab hereunder, there are
not outstanding any options, warrants, rights (including conversion or
preemptive rights) or agreements for the purchase or acquisition from the
Company of any shares of its capital stock. In addition to the aforementioned
options, the Company has reserved an additional 1,548,200 shares of its
Common Stock for purchase upon exercise of options to be granted in the
future under the Option Plan. The Company is not a party or subject to any
agreement or understanding, and, to the Company's knowledge, there is no
agreement or understanding between any persons and/or entities, which affects
or relates to the voting or giving of written consents with respect to any
security or by a director of the Company.
2.3 SUBSIDIARIES. The Company does not presently own or control,
directly or indirectly, any interest in any other corporation, association,
or other business entity. The Company is not a participant in any joint
venture, partnership, or similar arrangement.
2.4 AUTHORIZATION. All corporate action on the part of the Company,
its officers, directors and shareholders necessary for the authorization,
execution and delivery of this Agreement, the Investors' Rights Agreement,
the Right of First Refusal and Co-Sale Agreement, the Technology Assignment
Agreement and the Voting Agreement, the performance of all obligations of the
Company hereunder and thereunder, and the authorization, issuance (or
reservation for issuance), sale and delivery of the Series A Preferred Stock
and Series B Preferred Stock being sold hereunder and the Common Stock
issuable upon conversion of the Series A Preferred Stock and Series B
Preferred Stock has been taken or will be taken prior to the Closing, and
this Agreement, the Investors' Rights Agreement, the Right of First Refusal
and Co-Sale Agreement, the Technology Assignment Agreement and the Voting
Agreement constitute valid and legally binding obligations of the Company,
enforceable in accordance with their respective terms, except (i) as limited
by applicable bankruptcy, insolvency, reorganization, moratorium, and other
laws of general
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application affecting enforcement of creditors' rights generally, (ii) as
limited by laws relating to the availability of specific performance,
injunctive relief, or other equitable remedies, and (iii) to the extent the
indemnification provisions contained in the Investors' Rights Agreement may
be limited by applicable federal or state securities laws.
2.5 VALID ISSUANCE OF PREFERRED AND COMMON STOCK. The Series A
Preferred Stock and Series B Preferred Stock that is being purchased by the
Investors hereunder, when issued, sold and delivered in accordance with the
terms of this Agreement for the consideration expressed herein, will be duly
and validly issued, fully paid, and nonassessable, and will be free of
restrictions on transfer other than restrictions on transfer under this
Agreement, the Investors' Rights Agreement and the Right of First Refusal and
Co-Sale Agreement and under applicable state and federal securities laws. The
Common Stock issuable upon conversion of the Series A Preferred Stock and
Series B Preferred Stock purchased under this Agreement has been duly and
validly reserved for issuance and, upon issuance in accordance with the terms
of the Restated Articles will be duly and validly issued, fully paid, and
nonassessable and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement, the Investors' Rights
Agreement and the Right of First Refusal and Co-Sale Agreement and under
applicable state and federal securities laws.
2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part
of the Company is required in connection with the consummation of the
transactions contemplated by this Agreement, except for the filing pursuant
to Section 25102(f) of the California Corporate Securities Law of 1968, as
amended, and the rules thereunder.
2.7 OFFERING. Subject in part to the truth and accuracy of each
Investor's representations set forth in Section 3 of this Agreement, the
offer, sale and issuance of the Series A Preferred Stock and Series B
Preferred Stock as contemplated by this Agreement are exempt from the
registration requirements of the Act, and neither the Company nor any
authorized agent acting on its behalf will take any action hereafter that
would cause the loss of such exemption.
2.8 LITIGATION. There is no action, suit, proceeding or
investigation pending or currently threatened against the Company that
questions the validity of this Agreement, the Investors' Rights Agreement or
the Voting Agreement, or the right of the Company to enter into such
agreements, or to consummate the transactions contemplated hereby or thereby,
or that might result, either individually or in the aggregate, in any
material adverse changes in the assets, condition, affairs or prospects of
the Company, financially or otherwise, or any change in the current equity
ownership of the Company. The foregoing includes, without limitation,
actions, suits, proceedings or investigations pending or threatened involving
the prior employment of any of the Company's employees, their use in
connection with the Company's business of any information or techniques
allegedly proprietary to any of their former employers, or their obligations
under any agreements with prior employers. The Company is not a party or
subject to the provisions of any order, writ, injunction, judgment or decree
of any court or government agency or instrumentality. There is no action,
suit, proceeding or investigation by the Company currently pending or that
the Company intends to initiate.
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2.9 PROPRIETARY INFORMATION AND EMPLOYEE STOCK PURCHASE AGREEMENTS.
Each employee, officer and consultant of the Company has executed a
Proprietary Information and Inventions Agreement in the form provided to
counsel to the Investors. The Company, after reasonable investigation, is not
aware that any of its employees, officers or consultants are in violation
thereof, and the Company will use its best efforts to prevent any such
violation.
2.10 PATENTS AND TRADEMARKS. To its knowledge (but without having
conducted any special investigation or patent search), the Company has
sufficient title and ownership of all patents, trademarks, service marks,
trade names, copyrights, trade secrets, information, proprietary rights and
processes necessary for its business as now conducted and as proposed to be
conducted without any conflict with or infringement of the rights of others.
SCHEDULE 2.10 contains a complete list of patents and pending patent
applications of the Company. There are no outstanding options, licenses, or
agreements of any kind relating to the foregoing, nor is the Company bound by
or a party to any options, licenses or agreements of any kind with respect to
the patents, trademarks, service marks, trade names, copyrights, trade
secrets, licenses, information, proprietary rights and processes of any other
person or entity. The Company has not received any communications alleging
that the Company has violated or, by conducting its business as proposed,
would violate any of the patents, trademarks, service marks, trade names,
copyrights or trade secrets or other proprietary rights of any other person
or entity. The Company is not aware that any of its employees is obligated
under any contract (including licenses, covenants or commitments of any
nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with the use of his
or her best efforts to promote the interests of the Company or that would
conflict with the Company's business as proposed to be conducted. Neither the
execution nor delivery of this Agreement, the Investors' Rights Agreement,
the Right of First Refusal and Co-Sale Agreement, the Technology Assignment
Agreement or the Voting Agreement, nor the carrying on of the Company's
business by the employees of the Company, nor the conduct of the Company's
business as proposed, will, to the Company's knowledge, conflict with or
result in a breach of the terms, conditions or provisions of, or constitute a
default under, any contract, covenant or instrument under which any of such
employees is now obligated. The Company does not believe it is or will be
necessary to utilize any inventions of any of its employees (or people it
currently intends to hire) made prior to their employment by the Company.
2.11 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
violation or default in any material respect of any provision of its Restated
Articles or Bylaws, or in any material respect of any instrument, judgment,
order, writ, decree or contract to which it is a party or by which it is
bound, or, to its knowledge, of any provision of any federal or state
statute, rule or regulation applicable to the Company. The execution,
delivery and performance of this Agreement, the Investors' Rights Agreement,
the Right of First Refusal and Co-Sale Agreement, the Technology Assignment
Agreement and the Voting Agreement, and the consummation of the transactions
contemplated hereby and thereby will not result in any such violation or be
in conflict with or constitute, with or without the passage of time and
giving of notice, either a default under any such provision, instrument,
judgment, order, writ, decree or contract or an event that results in the
creation of any lien, charge or encumbrance upon any assets of the Company or
the suspension, revocation, impairment, forfeiture, or nonrenewal of any
material permit, license, authorization, or approval applicable to the
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Company, its business or operations or any of its assets or properties.
2.12 AGREEMENTS; ACTION.
(a) Except for agreements explicitly contemplated hereby and by the
Investors' Rights Agreement, the Investors' Rights Agreement, the Right of
First Refusal and Co-Sale Agreement, the Technology Assignment Agreement and
the Voting Agreement, there are no agreements, understandings or proposed
transactions between the Company and any of its officers, directors,
affiliates, or any affiliate thereof.
(b) There are no agreements, understandings, instruments,
contracts, proposed transactions, judgments, orders, writs or decrees to
which the Company is a party or by which it is bound that may involve (i)
obligations (contingent or otherwise) of, or payments to the Company in
excess of, $5,000, or (ii) the license of any patent, copyright, trade secret
or other proprietary right to or from the Company, or (iii) provisions
restricting or affecting the development, manufacture or distribution of the
Company's services.
(c) The Company has not (i) declared or paid any dividends or
authorized or made any distribution upon or with respect to any class or
series of its capital stock, (ii) incurred any indebtedness for money
borrowed or any other liabilities individually in excess of $5,000 or, in the
case of indebtedness and/or liabilities individually less than $5,000, in
excess of $25,000 in the aggregate, (iii) made any loans or advances to any
person, other than ordinary advances for travel expenses, or (iv) sold,
exchanged or otherwise disposed of any of its assets or rights, other than
the sale of its inventory in the ordinary course of business.
(d) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including
persons or entities the Company has reason to believe are affiliated
therewith) shall be aggregated for the purpose of meeting the individual
minimum dollar amounts of such subsections.
(e) The Company is not a party to and is not bound by any contract,
agreement or instrument, or subject to any restriction under its Restated
Articles or Bylaws that adversely affects its business as now conducted or as
proposed to be conducted, its properties or its financial condition.
(f) The Company has not engaged in the past three (3) months in any
discussion (i) with any representative of any corporation or corporations
regarding the consolidation or merger of the Company with or into any such
corporation or corporations, (ii) with any corporation, partnership,
association or other business entity or any individual regarding the sale,
conveyance or disposition of all or substantially all of the assets of the
Company or a transaction or series of related transactions in which more than
fifty percent (50%) of the voting power of the Company is disposed of, or
(iii) regarding any other form of acquisition, liquidation, dissolution or
winding up of the Company.
2.13 RELATED-PARTY TRANSACTIONS. No employee, officer, or director
of the Company or member of his or her immediate family is indebted to the
Company, nor is the
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Company indebted (or committed to make loans or extend or guarantee credit)
to any of them. To the Company's knowledge, none of such persons has any
direct or indirect ownership interest in any firm or corporation with which
the Company is affiliated or with which the Company has a business
relationship, or any firm or corporation that competes with the Company,
except that employees, officers, or directors of the Company and members of
their immediate families may own stock in publicly traded companies that may
compete with the Company. No member of the immediate family of any officer or
director of the Company is directly or indirectly interested in any material
contract with the Company.
2.14 PERMITS. The Company has all franchises, permits, licenses, and
any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company, and
the Company believes it can obtain, without undue burden or expense, any
similar authority for the conduct of its business as planned to be conducted.
The Company is not in default in any material respect under any of such
franchises, permits, licenses, or other similar authority.
2.15 ENVIRONMENTAL AND SAFETY LAWS. To its knowledge, the Company is
not in violation of any applicable statute, law or regulation relating to the
environment or occupational health and safety, and to its knowledge, no
material expenditures are or will be required in order to comply with any
such existing statute, law or regulation.
2.16 DISCLOSURE. The Company has fully provided each Investor with
all the information that such Investor has requested for deciding whether to
purchase the Series A Preferred Stock and Series B Preferred Stock. To its
knowledge, neither this Agreement, the Investors' Rights Agreement, the
Voting Agreement, nor any other statements or certificates made or delivered
in connection herewith or therewith contains any untrue statement of a
material fact or omits to state a material fact necessary to make the
statements herein or therein not misleading.
2.17 BUSINESS PLAN. The Business Plan dated June, 1998, previously
delivered to each Investor has been prepared in good faith by the Company and
does not contain any untrue statement of a material fact nor does it omit to
state a material fact necessary to make the statements made therein not
misleading, except that with respect to projections contained in the Business
Plan, the Company represents only that such projections were prepared in good
faith and that the Company reasonably believes there is a reasonable basis
for such projections.
2.18 REGISTRATION RIGHTS. Except as provided in the Investors'
Rights Agreement, the Company has not granted or agreed to grant any
registration rights, including piggyback rights, to any person or entity.
2.19 CORPORATE DOCUMENTS. Except for amendments necessary to satisfy
representations and warranties or conditions contained herein (the form of
which amendments has been approved by the Investors), the Restated Articles
and Bylaws of the Company are in the form previously provided to counsel for
the Investors.
2.20 TITLE TO PROPERTY AND ASSETS. The Company owns its property and
assets free
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and clear of all mortgages, liens, loans and encumbrances, except such
encumbrances and liens that arise in the ordinary course of business and do
not materially impair the Company's ownership or use of such property or
assets. With respect to the property and assets it leases, the Company is in
compliance with such leases and, to its knowledge, holds a valid leasehold
interest free of any liens, claims or encumbrances.
2.21 LIABILITIES. The Company has delivered to each Investor its
unaudited financial statements (balance sheet and statement of cash flows,
including notes thereto) at June 30, 1998 and for the fiscal year then ended
(the "FINANCIAL STATEMENTS"). Except as set forth in the Financial
Statements, the Company has no material liabilities, contingent or otherwise,
other than (i) liabilities incurred in the ordinary course of business
subsequent to June 30, 1998 and (ii) obligations under contracts and
commitments incurred in the ordinary course of business, which, in both
cases, individually or in the aggregate, are not material to the financial
condition or operating results of the Company.
2.22 CHANGES. Since June 30, 1998, there has not been:
(a) any change in the assets, liabilities, financial condition or
operating results of the Company from that reflected in the Financial
Statements, except changes in the ordinary course of business that have not
been, in the aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties,
financial condition, operating results, prospects or business of the Company
(as such business is presently conducted and as it is proposed to be
conducted);
(c) any waiver by the Company of a valuable right or of a material
debt owed to it;
(d) any satisfaction or discharge of any lien, claim or encumbrance
or payment of any obligation by the Company, except in the ordinary course of
business and that is not material to the assets, properties, financial
condition, operating results or business of the Company (as such business is
presently conducted and as it is proposed to be conducted);
(e) any material change or amendment to a material contract or
arrangement by which the Company or any of its assets or properties is bound
or subject;
(f) any material change in any compensation arrangement or
agreement with any employee;
(g) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(h) any resignation or termination of employment of any key officer
of the Company; and the Company, to its knowledge, does not know of the
impending resignation or termination of employment of any such officer;
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(i) to the Company's knowledge, any other event or condition of any
character that might materially and adversely affect the assets, properties,
financial condition, operating results or business of the Company (as such
business is presently conducted and as it is proposed to be conducted); or
(j) any agreement or commitment by the Company to do any of the
things described in this Section 2.22.
2.23 EMPLOYEE BENEFIT PLANS. The Company does not have any Employee
Benefit Plan as defined in the Employee Retirement Income Security Act of
1974.
2.24 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company has filed all
tax returns and reports as required by law. These returns and reports are
true and correct in all material respects. The Company has paid all taxes and
other assessments due, except those contested by it in good faith that are
listed in the Schedule of Exceptions. The Company has not elected pursuant to
the Internal Revenue Code of 1986, as amended (the "CODE"), to be treated as
a Subchapter S corporation or a collapsible corporation pursuant to Section
1362(a) or Section 341(f) of the Code, nor has it made any other elections
pursuant to the Code (other than elections that relate solely to methods of
accounting, depreciation or amortization) that would have a material effect
on the Company, its financial condition, its business as presently conducted
or proposed to be conducted or any of its properties or material assets.
2.25 INSURANCE. The Company has in full force and effect fire and
casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its
properties that might be damaged or destroyed. The Company has in full force
and effect products liability and errors and omissions insurance in amounts
customary for companies similarly situated.
2.26 LABOR AGREEMENTS AND ACTIONS. The Company is not bound by or
subject to (and none of its assets or properties is bound by or subject to)
any written or oral, express or implied, contract, commitment or arrangement
with any labor union, and no labor union has requested or, to the Company's
knowledge, has sought to represent any of the employees, representatives or
agents of the Company. There is no strike or other labor dispute involving
the Company pending, or to the Company's knowledge, threatened, that could
have a material adverse effect on the assets, properties, financial
condition, operating results, or business of the Company (as such business is
presently conducted and as it is proposed to be conducted), nor is the
Company aware of any labor organization activity involving its employees. The
Company is not aware that any officer or key employee, or that any group of
key employees, intends to terminate their employment with the Company, nor
does the Company have a present intention to terminate the employment of any
of the foregoing. The employment of each officer and employee of the Company
is terminable at the will of the Company. To its knowledge, the Company has
complied in all material respects with all applicable state and federal equal
employment opportunity and other laws related to employment.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each Investor
hereby represents and warrants that:
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3.1 AUTHORIZATION. Such Investor has full power and authority to
enter into this Agreement, the Investors' Rights Agreement and the Voting
Agreement, and each such Agreement constitutes its valid and legally binding
obligation, enforceable in accordance with its terms.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with
such Investor in reliance upon such Investor's representation to the Company,
which by such Investor's execution of this Agreement such Investor hereby
confirms, that the Series A Preferred Stock and Series B Preferred Stock to
be received by such Investor and the Common Stock issuable upon conversion
thereof (collectively, the "SECURITIES") will be acquired for investment for
such Investor's own account, not as a nominee or agent, and not with a view
to the resale or distribution of any part thereof, and that such Investor has
no present intention of selling, granting any participation in, or otherwise
distributing the same. By executing this Agreement, such Investor further
represents that such Investor does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of
the Securities.
3.3 DISCLOSURE OF INFORMATION. Such Investor represents that it has
had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Series A Preferred
Stock and Series B Preferred Stock and the business, properties, prospects
and financial condition of the Company. The foregoing, however, does not
limit or modify the representations and warranties of the Company in Section
2 of this Agreement or the right of the Investors to rely thereon.
3.4 INVESTMENT EXPERIENCE. Such Investor is an investor in
securities of companies in the development stage and acknowledges that it is
able to fend for itself, can bear the economic risk of its investment, and
has such knowledge and experience in financial or business matters that it is
capable of evaluating the merits and risks of the investment in the Series A
Preferred Stock and Series B Preferred Stock. If other than an individual,
Investor also represents it has not been organized for the purpose of
acquiring the Series A Preferred Stock and Series B Preferred Stock.
3.5 ACCREDITED INVESTOR. Such Investor is an "accredited investor"
within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of
Regulation D, as presently in effect.
3.6 RESTRICTED SECURITIES. Such Investor understands that the
Securities it is purchasing are characterized as "restricted securities"
under the federal securities laws inasmuch as they are being acquired from
the Company in a transaction not involving a public offering and that under
such laws and applicable regulations such securities may be resold without
registration under the Act, only in certain limited circumstances. In this
connection, such Investor represents that it is familiar with SEC Rule 144,
as presently in effect, and understands the resale limitations imposed
thereby and by the Act.
3.7 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting
the representations set forth above, such Investor further agrees not to make
any disposition of all or any portion of the Securities unless and until the
transferee has agreed in writing for the
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benefit of the Company to be bound by this Section 3, the Investors' Rights
Agreement and the Voting Agreement provided and to the extent this Section
and such agreement are then applicable, and:
(a) There is then in effect a Registration Statement under the Act
covering such proposed disposition and such disposition is made in accordance
with such Registration Statement; or
(b) (i) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii)
if reasonably requested by the Company, such Investor shall have furnished
the Company with an opinion of counsel, reasonably satisfactory to the
Company that such disposition will not require registration of such shares
under the Act. It is agreed that the Company will not require opinions of
counsel for transactions made pursuant to Rule 144 except in unusual
circumstances.
(c) Notwithstanding the provisions of paragraphs (a) and (b) above,
no such registration statement or opinion of counsel shall be necessary for
(i) a transfer by an Investor that is a partnership to a partner of such
partnership or a retired partner of such partnership who retires after the
date hereof, or to the estate of any such partner or retired partner, the
transfer by gift, will or intestate succession of any partner to his or her
spouse or to the siblings, lineal descendants or ancestors of such partner or
his or her spouse or (ii) a transfer to an Affiliate (as such term is defined
in Rule 12(b)(2) promulgated under the Securities Exchange Act of 1934, as
amended, if the transferee agrees in writing to be subject to the terms
hereof to the same extent as if he or she were an original Investor hereunder.
3.8 LEGENDS. It is understood that the certificates evidencing the
Securities may bear one or all of the following legends:
(a) "These securities have not been registered under the Securities
Act of 1933, as amended. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with
respect to the securities under such Act or an opinion of counsel
satisfactory to the Company that such registration is not required or unless
sold pursuant to Rule 144 of such Act."
(b) Any legend required by the laws of the State of California,
including any legend required by the California Department of Corporations
and Sections 417 and 418 of the California Corporations Code.
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4. CALIFORNIA COMMISSIONER OF CORPORATIONS.
4.1 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES THAT ARE
THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES
OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH
SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF
SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF
THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT
ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE
SALE IS SO EXEMPT.
5. COVENANTS OF THE COMPANY.
5.1 VESTING. All options granted by the Company after the date
hereof to management and key employees of the Company shall vest ratably over
four (4) years, or in the Company's sole discretion, according to any other
vesting schedule which does not at any given time result in a higher vesting
percentage. All shares of Common Stock and option shares currently
outstanding shall automatically vest in fifty percent (50%) of such shares
upon the Initial Series A Closing, and the balance of such shares shall vest
over the four (4) year period thereafter or, in the Company's sole
discretion, according to any other vesting schedule which does not at any
given time result in a higher vesting percentage. Notwithstanding the
foregoing provisions of this Section 5.1, by vote of at least a majority of
the non-employee members of the Company's Board of Directors (the "BOARD")
and at least one (1) member of the Board appointed by the Series A Preferred
Stock and/or Series B Preferred Stock and, for so long as the holders of the
Series A Preferred Stock and/or Series B Preferred Stock have the right to
appoint one (1) or more directors, the Board may accelerate the vesting
schedules outlined above.
5.2 SALARIES. (i) For so long as ICP I-A and ICP I-B are not in
breach of their obligations to purchase the Series A Preferred Stock and
Series B Preferred Stock as required hereunder or, if ICP I-A and ICP I-B are
in breach of such purchase obligations due to a good faith dispute over
whether the requisite criteria have been met and the dispute has been
referred to arbitration in accordance with Section 8.10 hereof, for so long
as there has not been a final determination of the dispute by the arbitrator
and (ii) unless otherwise determined by a majority of the Company's
non-employee directors, the non-cash compensation paid by the Company to
employees of the Company shall be reasonable (e.g. commensurate with the
salary level of each such employee and not used as a means of circumventing
the salary limitations provided herein) and the salaries paid by the Company
to such individuals shall not exceed the amounts listed on SCHEDULE 5.
5.3 IMPACT SOFTWARE, INC. The Company agrees that the approval of a
majority of those directors of the Company who are not affiliates of Impact
Software, Inc., a California corporation ("IMPACT") must be obtained prior to
entering into any contract or other transaction with Impact, with the
exception of the Technology Assignment Agreement (as defined below).
14
<PAGE>
The Company agrees to remit to Impact the sum of $100,000, to be paid in four
(4) equal monthly installments commencing on the Initial Series A Closing
date, in exchange for the execution by Impact of the Technology Assignment
Agreement (the "TECHNOLOGY ASSIGNMENT AGREEMENT") in substantially the form
attached hereto as EXHIBIT E.
6. CONDITIONS OF INVESTOR'S OBLIGATIONS AT CLOSING.
6.1 INITIAL SERIES A CLOSING. The obligation of each Investor to
purchase and pay for the Series A Preferred Stock which the Investors have
agreed to purchase on the Initial Series A Closing Date is subject to the
fulfillment on or before such Closing, of each of the following conditions,
any of which may be waived in whole or in part by the Investors; provided,
however, that no Investor shall have the power to waive any condition for any
other Investor:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in Section 2 shall be true on and as of
the Initial Series A Closing with the same effect as though such
representations and warranties had been made on and as of the date of such
Closing, unless the representations contained in Section 2 are made as of a
specific date.
(b) PERFORMANCE. The Company shall have performed and complied with
all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied with by it on or before the Initial
Series A Closing.
(c) COMPLIANCE CERTIFICATE. The President of the Company shall
deliver to each Investor at the Initial Series A Closing a certificate
stating that the conditions specified in Section 6.1 have been fulfilled and
stating that there shall have been no material adverse change in the
business, affairs, operations, properties, assets or condition of the Company
since the date of the Business Plan.
(d) QUALIFICATIONS. All authorizations, approvals, or permits, if
any, of any governmental authority or regulatory body of the United States or
of any state that are required in connection with the lawful issuance and
sale of the Securities pursuant to this Agreement shall be duly obtained and
effective as of the Initial Series A Closing.
(e) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings
in connection with the transactions contemplated at the Initial Series A
Closing and all documents incident thereto shall be reasonably satisfactory
in form and substance to Investors' counsel, and they shall have received all
such counterpart original and certified or other copies of such documents as
they may reasonably request.
(f) OPINION OF COMPANY COUNSEL. Each Investor shall have received
from Brobeck, Phleger & Harrison LLP, counsel for the Company, an opinion,
dated as of the Initial Series A Closing, in substantially the form attached
hereto as EXHIBIT C.
(g) INVESTORS' RIGHTS AGREEMENT. The Company and each Investor
shall have entered into the Investors' Rights Agreement in the form attached
as EXHIBIT B.
15
<PAGE>
(h) VOTING AGREEMENT. The Company and each Investor shall have
entered into the Voting Agreement in the form attached hereto as EXHIBIT D.
(i) TECHNOLOGY ASSIGNMENT AGREEMENT. Impact and the Company shall
have entered into a Technology Assignment Agreement in the form attached
hereto as EXHIBIT E.
(j) RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT. The Company and
each Investor shall have entered into the Right of First Refusal and Co-Sale
Agreement in the form attached hereto as EXHIBIT F.
(k) PROPRIETARY INFORMATION. Each employee of and consultant to the
Company shall have entered into a Proprietary Information and Inventions
Agreement in the form previously provided to counsel for Investors.
(l) PRESIDENT'S CERTIFICATE. The President of the Company shall
deliver to each Investor a certificate in the form attached hereto as EXHIBIT
G.
6.2 INITIAL SERIES B CLOSING. The obligation of each Investor to
purchase and pay for the Series B Preferred Stock which Investors have agreed
to purchase on the Initial Series B Closing Date is subject to the
fulfillment on or before such Closing, of the following condition, which may
be waived in whole or in part by the Investors; provided, however, that no
Investor shall have the power to waive such condition for such other Investor:
(a) PRESIDENT'S CERTIFICATE. The President of the Company shall
deliver to each Investor at the Initial Series B Closing a certificate
stating that no Material Adverse Effect with respect to the Company shall
have occurred since the Initial Series A Closing. For the purposes hereof, a
"Material Adverse Effect" shall mean any event, change or effect that is
materially adverse to the condition (financial or otherwise), properties,
assets, liabilities, business, operations or results of operations of such
entity and its subsidiaries (if any), taken as a whole.
7. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING.
7.1 INITIAL SERIES A CLOSING. The obligation of the Company to sell
and issue the Series A Preferred Stock which the Company has agreed to issue
on the Initial Series A Closing Date is subject to the fulfillment on or
before such Closing of each of the following conditions, any of which may be
waived in whole or in part by the Company:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Investors contained in Section 3 shall be true on and as of
the Initial Series A Closing with the same effect as though such
representations and warranties had been made on and as of such Closing,
unless the representations contained in Section 3 are made as of a specific
date.
(b) PAYMENT OF PURCHASE PRICE. The Investors shall have delivered the
purchase price specified in Section 1.2.
16
<PAGE>
(c) QUALIFICATIONS. All authorizations, approvals, or permits, if
any, of any governmental authority or regulatory body of the United States or
of any state that are required in connection with the lawful issuance and
sale of the Securities pursuant to this Agreement shall be duly obtained and
effective as of the Initial Series A Closing.
7.2 SUBSEQUENT CLOSINGS. The obligation of the Company to sell and
issue Series A Preferred Stock or Series B Preferred Stock, as the case may
be, at each Closing subsequent to the Initial Series A Closing is subject to
the fulfillment on or before each such Closing of the following condition,
which may be waived in whole or in part by the Company:
(a) PAYMENT OF PURCHASE PRICE. The Investors shall have delivered
the purchase price specified in 1.2 or 1.4, as the case may be, and, with
respect to each Series A Closing or Series B Closing, as the case may be, ICP
I-A and ICP I-B shall not be in breach of their obligations to purchase the
Series A Preferred Stock and Series Preferred Stock as required hereunder as
of each such Closing.
8. MISCELLANEOUS.
8.1 SURVIVAL OF WARRANTIES. The warranties, representations and
covenants of the Company and Investors contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Initial Series A Closing for a period of two (2) years from the Initial
Series A Closing Date and shall in no way be affected by any investigation of
the subject matter thereof made by or on behalf of the Investors or the
Company.
8.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein,
the terms and conditions of this Agreement shall inure to the benefit of and
be binding upon the respective successors and assigns of the parties
(including transferees of any Securities). Nothing in this Agreement, express
or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement. Notwithstanding anything to the
contrary contained in this Agreement or in any of the agreements referenced
herein (the "ANCILLARY AGREEMENTS"), the parties agree that none of the
rights, preferences, privileges or benefits granted hereunder or in any of
the Ancillary Agreements to the Preferred Stock of the Company acquired
hereunder or to the holders thereof shall be diminished, modified or
cancelled as a result of a transfer of some or all of such Preferred Stock
(or the Common Stock issuable upon exercise thereof or the options to acquire
Preferred Stock referred to in Section 1.7 of this Agreement) to an Affiliate
or Affiliates of any of the Investors (a "TRANSFEREE") and such Transferee
shall succeed to any such rights, preferences, privileges or benefits enjoyed
by any or all of the Investors; PROVIDED, HOWEVER, that any such transfers
are made in accordance with the procedures set forth in the applicable
Ancillary Agreement and that the Transferees agree in writing to take the
shares (or options to acquire the shares) subject to the restrictions and
provisions set forth in the applicable Ancillary Agreement.
8.3 GOVERNING LAW. This Agreement shall be governed by and
construed under
17
<PAGE>
the laws of the State of California as applied to agreements among California
residents entered into and to be performed entirely within California.
8.4 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.5 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
8.6 NOTICES. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other
address as such party may designate by ten (10) days' advance written notice
to the other parties.
8.7 FINDER'S FEE. Each party represents that it neither is nor will
be obligated for any finders' fee or commission in connection with this
transaction. Each Investor agrees to indemnify and to hold harmless the
Company from any liability for any commission or compensation in the nature
of a finders' fee (and the costs and expenses of defending against such
liability or asserted liability) for which such Investor or any of its
officers, partners, employees, or representatives is responsible and the
Company agrees to indemnify and hold harmless each Investor from any
liability for any commission or compensation in the nature of a finders' fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees or
representatives is responsible.
8.8 EXPENSES. Irrespective of whether the Closing is effected, the
Company shall pay all costs and expenses that it incurs with respect to the
negotiation, execution, delivery and performance of this Agreement. If the
Initial Series A Closing is effected, the Company shall reimburse the
reasonable fees of one (1) special counsel to the Investors, not to exceed a
total of $15,000 (the "Fee Limitation"), payable at the Initial Series A
Closing and, if the Fee Limitation is not reached in connection with that
closing, at subsequent closings until the Company has paid up to the Fee
Limitation. If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the Investors' Rights Agreement, the
Voting Agreement or the Restated Articles, the prevailing party shall be
entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
8.9 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders
of a majority of the Common Stock issued upon conversion of the Series A
Preferred Stock and Series B Preferred Stock or issuable upon conversion of
the Series A Preferred Stock and Series B Preferred Stock. Any amendment or
waiver effected in accordance with this paragraph shall be binding upon each
holder of any securities purchased
18
<PAGE>
under this Agreement at the time outstanding (including securities into which
such securities are convertible), each future holder of all such securities,
and the Company.
8.10 DISPUTES. If the parties are unable, after good faith
negotiations, which each hereby covenants to undertake, to resolve any
dispute arising between them within fifteen (15) days after notice is given
of such dispute, then the dispute will be referred to arbitration (which the
parties agree is the exclusive means of resolving any such dispute) before
one (1) arbitrator in Los Angeles County, California, or any other place
mutually agreed upon by the parties hereto, in accordance with the applicable
rules then in effect of the Judicial Arbitration and Mediation Service (the
"JAMS Rules") (or any other form of arbitration mutually acceptable to the
parties). The determination made in accordance with the JAMS rules shall be
delivered in writing to the parties hereto and shall be final, binding and
conclusive on the parties hereto, and the amount of the claim, if any,
determined to exist shall be a valid claim and no further remedy shall be
available to either party with respect to such dispute and judgment may be
entered upon such decision in accordance with applicable law in any court
having jurisdiction thereof. The arbitration award shall include (i) a
provision that the prevailing party in such arbitration recover its costs
relating to the arbitration and reasonable attorneys' fees from the other
party, (ii) the amount of such costs and fees, and (iii) an order that the
losing party pay the fees and expenses of the arbitrator.
8.11 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
8.12 AGGREGATION OF STOCK. All shares of the Preferred Stock held or
acquired by affiliated entities or persons shall be aggregated together for
the purpose of determining the availability of any rights under this
Agreement.
8.13 ENTIRE AGREEMENT. This Agreement and the documents referred to
herein constitute the entire agreement among the parties and no party shall
be liable or bound to any other party in any manner by any warranties,
representations, or covenants except as specifically set forth herein or
therein.
19
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
<TABLE>
<S> <C>
COMPANY:
NETZERO, INC.
By: /s/ RONALD T. BURR
--------------------------------------------
Ronald T. Burr, Chief Executive Officer
Address: 21601 Vanowen Street, Suite 100
Canoga Park, CA 91303
INVESTORS:
IDEALAB! CAPITAL PARTNERS I-A, L.P.
By: /s/ WILLIAM S. ELKUS
--------------------------------------------
William S. Elkus, Manager Member
idealab! Capital Management I, LLC
General Partner of idealab! Capital Partners
I-A, L.P.
Address: 130 West Union Street
Pasadena, CA 91103
IDEALAB! CAPITAL PARTNERS I-B, L.P.
By: /s/ WILLIAM S. ELKUS
--------------------------------------------
William S. Elkus, Manager Member
idealab! Capital Management I, LLC
General Partner of idealab! Capital Partners
I-B, L.P.
Address: 130 West Union Street
Pasadena, CA 91103
</TABLE>
<PAGE>
PREFERRED STOCK PURCHASE AGREEMENT SIGNATURE PAGE
BILL GROSS' IDEALAB!
By: /s/ MARCIA GOODSTEIN
-------------------------------------
Name:
-----------------------------------
Its:
------------------------------------
Address:
--------------------------------
--------------------------------
<PAGE>
[GTE INTERNETWORKING LOGO] MASTER AGREEMENT FOR
INTERNETWORKING SERIVCES
This Master Agreement between GTE Internetworking Incorporated ("we") and the
Customer Identified below ("you") includes the attached Service Schedules and
Service Quotations (collectively "Schedules") together with any additional
Schedules mutually agreed in writing in the future.
1. SERVICES. We will provide you the Internetworking services ("Services")
specified in the Schedule(s). Our commencement of providing any of the
Services shall constitute our acceptance of this Master Agreement.
2. PRICES. Prices are stated in the Schedules and are guaranteed for the Term
stated in the Schedules. If any of the Services are on a month-to-month
basis, we will give you at least 30 days notice of a price change. In
addition, you are responsible for applicable taxes, tariffs,
telecommunications surcharges or other governmental charges due on account of
the Services.
3. PAYMENT. Unless otherwise stated in a Schedule, we will invoice you
monthly. You agree to pay within 30 days from receipt of invoice. For overdue
invoices, you will pay interest of 1.5% for each month or part of a month (or
the maximum allowed by law, whichever is less).
4. OUR RESPONSIBILITY. We are responsible for providing the Services by
qualified personnel in a professional manner. WE DISCLAIM ALL OTHER
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE.
5. YOUR RESPONSIBILITY. You are responsible for the manner in which you use
the Services, including the maintenance and security of your data, computer
network and other facilities; your choice of equipment, software and online
content and all other matters related to how you use the Services. Unless
expressly permitted by a Schedule or separate reseller agreement with us, you
shall not resell Services, or access to Services, directly or indirectly to
third parties.
6. INDEMNIFICATION. We will indemnify you for damages, costs and attorneys
fees you incur from any claim that our design of the Services infringes any
U.S. patent, copyright, trademark, trade secret or other intellectual property
right. You will indemnify us for damages, costs and attorneys fees we incur
from any claim arising from your manner of using of the Services, your
combination of the Services with other products or services not provided by
us, or your modification of the Services. The indemnifying party shall conduct
the defense and shall have control of the litigation; the other party shall
give prompt notice of claims and shall cooperate in defending against the
claim. THE PARTIES DISCLAIM THE IMPLIED WARRANTY OF NON-INFRINGEMENT, RELYING
INSTEAD ON THE TERMS OF THIS SECTION.
7. IP ADDRESSES. Upon expiration, cancellations or termination of the
Agreement or applicable Schedule, you shall relinquish any IP addresses or
address blocks assigned to you by us.
8. ACKNOWLEDGEMENT. You agree that we may include your name in listings of
our customers.
9. COMPLIANCE WITH LAWS. You shall not use or permit your end users to use
the Services in ways that violate the laws or our acceptable use policy which
is published on our web site at http://www.bbn.com/sup/, infringe the rights
of others, or interfere with users of our network or other networks. For
example, you shall not distribute chain letters or unsolicited bulk
electronic mail ("spamming"); propagate computer worms or viruses; use a
false identity; attempt to gain unauthorized entry to any site or network;
distribute child pornography, obscenity or defamatory material over the
Internet; or infringe copyrights, trademarks or other intellectual property
rights. You further agree to comply with U.S. export laws concerning the
transmission of technical data and other regulated materials via the Services.
10. TERMINATION. Either party may terminate or cancel this Agreement if the
other fails to cure a material breach of the Agreement within 30 days after
receiving written notice of the breach. We reserve the right, but assume no
obligation to suspend performance immediately if you are more than 30 days
overdue in payments or if, in our reasonable judgment, you have violated
Section 9.
11. LIMITATION OF LIABILITY. EXCEPT FOR (A) INDEMNIFICATIONS PURSUANT TO
SECTION 6, (B) BREACH OF ANY CONFIDENTIALITY OBLIGATIONS STATED IN A SERVICE
SCHEDULE, AND (C) BREACHES BY YOU OF LICENSE TERMS APPLICABLE TO GTE-PROVIDED
SOFTWARE, NEITHER PARTY (NOR ITS SUPPLIERS OR CUSTOMERS) SHALL BE LIABLE TO
THE OTHER PARTY FOR PUNITIVE, SPECIAL, CONSEQUENTIAL, INCIDENTAL OR INDIRECT
DAMAGES INCLUDING WITHOUT LIMITATION, LOST PROFITS OR LOSS OF DAMAGE TO DATA
ARISING OUT OF THE USE OR INABILITY TO USE SERVICES, EVEN IF THE PARTY HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
12. LIMITATION OF DAMAGES. OUR AGGREGATE LIABILITY TO YOU RELATING TO OR
ARISING OUT OF THIS AGREEMENT, WHETHER IN CONTRACT, TORT OR OTHERWISE, SHALL
NOT EXCEED (a) THE TOTAL AMOUNTS PAID BY YOU TO US FOR THE SERVICE IN
QUESTION, DURING THE ONE-YEAR PERIOD IMMEDIATELY PRECEDING THE EVENT WHICH
GAVE RISE TO YOUR CLAIMS OR (b) $100,000, WHICHEVER IS LESS.
13. MISCELLANEOUS. The terms and conditions of this Agreement supersede all
previous agreements, proposals or representations related to the Services.
Except for assignments to GTE affiliates, neither party may assign this
Agreement without the prior written consent of the other party. This
Agreement shall be governed by the substantive laws of the Commonwealth of
Massachusetts. Any changes to this Agreement, or any additional or different
terms in your purchase orders, acknowledgments or other documents, will not
be effective unless expressly agreed to in writing by us.
PLEASE SIGN BELOW TO INDICATE YOUR UNDERSTANDING AND ACCEPTANCE
OF THE TERMS OF THIS AGREEMENT.
COMPANY (TYPE OR PRINT FULL CUSTOMER NAME): NETZERO,INC.
-----------------------------
SIGNATURE: /s/ Ronald Burr DATE: 10/13/98
----------------------------- ----------------------
PRINT NAME: RONALD BURR TITLE: CEO
----------------------------- ----------------------
1 of 1
<PAGE>
[GTE INTERNETWORKING LOGO] SERVICE SCHEDULE
DIALINX SERVICE (DOMESTIC)
This Service Schedule is part of and is governed by the Master Agreement for
Internetworking Services ("Master Agreement"). The terms and conditions of
the Master Agreement are incorporated herein by reference.
1. COVERED SERVICES. We will provide you with the DiaLinx-TM- Basic Services
and Enhanced Services ("DiaLinx Service") indicated in the applicable GTE
Internetworking Services Quotation ("Quotation") which is attached hereto or
which we may provide to you in the future for additional DiaLinx Service. The
term of the Service Period is one year or longer, as selected by you, and the
corresponding fees are described in the Quotation. Our commencement of
providing DiaLinx Services to you under the Quotations shall constitute our
acceptance of the Agreement in respect of such DiaLinx Service.
2. SERVICE DESCRIPTION. DiaLinx Service provides you with dial-up Internet
access service. further details of the DiaLinx Service are set forth in the
applicable Service Description. Service Descriptions are available from your
GTE sales representative.
3. RENEWAL. We encourage you to contact us, via email to:
[email protected] prior to the expiration of the then-current Service
Period to renew the DiaLinx Service for an additional term of one (1) year or
greater. If the Service Period expires before it has been renewed in
writing, then we may continue to provide you with the DiaLinx Service on a
month-to-month basis, at our then-current undiscounted list prices, until the
Service Period has been renewed in writing.
4. MINIMUM CUSTOMER COMMITMENT. You agree to the Minimum Customer
Commitment(s) for DiaLinx Service set forth in the Quotation. You agree that
you are obligated to pay the full amount due for the Minimum Customer
Commitment even if your actual usage is less than the Minimum Customer
Commitment.
5. THIRD PARTY ACCESS. Subject to the terms and conditions of this Service
Schedule, you have the non-exclusive right to authorize access to DiaLinx
Services to your employees and/or to any third party (including the right to
sell such DiaLinx Services). You agree that if you offer DiaLinx Service
other than to your bona fide employees, you will do so only pursuant to a
binding agreement incorporating terms substantially similar to those stated
in Section 10 (Mandatory Flow-down Terms) of this Service Schedule.
6. RESPONSIBILITY FOR END USERS. You agree to be responsible for all billing
and collection from end users and that you will pay us on a timely basis,
regardless of whether you collect payment from end users. You agree to be
responsible for all communications to and business relations with end users.
You shall be responsible for providing all technical and business support
related to DiaLinx Services access for end users, including but not limited
to responding to inquiries and questions, hot-line support, problem
resolution, providing system configuration, installation and support, as
applicable and other such services and shall maintain an organization which
is highly trained and qualified to provide such support. You are responsible
for authenticating and authorizing access by your end users to DiaLinx
Services. Unless you have purchased optional RADIUS hosting services from us,
you shall install, operate, and maintain a dedicated RADIUS server meeting
the RADIUS specifications published in Internet RFC 2138 and all published
derivative RFC's. Our RADIUS server will prompt each end user for the end
user's identification and password, and poll your RADIUS server for access
information. Unless otherwise provided for in the Quotation, we will support
only one authentication realm (e.g. companyname.com).
7. EQUIPMENT AND TELEPHONE SERVICE. You are solely responsible for
obtaining and providing the telephone services and user modems necessary to
access DiaLinx Services. In no event will we be responsible for and user
telephone charges.
8. NETWORK ACCESS AVAILABILITY. ACCESS TO THE DIALINX NETWORK CANNOT BE
GUARANTEED TO YOU OR YOUR END USERS. END USERS MAY BE UNABLE TO ACCESS THE
DIALINX SERVICE AT ANY TIME, AND DISCONNECTIONS MAY OCCUR FROM TIME TO TIME.
YOU AGREE THAT WE WILL NOT BE LIABLE FOR ANY DAMAGES THAT YOU OR YOUR END
USERS MAY INCUR ARISING OUT OF THE USE OR INABILITY TO USE THE DIALINX
SERVICES. END USERS MAY BE AUTOMATICALLY DISCONNECTED FROM THE NETWORK AFTER
30 MINUTES OF INACTIVITY. THIS DISCLAIMER IS IN ADDITION TO, NOT INSTEAD OF,
THE DISCLAIMER, LIMITATION OF LIABILITY AND LIMITATION OF DAMAGES CONTAINED
IN THE MASTER AGREEMENT.
9. REGULATORY CHANGES. We shall flow through to you any local exchange
carrier (LEC) price changes (i) that are attributable to changes in Federal
or state regulation, or (ii) for Federally regulated services, that are
treated as exogenous regulatory cost changes by the Federal Communications
Commission (the "FCC") under its price caps regulations as defined in the FCC
Rules, 47 C.F.R. Section 61.45. For purposes of this paragraph, price changes
attributable to changes in regulation include, but are not necessarily
limited to, price changes reflecting total or partial elimination of any
enhanced services provide exemption from payment of interexchange access
charges or any regulatory decision which results in application of multiple
Subscriber Line Charges to ISDN Primary Rate interface circuits or
channelized TI circuits.
10. ACCEPTABLE USE. You agree to use the Dialinx Service in accordance with
our acceptable use policy. Our current acceptable use policy is published on
our web site at http://www.bbn.com/aup/
11. COMPLIANCE WITH LAWS. You shall not use or permit your end users to use
the Services in ways that violate laws, infringe the rights of others, or
interfere with users of our network or other networks. For example, you shall
not distribute chain letters or unsolicited bulk electronic mail
("spamming"); propagate computer worms or viruses; use a false identity;
attempt to gain unauthorized entry to any site or network; distribute child
pornography, obscenity or defamatory material over the Internet; or infringe
copyrights, trademarks or other intellectual property rights. You further
agree to comply with U.S. export laws concerning the transmission of
technical data and other regulated materials via the Services.
12. MANDATORY FLOW-DOWN TERMS. You agree to include terms substantially
similar to the following minimum terms in legally binding agreements with end
users who are not your bona fide employees. For the purpose of this section,
"Network Services Supplier" shall mean us, "Company" shall mean you, "User"
shall mean the non-employee end user, and "Network" shall mean the dial-up
network operated and maintained by us in the Territory which is designed to
provide access to the Internet:
NO RIGHT OF RESALE. Use may not resell or redistribute any DiaLinx Services.
<PAGE>
[GTE INTERNETWORKING LOGO] SERVICE SCHEDULE
DIALINX SERVICE (DOMESTIC)
CONTENT RESPONSIBILITY. User understands that neither Company nor its Network
Services Supplier is responsible for the content of the transmissions which
may pass through the Network. User agrees that it will NOT use the DiaLinx
Services in ways that violate laws, infringe the rights of others, or
interfere with the users, services, or equipment of other networks.
For example, you shall not distribute unsolicited advertising, chain letters,
or commercial electronic mail ("spamming"); propagate computer worms or
viruses; attempt to gain unauthorized entry to other computers, data or
networks; distribute child pornography, obscenity, or defamatory material
over the Internet; or infringe copyrights, trademarks, or other intellectual
property rights.
WARRANTY AND LIABILITY LIMITATIONS. COMPANY DOES NOT WARRANT THAT THE DIALINX
SERVICES WILL BE AVAILABLE ON A SPECIFIED DATE OR TIME OR THAT THE NETWORK
WILL HAVE THE CAPACITY TO MEET THE DEMAND OF END USERS DURING SPECIFIC HOURS.
USER MAY BE UNABLE TO ACCESS THE NETWORK AT ANY TIME AND DISCONNECTION FROM
THE NETWORK MAY OCCUR FROM TIME TO TIME. USERS MAY BE AUTOMATICALLY
DISCONNECTED FROM THE NETWORK AFTER 30 MINUTES OF INACTIVITY. NEITHER COMPANY
NOR ITS NETWORK SERVICES SUPPLIER WILL BE LIABLE FOR UNAUTHORIZED ACCESS TO
COMPANY'S OR USER'S TRANSMISSION FACILITIES OR PREMISE EQUIPMENT OR FOR
UNAUTHORIZED ACCESS TO OR ALTERATION, THEFT OR DESTRUCTION OF USER'S DATA
FILES, PROGRAMS, PROCEDURES OR INFORMATION THROUGH ACCIDENT, FRAUDULENT MEANS
OR DEVICES, OR ANY OTHER METHOD, REGARDLESS OF WHETHER SUCH DAMAGE OCCURS AS
A RESULT OF COMPANY'S OR ITS NETWORK SERVICE SUPPLIER'S NEGLIGENCE IN NO
EVENT WILL COMPANY OR ITS NETWORK SERVICES SUPPLIERS BE LIABLE FOR ANY
DAMAGES, INCLUDING BUT NOT LIMITED TO LOSS OF DATA, LOSS OF REVENUE OR
PROFITS, OR FOR ANY OTHER SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL
DAMAGES, ARISING OUT OF OR IN CONNECTION WITH THE USE OF OR INABILITY TO USE
SERVICES OR PRODUCTS PROVIDED HEREUNDER.
PLEASE SIGN BELOW TO INDICATE YOUR UNDERSTANDING AND ACCEPTANCE
OF THE TERMS OF THIS AGREEMENT.
COMPANY (TYPE OR PRINT FULL CUSTOMER NAME): NETZERO,INC.
-----------------------------
SIGNATURE: /s/ Ronald Burr DATE: 10/13/98
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PRINT NAME: RONALD BURR TITLE: CEO
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NETZERO, INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
This Series C Preferred Stock Purchase Agreement (the "Stock Purchase
Agreement") is made as of __________________, by and between NetZero, Inc.,
a California corporation (the "Company"), and David C. Bohnett ("Optionee"
or "Purchaser").
All capitalized terms in this Agreement shall have the meaning assigned
to them in this Agreement or in the attached Appendix.
A. EXERCISE OF OPTION
1. EXERCISE. Optionee hereby purchases 150,000 shares of Series C
Preferred Stock (the "Purchased Shares") pursuant to that certain option (the
"Option") granted Optionee on December 4, 1998 (the "Grant Date") to purchase
up to 150,000 shares of Series C Preferred Stock (the "Option Shares") at the
exercise price of $0.6446 per share (the "Exercise Price").
2. PAYMENT. Concurrently with the delivery of this Agreement to the
Company, Optionee shall pay the Exercise Price for the Purchased Shares in
accordance with the provisions of the Option Agreement and shall deliver
whatever additional documents may be required by the Option Agreement as a
condition for exercise, together with a duly-executed blank Assignment
Separate from Certificate (in the form attached hereto as Exhibit I with
respect to the Purchased Shares.
3. SHAREHOLDER RIGHTS. Until such time as the Company exercises the
Repurchase Right, Optionee (or any successor in interest deriving their claim
of ownership through a Permitted Transfer from Optionee, such successor an
"Owner") shall have all the rights of a shareholder with respect to the
Purchased Shares as set forth in the Company's Articles of Incorporation, as
amended (including voting, dividend, liquidation and conversion rights),
subject, however, to the transfer restrictions of Article B.
B. SECURITIES LAW COMPLIANCE
1. EXEMPTION FROM REGISTRATION. Purchaser acknowledges that the
Purchased Shares are not being registered under the Securities Act of 1933,
as amended (the "1933 ACT"), based, in part, on reliance that the issuance of
the Purchased Shares is exempt from registration under Section 4(2) of the
1933 Act as not involving any public offering. Purchaser further acknowledges
that the Company's reliance on such exemption is predicated, in part, on the
representations set forth below made by Purchaser to the Company:
(a) Purchaser is acquiring the Purchased Shares solely for his
own account, for investment purposes only, and not with an intent to sell,
or for resale in connection with any distribution of all or any portion of
the Shares within the meaning of the 1933 Act;
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(b) Purchaser is an "Accredited Investor" as that term is defined
in Rule 501 of the General Rules and Regulations under the Securities Act of
1933;
(c) In evaluating the merits and risks of an investment in the
Purchased Shares, Purchaser has relied upon the advice of Purchaser's legal
counsel, tax advisors, and/or other investment advisors;
(d) Purchaser is experienced in evaluating and investing in
companies such as the Company. In addition, Purchaser has a preexisting
business relationship with the Company. Purchaser has been given access to
all books, records and other information of the Company which Purchaser has
desired to review and analyze in connection with Purchaser's purchase of the
Purchased Shares hereunder;
(e) Purchaser is aware that an investment in securities of a
closely held corporation such as the Company is non-marketable,
non-transferable and will require Purchaser's capital to be invested for an
indefinite period of time, possibly without return. Purchaser has no need for
liquidity in this investment, has the ability to bear the economic risk of
this investment, and can afford a complete loss of the entire purchase price
paid for the Purchased Shares;
(f) Purchaser understands that the Shares being purchased
hereunder are characterized as "restricted securities" under the federal
securities laws since the Purchased Shares are being acquired from the
Company in a transaction not involving a public offering and that under such
laws and applicable regulations such securities may be resold without
registration under the 1933 Act only in certain limited circumstances.
Purchaser understands that the Company has no obligation to file a
registration statement under the 1933 Act for the Purchased Shares or to
otherwise assist Purchaser in complying with any exemption from registration.
Purchaser represents that Purchaser is familiar with Rule 144 promulgated
under the 1933 Act, as presently in effect, and understands the resale
limitations imposed thereby and by the 1933 Act; and
(g) At no time was an oral representation made to Purchaser
relating to the purchase of the Purchased Shares or was Purchaser presented
with or solicited by any leaflet, public or promotional material, newspaper
or magazine article, radio or television advertisement or any other form of
general advertising relating to the purchase hereunder.
2. DISPOSITION OF PURCHASED SHARES. Purchaser hereby agrees that
Purchaser shall make no disposition of the Purchased Shares unless and until:
(a) Purchaser shall have notified the Company of the proposed
disposition and provided a written summary in reasonable detail of the terms
and conditions of the proposed disposition;
(b) Purchaser shall have complied with all requirements of this
Agreement applicable to the disposition of the Shares;
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(c) Purchaser shall have provided the Company with reasonable
written assurances, in form and substance satisfactory to the Company, that
(i) the proposed disposition does not require registration or qualification
of the Shares under the 1933 Act or any state securities laws or (ii) all
appropriate action necessary for compliance with the registration
requirements of the 1933 Act or any state securities laws or of any exemption
from registration available under the 1933 Act (including Rule 144) or any
state securities laws has been taken; and
(d) Purchaser shall have provided the Company with reasonable
written assurances, in form and substance satisfactory to the Company, that
the proposed disposition will not result in the contravention of any transfer
restrictions applicable to the Shares.
The Company shall NOT be required (i) to transfer on its books any
Shares which have been sold or transferred in violation of the provisions of
this Article II NOR (ii) to treat as the owner of the Shares, or otherwise to
accord voting, dividend or liquidation rights to, any transferee to whom the
Shares have been transferred in contravention of this Agreement.
3. RESTRICTIVE LEGENDS. In order to reflect the restrictions on
disposition of the Purchased Shares, the stock certificates for the Purchased
Shares will be endorsed with restrictive legends, including the following
legends:
(i) "THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS THERE
IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH
SECURITIES OR THE ISSUER RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO IT
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT."
(ii) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
THE TERMS AND CONDITIONS OF AN INVESTOR'S RIGHTS AGREEMENT AMONG THE ISSUER,
THE HOLDER OF THE SECURITIES EVIDENCED HEREBY (OR SUCH HOLDER'S PREDECESSOR
IN INTEREST) AND CERTAIN OTHER SHAREHOLDERS WHICH MAY RESTRICT THE
DISPOSITION OF SUCH SHARES FOLLOWING A PUBLIC OFFERING OF THE COMPANY'S
SECURITIES."
(iii) Any legends required by state securities laws.
C. REPURCHASE RIGHT
1. GRANT. The Company is hereby granted the right (the
"Repurchase Right"), exercisable at any time during the sixty (60) day period
following the date Optionee ceases for any reason to remain in Service or (if
later) during the sixty (60) day period following the execution date of this
Agreement, to repurchase at the Exercise Price any or all of the Purchased
Shares in which Optionee is not, at the time of his or her cessation of
Service, vested
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in accordance with the Vesting Schedule applicable to those shares or the
special vesting acceleration provisions of Paragraph C.6 of this Agreement
(such shares to be hereinafter referred to as the "Unvested Shares").
2. EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall be
exercisable by written notice delivered to each Owner of the Unvested Shares
prior to the expiration of the sixty (60) day exercise period. The notice
shall indicate the number of Unvested Shares to be repurchased and the date
on which the repurchase is to be effected, such date to be not more than
thirty (30) days after the date of such notice. The certificates representing
the Unvested Shares to be repurchased shall be delivered to the Company on or
before the close of business on the date specified for the repurchase.
Concurrently with the receipt of such stock certificates, the Company shall
pay to Owner, in cash or cash equivalents (including the cancellation of any
purchase-money indebtedness), an amount equal to the Exercise Price
previously paid for the Unvested Shares which are to be repurchased from
Owner.
3. TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right shall
terminate with respect to any Unvested Shares for which it is not timely
exercised under Paragraph C.2. In addition, the Repurchase Right shall
terminate and cease to be exercisable with respect to any and all Purchased
Shares in which Optionee vests in accordance with the Vesting Schedule. All
Purchased Shares as to which the Repurchase Right lapses shall, however,
remain subject to the Investors' Rights Agreement.
4. AGGREGATE VESTING LIMITATION. If the Option is exercised in
more than one increment so that Optionee is a party to one or more other
Stock Purchase Agreements (the "Prior Purchase Agreements") which are
executed prior to the date of this Agreement, then the total number of
Purchased Shares as to which Optionee shall be deemed to have a fully-vested
interest under this Agreement and all Prior Purchase Agreements shall not
exceed in the aggregate the number of Purchased Shares in which Optionee
would otherwise at the time be vested, in accordance with the Vesting
Schedule, had all the Purchased Shares (including those acquired under the
Prior Purchase Agreements) been acquired exclusively under this Agreement.
5. RECAPITALIZATION. Any new, substituted or additional securities
or other property (including cash paid other than as a regular cash dividend)
which is by reason of any Recapitalization distributed with respect to the
Purchased Shares shall be immediately subject to the Repurchase Right and any
escrow requirements hereunder, but only to the extent the Purchased Shares
are at the time covered by such right or escrow requirements. Appropriate
adjustments to reflect such distribution shall be made to the number and/or
class of Purchased Shares subject to this Agreement and to the price per
share to be paid upon the exercise of the Repurchase Right in order to
reflect the effect of any such Recapitalization upon the Company's capital
structure; provided, however, that the aggregate purchase price shall remain
the same.
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6. CORPORATE TRANSACTION.
(a) The Repurchase Right shall automatically terminate in its
entirety, and all the Purchased Shares shall vest in full, immediately prior
to the consummation of any Corporate Transaction, except to the extent the
Repurchase Right is to be assigned to the successor entity in such Corporate
Transaction.
(b) To the extent the Repurchase Right remains in effect
following a Corporate Transaction, such right shall apply to any new
securities or other property (including any cash payments) received in
exchange for the Purchased Shares in consummation of the Corporate
Transaction, but only to the extent the Purchased Shares are at the time
covered by such right. Appropriate adjustments shall be made to the price per
share payable upon exercise of the Repurchase Right to reflect the effect of
the Corporate Transaction upon the Company's capital structure; provided,
however, that the aggregate purchase price shall remain the same. The new
securities or other property (including any cash payments) issued or
distributed with respect to the Purchased Shares in consummation of the
Corporate Transaction shall be immediately deposited in escrow with the
Company (or the successor entity) and shall not be released from escrow until
Optionee vests in such securities or other property in accordance with the
same Vesting Schedule in effect for the Purchased Shares.
(c) The Repurchase Right shall also terminate on an accelerated
basis, and the Purchased Shares shall immediately vest in full, in the event
Optionee voluntarily resigns from the Board at the request of the Company's
Board of Directors or controlling shareholders, if Optionee is involuntarily
removed from the Board for any reason other than Misconduct, or if Optionee
is not re-elected to the Board for any reason other than Misconduct.
D. SPECIAL TAX ELECTION
The acquisition of the Purchased Shares may result in adverse tax
consequences which may be avoided or mitigated by filing an election under
Code Section 83(b). Such election must be filed within thirty (30) days after
the date of this Agreement. A description of the tax consequences applicable
to the acquisition of the Purchased Shares and the form for making the Code
Section 83(b) election are set forth in Exhibit II. OPTIONEE SHOULD CONSULT
WITH HIS OR HER TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES OF ACQUIRING
THE PURCHASED SHARES AND THE ADVANTAGES AND DISADVANTAGES OF FILING THE CODE
SECTION 83(b) ELECTION. OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE
RESPONSIBILITY, AND NOT THE COMPANY'S, TO FILE A TIMELY ELECTION UNDER CODE
SECTION 83(b), EVEN IF OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVES
TO MAKE THIS FILING ON HIS OR HER BEHALF.
E. GENERAL PROVISIONS
1. ASSIGNMENT. The Company may assign the Repurchase Right to any
person or entity selected by the Board, including (without limitation) one
or more shareholders of the Company.
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2. NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement or
in the Plan shall confer upon Optionee any right to continue in Service for
any period of specific duration or interfere with or otherwise restrict in
any way the rights of the Company (or any Parent or Subsidiary employing or
retaining Optionee) or of Optionee, which rights are hereby expressly
reserved by each, to terminate Optionee's Service at any time for any reason,
with or without cause.
3. NOTICES. Any notice required to be given under this Agreement
shall be in writing and shall be deemed effective upon personal delivery or
upon deposit in the U.S. mail, registered or certified, postage prepaid and
properly addressed to the party entitled to such notice at the address
indicated below such party's signature line on this Agreement or at such
other address as such party may designate by ten (10) days advance written
notice under this paragraph to all other parties to this Agreement.
4. NO WAIVER. The failure of the Company in any instance to
exercise the Repurchase Right shall not constitute a waiver of any other
repurchase rights and/or rights of first refusal that may subsequently arise
under the provisions of this Agreement or any other agreement between the
Company and Optionee. No waiver of any breach or condition of this Agreement
shall be deemed to be a waiver of any other or subsequent breach or
condition, whether of like or different nature.
5. CANCELLATION OF SHARES. If the Company shall make available, at
the time and place and in the amount and form provided in this Agreement, the
consideration for the Purchased Shares to be repurchased in accordance with
the provisions of this Agreement, then from and after such time, the person
from whom such shares are to be repurchased shall no longer have any rights
as a holder of such shares (other than the right to receive payment of such
consideration in accordance with this Agreement). Such shares shall be deemed
purchased in accordance with the applicable provisions hereof, and the
Company shall be deemed the owner and holder of such shares, whether or not
the certificates therefor have been delivered as required by this Agreement.
6. OPTIONEE UNDERTAKING. Optionee hereby agrees to take whatever
additional action and execute whatever additional documents the Company may
deem necessary or advisable in order to carry out or effect one or more of
the obligations or restrictions imposed on either Optionee or the Purchased
Shares pursuant to the provisions of this Agreement.
7. AGREEMENT IS ENTIRE CONTRACT. This Agreement and the Option
Agreement constitute the entire contract between the parties hereto with
regard to the subject matter hereof.
8. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California without
resort to that State's conflict-of-laws rules.
9. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which together
shall constitute one and the same instrument.
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10. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall
inure to the benefit of, and be binding upon, the Company and its successors
and assigns and upon Optionee, Optionee's permitted assigns and the legal
representatives, heirs and legatees of Optionee's estate, whether or not any
such person shall have become a party to this Agreement and have agreed in
writing to join herein and be bound by the terms hereof.
IN WITNESS WHEREOF, the parties have executed this Series C
Preferred Stock Purchase Agreement on the day and year first indicated above.
COMPANY:
NETZERO, INC.
a California corporation
/s/ RONALD T. BURR
-----------------------------------------
By: Ronald T. Burr
Its President
PURCHASER:
/s/ DAVID C. BOHNETT
-----------------------------------------
David C. Bohnett
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SERIES B PREFERRED STOCK PURCHASE AGREEMENT
This Series B Preferred Stock Purchase Agreement (the
"AGREEMENT") is made as of January 1, 1999, by and between NetZero, Inc., a
California corporation (the "COMPANY"), and David C. Bohnett Living Trust Dtd
11/22/96 ("PURCHASER").
WHEREAS, Purchaser wishes to purchase shares of Series B
Preferred Stock of the Company upon the terms and subject to the conditions
of this Agreement.
NOW THEREFORE, in consideration of the premises and the
mutual covenants contained herein and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties
agree as follows:
I. PURCHASE OF SHARES
1.1 PRICE. Purchaser hereby agrees to purchase 67,507
shares of Series B Preferred Stock of the Company (the "Shares") at a price
of $0.2222 per Share. The aggregate purchase price for the Shares shall be
$15,000.01.
1.2 FORM OF PAYMENT. Purchaser shall pay the purchase price
for the Shares by delivering good funds in United States dollars to the
Company. Such delivery of funds shall be made against delivery by the Company
of a certificate for the Shares.
1.3 RIGHT, PREFERENCES AND PRIVILEGES. The Series B
Preferred Stock of the Company shall have the rights, preferences and
privileges set forth in the Company's Amended and Restated Articles of
Incorporation filed with the Secretary of the State of California on
September 3, 1998.
II. SECURITIES LAW COMPLIANCE
2.1 EXEMPTION FROM REGISTRATION. Purchaser acknowledges
that the Shares are not being registered under the Securities Act of 1933, as
amended (the "1933 ACT"), based, in part, on reliance that the issuance of
the Shares is exempt from registration under Section 4(2) of the 1933 Act as
not involving any public offering. Purchaser further acknowledges that the
Company's reliance on such exemption is predicated, in part, on the
representations set forth below made by Purchaser to the Company:
(a) Purchaser is acquiring the Shares solely for his
own account, for investment purposes only, and not with an intent to sell, or
for resale in connection with any distribution of all or any portion of the
Shares within the meaning of the 1933 Act;
(b) Purchaser is an "Accredited Investor" as that term
is defined in Rule 501 of the General Rules and Regulations under the
Securities Act of 1933;
(c) In evaluating the merits and risks of an
investment in the Shares, Purchaser has relied upon the advice of Purchaser's
legal counsel, tax advisors, and/or other investment advisors;
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(d) Purchaser is experienced in evaluating and
investing in companies such as the Company. In addition, Purchaser has a
preexisting business relationship with the Company. Purchaser has been given
access to all books, records and other information of the Company which
Purchaser has desired to review and analyze in connection with Purchaser's
purchase of the Shares hereunder;
(e) Purchaser is aware that an investment in
securities of a closely held corporation such as the Company is
non-marketable, non-transferable and will require Purchaser's capital to be
invested for an indefinite period of time, possibly without return. Purchaser
has no need for liquidity in this investment, has the ability to bear the
economic risk of this investment, and can afford a complete loss of the
entire purchase price paid for the Shares;
(f) Purchaser understands that the Shares being
purchased hereunder are characterized as "restricted securities" under the
federal securities laws since the Shares are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration
under the 1933 Act only in certain limited circumstances. Purchaser
understands that the Company has no obligation to file a registration
statement under the 1933 Act for the Shares or to otherwise assist Purchaser
in complying with any exemption from registration. Purchaser represents that
Purchaser is familiar with Rule 144 promulgated under the 1933 Act, as
presently in effect, and understands the resale limitations imposed thereby
and by the 1933 Act; and
(g) At no time was an oral representation made to
Purchaser relating to the purchase of the Shares or was Purchaser presented
with or solicited by any leaflet, public or promotional material, newspaper
or magazine article, radio or television advertisement or any other form of
general advertising relating to the purchase hereunder.
2.2 DISPOSITION OF SHARES. Purchaser hereby agrees that
Purchaser shall make no disposition of the Shares unless and until:
(a) Purchaser shall have notified the Company of the
proposed disposition and provided a written summary in reasonable detail of
the terms and conditions of the proposed disposition;
(b) Purchaser shall have complied with all
requirements of this Agreement applicable to the disposition of the Shares;
(c) Purchaser shall have provided the Company with
reasonable written assurances, in form and substance satisfactory to the
Company, that (i) the proposed disposition does not require registration or
qualification of the Shares under the 1933 Act or any state securities laws
or (ii) all appropriate action necessary for compliance with the registration
requirements of the 1933 Act or any state securities laws or of any exemption
from registration available under the 1933 Act (including Rule 144) or any
state securities laws has been taken; and
(d) Purchaser shall have provided the Company with
reasonable written assurances, in form and substance satisfactory to the
Company, that the proposed
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disposition will not result in the contravention of any transfer restrictions
applicable to the Shares.
The Company shall NOT be required (i) to transfer on its
books any Shares which have been sold or transferred in violation of the
provisions of this Article II NOR (ii) to treat as the owner of the Shares,
or otherwise to accord voting, dividend or liquidation rights to, any
transferee to whom the Shares have been transferred in contravention of this
Agreement.
2.3 RESTRICTIVE LEGENDS. In order to reflect the
restrictions on disposition of the Shares, the stock certificates for the
Shares will be endorsed with restrictive legends, including the following
legends:
(i) "THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS
THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH
SECURITIES OR THE ISSUER RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO IT
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT."
(ii) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO THE TERMS AND CONDITIONS OF AN INVESTOR'S RIGHTS AGREEMENT AMONG
THE ISSUER, THE HOLDER OF THE SECURITIES EVIDENCED HEREBY (OR SUCH HOLDER'S
PREDECESSOR IN INTEREST) AND CERTAIN OTHER SHAREHOLDERS WHICH MAY RESTRICT
THE DISPOSITION OF SUCH SHARES FOLLOWING A PUBLIC OFFERING OF THE COMPANY'S
SECURITIES."
(iii) Any legends required by state securities laws.
III. GENERAL PROVISIONS.
3.1 NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this
Agreement shall confer upon Purchaser any right to continue in the service of
the Company (or any parent or subsidiary corporation of the Company employing
or retaining Purchaser) for any period of specific duration or interfere with
or restrict in any way the rights of the Company (or any parent or subsidiary
corporation of the Company employing or retaining Purchaser) or Purchaser,
which rights are hereby expressly reserved by each, to terminate the Employee
status of Purchaser at any time for any reason whatsoever, with or without
cause.
3.2 NOTICES. Any notice required hereunder shall be given
in writing and shall be deemed effective upon personal delivery or upon
deposit in the United States mail, registered or certified, postage prepaid
and addressed to the party entitled to such notice at the address indicated
below such party's signature line on this Agreement or at such other address
as such party may designate by ten days advance written notice under this
Section 3.2 to all other parties to this Agreement.
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3.3 NO WAIVER. No waiver of any breach or condition of this
Agreement shall be deemed to be a waiver of any other or subsequent breach or
condition, whether of like or different nature.
3.4 PURCHASER UNDERTAKING. Purchaser hereby agrees to take
whatever additional action and execute whatever additional documents the
Company may in its judgment deem necessary or advisable in order to carry out
or effect one or more of the obligations or restrictions imposed on either
Purchaser or the Shares pursuant to the express provisions of this Agreement.
3.6 AGREEMENT IS ENTIRE CONTRACT. This Agreement
constitutes the entire contract between the parties hereto with regard to the
subject matter hereof.
3.7 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California, as such
laws are applied to contracts entered into and performed in such state
without resort to that state's conflict-of-laws rules.
3.8 COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
3.9 SUCCESSORS AND ASSIGNS. The provisions of this
Agreement shall inure to the benefit of, and be binding upon, the Company and
its successors and assigns and Purchaser and Purchaser's legal
representatives, heirs, legatees, distributees, assigns and transferees by
operation of law, whether or not any such person shall have become a party to
this Agreement and have agreed in writing to join herein and be bound by the
terms and conditions hereof.
3.10 RIGHT TO SPECIFIC PERFORMANCE. Purchaser agrees that
the Company shall be entitled to a decree of specific performance of the
terms hereof or an injunction restraining violation of this Agreement, said
right to be in addition to any other remedies available to the Company.
3.11 SEVERABILITY. If one or more provisions of this
Agreement are held to be unenforceable under applicable law, such provision
shall be excluded from this Agreement and the balance of the Agreement shall
be interpreted as if such provision were so excluded and shall be enforceable
in accordance with its terms.
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IN WITNESS WHEREOF, the parties have executed this Series B
Preferred Stock Purchase Agreement as of the date first written above.
COMPANY:
NETZERO, INC.
a California corporation
/s/ RONALD T. BURR
----------------------------
By: Ronald T. Burr
Its Chief Executive Officer
PURCHASER:
/s/ DAVID C. BOHNETT
----------------------------
By: David C. Bohnett, as Trustee of
David C. Bohnett Living Trust Dtd
11/22/96
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CONVERTIBLE SUBORDINATED NOTE AND WARRANT PURCHASE
AGREEMENT
This Convertible Subordinated Note and Warrant Purchase Agreement (this
"Agreement") is made and entered into as of January 15, 1999 by and among
NetZero, Inc., a California corporation (the "Company"), and the entities
listed on Exhibit A attached hereto (the "Purchasers").
The Company desires to issue and sell and the Purchasers desire to
purchase promissory notes in the form attached hereto as EXHIBIT B (the
"Notes") and warrants to purchase shares of capital stock of the Company in
the form attached hereto as EXHIBIT C (the "Warrants") as further described
herein.
In consideration of the mutual promises contain herein, the parties
agree as follows:
1. Sale of Notes and Warrants:
1.1 COMMITMENT. Subject to the terms and conditions of this
Agreement, the Purchasers agree to purchase from the Company and the Company
agrees to sell and issue to the Purchasers the Notes and the Warrants. The
purchase price of each Note shall be equal to 100% of the principal amount of
such Note as specified on the Schedule of Purchasers attached hereto as
EXHIBIT A and the purchase price of the Warrant to be issued to each
Purchaser shall be as specified on the Schedule of Purchasers, for a purchase
price for each Warrant of $0.01 per share issuable upon exercise of the
Warrant, which amount the parties have determined in good faith, after
consultation with their advisors, to be the fair value of each Warrant. For
purposes of this Agreement, an "Equity Financing" shall have the meaning
given to it in the Note.
1.2 CLOSING. The closing of the purchase and sale of the Notes and
the Warrants hereunder shall be made pursuant to one or more closings (each
of which is a "Closing") held within 60 days of the date hereof, with the
first such closing to be held at the offices of the Company, at 10:00 a.m. on
January 15, 1999 (the "First Closing') or at such other time and place as the
parties shall agree (the date of a Closing is hereinafter referred to as a
"Closing Date"). At the Closing, the Company shall deliver to each Purchaser
the Note and the Warrant to be purchased by such Purchaser against payment of
the purchase price for the Note and the Warrant by cash, check or wire
transfer to a bank account designated by the Company. Any person or entity
who purchases any Notes or Warrants after the First Closing shall become a
party to this Agreement and shall be added to the list of purchasers. The
Company's agreements with each of the Purchasers are separate agreements and
the sale of the Notes and the Warrants to each Purchaser are separate sales.
2. PURCHASE OF STOCK:
2.1 EQUITY FINANCING. If an Equity Financing is completed on or
before June 30, 1999, (a) up to the total amount of the unpaid principal
amount of the Note and any accrued but unpaid interest will automatically be
converted into shares of the Company's capital
<PAGE>
stock (the "New Stock") sold in the Financing upon the terms and conditions
set forth in the Note and (b) at the closing of an Equity Financing, each
Purchaser will execute a stock purchase agreement substantially similar to
that executed by other purchasers of the New Stock in an Equity Financing. If
the Company does not complete an Equity Financing on or before June 30, 1999,
(x) the unpaid principal amount of the Note and any accrued but unpaid
interest will automatically be converted into shares of the Company's Series
B Preferred Stock in the' manner set forth in the Note attached hereto as
EXHIBIT B.
2.2 CONDITIONS TO CLOSING; REGISTRATION RIGHTS. The obligations of
the Company to issue shares of New Stock and the obligations of each
Purchaser to purchase such stock as described in Section 2.1 above are
subject to the conditions that:
(a) The Company shall have obtained all requisite approvals of
and made all required filings with applicable federal and state securities
and corporate law authorities;
(b) The Company shall have obtained all appropriate Board and
stockholder consents, waivers and approvals required in connection with the
transaction;
(c) Each Purchaser and the Company shall have executed a stock
purchase agreement covering the sale of shares of New Stock substantially
similar to that executed by the other purchasers in the Equity Financing; and
(d) Such stock purchase agreement shall grant each Purchaser
rights with respect to registration under the Securities Act of 1933, as
amended (the "Securities Act"), of shares of New Stock or of shares of Common
Stock issued or issuable to such Purchaser upon conversion of the New Stock,
as the case may be, issued upon conversion of such Purchaser's Note, which
registration rights shall be substantially identical to those granted to the
other purchasers in the Equity Financing.
2.3 BEST EFFORTS. The Company and the Purchasers will use their best
efforts promptly to fulfill all of the conditions described in Section 2.2
above.
2.4 ISSUANCE OF SECURITIES ON CONVERSION. As soon as practicable
after conversion of each Note, the Company at its expense will cause to be
issued in the name of and delivered to the holder of the Note, a certificate
or certificates for the number of fully paid and non-assessable shares of New
Stock of the Company to which that holder shall be entitled on such
conversion, together with any other securities and property to which the
holder is entitled on conversion under the terms of this Agreement. No
fractional shares will be issued on conversion of the Note. If on conversion
of the Note a fraction of a share results, the Company will pay the cash
value of that fractional share, calculated on the basis of the applicable
conversion price.
3. REPRESENTATIONS OF THE PURCHASERS:
Each Purchaser hereby represents and warrants to the Company that:
-2-
<PAGE>
3.1 AUTHORIZATION. This Agreement, when executed and delivered by the
Purchaser, will constitute valid and legally binding obligations of the
Purchaser, enforceable in accordance with its terms, except as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, and any other laws of general application affecting enforcement
of creditors' rights generally, and as limited by laws relating to the
availability of a specific performance, injunctive relief, or other equitable
remedies.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT; ACCREDITED INVESTOR. This
Agreement is made with the Purchaser in reliance upon the Purchaser's
representation to the Company, which by the Purchaser's execution of this
Agreement the Purchaser hereby confirms, that (i) the Notes, the Warrants,
the Preferred Stock issuable upon conversion of the Notes and exercise of the
Warrants and the Common Stock issuable upon conversion of the Preferred Stock
(collectively the "Securities") to be acquired by the Purchaser will be
acquired for investment for the Purchaser's own account, not as a nominee or
agent, and not with a view to the resale or distribution of any part thereof,
and that the Purchaser has no present intention of selling, granting any
participation in, or otherwise distributing the same and (ii) that the
Purchaser is an "accredited investor" as such term is defined under the
Securities Act. By executing this Agreement, the Purchaser further represents
that the Purchaser does not presently have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of
the Securities. The Purchaser represents that it has full power and authority
to enter into this Agreement. Either (i) the Purchaser has not been formed
for the specific purpose of acquiring the Securities or (ii) if the Purchaser
has been formed for the specific purpose of acquiring the Securities, each
person or entity that has an interest in the Purchaser is an accredited
investor.
3.3 DISCLOSURE OF INFORMATION. The Purchaser has had an opportunity
to discuss the Company's business, management, financial affairs and the
terms and conditions of the offering of the Stock with the Company's
management and has had an opportunity to review the Company's facilities. The
Purchaser understands that such discussions, as well as the written
information issued by the Company, were intended to describe the aspects of
the Company's business which it believes to be material.
3.4 RESTRICTED SECURITIES. The Purchaser understands that the
Securities have not been, and will not be, registered under the Securities
Act, by reason of a specific exemption from the registration provisions of
the Securities Act which depends upon, among other things, the bona fide
nature of the investment intent and the accuracy of the Purchaser's
representations as expressed herein. The Purchaser understands that the
Securities are "restricted securities" under applicable U.S. federal and
state securities laws and that, pursuant to these laws, the Purchaser must
hold the Securities indefinitely unless they are registered with the
Securities and Exchange Commission and qualified by state authorities, or an
exemption from such registration and qualification requirements is available.
The Purchaser acknowledges that the Company has no obligation to register or
qualify the Securities for resale. The Purchaser further acknowledges that if
an exemption from registration or qualification is available, it may be
conditioned on various requirements including, but not limited to, the time
and manner of sale, the holding period for the Securities, and on
requirements relating to the Company which are outside of the
-3-
<PAGE>
Purchaser's control, and which the Company is under no obligation and may not
be able to satisfy.
3.5 NO PUBLIC MARKET. The Purchaser understands that no public market
now exists for any of the securities issued by the Company, and that the
Company has made no assurances that a public market will ever exist for the
Securities.
3.6 LEGENDS. The Purchaser understands that the Securities, and any
securities issued in respect of or exchange for the Securities, may bear one
or all of the following legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN
A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED
UNDER THE SECURITIES ACT OF 1933."
(b) Any legend required by the Blue Sky laws of any state to
the extent such laws are applicable to the shares represented by the
certificate so legended.
3.7 LEGAL ADVICE. The Purchaser has had the opportunity to consult
with his or her counsel regarding the matters relevant to this Agreement and
the transactions contemplated hereby.
4. GENERAL PROVISIONS:
4.1 ENTIRE AGREEMENT. This Agreement, together with its exhibits, re
resents the entire agreement between the Company and the Purchasers,
supersedes all prior agreements and understandings, and this Agreement and
the Notes and Warrants issued hereunder may only be amended in writing signed
by the Company and the holders of over fifty percent (50%) of the
indebtedness represented by the Notes. Furthermore, the terms and provisions
of a Note or Warrant may not be amended in a manner different than any other
Note or Warrant, as applicable, without the written consent of the holder of
such Note or Warrant and that of the holders of over fifty percent (50%) of
the indebtedness represented by the Notes. Any amendment or waiver of this
Agreement, the Notes or Warrants effected in accordance with this Agreement
shall be binding upon each Purchaser under this Agreement.
4.2 ASSIGNMENT. This Agreement shall bind and benefit the successors,
assigns, heirs, executors and administrators of the parties (including
without limitation any successor corporation to the Company). The rights of
each Purchaser under this Agreement may not be assigned without the written
consent of the Company.
4.3 GOVERNING LAW. This Agreement shall be governed in all respects
by the laws of the State of California.
-4-
<PAGE>
4.4 NOTICES. All notices and other communications required or
permitted hereunder shall be in writing and shall be delivered personally or
transmitted by telex or facsimile, or, if sent within the U.S., mailed by
first-class mail, postage prepaid, addressed (i) if to a Purchaser, at the
Purchaser's address set forth below its signature, or at such other address
as the Purchaser shall have furnished to the Company in writing, or (ii) if
to the Company, at its address set forth below, or at such other address as
the Company shall have furnished to the Purchaser in writing. All notices
shall be deemed effectively delivered upon delivery or transmission or three
days after mailing.
4.5 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
[SIGNATURE PAGES FOLLOW]
-5-
<PAGE>
The parties hereto have executed this Agreement as of the day and year
first set forth above.
COMPANY:
NETZER0, INC.
By: /s/ Ronald T. Burr
----------------------------------
Ronald T. Burr, President and
Chief Executive Officer
Address: 31416 Agoura Road, Suite 150
Westlake Village, CA 91362
SIGNATURE PAGE TO NETZERO, INC.
CONVERTIBLE SUBORDINATED NOTE AND WARRANT PURCHASE
AGREEMENT
<PAGE>
PURCHASERS:
IDEALAB! CAPITAL PARTNERS I-A, L.P.
By: /s/ William S. Elkus
--------------------------------
Name: William S. Elkus
Title: Manacuna Member,
idealab! Capital Management I, LLC,
General Partner of idealab!
Capital Partners I-A, LP
IDEALAB! CAPITAL PARTNERS I-B, L.P.
By: /s/ William S. Elkus
---------------------------------
Name: William S. Elkus
Title: Managing Member,
idealab! Capital Management I, LLC,
General Partner of idealab!
Capital Partners I-B, LP
SIGNATURE PAGE TO NETZERO, INC.
CONVERTIBLE SUBORDINATED NOTE AND WARRANT PURCHASE
AGREEMENT
<PAGE>
EXHIBIT A
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
DOLLAR AMOUNT
NAME OF INVESTMENT
- ----------------------------------- ---------------------
<S> <C>
idealab! Capital Partners I-A, LP $22,360.00
idealab! Capital Partners I-B, LP $77,640.00
TOTAL: $100,000.00
</TABLE>
<PAGE>
EXHIBIT B
FORM OF CONVERTIBLE PROMISSORY NOTE
<PAGE>
THIS SUBORDINATED CONVERTIBLE PROMISSORY NOTE AND THE SECURITIES ISSUABLE
HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE
BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH,
THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF
COUNSEL FOR THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE
SECURITIES ACT OF 1933.
- -------------------------------------------------------------------------------
JANUARY 15, 1999
WESTLAKE VILLAGE, CALIFORNIA
NETZERO, INC.
CONVERTIBLE SUBORDINATED PROMISSORY NOTE
FOR THE VALUE RECEIVED, NetZero, Inc., a California corporation (the
"Company"), promises to pay to _______________________________________________
("Holder"), the principal sum of $___________. Interest shall accrue from the
date of this note on the unpaid principal amount at the rate of eight percent
(8.00%) per annum until paid, compounded annually. Such principal amount,
together with accrued but unpaid interest, shall be payable on demand by the
Holder of this Note after June 30, 1999, except as otherwise set forth below
or unless earlier converted in accordance with Section 2 of this Note. Any
term not otherwise defined herein shall have the meaning given to it in that
certain Convertible Subordinated Promissory Note Purchase Agreement dated as
of the date hereof.
1. PAYMENT. All payments shall be made in lawful tender of the
United States of America at such place as the Holder hereof may from time to
time designate in writing to the Company. Payment shall be credited first to
the accrued interest then due and payable and the remainder applied to
principal.
2. AUTOMATIC CONVERSION. Notwithstanding the foregoing, if the
Company consummates an equity financing (in one or a series of closings)
after the date of this Note but on or prior to June 30, 1999 resulting in
gross aggregate proceeds to the Company of at least Two Million Dollars
($2,000,000) (an "Equity Financing"), then the unpaid principal amount of the
Note and any accrued but unpaid interest shall be automatically converted
into fully paid and nonassessable shares of the Company's capital stock (the
"New Stock") sold in such financing. The number of shares of New Stock to be
issued upon such automatic conversion shall be equal to the quotient obtained
by dividing (x) the unpaid principal amount of this Note plus any accrued but
unpaid interest by (y) the price per share of the shares of New Stock. Any
New Stock to be issued to the Holder shall have the same rights preferences
and privileges as those applicable to shares issued in the Equity Financing.
1
<PAGE>
If an Equity Financing is not consummated on or prior to June 30,
1999, then the unpaid principal amount of the Note and any accrued but unpaid
interest shall be automatically converted into fully paid and nonassessable
shares of the Company's Series B Preferred Stock ("SERIES B PREFERRED
STOCK"), which shall have rights, preferences and privileges identical to
those of the Company's Series A Preferred, which shall be as set forth in the
Company's Certificate of Incorporation. The number of shares of Series B
Preferred Stock to be issued upon such automatic conversion shall be equal to
the quotient obtained by dividing (a) the unpaid principal amount of this
Note plus any accrued but unpaid interest by (b) $0.2222 (as appropriately
adjusted for stock splits, stock dividends, combinations and the like).
3. SUBORDINATION. The indebtedness evidenced by this Note is hereby
expressly subordinated, to the extent and in the manner hereinafter set forth,
in right of payment to the prior payment in full of all the Company's Senior
Indebtedness, as hereinafter defined.
3.1 SENIOR INDEBTEDNESS. As used in this Note, the term "SENIOR
INDEBTEDNESS" shall mean the principal of and unpaid accrued interest on (i)
indebtedness of the Company or with respect to which the Company is a
guarantor, to banks, insurance companies, lease financing institutions or
other financial institutions regularly engaged in the business of lending
money, which is for money borrowed (or purchase or lease of equipment in the
case of lease financing) by the Company (whether or not secured) in the
ordinary course of business, and (ii) any such indebtedness or any
debentures, notes or other evidence of indebtedness issued in exchange for
such Senior Indebtedness, or any indebtedness arising from the satisfaction
of such Senior Indebtedness by a guarantor.
3.2 DEFAULT ON SENIOR INDEBTEDNESS. If there re should occur any
receivership, insolvency, assignment for the benefit of creditors,
bankruptcy, reorganization or arrangements with creditors (whether or not
pursuant to bankruptcy or other insolvency laws), sale of all or
substantially all of the assets, dissolution, liquidation or any other
marshaling of the assets and liabilities of the Company, or if this Note
shall be declared due and payable upon the occurrence of an event of default
with respect to any Senior Indebtedness, then (i) no amount shall be paid by
the Company in respect of the principal of or interest on this Note at the
time outstanding, unless and until the principal of and interest on the
Senior Indebtedness then outstanding shall be paid in full, and (ii) no claim
or proof of claim shall be filled with the Company by or on behalf of the
Holder of this Note that shall assert any right to receive any payments in
respect of the principal of and interest on this Note, except subject to the
payment in full of the principal of and interest on all of the Senior
Indebtedness then outstanding. If there occurs an event of default that has
been declared in writing with respect to any Senior Indebtedness, or in the
instrument under which any Senior Indebtedness is outstanding, permitting the
holder of such Senior Indebtedness to accelerate the maturity thereof, then,
unless and until such event of default shall have been cured or waived or
shall have ceased to exist, or all Senior Indebtedness shall have been paid
in full, no payment shall be made in respect of the principal of or interest
on this Note, unless within 90 days after the happening of such event of
default, the maturity of such Senior Indebtedness shall not have been
accelerated.
2
<PAGE>
3.3 EFFECT OF SUBORDINATION. Subject to the rights, if any, of
the holders of Senior Indebtedness under this Section 3 to receive cash,
securities or other properties otherwise payable or deliverable to the Holder
of this Note, nothing contained in this Section 3 shall impair, as between
the Company and the Holder, the obligation of the Company, subject to the
terms and conditions hereof, to pay to the Holder the principal hereof and
interest hereon as and when the same become due and payable, or shall prevent
the Holder of this Note, upon default hereunder, from exercising all rights,
powers and remedies otherwise provided herein or by applicable law.
3.4 SUBROGATION. Subject to the payment in full of all Senior
Indebtedness and until this Note shall be paid in full, the Holder shall be
subrogated to the rights of the holders of Senior Indebtedness (to the extent
of payments or distributions previously made to such holders of Senior
Indebtedness pursuant to the provisions of Section 3 above) to receive
payments or distributions of assets of the Company applicable to the Senior
Indebtedness. No such payments or distributions applicable to the Senior
Indebtedness shall, as between the Company and its creditors, other than the
holders of Senior Indebtedness and the Holder, be deemed to be a payment by
the Company to or on account of this Note; and for the purposes of such
subrogation, no payments or distributions to the holders of Senior
Indebtedness to which the Holder would be entitled except for the provisions
of this Section 3 shall, as between the Company and its creditors, other than
the holders of Senior Indebtedness and the Holder, be deemed to be a payment
by the Company to or on account of the Senior Indebtedness.
3.5 UNDERTAKING. By its acceptance of this Note, the Holder
agrees to execute and deliver such documents as may be reasonably requested
from time to time by the Company or the lender of any Senior Indebtedness in
order to implement the foregoing provisions of this Section 3. The provisions
of this Paragraph 3 shall bind any successors or assignees of Holder and
shall benefit any successors or assigns of Bank, and, if the Company
refinances a portion of the Senior Debt with a new lender, such new lender
shall be deemed a successor of Bank for the purposes of this Paragraph 3.
This Paragraph 3 is solely for the benefit of Holder and Bank and not for the
benefit of the Company or any other party. The provisions of this Paragraph 3
may be amended only by written instrument signed by Holder and Bank. In the
event of any legal action to enforce the rights of a party under this
Paragraph 3, the party prevailing in such action shall be entitled, in
addition to such other relief as may be granted, all reasonable costs and
expenses, including reasonable attorneys' fees, incurred in such action.
4. MISCELLANEOUS.
4.1 COSTS. If action is instituted to collect this Note by
Holder, the Company hereby agrees to pay all costs and expenses, including
reasonable attorneys' fees, incurred by Holder in connection with such action.
4.2 DELAY. No extension of time for payment of any amount
owing hereunder shall affect the liability of the Company for payment of the
indebtedness evidenced hereby. No delay by the Holder or any holder hereof in
exercising any power or right hereunder shall operate as a waiver of any power
or right hereunder.
3
<PAGE>
4.3 WAIVER AND AMENDMENT. No waiver or modification of the terms
of this Note shall be valid without the written consent of the holders of
over fifty percent (50%) of the indebtedness represented by this Note and all
other Notes issued by the Company pursuant to the Note Agreement; provided,
however, that any such waiver or modification of Paragraph 3 shall require
the written consent of any holder of Senior Indebtedness and provided,
further, that the terms and provisions of this Note shall not be amended in a
manner different than any other Note without the consent of the Holder and of
the holders of over fifty percent (50%) of the indebtedness represented by
all Notes issued by the Company pursuant to the Note Agreement.
4.4 GOVERNING LAW. This Note shall be governed by and construed
in accordance with the laws of the State of California as applied to
contracts entered into between California residents wholly to be performed in
California.
4.5 SEVERABILITY. In case any provision contained herein (or part
thereof) shall for any, reason be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or other
unenforceability shall not affect any other provision (or the remaining part
of the affected provision) hereof, but this Note shall be construed as if
such invalid, illegal, or unenforceable provision (or part thereof) had never
been contained herein, but only to the extent that such provision is invalid,
illegal, or unenforceable.
4.6 NOTICE. Any notice or other communication required or
permitted hereunder shall be in writing, and shall be deemed to have been
duly given on the date of service if served personally or by facsimile, or
five days after the date of mailing if mailed, by first class mail,
registered or certified, postage prepaid. Notices shall be addressed as
follows:
To Holder at: idealab! Capital Partners
130 W. Union Street
Pasadena, CA 91103
To Company at: NetZero, Inc.
416 Agoura Road, Suite 150
Westlake Village, CA 91362
Attention: President
or to such other address as a party has designated by notice in writing to
the other party in the manner provided by this Section 4.6.
[SIGNATURE PAGE FOLLOWS]
4
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be duly
executed and delivered by its authorized officer as of the date first above
written.
COMPANY:
NETZERO, INC.
By:
----------------------------------
HOLDER:
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
5
<PAGE>
EXHIBIT C
FORM OF WARRANT
<PAGE>
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A
VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH
SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
Warrant No. WB- I Number of Shares: _______
Date of Issuance: January 15, 1999 Subject To Adjustment in
The Manner Described Below
NETZERO, INC.
STOCK PURCHASE WARRANT
NetZero, Inc., a California corporation (the "COMPANY") for value
received, hereby certifies that ___________________________________ or its
registered assigns (the "REGISTERED HOLDER"), is entitled, subject to the
terms set forth below, to purchase from the Company, at any time after the
date hereof and on or before the earliest December 31, 2002, (ii) the closing
of the Company's sale of all or substantially all of its as assets or the
acquisition of the Company by another entity by means of merger or other
transaction as a result of which stockholders of the Company immediately
prior to such acquisition, possess a minority of the voting power of the
acquiring entity immediately following such acquisition, or (iii) the closing
of the initial public offering of the Company's Common Stock pursuant a
registration statement under the Securities Act of 1933, as amended (the
"SECURITIES ACT"), at a price per share equal to the Purchase Price (as
defined below) that number of shares of Preferred Stock (as defined below)
equal to the quotient obtained by dividing (A) the product of (x) one tenth
of the total original principal dollar amount represented by the Note and (y)
one (1) plus the number of full monthly periods, up to a maximum of 5 of such
periods, that have expired from and after January 1, 1999 prior to the
consummation of an Equity Financing by (B) the Purchase Price of the
Preferred. The Purchase Price and the number and character of shares of
Preferred Stock purchasable under this Warrant are subject to adjustment from
time to time pursuant to the provisions of this Warrant. The number of shares
of Preferred Stock purchasable upon exercise of this Warrant is hereinafter
referred to from time to time as the "WARRANT STOCK."
1. CERTAIN DEFINITIONS. The following definitions shall apply for purposes
of this Warrant:
(a) "EQUITY FINANCING" shall have the same meaning as set forth in
the Purchase Agreement.
1
<PAGE>
(b) "PREFERRED STOCK" shall mean (i) the shares of the Company's
preferred stock issued and sold in the Equity Financing on or prior to June
30, 1999, or (ii) if the Company does not complete an Equity Financing on or
prior to June 30, 1999, the Company's Series B Preferred Stock, as such term
is defined in the Purchase Agreement.
(c) "PURCHASE AGREEMENT" shall mean that certain Convertible
Subordinated Promissory Note and Warrant Purchase Agreement, dated December
__, 1998, by and among the Company and the Registered Holder.
(d) "PURCHASE PRICE" shall mean (i) an amount equal to the price per
share at which shares of Preferred Stock are issued and sold in the Equity
Financing, if such Equity Financing occurs on or prior to June 30, 1999 or
(ii) $0.2222 per share (as appropriately adjusted for stock splits,
dividends, combinations and the like) if the Company does not consummate an
Equity Financing on or prior to June 30, 1999.
2. EXERCISE.
(a) This Warrant may be exercised by the Registered Holder, in whole
or in part, by surrendering this Warrant, with the purchase form appended
hereto as EXHIBIT A duly executed by such Registered Holder or by such
Registered Holder's duly authorized attorney, at the principal office of the
Company, or at such other office or agency as the Company may designate,
accompanied by payment in full by cash, check or wire transfer of the
Purchase Price payable in respect of the number of shares of Warrant Stock
purchased upon such exercise.
(b) Each exercise of this Warrant shall be deemed to have been
effected immediately prior to the close of business on the day on which this
Warrant shall have been surrendered to the Company as provided in Section
2(a) above. At such time, the person or persons in whose name or names any
certificates for Warrant Stock shall be issuable upon such exercise as
provided in Section 2(d) below shall be deemed to have become the holder or
holder's of record of the Warrant Stock represented by such certificates.
(c) NET ISSUE EXERCISE.
(i) In the event that this is Warrant is exercised immediately
prior to the closing of the Company's sale of all or substantially all of its
assets or the acquisition of the Company by another entity by means of merger
or other transaction as a result of which shareholders of the Company
immediately prior to such acquisition possess a minority of the voting power
of the acquiring entity immediately following such acquisition (an
"ACQUISITION"), or the closing of the initial public offering of the
Company's Common Stock pursuant to a registration statement under the
Securities Act (the "INITIAL PUBLIC OFFERING"), in lieu of exercising this
Warrant in the manner provided above in Section 2(a), the Registered Holder
may elect to receive shares equal to the value of this Warrant (or the
portion thereof being canceled) by surrender of this Warrant at the principal
office of the Company together with notice of such election in which event
the Company shall issue to holder a number of shares of Preferred Stock
computed using the following formula:
2
<PAGE>
X Y (A - B)
---------
A
Where X = The number of shares of Preferred Stock to be issued to the
Registered Holder.
Y = The number of shares of Preferred Stock purchasable
under this Warrant (at the date of such calculation).
A = The fair market value of one share of Preferred Stock (at
the date of such calculation).
B = The Purchase Price (as adjusted to the date of such
calculation).
(ii) For purposes of this Section 2(c), the fair market value of
the Company's Preferred Stock shall be the price per share which the Company
receives for a single share of Preferred Stock in the Acquisition, or, if
this Warrant is exercised in connection with the Initial Public Offering, the
fair market value of the Company's Preferred Stock shall be equal to the
mid-price of the range of prices set forth in the registration statement
relating to the Initial Public Offering or, if a subsequent amendment thereto
sets forth a different range of prices (other than a "pricing amendment"
setting forth a single, final price) then the mid-price of the range of
prices set forth in such amendment.
(d) As soon as practicable after the exercise of this Warrant in full
or in part, and in any event within 10 days thereafter, the Company at its
expense will cause to be issued in the name of, and delivered to, the
Registered Holder, or as such Holder (upon payment by such Holder of any
applicable transfer taxes) may direct a certificate or certificates for the
number of shares of Warrant Stock to which such Registered Holder shall
entitled.
3. ADJUSTMENTS.
(a) If, after the closing date of the Equity Financing or the date
upon which all of the Notes issued pursuant to the Purchase Agreement are
converted, outstanding shares of the Company's Preferred Stock shall be
subdivided greater number of shares or a dividend in Preferred Stock shall be
paid in respect of Preferred Stock, the Purchase Price in effect immediately
prior to such subdivision or at the record date of such dividend shall
simultaneously with the effectiveness of such subdivision or immediately
after the record date of such dividend be proportionately reduced. If
outstanding shares of Preferred Stock shall be combined into a smaller number
of shares, the Purchase Price in effect immediately prior to such combination
shall, simultaneously with the effectiveness of such combination, be,
proportionately increased. When any adjustment is required to be made in the
Purchase Price, the number of shares of Warrant Stock purchasable upon the
exercise of this Warrant shall be changed to the number determined by
dividing (i) an amount equal to the number of shares issuable upon the
exercise of this Warrant immediately prior to such adjustment, multiplied by
the Purchase Price in effect
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immediately prior to such adjustment, by (ii) the Purchase Price in effect
immediately after such adjustment.
(b) In case of any reclassification or change of the outstanding
securities of the Company or of any reorganization of the Company (or any
other corporation the stock or securities of which are at the time receivable
upon the exercise of this Warrant) or any similar corporate reorganization on
or after the date hereof, then and in each such case the holder of this
Warrant, upon the exercise hereof at any time after the consummation of such
reclassification, change, reorganization, merger or conveyance, shall be
entitled to receive, in lieu of the stock or other securities and property
receivable upon the exercise hereof prior to such consummation, the stock or
other securities or property to which such holder would have been entitled
upon such consummation if such holder had exercised this Warrant immediately
prior thereto, all subject to further adjustment as provided in paragraph
(a); and in each such case, the terms of this Section 2 shall be applicable
to the shares of stock or other securities properly receivable upon the
exercise of this Warrant after such consummation.
(c) When any adjustment is required to be made in the Purchase Price,
the Company shall promptly mail to the Registered Holder a certificate
setting forth the Purchase Price after such adjustment and setting forth a
brief statement of the facts requiring such adjustment. Such certificate
shall also set forth the kind and amount of stock or other securities or
property into which this Warrant shall be exercisable following the
occurrence of any of the events specified in Section 3(a) or (b) above.
(d) In order to avoid doubt, it is acknowledged that the holder of
this Warrant shall be entitled to the benefit of all adjustments in the
number of shares of Common Stock of the Company issuable upon conversion of
the Preferred Stock of the Company which occur prior to the exercise of this
Warrant, including without limitation, any increase in the number of shares
of Common Stock issuable upon conversion as a result of a dilutive issuance
of capital stock.
4. TRANSFERS.
(a) Each holder of this Warrant acknowledges that this Warrant, the
Warrant Stock and the Common Stock of the Company have not been registered
under the Securities Act, and agrees not to sell, pledge, distribute, offer
for sale, transferred or otherwise dispose of this Warrant, any Warrant Stock
issued upon its exercise or any Common Stock issued upon conversion of the
Warrant Stock in the absence of (i) an registration statement under the Act
as to this Warrant, such Warrant Stock or such Common Stock and registration
or qualification of this Warrant, such Warrant Stock or such Common Stock
under any applicable Blue Sky or state securities law then in effect, or (ii)
an opinion of counsel, satisfactory to the Company, that such registration
and qualification are not required. Each certificate or other instrument for
Warrant Stock issued upon the exercise of this Warrant shall bear a legend
substantially to the foregoing effect.
(b) Subject to the provisions of Section 4(a) hereof, this Warrant
and all rights hereunder are transferable, in whole or in part, upon
surrender of the Warrant with a properly
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<PAGE>
executed assignment (in the form of EXHIBIT B hereto) at the principal office
of the Company; PROVIDED, HOWEVER, that this Warrant may not be transferred
in WHOLE or in part without the prior written consent of the Company.
(c) Until any transfer of this Warrant is made in the warrant
register, the Company may treat the Registered Holder of this Warrant as the
absolute owner hereof for all purposes; PROVIDED, HOWEVER, that if and when
this warrant is properly assigned in blank, the Company may (but shall not be
required to) treat the bearer hereof as the absolute owner hereof for all
purposes, notwithstanding any notice to the contrary.
(d) The Company will maintain a register containing the names and
addresses of the Registered Holders of this Warrant. Any Registered Holder
may change such Registered Holder's address as shown on the warrant register
by written notice to the Company requesting such change.
5. NO IMPAIRMENT. The Company will not, by amendment of its charter or
through reorganization, consolidation, merger, dissolution, sale of assets or
any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will (subject to Section
15 below) at all times in good faith assist in the carrying out of all such
terms and in the taking of all such action as may be necessary or appropriate
in order to protect the rights of the holder of this Warrant against
impairment.
6. LIQUIDATING DIVIDENDS. If the Company pays a dividend or makes a
distribution on the Preferred Stock payable otherwise than in cash out of
earnings or earned surplus (determined in accordance with generally accepted
accounting principles) except for a stock dividend payable in shares of
Preferred Stock ( a "LIQUIDATING DIVIDEND"), then the Company will pay or
distribute to the Registered Holder of this Warrant, upon the exercise
hereof, in addition to the Warrant Stock purchased upon such exercise, the
Liquidating Dividend which would have been paid to such Registered Holder if
he had been the owner of record of such ,shares of Warrant Stock immediately
prior to the date on which a record was taken for such Liquidating Dividend
or, if no record was taken, the date as of which the record holders of
Preferred Stock entitled to such dividends or distribution were determined.
7. TERMINATION. This Warrant (and the right to pure securities upon
exercise hereof) shall terminate upon the earliest of. (i) December 31, 2002,
(ii) the closing of the Company's sale of all or substantially all of its assets
or the acquisition of the Company by another entity by means of merger or other
transaction as a result of which stockholders of the Company immediately prior
to such acquisition possess a minority of the voting power of the acquiring
entity immediately following such acquisition, or (iii) the closing of the
Initial Public Offering.
8. NOTICES OF CERTAIN TRANSACTIONS. In case:
(a) the Company shall take a record of the holders of its Preferred
Stock (or other stock or securities at the time deliverable upon the exercise
of this Warrant) for the purpose
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of entitling or enabling them to receive any dividend or other distribution,
or to receive any right to subscribe for or purchase any shares of stock of
any class or any other securities, or to receive any other right, to
subscribe for or purchase any shares of stock of any class or any other
securities, or to receive any other right, or
(b) of any capital reorganization of the Company, any
reclassification of the capital stock of the Company, any consolidation or
merger of the Company, any consolidation or merger of the Company with or
into another corporation (other than a consolidation or merger in which the
Company is the surviving entity), or any transfer of all or substantially all
of the assets of the Company, or
(c) of the voluntary or involuntary dissolution, liquidation
or winding-up of the Company, or
(d) of any redemption of the Preferred Stock or mandatory conversion
of the Preferred Stock into Common Stock of the Company,
then, and in each such case, the Company will mail or cause to be mailed to
the Registered Holder of this Warrant a notice specifying, as the case may
be, (i) the date on which a record is to be taken for the purpose of such
dividend, distribution or right, and stating the amount and character of such
dividend, distribution or right, or (ii) the effective date on which such
reorganization, reclassification, consolidation, merger, transfer,
dissolution, liquidation, winding-up, redemption or conversion is to take
place, and the time, if any is to be fixed, as of which the holders of record
of Preferred Stock (or such other stock or securities at the time deliverable
upon such reorganization, reclassification, consolidation, merger, transfer,
dissolution, liquidation, winding-up, redemption or conversion) are to be
determined. Such notice shall be mailed at least ten (10) days prior to the
record date or effective date for the event specified in such notice.
9. RESERVATION OF STOCK. From and after the date of the issuance of this
Warrant, the Company will at all times reserve and keep available, solely for
the issuance and delivery upon the exercise of this Warrant, such shares of
Warrant Stock and other stock, securities and property, as from time to time
shall be issuable upon the exercise of this Warrant.
10. EXCHANGE OF WARRANTS. Upon the surrender by the Registered Holder of
any Warrant or Warrants, properly endorsed, to the Company at the principal
office of the Company, the Company will, subject to the provisions of Section
4 hereof, issue and deliver to or upon the order of such Holder, at the
Company's expense, a new Warrant or Warrants of like tenor, in the name of
such Registered Holder or as such Registered Holder upon payment by such
Registered Holder of any applicable transfer taxes) may direct, calling in
the aggregate on the face or faces thereof for the number of shares of
Preferred Stock called for on the face or faces of the Warrant or Warrants so
surrendered.
11. REPLACEMENT OF WARRANTS. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and (in the case of loss,
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theft or destruction) upon delivery of an indemnity agreement (with surety if
reasonably required) in an amount reasonably satisfactory to the Company, or
(in the case of mutilation) upon surrender and cancellation of this Warrant,
the Company will issue, in lieu thereof, a new Warrant of like tenor.
12. MAILING OF NOTICES. Any notice required or permitted pursuant to
this Warrant shall be in writing and shall be deemed sufficient when
delivered personally or sent by telegram or fax or forty-eight (48) hours
after being, deposited in the U.S. mail, as certified or registered mail,
with postage prepaid, addressed (a) if to the Registered Holder, to the
address of the Registered Holder most recently furnished in writing to the
Company and (b) if to the Company, to the address set forth below or
subsequently modified by written notice to the Registered Holder.
13. NO RIGHTS AS STOCKHOLDER. Until the exercise of this Warrant, the
Registered Holder of this Warrant shall not have or exercise any rights by
virtue hereof as a stockholder of the Company.
14. NO FRACTIONAL SHARES. No fractional shares of Preferred Stock will
be issued in connection with any exercise hereunder. In lieu of any
fractional shares which would otherwise be issuable, the Company shall pay
cash equal to the product of such fraction multiplied by the fair market
value of one share of Preferred Stock on the date of exercise, as determined
in good faith by the Company's Board of Director s.
15. AMENDMENT OR WAIVER. Any term of this Warrant may be amended or
waived upon written consent of the Company and the Holder of fifty percent
(50%) of the shares issuable pursuant to the Warrants issued pursuant to that
certain Convertible Subordinated Promissory Note Purchase Agreement dated as
of the date hereof, between the Company and certain investors.
16. HEADINGS. The headings in this Warrant are for purposes of reference
only and shall not limit or otherwise affect the meaning of any provision of
this Warrant.
17. GOVERNING LAW. This Warrant shall be governed, construed and
interpreted accordance with the laws of the State of Cal without giving
effect to principles of conflicts of law.
[SIGNATURE PAGE FOLLOWS]
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NETZERO, INC.
By:
--------------------------------
Ronald T. Burr, President and
Chief Executive Officer
Address:
SIGNATURE PAGE TO NETZERO, INC.
STOCK PURCHASE WARRANT
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NETZERO, INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
JANUARY 27, 1999
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
1. Purchase and Sale of Stock............................................................................1
1.1 Restated Articles............................................................................1
1.2 Sale and Issuance of Series C Preferred Stock................................................1
1.3 Closing......................................................................................1
2. Representations and Warranties of the Company.........................................................1
2.1 Organization, Good Standing and Qualification................................................1
2.2 Capitalization and Voting Rights.............................................................1
2.3 Subsidiaries.................................................................................3
2.4 Authorization................................................................................3
2.5 Valid Issuance of Preferred and Common Stock.................................................3
2.6 Governmental Consents........................................................................3
2.7 Offering.....................................................................................3
2.8 Litigation...................................................................................4
2.9 Proprietary Information and Employee Stock Purchase Agreements...............................4
2.10 Patents and Trademarks.......................................................................4
2.11 Compliance with Other Instruments............................................................5
2.12 Agreements; Action...........................................................................5
2.13 Related-Party Transactions...................................................................5
2.14 Permits......................................................................................6
2.15 Environmental and Safety Laws................................................................6
2.16 Disclosure...................................................................................6
2.17 Registration Rights..........................................................................6
2.18 Corporate Documents..........................................................................6
2.19 Title to Property and Assets.................................................................6
2.20 Liabilities..................................................................................6
2.21 Changes......................................................................................7
2.22 Employee Benefit Plans.......................................................................7
2.23 Tax Returns, Payments and Elections..........................................................7
2.24 Insurance....................................................................................8
2.25 Labor Agreements and Actions.................................................................8
3. Representations and Warranties of the Investors.......................................................8
3.1 Authorization................................................................................8
3.2 Purchase Entirely for Own Account............................................................8
3.3 Disclosure of Information....................................................................8
3.4 Investment Experience........................................................................9
3.5 Accredited Investor..........................................................................9
3.6 Restricted Securities........................................................................9
3.7 Further Limitations on Disposition...........................................................9
3.8 Legends.....................................................................................10
4. California Commissioner of Corporations..............................................................10
4.1 Corporate Securities Law....................................................................10
<PAGE>
TABLE OF CONTENTS (CONTINUED) PAGE
5. Covenants of the Company.............................................................................10
5.1 Vesting.....................................................................................10
5.2 Salaries....................................................................................11
6. Conditions of Investors' Obligations at Closing......................................................11
6.1 Closing.....................................................................................11
7. Conditions of the Company's Obligations at Closing...................................................12
7.1 Closing.....................................................................................12
8. Miscellaneous........................................................................................12
8.1 Survival of Warranties......................................................................12
8.2 Successors and Assigns......................................................................12
8.3 Governing Law...............................................................................12
8.4 Counterparts................................................................................13
8.5 Titles and Subtitles........................................................................13
8.6 Notices.....................................................................................13
8.7 Finder's Fee................................................................................13
8.8 Expenses....................................................................................13
8.9 Amendments and Waivers......................................................................13
8.10 Disputes....................................................................................13
8.11 Severability................................................................................14
8.12 Aggregation of Stock........................................................................14
8.13 Entire Agreement............................................................................14
SCHEDULE A Investors
SCHEDULE OF EXCEPTIONS
EXHIBIT A Restated Articles of Incorporation
EXHIBIT B Amended Investors' Rights Agreement
EXHIBIT C Opinion of Counsel for the Company
EXHIBIT D Amended Voting Agreement
EXHIBIT E Amended Right of First Refusal and Co-Sale Agreement
EXHIBIT F List of Shareholders
</TABLE>
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SERIES C PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES C PREFERRED STOCK PURCHASE AGREEMENT is made as of
the 27th day of January 1999, among NetZero, Inc., a California corporation (the
"Company"), and the investors listed on Schedule A hereto (the "Investors").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF STOCK.
1.1 RESTATED ARTICLES. The Company shall adopt and file
with the Secretary of the State of California on or before the Closing (as
defined below) the Restated Articles of Incorporation in the form attached
hereto as Exhibit A (the "Restated Articles").
1.2 SALE AND ISSUANCE OF SERIES C PREFERRED STOCK.
Subject to the terms and conditions of this Agreement, each Investor agrees
to purchase at the Closing, and the Company agrees to sell and issue to each
such Investor at the Closing, that number of shares of the Company's Series C
Preferred Stock (as defined below) set forth opposite each such Investor's
name on Schedule A for a purchase price of $0.6446 per share.
1.3 CLOSING. The purchase and sale of the Series C
Preferred Stock (the "Closing") shall take place at the offices of Brobeck,
Phleger & Harrison LLP ("BPH"), 38 Technology Drive, Irvine, California, at
10:00 a.m., on January 27, 1999, or at such other time and place as the
Company and Investors mutually agree upon orally or in writing (the "Closing
Date"). At the Closing, the Company shall deliver to each Investor a
certificate representing the Series C Preferred Stock that such Investor is
purchasing against payment of the purchase price therefor by check, wire
transfer and/or cancellation of existing indebtedness; provided, that
idealab! Capital Partners I-A, L.P. and idealab! Capital Partners, L.P. shall
deliver their respective payment by check or wire transfer prior to or on
February 5, 1999.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to each Investor that, except as set forth on
a Schedule of Exceptions (the "Schedule of Exceptions") furnished to each
Investor and counsel for the Investors, specifically identifying the relevant
subparagraph hereof, which exceptions shall be deemed to be representations
and warranties as if made hereunder:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The
Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of California and has all requisite
corporate power and authority to carry on its business as now conducted and
as proposed to be conducted. The Company is duly qualified to transact
business and is in good standing in each jurisdiction in which the failure to
so qualify would have a material adverse effect on its business or properties.
2.2 CAPITALIZATION AND VOTING RIGHTS. The authorized
capital of the Company consists, or will consist immediately prior to the
Closing, of:
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(a) PREFERRED STOCK. Thirty-Six Million Two Hundred
Seventy-Four Thousand Seven Hundred Forty-Eight (36,274,748) shares of
Preferred Stock (the "Preferred Stock"), of which (A) Seven Million Nine
Hundred Seventy Thousand Seven Hundred Forty-Eight (7,970,748) shares have
been designated Series A Preferred Stock (the "Series A Preferred Stock") and
of which Seven Million Thirty-Three Thousand Fourteen (7,033,014) shares are
issued and outstanding; (B) Four Million Eight Hundred Fifty Thousand
(4,850,000) shares have been designated Series B Preferred Stock (the "Series
B Preferred Stock") of which Four Million Two Hundred Nineteen Thousand One
Hundred Seventy-Three (4,219,173) shares are issued and outstanding; and (C)
Eighteen Million Four Hundred Fifty-Four Thousand (18,454,000) shares have
been designated Series C Preferred Stock (the "Series C Preferred Stock") and
up to Seventeen Million Nine Hundred One Thousand Twenty-Five (17,901,025) of
which may be sold pursuant to this Agreement. The rights, privileges and
preferences of the Series C Preferred Stock will be as stated in the
Company's Restated Articles.
(b) COMMON STOCK. Seventy-Five Million (75,000,000)
shares of common stock ("Common Stock"), of which Twelve Million Three
Hundred Ninety Thousand (12,390,000) shares are issued and outstanding.
(c) SHAREHOLDERS. The outstanding shares of Common
Stock and Preferred Stock are owned by the shareholders and in the numbers
specified in Exhibit B hereto.
(d) VALID ISSUANCE. The outstanding shares of
Common Stock and Preferred Stock are all duly and validly authorized and
issued, fully paid and nonassessable, and were issued in accordance with the
registration or qualification provisions of the Securities Act of 1933, as
amended (the "Act") and any relevant state securities laws or pursuant to
valid exemptions therefrom.
(e) Except for (A) the conversion privileges of the
Series A Preferred Stock, the Series B Preferred Stock and the Series C
Preferred Stock, (B) the rights provided in the Amended Investors' Rights
Agreement, (C) currently outstanding options to purchase Two Million Twenty
Thousand Eight Hundred (2,020,800) shares of Common Stock granted to
employees pursuant to the Company's 1998 Stock Option Plan (the "1998 Option
Plan"), (D) currently outstanding options to purchase Sixty Thousand Five
Hundred (60,500) shares of Common Stock granted to employees pursuant to the
Company's 1999 Stock Option Plan (the "1999 Option Plan"), (E) options
granted to David C. Bohnett to purchase 150,000 shares of Series C Preferred
Stock, (F) options to purchase 468,867 shares of Series A Preferred Stock and
281,278 shares of Series B Preferred Stock; (G) contractual rights and
obligations to purchase 468,867 shares of Series A Preferred Stock and
281,278 shares of Series B Preferred Stock; (H) contractual rights granted to
David C. Bohnett to purchase 67,507 shares of Series B Preferred Stock; and
(I) warrants to purchase Fifteen Thousand Five Hundred Fourteen (15,514)
shares of the Series C Preferred Stock granted to certain holders of the
Company's existing Series A Preferred Stock and Series B Preferred Stock,
there are not outstanding any options, warrants, rights (including conversion
or preemptive rights) or agreements for the purchase or acquisition from the
Company of any shares of its capital stock. In addition to the aforementioned
options, the Company has reserved an additional Three Million Twenty-Eight
Thousand Seven Hundred (3,028,700) shares of its Common Stock for purchase
upon exercise of options to be granted in the future under the 1999 Option
Plan. Except for the Amended Voting Agreement, the
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Company is not a party or subject to any agreement or understanding and, to
the Company's knowledge, there is no agreement or understanding between any
persons and/or entities, which affects or relates to the voting or giving of
written consents with respect to any security or by a director of the Company.
2.3 SUBSIDIARIES. The Company does not presently own or
control, directly or indirectly, any interest in any other corporation,
association, or other business entity. The Company is not a participant in
any joint venture, partnership, or similar arrangement.
2.4 AUTHORIZATION. All corporate action on the part of
the Company, its officers, directors and shareholders necessary for the
authorization, execution and delivery of this Agreement, the Amended
Investors' Rights Agreement in the form attached hereto as Exhibit B (the
"Amended Investors' Rights Agreement"), the Amended Right of First Refusal
and Co-Sale Agreement in the form attached hereto as Exhibit E (the "Amended
Right of First Refusal and Co-Sale Agreement"), and the Amended Voting
Agreement in the form attached hereto as Exhibit D (the "Amended Voting
Agreement") (collectively, the "Transaction Agreements"), the performance of
all obligations of the Company hereunder and thereunder, and the
authorization, issuance, sale and delivery of the Series C Preferred Stock
being sold hereunder has been taken or will be taken prior to the Closing,
and the Transaction Agreements constitute valid and legally binding
obligations of the Company, enforceable in accordance with their respective
terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by laws relating
to the availability of specific performance, injunctive relief, or other
equitable remedies, and (iii) to the extent the indemnification provisions
contained in the Amended Investors' Rights Agreement may be limited by
applicable federal or state securities laws.
2.5 VALID ISSUANCE OF PREFERRED AND COMMON STOCK. The
Series C Preferred Stock that is being purchased by the Investors hereunder,
when issued, sold and delivered in accordance with the terms of this
Agreement for the consideration expressed herein, will be duly and validly
issued, fully paid, and nonassessable, and will be free of restrictions on
transfer other than restrictions on transfer under the Transaction Agreements
and under applicable state and federal securities laws. The Common Stock
issuable upon conversion of the Series C Preferred Stock purchased under this
Agreement has been duly and validly reserved for issuance and, upon issuance
in accordance with the terms of the Restated Articles, will be duly and
validly issued, fully paid, and nonassessable and will be free of
restrictions on transfer other than restrictions on transfer under the
Transaction Agreements and under applicable state and federal securities laws.
2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part
of the Company is required in connection with the consummation of the
transactions contemplated by this Agreement, except for the filing pursuant
to Section 25102(f) of the California General Corporation Law, as amended,
and the rules thereunder, and any filings required by federal securities laws.
2.7 OFFERING. Subject in part to the truth and accuracy
of each Investor's representations set forth in Section 3 of this Agreement,
the offer, sale and issuance of the Series
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C Preferred Stock as contemplated by this Agreement are exempt from the
registration requirements of the Act.
2.8 LITIGATION. There is no action, suit, proceeding or
investigation pending or currently threatened against the Company that
questions the validity of the Transaction Agreements or the right of the
Company to enter into such agreements, or to consummate the transactions
contemplated hereby or thereby, or that might result, either individually or
in the aggregate, in any material adverse changes in the assets, condition,
affairs or prospects of the Company, financially or otherwise, or any change
in the current equity ownership of the Company. The foregoing includes,
without limitation, actions, suits, proceedings or investigations pending or
threatened involving the prior employment of any of the Company's employees,
their use in connection with the Company's business of any information or
techniques allegedly proprietary to any of their former employers, or their
obligations under any agreements with prior employers. The Company is not a
party or subject to the provisions of any order, writ, injunction, judgment
or decree of any court or government agency or instrumentality. There is no
action, suit, proceeding or investigation by the Company currently pending or
that the Company intends to initiate.
2.9 PROPRIETARY INFORMATION AND EMPLOYEE STOCK PURCHASE
AGREEMENTS. Each employee, officer and consultant of the Company has executed
a Proprietary Information and Inventions Agreement in the form provided to
counsel to the Investors.
2.10 PATENTS AND TRADEMARKS. To its knowledge (but
without having conducted any special investigation or patent search), the
Company has sufficient title and ownership of all patents, trademarks,
service marks, trade names, copyrights, trade secrets, information,
proprietary rights and processes necessary for its business as now conducted
without any conflict with or infringement of the rights of others. The
Company has no patents or pending patent applications. There are no
outstanding options, licenses, or agreements of any kind relating to the
foregoing, nor is the Company bound by or a party to any options, licenses or
agreements of any kind with respect to the patents, trademarks, service
marks, trade names, copyrights, trade secrets, licenses, information,
proprietary rights and processes of any other person or entity. The Company
has not received any communications alleging that the Company has violated
or, by conducting its business as proposed, would violate any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other
proprietary rights of any other person or entity. The Company is not aware
that any of its employees is obligated under any contract (including
licenses, covenants or commitments of any nature) or other agreement, or
subject to any judgment, decree or order of any court or administrative
agency, that would interfere with the use of his or her best efforts to
promote the interests of the Company or that would conflict with the
Company's business as proposed to be conducted. Neither the execution nor
delivery of the Transaction Agreements, nor the carrying on of the Company's
business by the employees of the Company will, to the Company's knowledge,
conflict with or result in a breach of the terms, conditions or provisions
of, or constitute a default under, any contract, covenant or instrument under
which any of such employees is now obligated. The Company does not believe it
is or will be necessary to utilize any inventions of any of its employees (or
people it currently intends to hire) made prior to their employment by the
Company.
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2.11 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is
not in violation or default in any material respect of any provision of its
Restated Articles or Bylaws, or in any material respect of any instrument,
judgment, order, writ, decree or contract to which it is a party or by which
it is bound, or, to its knowledge, of any provision of any federal or state
statute, rule or regulation applicable to the Company. The execution,
delivery and performance of the Transaction Agreements and the consummation
of the transactions contemplated thereby will not result in any such
violation or be in conflict with or constitute, with or without the passage
of time and giving of notice, either a default under any such provision,
instrument, judgment, order, writ, decree or contract or an event that
results in the creation of any lien, charge or encumbrance upon any assets of
the Company or the suspension, revocation, impairment, forfeiture, or
nonrenewal of any material permit, license, authorization, or approval
applicable to the Company, its business or operations or any of its assets or
properties.
2.12 AGREEMENTS; ACTION.
(a) Except for agreements explicitly contemplated by
the Transaction Agreements, there are no agreements between the Company and
any of its officers, directors, affiliates, or any affiliate thereof.
(b) There are no agreements, understandings,
instruments, contracts, proposed transactions, judgments, orders, writs or
decrees to which the Company is a party or by which it is bound that may
involve (i) obligations (contingent or otherwise) of, or payments to the
Company in excess of, $50,000, or (ii) the license of any patent, copyright,
trade secret or other proprietary right to or from the Company.
(c) The Company has not (i) declared or paid any
dividends or authorized or made any distribution upon or with respect to any
class or series of its capital stock, (ii) incurred any indebtedness for
money borrowed individually in excess of $50,000, (iii) made any loans or
advances to any person, other than ordinary advances for travel expenses, or
(iv) sold, exchanged or otherwise disposed of any of its assets or rights.
(d) For the purposes of subsections (b) and (c)
above, all indebtedness, liabilities, agreements, understandings,
instruments, contracts and proposed transactions involving the same person or
entity (including persons or entities the Company has reason to believe are
affiliated therewith) shall be aggregated for the purpose of meeting the
individual minimum dollar amounts of such subsections.
(e) The Company is not a party to and is not bound
by any contract, agreement or instrument, or subject to any restriction under
its Restated Articles or Bylaws that is likely to materially and adversely
affect its business.
2.13 RELATED-PARTY TRANSACTIONS. No employee, officer, or
director of the Company or member of his or her immediate family is indebted
to the Company, nor is the Company indebted (or committed to make loans or
extend or guarantee credit) to any of them. To the Company's knowledge, no
employee or officer has any direct or indirect ownership interest in any firm
or corporation with which the Company is affiliated or with which the Company
has a business relationship, or any firm or corporation that competes with
the
5
<PAGE>
Company, except that employees and officers of the Company and members of
their immediate families may own stock in publicly traded companies that may
compete with the Company. No member of the immediate family of any officer of
the Company is directly or indirectly interested in any material contract
with the Company.
2.14 PERMITS. The Company has all franchises, permits,
licenses, and any similar authority necessary for the conduct of its business
as now being conducted by it, the lack of which could materially and
adversely affect the business, properties, prospects, or financial condition
of the Company, and the Company believes it can obtain, without undue burden
or expense, any similar authority for the conduct of its business as planned
to be conducted. The Company is not in default in any material respect under
any of such franchises, permits, licenses, or other similar authority.
2.15 ENVIRONMENTAL AND SAFETY LAWS. To its knowledge, the
Company is not in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety, and to its
knowledge, no material expenditures are or will be required in order to
comply with any such existing statute, law or regulation.
2.16 DISCLOSURE. The Company has fully provided each
Investor with all the information that such Investor has requested for
deciding whether to purchase the Series C Preferred Stock. To its knowledge,
neither the Transaction Agreements nor any other statements or certificates
made or delivered in connection herewith or therewith contains any untrue
statement of a material fact or omits to state a material fact necessary to
make the statements herein or therein not misleading.
2.17 REGISTRATION RIGHTS. Except as provided in the
Amended Investors' Rights Agreement, the Company has not granted or agreed to
grant any registration rights, including piggyback rights, to any person or
entity.
2.18 CORPORATE DOCUMENTS. Except for amendments necessary
to satisfy representations and warranties or conditions contained herein, the
Restated Articles and Bylaws of the Company are in the form previously
provided to counsel for the Investors.
2.19 TITLE TO PROPERTY AND ASSETS. The Company owns its
property and assets free and clear of all mortgages, liens, loans and
encumbrances, except such encumbrances and liens that arise in the ordinary
course of business and do not materially impair the Company's ownership or
use of such property or assets. With respect to the property and assets it
leases, the Company is in compliance with such leases and, to its knowledge,
holds a valid leasehold interest free of any liens, claims or encumbrances.
2.20 LIABILITIES. The Company has delivered to each
Investor its unaudited financial statements (balance sheet and statement of
cash flows, including notes thereto) at November 30, 1998 and for the fiscal
year ended June 30, 1998 (the "Financial Statements"). Except as set forth in
the Financial Statements, the Company has no material liabilities, contingent
or otherwise, other than (i) liabilities incurred in the ordinary course of
business subsequent to November 30, 1998 and (ii) obligations under contracts
and commitments incurred
6
<PAGE>
in the ordinary course of business, which, in both cases, individually or in
the aggregate, are not material to the financial condition or operating
results of the Company.
2.21 CHANGES. Since November 30, 1998, there has not been:
(a) any change in the assets, liabilities,
financial condition or operating results of the Company from that reflected
in the Financial Statements, except changes in the ordinary course of
business that have not been, in the aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not
covered by insurance, materially and adversely affecting the assets,
properties, financial condition, operating results, prospects or business of
the Company;
(c) any waiver by the Company of a valuable right
or of a material debt owed to it;
(d) any satisfaction or discharge of any lien,
claim or encumbrance or payment of any obligation by the Company, except in
the ordinary course of business and that is not material to the assets,
properties, financial condition, operating results or business of the Company;
(e) any material change in any compensation
arrangement or agreement with any employee;
(f) any sale, assignment or transfer of any
patents, trademarks, copyrights, trade secrets or other intangible assets;
(g) any resignation or termination of employment of
any key officer of the Company; and the Company, to its knowledge, does not
know of the impending resignation or termination of employment of any such
officer;
(h) to the Company's knowledge, any other event or
condition of any character that is likely to materially and adversely affect
the assets, properties, financial condition, operating results or business of
the Company; or
(i) any agreement or commitment by the Company to
do any of the things described in this Section 2.21.
2.22 EMPLOYEE BENEFIT PLANS. The Company does not have any
Employee Benefit Plan as defined in the Employee Retirement Income Security
Act of 1974.
2.23 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company has
filed all tax returns and reports as required by law. These returns and
reports are true and correct in all material respects. The Company has paid
all taxes and other assessments due, except those contested by it in good
faith that are listed in the Schedule of Exceptions. The Company has not
elected pursuant to the Internal Revenue Code of 1986, as amended (the
"Code"), to be treated as a Subchapter S corporation or a collapsible
corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor
has it made any other elections pursuant to the Code (other than elections
7
<PAGE>
that relate solely to methods of accounting, depreciation or amortization)
that would have a material effect on the Company, its business, financial
condition, or any of its properties or material assets.
2.24 INSURANCE. The Company has in full force and effect
fire and casualty insurance policies, with extended coverage, sufficient in
amount (subject to reasonable deductibles) to allow it to replace any of its
properties that might be damaged or destroyed. The Company has in full force
and effect products liability and errors and omissions insurance in amounts
customary for companies similarly situated.
2.25 LABOR AGREEMENTS AND ACTIONS. The Company is not
bound by or subject to (and none of its assets or properties is bound by or
subject to) any written or oral, express or implied, contract, commitment or
arrangement with any labor union, and no labor union has requested or, to the
Company's knowledge, has sought to represent any of the employees,
representatives or agents of the Company. There is no strike or other labor
dispute involving the Company pending, or to the Company's knowledge,
threatened, that is likely to have a material adverse effect on the assets,
properties, financial condition, operating results, or business of the
Company, nor is the Company aware of any labor organization activity
involving its employees. The Company is not aware that any officer or key
employee, or that any group of key employees, intends to terminate their
employment with the Company, nor does the Company have a present intention to
terminate the employment of any of the foregoing. The employment of each
officer and employee of the Company is terminable at the will of the Company.
To its knowledge, the Company has complied in all material respects with all
applicable state and federal equal employment opportunity and other laws
related to employment.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each
Investor hereby represents and warrants that:
3.1 AUTHORIZATION. Such Investor has full power and
authority to enter into the Transaction Agreements, and each such agreement
constitutes its valid and legally binding obligation, enforceable in
accordance with its terms.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is
made with such Investor in reliance upon such Investor's representation to
the Company, which by such Investor's execution of this Agreement such
Investor hereby confirms, that the Series C Preferred Stock to be received by
such Investor and the Common Stock issuable upon conversion thereof
(collectively, the "Securities") will be acquired for investment for such
Investor's own account, not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and that such Investor has no
present intention of selling, granting any participation in, or otherwise
distributing the same. By executing this Agreement, such Investor further
represents that such Investor does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of
the Securities.
3.3 DISCLOSURE OF INFORMATION. Such Investor represents
that it has had an opportunity to ask questions and receive answers from the
Company regarding the terms and conditions of the offering of the Series C
Preferred Stock and the business, properties, prospects
8
<PAGE>
and financial condition of the Company. The foregoing, however, does not
limit or modify the representations and warranties of the Company in Section
2 of this Agreement or the right of the Investors to rely thereon.
3.4 INVESTMENT EXPERIENCE. Such Investor is an investor
in securities of companies in the development stage and acknowledges that it
is able to fend for itself, can bear the economic risk of its investment, and
has such knowledge and experience in financial or business matters that it is
capable of evaluating the merits and risks of the investment in the Series C
Preferred Stock. If other than an individual, Investor also represents it has
not been organized for the purpose of acquiring the Series C Preferred Stock.
3.5 ACCREDITED INVESTOR. Such Investor is an "accredited
investor" within the meaning of Securities and Exchange Commission ("SEC")
Rule 501 of Regulation D, as presently in effect.
3.6 RESTRICTED SECURITIES. Such Investor understands that
the Securities it is purchasing are characterized as "restricted securities"
under the federal securities laws inasmuch as they are being acquired from
the Company in a transaction not involving a public offering and that under
such laws and applicable regulations such securities may be resold without
registration under the Act only in certain limited circumstances. In this
connection, such Investor represents that it is familiar with SEC Rule 144,
as presently in effect, and understands the resale limitations imposed
thereby and by the Act.
3.7 FURTHER LIMITATIONS ON DISPOSITION. Without in any
way limiting the representations set forth above, such Investor further
agrees not to make any disposition of all or any portion of the Securities
unless and until the transferee has agreed in writing for the benefit of the
Company to be bound by this Section 3, the Amended Investors' Rights
Agreement and the Amended Voting Agreement provided and to the extent this
Section and such agreements are then applicable, and:
(a) There is then in effect a Registration
Statement under the Act covering such proposed disposition and such
disposition is made in accordance with such Registration Statement; or
(b) Such Investor shall have notified the Company
of the proposed disposition and shall have furnished the Company with a
detailed statement of the circumstances surrounding the proposed disposition,
and (ii) if reasonably requested by the Company, such Investor shall have
furnished the Company with an opinion of counsel, reasonably satisfactory to
the Company that such disposition will not require registration of such
shares under the Act. It is agreed that the Company will not require opinions
of counsel for transactions made pursuant to Rule 144 except in unusual
circumstances.
(c) (i) Notwithstanding the provisions of
paragraphs (a) and (b) above, no such registration statement or opinion of
counsel shall be necessary for (i) a transfer by an Investor that is a
partnership to a partner of such partnership or a retired partner of such
partnership who retires after the date hereof, or to the estate of any such
partner or retired partner, the transfer by gift, will or intestate
succession of any partner to his or her spouse or to
9
<PAGE>
the siblings, lineal descendants or ancestors of such partner or his or her
spouse or (ii) a transfer to an Affiliate (as such term is defined in Rule
12(b)(2) promulgated under the Securities Exchange Act of 1934, as amended,
if the transferee agrees in writing to be subject to the terms hereof to the
same extent as if he or she were an original Investor hereunder.
3.8 LEGENDS. It is understood that the certificates
evidencing the Securities may bear one or all of the following legends:
(a) "THESE SECURITIES HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED
FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT
IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR
UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT."
(b) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO CERTAIN RESTRICTIONS SET FORTH IN AN AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT, AN AMENDED AND RESTATED RIGHT OF FIRST REFUSAL
AND CO-SALE AGREEMENT AND AN AMENDED AND RESTATED VOTING AGREEMENT, COPIES OF
WHICH MAY BE OBTAINED BY ANY SHAREHOLDER, UPON REQUEST AND WITHOUT CHARGE, AT
THE PRINCIPAL OFFICES OF THE CORPORATION."
(c) Any legend required by the laws of the State of
California, including any legend required by the California Department of
Corporations and Sections 417 and 418 of the California Corporations Code.
4. CALIFORNIA COMMISSIONER OF CORPORATIONS.
4.1 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES
THAT ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF
SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION
FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE
OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105
OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS
AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED,
UNLESS THE SALE IS SO EXEMPT.
5. COVENANTS OF THE COMPANY.
5.1 VESTING. All future options granted by the Company
after the date hereof to management, employees and consultants of the Company
shall vest twenty-five percent (25%) after one year of service, and the
remainder in equal monthly installments over the subsequent forty-eight (48)
months, or in the Company's sole discretion, according to any other vesting
schedule which does not at any given time result in a higher vesting
percentage.
10
<PAGE>
Notwithstanding the foregoing provisions of this Section 5.1, by vote of at
least a majority of the non-employee members of the Company's Board of
Directors (the "Board"), the Board may modify or accelerate the vesting
schedule outlined above.
5.2 SALARIES. The compensation levels of all officers and
employees of the Company shall be determined by the Company's Compensation
Committee, subject to final approval by the Company's Board of Directors.
6. CONDITIONS OF INVESTORS' OBLIGATIONS AT CLOSING.
6.1 CLOSING. The obligation of each Investor to purchase
and pay for the Series C Preferred Stock which the Investors have agreed to
purchase on the Closing Date is subject to the fulfillment on or before such
Closing, of each of the following conditions, any of which may be waived in
whole or in part by the Investors; provided, however, that no Investor shall
have the power to waive any condition for any other Investor:
(a) REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the Company contained in Section 2 shall be
true on and as of the Closing with the same effect as though such
representations and warranties had been made on and as of the date of such
Closing, unless the representations contained in Section 2 are made as of a
specific date.
(b) PERFORMANCE. The Company shall have performed
and complied with all agreements, obligations and conditions contained in
this Agreement that are required to be performed or complied with by it on or
before the Closing.
(c) COMPLIANCE CERTIFICATE. The President of the
Company shall deliver to each Investor at the Closing a certificate stating
that the conditions specified in Section 6.1(a), 6.1(b), 6.1(d) and 6.1(g)
have been fulfilled and stating that there shall have been no material
adverse change in the business, affairs, operations, properties, assets or
condition of the Company since the date of the Financial Statements.
(d) QUALIFICATIONS. All authorizations, approvals, or
permits, if any, of any governmental authority or regulatory body of the
United States or of any state that are required in connection with the lawful
issuance and sale of the Securities pursuant to this Agreement shall be duly
obtained and effective as of the Closing.
(e) PROCEEDINGS AND DOCUMENTS. All corporate and
other proceedings in connection with the transactions contemplated at the
Closing and all documents incident thereto shall be reasonably satisfactory
in form and substance to the Investors, and they shall have received all such
counterpart original and certified or other copies of such documents as they
may reasonably request.
(f) OPINION OF COMPANY COUNSEL. Each Investor shall
have received from Brobeck, Phleger & Harrison LLP, counsel for the Company,
an opinion, dated as of the Closing, in substantially the form attached
hereto as Exhibit C.
(g) TRANSACTION AGREEMENTS. The Company, the
Investors purchasing a majority of the Series C Preferred Stock to be
purchased hereunder and the other parties
11
<PAGE>
necessary to make the Transaction Agreements effective shall have entered
into the Transaction Agreements.
(h) LEGAL FEES. The Company shall pay the
Investors' reasonable legal fees owed to Pillsbury Madison & Sutro LLP in
connection with the review of this Agreement and the Transaction Agreements,
not to exceed $5,000.
7. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING.
7.1 CLOSING. The obligation of the Company to sell and
issue the Series C Preferred Stock which the Company has agreed to issue on
the Closing Date is subject to the fulfillment on or before such Closing of
each of the following conditions, any of which may be waived in whole or in
part by the Company:
(a) REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the Investors contained in Section 3 shall
be true on and as of the Closing with the same effect as though such
representations and warranties had been made on and as of such Closing,
unless the representations contained in Section 3 are made as of a specific
date.
(b) PAYMENT OF PURCHASE PRICE. The Investors shall
have delivered the purchase price specified in Section 1.2.
(c) QUALIFICATIONS. All authorizations, approvals,
or permits, if any, of any governmental authority or regulatory body of the
United States or of any state that are required in connection with the lawful
issuance and sale of the Securities pursuant to this Agreement shall be duly
obtained and effective as of the Closing.
8. MISCELLANEOUS.
8.1 SURVIVAL OF WARRANTIES. The warranties,
representations and covenants of the Company and Investors contained in or
made pursuant to this Agreement shall survive the execution and delivery of
this Agreement and the Closing for a period of one (1) year from the Closing
Date and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investors or the Company.
8.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, the terms and conditions of this Agreement shall inure to the benefit
of and be binding upon the respective successors and assigns of the parties
(including transferees of any Securities). Nothing in this Agreement, express
or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.
8.3 GOVERNING LAW. This Agreement shall be governed by
and construed under the laws of the State of California as applied to
agreements among California residents entered into and to be performed
entirely within California.
12
<PAGE>
8.4 COUNTERPARTS. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
8.5 TITLES AND SUBTITLES. The titles and subtitles used
in this Agreement are used for convenience only and are not to be considered
in construing or interpreting this Agreement.
8.6 NOTICES. Unless otherwise provided, any notice
required or permitted under this Agreement shall be given in writing and
shall be deemed effectively given upon personal delivery to the party to be
notified or upon deposit with the United States Postal Service, by registered
or certified mail, postage prepaid and addressed to the party to be notified
at the address indicated for such party on the signature page hereof, or at
such other address as such party may designate by ten (10) days' advance
written notice to the other parties.
8.7 FINDER'S FEE. Each party represents that it neither
is nor will be obligated for any finders' fee or commission in connection
with this transaction. Each Investor agrees to indemnify and to hold harmless
the Company from any liability for any commission or compensation in the
nature of a finders' fee (and the costs and expenses of defending against
such liability or asserted liability) for which such Investor or any of its
officers, partners, employees, or representatives is responsible and the
Company agrees to indemnify and hold harmless each Investor from any
liability for any commission or compensation in the nature of a finders' fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees or
representatives is responsible.
8.8 EXPENSES. Irrespective of whether the Closing is
effected, the Company shall pay all costs and expenses that it incurs with
respect to the negotiation, execution, delivery and performance of this
Agreement. If the Closing is effected, the Company shall reimburse the
reasonable fees of one (1) special counsel to the Investors, not to exceed a
total of $5,000, payable at the Closing. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorney's fees, costs and necessary
disbursements in addition to any other relief to which such party may be
entitled.
8.9 AMENDMENTS AND WAIVERS. Any term of this Agreement
may be amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders
of a majority of the Common Stock issued upon conversion of the Series C
Preferred Stock (assuming the conversion of the Series C Preferred Stock).
Any amendment or waiver effected in accordance with this paragraph shall be
binding upon each holder of any securities purchased under this Agreement at
the time outstanding (including securities into which such securities are
convertible), each future holder of all such securities, and the Company.
8.10 DISPUTES. If the parties are unable, after good
faith negotiations, which each hereby covenants to undertake, to resolve any
dispute arising between them within fifteen (15) days after notice is given
of such dispute, then the dispute will be referred to arbitration (which the
parties agree is the exclusive means of resolving any such dispute) before
one (1)
13
<PAGE>
arbitrator in Los Angeles County, California, or any other place mutually
agreed upon by the parties hereto, in accordance with the applicable rules
then in effect of the Judicial Arbitration and Mediation Service (the "JAMS
Rules") (or any other form of arbitration mutually acceptable to the
parties). The determination made in accordance with the JAMS rules shall be
delivered in writing to the parties hereto and shall be final, binding and
conclusive on the parties hereto, and the amount of the claim, if any,
determined to exist shall be a valid claim and no further remedy shall be
available to either party with respect to such dispute and judgment may be
entered upon such decision in accordance with applicable law in any court
having jurisdiction thereof. The arbitration award shall include (i) a
provision that the prevailing party in such arbitration recover its costs
relating to the arbitration and reasonable attorneys' fees from the other
party, (ii) the amount of such costs and fees, and (iii) an order that the
losing party pay the fees and expenses of the arbitrator.
8.11 SEVERABILITY. If one or more provisions of this
Agreement are held to be unenforceable under applicable law, such provision
shall be excluded from this Agreement and the balance of the Agreement shall
be interpreted as if such provision were so excluded and shall be enforceable
in accordance with its terms.
8.12 AGGREGATION OF STOCK. All shares of Series C
Preferred Stock held or acquired by affiliated entities or persons shall be
aggregated together for the purpose of determining the availability of any
rights under this Agreement.
8.13 ENTIRE AGREEMENT. This Agreement and the documents
referred to herein constitute the entire agreement among the parties and no
party shall be liable or bound to any other party in any manner by any
warranties, representations, or covenants except as specifically set forth
herein or therein.
14
<PAGE>
SERIES C PREFERRED STOCK PURCHASE
AGREEMENT SIGNATURE PAGE
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMPANY:
NETZERO, INC.
By: /s/ RONALD T. BURR
---------------------------------------
Ronald T. Burr, Chief Executive Officer
Address: 3835-R East Thousand Oaks Blvd., #338
Westlake Village, CA 91362
INVESTORS:
DRAPER FISHER JURVETSON FUND V, L.P.
By: /s/ TIM DRAPER
-------------------------------------
Name: -------------------------------------
Its: -------------------------------------
Address: 400 Seaport Court, Suite 350
Redwood City, CA 94063
DRAPER FISHER JURVETSON PARTNER
FUND V, LLC
By: /s/ TIM DRAPER
-------------------------------------
Name: -------------------------------------
Its: -------------------------------------
Address: 400 Seaport Court, Suite 350
Redwood City, CA 94063
15
<PAGE>
SERIES C PREFERRED STOCK PURCHASE
AGREEMENT SIGNATURE PAGE
FOUNDATION CAPITAL II, L.P.
BY: FOUNDATION CAPITAL
MANAGEMENT II, LLC
By: /s/ PAUL G. KOONTZ
-------------------------------------
Name: -------------------------------------
Its: Manager
Address: 70 Willow Road, Suite 200
Menlo Park, CA 94025
FOUNDATION CAPITAL II ENTREPRENEURS
FUND, LLC
BY: FOUNDATION CAPITAL
MANAGEMENT II, LLC
By: /s/ PAUL G. KOONTZ
-------------------------------------
Name: -------------------------------------
Its: Manager
Address: 70 Willow Road, Suite 200
Menlo Park, CA 94025
FOUNDATION CAPITAL II PRINCIPALS
FUND, LLC.
BY: FOUNDATION CAPITAL
MANAGEMENT II, LLC
By: /s/ PAUL G. KOONTZ
-------------------------------------
Name: -------------------------------------
Its: Manager
Address: 70 Willow Road, Suite 200
Menlo Park, CA 94025
16
<PAGE>
SERIES C PREFERRED STOCK PURCHASE
AGREEMENT SIGNATURE PAGE
THE JOHN B. & MICHELLE S. NIRENSTEIN
FAMILY TRUST DTD 10/4/95
By: /s/ JOHN B. NIRENSTEIN
-------------------------------------
John B. Nirenstein, Trustee
Address: 732 Coastland Drive
Palo Alto, CA 94303
IDEALAB! CAPITAL PARTNERS I-A, L.P.
By: /s/ WILLIAM S. ELKUS
-------------------------------------
Name:
-------------------------------------
Its:
-------------------------------------
Address: 130 West Union Street
Pasadena, CA 91103
IDEALAB! CAPITAL PARTNERS I-B, L.P.
By: /s/ WILLIAM S. ELKUS
-------------------------------------
Name:
-------------------------------------
Its:
-------------------------------------
Address: 130 West Union Street
Pasadena, CA 91103
BROBECK PHLEGER & HARRISON LLP
By: /s/ THOMAS W. ALLEN
-------------------------------------
Name:
-------------------------------------
Its:
-------------------------------------
Address: 38 Technology Drive
Irvine, CA 92618-5312
17
<PAGE>
SERIES C PREFERRED STOCK PURCHASE
AGREEMENT SIGNATURE PAGE
/s/ HARVEY COHEN
--------------------------------------------
HARVEY COHEN
Address: --------------------------------------------
--------------------------------------------
/s/ ROBERT CONEYBEER
--------------------------------------------
ROBERT CONEYBEER
Address: --------------------------------------------
--------------------------------------------
/s/ FREDERIC A. RANDALL, JR.
--------------------------------------------
FREDERIC A. RANDALL, JR.
Address: 469 Lenwood Circle
Costa Mesa, CA 92627
/s/ JAMES K. BAER
--------------------------------------------
JAMES K. BAER
Address: --------------------------------------------
--------------------------------------------
/s/ BRAD SCHWARTZ
--------------------------------------------
BRAD SCHWARTZ
Address: --------------------------------------------
--------------------------------------------
18
<PAGE>
SERIES C PREFERRED STOCK PURCHASE
AGREEMENT SIGNATURE PAGE
/s/ JONATHAN AXELRAD
--------------------------------------------
JONATHAN AXELRAD
Address: --------------------------------------------
--------------------------------------------
19
<PAGE>
EXHIBIT 10.11
STANDARD OFFICE LEASE
BETWEEN
WESTLAKE GARDENS, LLC,
a California limited liability company
AS LANDLORD
AND
NETZERO, INC.,
a California corporation
AS TENANT
SUITES 200 and 300
2555 Townsgate Road
Westlake Village, California
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1 - BASIC LEASE PROVISIONS......................................... 1
ARTICLE 2 - TERM........................................................... 3
ARTICLE 3 - RENTAL ........................................................ 3
(a) Basic Rental......................................... 3
(b) Increase in Direct Costs............................. 3
(c) Definitions.......................................... 4
(d) Determination of Payment............................. 7
ARTICLE 4 - Security Deposit............................................... 8
ARTICLE 5 - HOLDING OVER................................................... 10
ARTICLE 6 - PERSONAL PROPERTY TAXES........................................ 10
ARTICLE 7 - USE............................................................ 11
ARTICLE 8 - CONDITION OF PREMISES.......................................... 11
ARTICLE 9 - REPAIRS AND ALTERATIONS........................................ 12
ARTICLE 10 - LIENS......................................................... 14
ARTICLE 11 - PROJECT SERVICES.............................................. 14
ARTICLE 12 - RIGHTS OF LANDLORD............................................ 16
ARTICLE 13 - INDEMNITY; EXEMPTION OF LANDLORD FROM LIABILITY............... 16
(a) Indemnity by Tenant. ................................ 16
(b) Indemnity by Landlord................................ 16
(c) Exemption of Landlord from Liability................. 16
ARTICLE 14 - INSURANCE..................................................... 17
(a) Tenant's Insurance................................... 17
(b) Form of Policies..................................... 17
(c) Landlord's Insurance................................. 17
(d) Waiver of Subrogation................................ 18
(e) Compliance with Law.................................. 18
ARTICLE 15 - ASSIGNMENT AND SUBLETTING..................................... 18
ARTICLE 16 - DAMAGE OR DESTRUCTION......................................... 20
ARTICLE 17 - SUBORDINATION................................................. 21
ARTICLE 18 - EMINENT DOMAIN................................................ 22
ARTICLE 19 - DEFAULT....................................................... 22
ARTICLE 20 - REMEDIES...................................................... 23
ARTICLE 21 - TRANSFER OF LANDLORD'S INTEREST............................... 24
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 22 - BROKER........................................................ 25
ARTICLE 23 - PARKING....................................................... 25
ARTICLE 24 - WAIVER........................................................ 25
ARTICLE 25 - ESTOPPEL CERTIFICATE.......................................... 26
ARTICLE 26 - LIABILITY OF LANDLORD......................................... 26
ARTICLE 27 - INABILITY TO PERFORM.......................................... 26
ARTICLE 28 - HAZARDOUS WASTE............................................... 26
ARTICLE 29 - SURRENDER OF PREMISES; REMOVAL OF PROPERTY.................... 28
ARTICLE 30 - MISCELLANEOUS................................................. 29
(a) Severability; Entire Agreement....................... 29
(b) Attorneys' Fees; Waiver of Jury Trial................ 29
(c) Time of Essence...................................... 29
(d) Headings; Joint and Several.......................... 29
(e) Reserved Area........................................ 29
(f) No Option............................................ 30
(g) Use of Project Name; Improvements.................... 30
(h) Rules and Regulations................................ 30
(i) Quiet Possession..................................... 30
(j) Rent................................................. 30
(k) Successors and Assigns............................... 30
(l) Notices.............................................. 30
(m) Persistent Delinquencies............................. 31
(n) Right of Landlord to Perform......................... 31
(o) Access, Changes in Project, Facilities, Name......... 31
(p) Signing Authority.................................... 31
(q) Intentionally Omitted. ............................. 32
(r) Intentionally Omitted................................ 32
(s) Survival of Obligations.............................. 32
(t) Confidentiality...................................... 32
(u) Governing Law........................................ 32
(v) Exhibits and Addendum................................ 32
ARTICLE 31 - OPTION TO EXTEND.............................................. 32
(a) Option Right......................................... 32
(b) Option Rent.......................................... 32
(c) Exercise of Options.................................. 33
(d) Determination of Market Rent......................... 33
ARTICLE 32 - Right of First Offer.......................................... 34
ARTICLE 33 - Must Take Space............................................... 35
ARTICLE 34 - Top of Building Signage....................................... 35
ARTICLE 35 - GENERATOR..................................................... 36
ARTICLE 36 - TERMINATION OPTION............................................ 36
EXHIBIT "A" PREMISES....................................................... 1
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C>
EXHIBIT "B" RULES AND REGULATIONS........................................... 1
EXHIBIT "C" NOTICE OF LEASE TERM DATES AND TENANT'S PERCENTAGE.............. 1
EXHIBIT "D" TENANT WORK LETTER.............................................. 1
EXHIBIT "E" CERTIFIED COPY OF BOARD OF DIRECTORS RESOLUTIONS OF............ 1
EXHIBIT "F" LETTER OF CREDIT................................................ 1
EXHIBIT "G" EXTERIOR SIGNS.................................................. 1
EXHIBIT "H" SUPERIOR RIGHTS................................................. 1
</TABLE>
-iii-
<PAGE>
STANDARD OFFICE LEASE
This Standard Office Lease ("Lease") is made and entered into
as of this 6th day of March, 1999, by and between WESTLAKE GARDENS, LLC, a
California limited liability company ("Landlord"), and NETZERO, INC., a
California corporation (the "Tenant").
Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord the premises described as (i) Suite 200 (containing 4,000 rentable
square feet), (ii) Suite 300 (containing 13,114 rentable square feet), and (iii)
after the Must Take Commencement Date (as defined in Article 33 below), the Must
Take Space (defined in Article 33 below), as such premises are designated on the
plan attached hereto and incorporated herein as Exhibit "A" (collectively,
"Premises") of the project ("Project") whose address is 2555 Townsgate Road,
Westlake Village, California for the term and upon the terms and conditions
hereinafter set forth, and Landlord and Tenant hereby agree as follows:
ARTICLE 1 - BASIC LEASE PROVISIONS:
- -----------------------------------
A. Term: Commencement Date: The earlier of (i) the date Tenant first
commences to conduct business in the
Premises, or (ii) the date of substantial
completion (as defined in the Tenant Work
Letter attached hereto as Exhibit "D") of
the tenant improvements to be constructed
by Landlord in the Premises pursuant to the
Work Letter Agreement. Upon Tenant's
occupancy of the Premises, Landlord and
Tenant agree to execute and deliver a
Commencement Letter in a form substantially
similar to that attached hereto as Exhibit
"C".
Expiration Date: The date immediately preceding the seventh
(7th) anniversary of the Commencement
Date; provided, however, that if the
Commencement Date is a date other than
the first day of a month, the Expiration
Date shall be the last day of the month
which is eighty-four (84) months after the
month in which the Commencement Date
falls, unless extended or earlier terminated
pursuant to this Lease.
B. Square Footage: Landlord and Tenant agree that the
Premises initially contains 17,114 rentable
square feet; after the Must Take
Commencement Date, the Premises shall
contain 30,162 rentable square feet. Such
square footage is hereby stipulated by the
parties to be true and correct.
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<PAGE>
C. Basic Rental:
<TABLE>
<CAPTION>
MONTHLY BASIC RENTAL A
LEASE MONTHS MONTHLY BASIC RENTAL RENTABLE SQUARE FOOT
------------ -------------------- ----------------------
<S> <C> <C>
Period from Month 1 $29,949.50 $1.75
until day immediately
preceding Must Take
Commencement Date
Must Take $52,783.50 $1.75
Commencement Date -
Month 9
Months 10-48 $63,943.44 $2.12
Months 49-60 $66,356.40 $2.20
Months 61-84 $69,372.60 $2.30
</TABLE>
D. Base Year: Calendar Year 1999
E. Tenant's Proportionate Share: 34.48% prior to the Must Take
Commencement Date and 60.76% after the
Must Take Commencement Date (based
upon the rentable square footage of the
Premises divided by the rentable square
footage of the Project)
F. Security Deposit: $52,783.50 plus a letter of credit in
accordance with Article 4 below.
G. Permitted Use: General office use.
H. Broker: Grubb & Ellis Company and Westcord
Commercial Real Estate Services
I. Parking Passes: Tenant shall have the right to lease, free
of charge, up to sixty-nine (69) unreserved
parking passes prior to the Must Take
Commencement Date and one-hundred
twenty-one (121) unreserved parking passes
thereafter, and six (6) reserved parking
spaces (in locations designated by
Landlord) in accordance with the provisions
set forth in Article 23 of this Lease.
Additionally, Landlord agrees to designate
up to six (6) parking spaces in the parking
lot serving the Project as "thirty (30)
minute customer only" parking for
customers of all of the tenants of the
Project.
J. First Month's Rent: The first full month's rent of
$29,949.50 shall be due and payable by
Tenant to Landlord upon Tenant's
execution of this Lease.
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<PAGE>
ARTICLE 2 - TERM
- ----------------
The term of this Lease shall commence on the Commencement Date as set
forth in Article 1.A. of the Basic Lease Provisions, and shall end on the
Expiration Date set forth in Article 1.A. of the Basic Lease Provisions. For
purposes of this Lease, the term "Lease Year" shall mean each consecutive twelve
(12) month period during the Lease term, with the first Lease Year commencing on
the Commencement Date; however, (a) if the Commencement Date falls on a day
other than the first day of a calendar month, the first Lease Year shall end on
the last day of the eleventh (11th) month after the Commencement Date and the
second (2nd) and each succeeding Lease Year shall commence on the first day of
the next calendar month, and (b) the last Lease Year shall end on the Expiration
Date. Notwithstanding anything to the contrary contained herein, if the
substantial completion of the Tenant Improvements to be performed by Landlord
pursuant to the Work Letter Agreement attached hereto as Exhibit "D" has not
occurred on or before August 1, 1999 (the "Deadline Date"), Tenant shall have
the right to terminate this Lease by notifying Landlord in writing of such
election at any time prior to said substantial completion. In the event of any
such termination, neither party shall have any further rights, obligations or
liabilities hereunder from and after the effective date of such termination and
Landlord shall promptly return any monies paid by Tenant, including, without
limitation, the anticipated first month's rent and the security deposit to
Tenant. The Deadline Date shall be extended for any delays in the substantial
completion of the Tenant Improvements caused by a Tenant Delay (defined in the
Work Letter Agreement), force majeure event or governmental delay, provided that
in no event shall any force majeure event or governmental delay extend the
Deadline Date by more than ninety (90) days.
ARTICLE 3 - RENTAL
- ------------------
(a) BASIC RENTAL. Commencing on the Commencement Date and continuing
throughout the balance of the Term, Tenant agrees to pay to Landlord, at
Landlord's office, or to such other person or at such other place as directed
from time to time by written notice to Tenant from Landlord, the initial monthly
and annual sums as set forth in Article 1.C of the Basic Lease Provisions,
payable in advance on the first day of each calendar month, without demand,
setoff or deduction (except as otherwise specifically provided herein), and in
the event the Commencement Date or the Expiration Date of this Lease occurs
other than on the first day or last day of a calendar month, the rent for such
month shall be prorated. Notwithstanding the foregoing, the first full month's
rent shall be paid to Landlord in accordance with Article 1.J. of the Basic
Lease Provisions.
(b) INCREASE IN DIRECT COSTS. The term "Base Year" means the calendar
year set forth in Article 1.D. of the Basic Lease Provisions. If, in any
calendar year during the term of this Lease, the Direct Costs (as hereinafter
defined) paid or incurred by Landlord shall be higher than the Direct Costs for
the Base Year, Tenant shall pay an additional sum for such and each subsequent
calendar year equal to the product of Tenant's Proportionate Share (as defined
in Article 1.E of the Basic Lease Provisions) multiplied by such increased
amount of Direct Costs. In the event either the Premises and/or the Project is
expanded or reduced, then Tenant's Proportionate Share shall be appropriately
adjusted, and as to the calendar year in which such change occurs, Tenant's
Proportionate Share for such year shall be determined on the basis of the number
of days during that particular calendar year that such Tenant's proportionate
share was in effect. In the event this Lease shall terminate on any date other
than the last day of a calendar year, the additional sum payable hereunder by
Tenant during the calendar year in which this Lease terminates shall be prorated
on the basis of the relationship which the number of days which have elapsed
from the commencement of said calendar year to and including said date on which
this Lease terminates bears to three hundred sixty-five (365). Any and all
amounts due and payable by Tenant pursuant to Articles 3(b), (c) and (d) hereof
shall be deemed "Additional Rent", and Landlord shall be entitled to exercise
the same rights and remedies upon default in these payments as Landlord is
entitled to exercise with respect to defaults in Monthly Basic Rental payments.
-3-
<PAGE>
(c) DEFINITIONS. As used herein the term "Direct Costs" shall mean the sum
of the following:
(i) "Tax Costs", which shall mean any and all real estate
taxes and other similar charges on real property or improvements, assessments,
water and sewer charges, and all other charges assessed, reassessed or levied
upon the Project and appurtenances thereto and the parking or other facilities
thereof, or the real property thereunder (collectively, "Real Property") or
attributable thereto or on the rents, issues, profits or income received or
derived therefrom which are assessed, reassessed or levied by the United States,
the State of California or any local government authority or agency or any
political subdivision thereof, and shall include Landlord's reasonable legal
fees, costs and disbursements incurred in connection with proceedings for
reduction of Tax Costs or any part thereof (but only up to the actual amount of
savings, amortized on a straight-line basis over the Lease Term); provided,
however, if at any time after the date of this Lease the methods of taxation now
prevailing shall be altered so that in lieu of or as a supplement to or a
substitute for the whole or any part of any Tax Costs, there shall be assessed,
reassessed or levied (a) a tax, assessment, reassessment, levy, imposition or
charge wholly or partially as a net income, capital or franchise levy or
otherwise on the rents, issues, profits or income derived therefrom, or (b) a
tax, assessment, reassessment, levy (including, but not limited to, any
municipal, state or federal levy), imposition or charge measured by or based in
whole or in part upon the Real Property and imposed upon Landlord, or (c) a
license fee measured by the rent payable under this Lease, then all such taxes,
assessments, reassessments or levies or the part thereof so measured or based,
shall be deemed to be included in the term "Direct Costs". In addition, when
calculating Tax Costs for the Base Year, special assessments shall only be
deemed included in Tax Costs for the Base Year to the extent that such special
assessments are included in Tax Costs for the applicable subsequent calendar
year during the Term. There shall be included in Tax Costs with respect to any
calendar year only the amount currently payable on any bonds or assessments,
including interest for such calendar year or the current annual installment for
such calendar year, and such sum shall be paid in the maximum number of
installments allowed. Notwithstanding anything to the contrary contained herein,
Tax Costs for the Base Year and all subsequent calendar years shall be
calculated on a fully-assessed basis.
(ii) PROPOSITION 13 PROTECTION. Despite any other provision of
this Lease, if any sale, refinancing, or change in ownership of the Project is
consummated and, as a result, all or part of the Project is reassessed
("Reassessment") for real estate tax purposes by the appropriate government
authority under the terms of Proposition 13 (as adopted by the voters of the
State of California in the June 1978 election), the terms of this Paragraph
3(c)(ii) shall apply.
I. For purposes of this Paragraph 3(c)(ii), the term "Tax
Increase" shall mean that portion of the Tax Costs, as calculated immediately
following the Reassessment, that is attributable solely to the Reassessment.
Accordingly, a Tax Increase shall not include any portion of the Tax Costs,
as calculated immediately following the Reassessment, that is:
(1) Attributable to the initial assessment of the value
of the Project, the base, shell and core of the Project, or the tenant
improvements located in the Project;
(2) Attributable to assessments pending immediately
before the Reassessment, but not otherwise excludable, that were conducted
during, and included in, that Reassessment or that were otherwise rendered
unnecessary following the Reassessment;
(3) Attributable to the annual inflationary increase
in real estate taxes; or
(4) Part of Tax Costs incurred or considered to be
incurred during the applicable Base Year as determined under this Lease.
-4-
<PAGE>
II. Tenant shall not be obligated to pay a portion of the Tax Increase
relating to a Reassessment of the Project in accordance with the following
schedule:
<TABLE>
<CAPTION>
DATE OF REASSESSMENT EVENT PERCENT OF TAX INCREASE WHICH
-------------------------- TENANT IS PROTECTED AGAINST DUE
TO REASSESSMENT EVENT
-------------------------------
<S> <C>
Months 1 - 12 100%
Months 13 - 24 80%
Months 25 - 36 60%
Months 37 - 48 40%
Months 49 - 60 20%
Months 61 - Expiration Date 0%
</TABLE>
III. The amount of Tax Costs that Tenant is not obligated to pay or
shall not be obligated to pay during the Term in connection with a particular
Reassessment under the terms of this Paragraph 3(c)(ii) shall be referred to as
the Proposition 13 Protection Amount. If a Reassessment is reasonably
foreseeable by Landlord and the Proposition 13 Protection Amount attributable to
that Reassessment may be reasonably quantified or estimated for each Lease Year
beginning with the Lease Year in which the Reassessment will occur, the terms of
this Paragraph 3(c)(ii) shall apply to each such Reassessment. On notice to
Tenant, Landlord shall have the right to purchase the entire Proposition 13
Protection Amount relating to the applicable Reassessment (Applicable
Reassessment), at any time during the Term, by paying to Tenant an amount equal
to the Proposition 13 Purchase Price, as defined below, as long as the right of
any successor of Landlord to exercise its right of repurchase under this Lease
shall not apply to any Reassessment that results from the event under which that
successor became Landlord under this Lease. As used in this Lease, the term
"Proposition 13 Purchase Price" shall mean the present value of the Proposition
13 Protection Amount remaining during the Term, as of the date of payment of the
Proposition 13 Purchase Price by Landlord. The present value shall be calculated
by:
(1) Using the portion of the Proposition 13 Protection Amount
attributable to each remaining Lease Year (as though the portion of that
Proposition 13 Protection Amount benefited Tenant at the end of each Lease Year)
as the amounts to be discounted; and
(2) Using discount rates for each amount to be discounted
equal to:
(A) The average rates of yield for United States Treasury
Obligations with maturity dates as close as reasonably possible to the end of
each Lease Year during which the portions of the Proposition 13 Protection
Amount would have benefited Tenant, using the rates in effect as of
Landlord's exercise of its right to purchase, as set forth in this Paragraph
3(c)(ii); plus
(B) two percent (2%) per annum.
On payment of the Proposition 13 Purchase Price, subparagraph (II) of this
Paragraph 3(c)(ii) shall not apply to any Taxes attributable to the Applicable
Reassessment. Because Landlord is estimating the Proposition 13 Purchase Price
because a Reassessment has not yet occurred, an adjustment shall be made when a
Reassessment occurs. If Landlord has underestimated the Proposition 13 Purchase
Price, Landlord shall, on notice to Tenant, credit Tenant's Rent next due with
the amount of that underestimation (and Landlord's successor in interest shall
be bound by any such underestimation). If Landlord has overestimated the
Proposition 13 Purchase Price, Landlord shall, on notice to Tenant, increase
Tenant's Rent next due by the amount of the overestimation.
-5-
<PAGE>
(iii) "Operating Costs", which shall mean all costs and
expenses incurred by Landlord in connection with the maintenance, operation,
replacement, ownership and repair of the Project, the equipment, the
intrabuilding network cable, adjacent walks, malls and landscaped and common
areas and the parking structure, areas and facilities of the Project,
including, but not limited to, salaries, wages, medical, surgical and general
welfare benefits and pension payments, payroll taxes, fringe benefits,
employment taxes, workers' compensation, uniforms and dry cleaning thereof
for all persons who perform duties on a full-time basis (or, if on a
part-time basis, prorated to reflect the percentage of time actually devoted
to the Project) connected with the operation, maintenance and repair of the
Project, its equipment, the intrabuilding network cable and the adjacent
walks and landscaped areas, including janitorial, gardening, security,
parking, operating engineer, elevator, painting, plumbing, electrical,
carpentry, heating, ventilation, air conditioning, window washing, hired
services, a reasonable allowance for depreciation of the cost of acquiring or
the rental expense of personal property used in the maintenance, operation
and repair of the Project, accountant's fees incurred in the preparation of
rent adjustment statements, legal fees (excluding fees incurred in connection
with negotiation and enforcement of leases), real estate tax consulting fees
(but only up to the actual amount of savings, amortized on a straight-line
basis over the Lease Term), personal property taxes on property used in the
maintenance and operation of the Project, capital expenditures incurred to
effect economies of operation (but only to the extent of the actual amount of
savings, amortized on a straight-line basis over the useful life of such
capital improvement) and capital expenditures required by government
regulations, laws, or ordinances, including, but not limited to the American
with Disabilities Act not in effect as of the date of this Lease (amortized
on a straight-line basis over the useful life of such capital improvement);
the cost of all charges for electricity, gas, water and other utilities
furnished to the Project, including any taxes thereon (except to the extent
that such costs are billed directly to any other tenant of the Project); the
cost of all charges for fire and extended coverage, liability and all other
insurance for the Project carried by Landlord (excluding earthquake coverage,
except to the extent earthquake insurance is carried in the Base Year); the
cost of all building and cleaning supplies and materials; the cost of all
charges for cleaning, maintenance and service contracts and other services
with independent contractors and administration fees (except to the extent
that such costs are billed directly to any other tenant of the Project); a
commercially reasonable property management fee (which fee may be imputed if
Landlord has internalized management or otherwise acts as its own property
manager); and license, permit and inspection fees relating to the Project
(excluding such fees paid in connection with the construction of other
tenant's premises). Notwithstanding the foregoing, the following shall not be
included in the calculation of Direct Costs: all costs associated with the
operation of the business of the entity which constitutes "Landlord" (as
distinguished from the costs of building operations) including, but not
limited to, Landlord's general corporate overhead and general administrative
expenses); costs incurred by Landlord in connection with the correction of
defects in design and construction of the Project; leasing commissions;
attorneys' fees and other costs relating to negotiations and disputes with
tenants and prospective tenants; costs relating to improvements, services,
common areas and other items that exclusively or primarily benefit tenants
other than Tenant (and which are not offered to Tenant); depreciation; costs
resulting from violations by Landlord and/or other tenants of laws
(including, but not limited to, laws relating to the storage and handling of
Hazardous Materials), leases and other contracts; interest, amortization,
fees and charges relating to indebtedness; ground rent; employee and other
costs relating to Landlord concessions; rents and other leasing costs for
capital items (other than (i) capital items which are expressly included in
Operating Costs, and (ii) equipment not affixed to the Project that is used
for janitorial or similar services, but only to the extent savings in
Operating Costs are reasonably anticipated as a result of said expenditure);
losses covered by insurance, to the extent of actual proceeds received;
advertising and promotional costs (other than expenses incurred for the
benefit of existing tenants of the Project generally and unrelated to
leasing); costs relating to the correction of law violations existing prior
to the execution of this Lease; franchise taxes, taxes imposed on (or
measured by) Landlord's income and other non-real estate taxes; costs
resulting from additions to the Project following the execution of this Lease
(except to the extent that there is a reasonably proportional corresponding
increase in the rentable square footage in the Project), costs paid or
required to be paid by other tenants (other than as an Operating Cost
pass-through item); overhead or profits paid to subsidiaries or affiliates of
-6-
<PAGE>
Landlord, or to any party as a result of a non-competitive selection process,
for management or other services, supplies or other materials, to the extent
that the costs of such exceed the costs that would have been paid on a
competitive basis; any cost or expense related to the removal, cleaning,
abatement or remediation of Hazardous Materials (as defined below); any costs,
dues or contributions for political, charitable, industry associations or
similar organizations; any acquisition costs for sculptures, paintings or other
objects of fine art or the display of such items; and the cost of any new
categories of services provided subsequent to the Base Year which (I) were not
provided by Landlord during the Base Year as a result of the newly constructed
nature of the Project, and (II) were being provided at comparable buildings
during the Base Year. Operating Costs relating to periods that fall partly
within and partly without any Lease Year and/or the Lease Term shall be
reasonably allocated. In the event, during any calendar year (including the Base
Year), the Project is less than ninety-five percent (95%) occupied at all times,
the Operating Costs shall be adjusted to reflect the Operating Costs of the
Project as though ninety-five percent (95%) were occupied at all times, and the
increase or decrease in the sums owed hereunder shall be based upon such
Operating Costs as so adjusted. Such adjustment shall be made by Landlord by
increasing those costs included in the Operating Costs which according to
industry practice vary based upon the level of occupancy of the Project. Any
warranties in the Base Year and all subsequent calendar years shall be accounted
for as if such service was paid for and provided. Notwithstanding anything to
the contrary contained herein, in no event shall Landlord be permitted to charge
or collect more than the actual Operating Costs incurred in any calendar year.
(d) DETERMINATION OF PAYMENT.
(i) If for any calendar year ending or commencing within the
Term, Tenant's Proportionate Share of Direct Costs for such calendar year
exceeds Tenant's Proportionate Share of Direct Costs for the Base Year, then
Tenant shall pay to Landlord, in the manner set forth in Sections 3(d)(ii) and
(iii), below, and as additional rent, an amount equal to the excess (the
"Excess").
(ii) Landlord shall endeavor to give Tenant a yearly expense
estimate statement (the "Estimate Statement") on or before March 1 of each
calendar year which shall set forth Landlord's reasonable estimate (the
"Estimate") of what the total amount of Direct Costs for the then-current
calendar year shall be and the estimated Excess (the "Estimated Excess") as
calculated by comparing Tenant's Proportionate Share of Direct Costs for such
calendar year, which shall be based upon the Estimate, to Tenant's Proportionate
Share of Direct Costs for the Base Year. The failure of Landlord to timely
furnish the Estimate Statement for any calendar year shall not preclude Landlord
from enforcing its rights to collect any Estimated Excess under this Article 3.
If pursuant to the Estimate Statement an Estimated Excess is calculated for the
then-current calendar year, Tenant shall pay, beginning with its next
installment of Monthly Basic Rental due, a fraction of the Estimated Excess for
the then-current calendar year (reduced by any amounts paid pursuant to the last
sentence of this Section 3(d)(ii)). Such fraction shall have as its numerator
the number of months which have elapsed in such current calendar year to the
month of such payment, both months inclusive, and shall have twelve (12) as its
denominator. Until a new Estimate Statement is furnished, Tenant shall pay
monthly, with the Monthly Basic Rental installments, an amount equal to
one-twelfth (1/12th) of the total Estimated Excess set forth in the previous
Estimate Statement delivered by Landlord to Tenant.
(iii) In addition, Landlord shall endeavor to give to Tenant
on or before the first day of April (but in no event later than the first day of
September) following the end of each calendar year, a statement (the
"Statement") which shall state the Direct Costs incurred or accrued for such
preceding calendar year, and which shall indicate the amount, if any, of the
Excess. Upon receipt of the Statement for each calendar year during the Term, if
amounts paid by Tenant as Estimated Excess are less than the actual Excess as
specified on the Statement, Tenant shall pay, with its next installment of
Monthly Basic Rental due, the full amount of the Excess for such calendar year,
less the amounts, if any, paid during such calendar year as Estimated Excess.
If, however, the Statement indicates that amounts paid by Tenant as Estimated
Excess are greater than the actual Excess as specified on the Statement,
-7-
<PAGE>
such overpayment shall be credited against Tenant's next installments of Monthly
Basic Rent. The failure of Landlord to timely furnish the Statement for any
calendar year shall not prejudice Landlord from enforcing its rights under this
Article 3. Even though the Term has expired and Tenant has vacated the Premises,
when the final determination is made of Tenant's Proportionate Share of the
Direct Costs for the calendar year in which this Lease terminates, if an Excess
is present, Tenant shall pay to Landlord within thirty (30) days an amount as
calculated pursuant to the provisions of this Article 3(d), and if Tenant has
overpaid during such calendar year, Landlord shall pay to Tenant within thirty
(30) days the amount of such overpayment. The provisions of this Section
3(d)(iii) shall survive the expiration or earlier termination of the Term.
(iv) Within two hundred seventy (270) days after receipt of a
Statement by Tenant ("Review Period"), if Tenant disputes the amount set forth
in the Statement, Tenant's employees or an independent certified public
accountant (which accountant is a member of a nationally or regionally
recognized accounting firm), designated by Tenant, may, after reasonable notice
to Landlord and at reasonable times, inspect Landlord's records at Landlord's
offices, provided that Tenant is not then in default after expiration of all
applicable cure periods and provided further that Tenant and such accountant or
representative shall, and each of them shall use their commercially reasonable
efforts to cause their respective agents and employees to, maintain all
information contained in Landlord's records in strict confidence.
Notwithstanding the foregoing, Tenant shall only have the right to review
Landlord's records one (1) time during any twelve (12) month period. Tenant's
failure to dispute the amounts set forth in any Statement within the Review
Period shall be deemed to be Tenant's approval of such Statement and Tenant,
thereafter, waives the right or ability to dispute the amounts set forth in such
Statement. If after such inspection, but not later than thirty (30) days after
the Review Period, Tenant notifies Landlord in writing that Tenant still
disputes such amounts, a certification as to the proper amount shall be made by
Tenant's certified public accountant, at Tenant's expense. Landlord shall
cooperate in good faith with Tenant and the accountant to show Tenant and the
accountant the information upon which the certification is to be based. However,
if such certification by Tenant's accountant (or pursuant to the terms set forth
below if Landlord disagrees with Tenant's accountant's determination) proves
that the Direct Costs set forth in the Statement were overstated by more than
three percent (3%) then the cost of Tenant's accountant and the cost of such
certification shall be paid for by Landlord. If such certification ultimately
proves that the Direct Costs set forth in the Statement were overstated by less
than 3%, then the cost of Landlord's accountant and the cost of such
certification shall be paid by Tenant. In the event Landlord disagrees with
Tenant's determination, Landlord shall engage an independent certified public
accountant to make a determination of the proper amount. In the event the
determination made by the accountant selected by Landlord and the amount
described in Tenant's certification are within ten percent (10%) of each other,
then the average of the two figures shall be used; if such figures are greater
than ten percent (10%) of each other, the parties shall mutually select a third
certified public accountant to make a determination (whose determination shall
be binding on both parties). Within thirty (30) days following the final
determination of any disputed amounts, the parties shall make such appropriate
payments or reimbursements, as the case may be, to each other, as are determined
to be owing pursuant to this paragraph.
(v) If the Project is a part of a multi-building development,
those Direct Costs attributable to such development as a whole (and not
attributable solely to any individual building therein) shall be allocated by
Landlord to the Project and to the other buildings within such development on an
equitable basis.
ARTICLE 4 - SECURITY DEPOSIT
- ----------------------------
Upon execution hereof, Tenant shall deposit with Landlord the sum set
forth in Article 1.F. of the Basic Lease Provisions as security for the full and
faithful performance of every provision of this Lease to be performed by Tenant.
If Tenant breaches any provision of this Lease, including but not limited to the
payment of rent, Landlord may use all or any part of this security deposit for
the payment of any rent or any other sums in default, or to compensate Landlord
for any other loss or damage which Landlord may suffer by reason of Tenant's
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<PAGE>
default. If any portion of said deposit is so used or applied, Tenant shall,
within five (5) days after written demand therefor, deposit cash with Landlord
in an amount sufficient to restore the security deposit to its original amount.
Tenant agrees that Landlord shall not be required to keep the security deposit
in trust, segregate it or keep it separate from Landlord's general funds, but
Landlord may commingle the security deposit with its general funds, and Tenant
shall not be entitled to interest on such deposit. At the expiration of the
Lease term, and provided there exists no default by Tenant hereunder, the
security deposit, or any balance thereof shall be returned to Tenant (or, at
Tenant's written request, to Tenant's assignee), provided that subsequent to the
expiration of this Lease, Landlord may retain from said security deposit (i) an
amount reasonably estimated by Landlord to cover potential Direct Cost
reconciliation payments due with respect to the calendar year in which this
Lease terminates or expires (such amount so retained shall not, in any event,
exceed ten percent (10%) of estimated Excess payments due from Tenant for such
calendar year through the date of expiration or earlier termination of this
Lease and any amounts so retained and not applied to such reconciliation shall
be returned to Tenant within thirty (30) days after Landlord's delivery of the
Statement for such calendar year), (ii) any and all amounts reasonably estimated
by Landlord to cover the anticipated costs to be incurred by Landlord to remove
any signage provided to Tenant under this Lease and to repair any damage caused
by such removal (in which case any excess amount so retained by Landlord shall
be returned to Tenant within thirty (30) days after such removal and repair),
and (iii) any and all amounts permitted by law or this Article 4. Tenant hereby
waives the provisions of Section 1950.7 of the California Civil Code and all
other provisions of law, now or hereafter in effect, which provide that Landlord
may claim from a security deposit only those sums reasonably necessary to remedy
defaults in the payment of rent, to repair damage caused by Tenant or to clean
the Premises, it being agreed that Landlord may, in addition, claim those sums
specified in this Article 4 above.
In addition to the cash security deposit referenced in Article 1.F. of
the Basic Lease Provisions, concurrently with the execution of this Lease by
Tenant, Tenant shall deliver to Landlord an additional security deposit in the
form of an irrevocable standby letter of credit in favor of Landlord in an
amount equal to $793,960.00 (the "Letter of Credit"). The Letter of Credit shall
be (i) from Silicon Valley Bank, (ii) in the form and content of that attached
hereto as Exhibit "F" (or on a different form which is reasonably acceptable to
Landlord), and (iii) subject to the conditions stated in this paragraph. The
Letter of Credit shall have a term of at least 12 months and be automatically
renewed (or a reasonably satisfactory replacement Letter of Credit from Silicon
Valley Bank or another bank reasonably acceptable to Landlord shall be in place
in strict accordance with the terms hereof) at least thirty (30) days prior to
expiration of each 12 month period for additional periods of 12 months each
until the 30th day following the expiration of the Term. The Letter of Credit
shall be held by Landlord as additional security for the full and faithful
performance by Tenant of the terms, covenants and conditions of this Lease
during the Term. Provided that Tenant is not in default under this Lease, after
all applicable notice and cure periods, the amount of the Letter of Credit shall
be reduced annually on the anniversary of the Commencement Date by the greater
of (i) 14% of the original amount of the Letter of Credit, or (ii) provided that
Tenant evidences to Landlord's reasonable satisfaction (based upon Landlord's
review of Tenants audited financial statements) that Tenant's business
operations from the Premises returned a net profit to Tenant during the
immediately preceding twelve (12) month period, twenty percent (20%) of the
original amount of the Letter of Credit.
In addition to the foregoing, (i) if Tenant becomes a publicly traded
company on a nationally recognized stock exchange with a market capitalization
in excess of $50,000,000 for no less than two (2) consecutive months, or (ii) if
Tenant evidences to Landlord's reasonable satisfaction that Tenant has received
at least $50,000,000 in a private equity investment from a third party investor
(either of the events identified in subparagraphs (i) and (ii) to be referred to
as an "LC Reduction Event"), then the outstanding amount of the Letter of Credit
shall be reduced by 50% on or before the date which is three (3) months after
the LC Reduction Event.
If Tenant breaches any of the terms or conditions of this Lease, beyond
the expiration of all applicable notice and cure periods, or if Tenant has filed
a voluntary petition under the United States Bankruptcy Code, or Tenant's
creditors have filed an involuntary petition under
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the United States Bankruptcy Code, then Landlord may draw upon all or a portion
of the Letter of Credit for the payment of the required amount of any sum in
default, and for the payment of any amount that Landlord may spend or may become
obligated to spend by reason of Tenant's default, and to compensate Landlord for
any other loss or damage that Landlord suffers by reason of Tenant's default to
the extent Landlord is entitled to compensation therefor pursuant to the terms
of this Lease (any amount of the Letter of Credit which is drawn upon by
Landlord in accordance with the provisions hereof, but is not used or applied in
accordance with the terms of this Lease, shall be deemed a part of the Security
Deposit). The use, application or retention of the Letter of Credit, or any
portion thereof, shall not prevent Landlord from exercising any other rights or
remedies provided under this Lease, it being intended that Landlord shall not be
required to proceed against the Security Deposit, including the Letter of
Credit, and shall not operate as a limitation on any recovery to which Landlord
may otherwise be entitled.
ARTICLE 5 - HOLDING OVER
- ------------------------
Should Tenant, without Landlord's written consent, hold over after
termination of this Lease, Tenant shall become a tenant from month-to-month,
only upon each and all of the terms herein provided as may be applicable to a
month-to-month tenancy, and any such holding over shall not constitute an
extension of this Lease. During such holding over, Tenant shall pay in advance,
monthly rent at (a) one hundred twenty-five percent (125%) for the first month
of the holdover period and (b) one hundred fifty percent (150%) for each month
thereafter, of the rate in effect for the last month of the term of this Lease,
in addition to, and not in lieu of, all other payments required to be made by
Tenant hereunder, including, but not limited to, Tenant's Proportionate Share of
any Excess. Nothing contained in this Article 5 shall be construed as consent by
Landlord to any holding over of the Premises by Tenant, and Landlord expressly
reserves the right to require Tenant to surrender possession of the Premises to
Landlord as provided in this Lease upon the expiration or earlier termination of
the Term. If Tenant fails to surrender the Premises upon the expiration or
termination of this Lease, Tenant agrees to indemnify, defend and hold Landlord
harmless from all costs after 30 days of holding over, loss, expense or
liability, including without limitation, claims made by any succeeding tenant
and real estate brokers claims and attorneys' fees.
ARTICLE 6 - PERSONAL PROPERTY TAXES
- -----------------------------------
Tenant shall pay, prior to delinquency, all taxes assessed against or
levied upon trade fixtures, furnishings, equipment and all other personal
property of Tenant located in the Premises. In the event any or all of Tenant's
trade fixtures, furnishings, equipment and other personal property shall be
assessed and taxed with property of Landlord, or if the cost or value of any
leasehold improvements in the Premises exceeds the cost or value of the Tenant
Improvement Allowance (as defined in the Work Letter Agreement attached hereto
as Exhibit "D") and, as a result, real property taxes for the Project are
increased, Tenant shall pay to Landlord its share of such taxes on the later of
(i) thirty (30) days prior to the delinquency date of such taxes, or (ii) twenty
(20) days following Tenant's receipt from Landlord of a statement in writing
setting forth the amount of such taxes applicable to Tenant's property or
improvements above the value of the Tenant Improvement Allowance. Tenant shall
assume and pay to Landlord at the time of paying Basic Rental any excise, sales,
use, rent, occupancy, garage, parking, gross receipts or other taxes (other than
net income taxes) which may be imposed on or on account of letting of the
Premises or the payment of Basic Rental or any other sums due or payable
hereunder, and which Landlord may be required to pay or collect under any law
now in effect or hereafter enacted. Tenant shall pay directly to the party or
entity entitled thereto all business license fees, gross receipts taxes and
similar taxes and impositions which may from time to time be assessed against or
levied upon Tenant, as and when the same become due and before delinquency.
Notwithstanding anything to the contrary contained herein, any sums payable by
Tenant under this Article 6 shall not be included in the computation of "Tax
Costs."
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ARTICLE 7 - USE
- ---------------
Tenant shall use and occupy the Premises only for the use set forth in
Article 1.G. of the Basic Lease Provisions and shall not use or occupy the
Premises or permit the same to be used or occupied for any other purpose without
the prior written consent of Landlord, which Landlord consent may be given or
withheld in Landlord's reasonable discretion, and Tenant agrees that it will use
the Premises in such a manner so as not to interfere with or infringe upon the
rights of other tenants in the Project. Tenant shall, at its sole cost and
expense, promptly comply with all laws, statutes, ordinances and governmental
regulations or requirements now in force or which may hereafter be in force
relating to or affecting (i) the condition, use or occupancy of the Premises or
the Project excluding structural changes to the Project or the Premises not
related to Tenant's particular use of the Premises, and (ii) improvements
installed or constructed in the Premises by or for the sole benefit of Tenant
(other than the Tenant Improvements described in the Tenant Work Letter attached
hereto as Exhibit "D"). Tenant shall not do or permit to be done anything which
would invalidate or increase the cost of any fire and extended coverage
insurance policy covering the Project and/or the property located therein, and
Tenant shall comply with all rules, orders, regulations and requirements of any
organization which sets out standards, requirements or recommendations commonly
referred to by major fire insurance underwriters. Tenant shall promptly upon
demand reimburse Landlord for any additional premium charges for any such
insurance policy assessed or increased by reason of Tenant's failure to comply
with the provisions of this Article.
ARTICLE 8 - CONDITION OF PREMISES
- ---------------------------------
Subject to Landlord's construction of the Tenant Improvements as
provided in Exhibit "D" and any latent defects, Tenant hereby agrees that the
Premises shall be taken "as is", "with all faults", "without any representations
or warranties", except for minor punch-list items, and Tenant hereby agrees and
warrants that it has investigated and inspected the condition of the Premises
and the suitability of same for Tenant's purposes. Tenant acknowledges that
neither Landlord nor any agent nor any employee of Landlord has made any
representations or warranty with respect to the Premises or the Project or with
respect to the suitability of either for the conduct of Tenant's business, and
Tenant expressly warrants and represents that Tenant has relied solely on its
own investigation and inspection of the Premises and the Project in its decision
to enter into this Lease and let the Premises in an "as is" condition. The
Premises shall be initially improved as provided in, and subject to, the Tenant
Work Letter attached hereto as Exhibit "D" and made a part hereof. Tenant hereby
waives Sections 1941 and 1942 of the Civil Code of California or any successor
provision of law.
Landlord reserves the right from time to time: (i) to install, use,
maintain, repair, replace and relocate for service to the Premises and/or other
parts of the Project pipes, ducts, conduits, wires, appurtenant fixtures, and
mechanical systems, wherever located in the Premises or the Project, (ii) to
alter, close or relocate any facility in the Premises or the Common Areas or
otherwise conduct any of the above activities for the purpose of complying with
a general plan for fire/life safety for the Project or otherwise, and (iii) to
comply with any federal, state or local law, rule or order with respect thereto
or the regulation thereof not currently in effect. Landlord shall provide Tenant
with commercially reasonable prior notice and shall perform any such work with
the least inconvenience to Tenant as reasonably possible, but in no event shall
Tenant be permitted to withhold or reduce Basic Rental or other charges due
hereunder as a result of same, or otherwise make claim against Landlord for
interruption or interference with Tenant's business and/or operations; provided,
however, in the event such interruption or interference materially and adversely
interferes with the operation of Tenant's business in the Premises for more than
five (5) consecutive business days, then the Basic Rental shall be equitably
abated from and after such fifth (5th) business day during the continuance of
such interruption or interference.
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ARTICLE 9 - REPAIRS AND ALTERATIONS
- -----------------------------------
(a) Landlord shall maintain the structural portions of the Project
including the foundation, floor/ceiling slabs, roof, curtain wall, exterior
glass, columns, beams, shafts, stairs, stairwells, elevator cabs and common
areas and shall also maintain and repair the basic mechanical, electrical,
lifesafety, plumbing, sprinkler systems and heating, ventilating and
air-conditioning systems. Except as expressly provided as Landlord's obligation
in this Article 9, Tenant shall keep the Premises in good condition and repair,
reasonable wear and tear and casualty excepted. All damage or injury to the
Premises or the Project not covered by Landlord's insurance (unless such lack of
coverage results from Landlord's failure to maintain the insurance it is
required to maintain under this Lease) resulting from the act or negligence of
Tenant, its employees, agents or visitors, guests, invitees or licensees or by
the use of the Premises shall be promptly repaired by Tenant, at its sole cost
and expense, to the reasonable satisfaction of Landlord; provided, however, that
for damage to the Project as a result of casualty or for any repairs that may
impact the mechanical, electrical, plumbing, heating, ventilation or air
conditioning systems of the Project, Landlord shall have the right (but not the
obligation) to select the contractor and oversee all such repairs. Landlord may
make any repairs which are not promptly made by Tenant after Tenant's receipt of
written notice and the reasonable opportunity of Tenant to commence making said
repair within five (5) business days from receipt of said written notice, (with
supporting documentation), and charge Tenant for the cost thereof, which cost
shall be paid by Tenant within five (5) days from invoice from Landlord. Tenant
shall be responsible for the design and function of all non-standard
improvements of the Premises installed at Tenant's request. Except as otherwise
set forth in Article 9(b) below, Tenant waives all rights to make repairs at the
expense of Landlord, or to deduct the cost thereof from the rent. Tenant shall
make no alterations, changes or additions in or to the Premises (collectively,
"Alterations") without Landlord's prior written consent, and then only by
contractors or mechanics approved by Landlord in writing and upon the approval
by Landlord in writing of fully detailed and dimensioned plans and
specifications pertaining to the Alterations in question, to be prepared and
submitted by Tenant at its sole cost and expense. Notwithstanding the foregoing,
Tenant may make strictly cosmetic changes to the finish work in the Premises,
not including any changes affecting the Project structure, appearance, or
systems and equipment, provided (i) at least ten (10) days prior written notice
of such changes is provided to Landlord, and (ii) the cost of such changes does
not exceed $30,000 in any one instance or $60,000 over any 12-month period.
Tenant shall at its sole cost and expense obtain all necessary approvals and
permits pertaining to any Alterations approved by Landlord. If Landlord, in
approving any Alterations, specifies a commencement date therefor, Tenant shall
not commence any work with respect to such Alterations prior to such date.
Tenant hereby indemnifies, defends and agrees to hold Landlord free and harmless
from all liens and claims of lien, and all other liability, claims and demands
arising out of any work done or material supplied to the Premises by or at the
request of Tenant in connection with any Alterations. If permitted Alterations
are made, they shall be made at Tenant's sole cost and expense and shall be and
become the property of Landlord, except that Landlord may, by written notice to
Tenant, given concurrently with Landlord's initial consent to the proposed
Alterations, require Tenant at Tenant's expense to remove all partitions,
counters, railings and other Alterations installed by Tenant, and to repair any
damages to the Premises caused by such removal. Any and all costs attributable
to or related to the applicable building codes of the city in which the Project
is located (or any other authority having jurisdiction over the Project) arising
from Tenant's plans, specifications, improvements, alterations or otherwise
shall be paid by Tenant at its sole cost and expense. With regard to repairs,
Alterations or any other work arising from or related to this Article 9 which
Landlord performs on Tenant's behalf, Landlord shall be entitled to receive an
administrative/supervision fee of three percent (3%) of the total costs of said
repairs, Alterations or other work, provided that there shall be no such
supervision fee in those instances where Tenant or its agents or
representatives, rather than Landlord, are performing the requisite repair,
Alteration or other work, and such repair, Alteration or other work does not
affect the structure of the Project or any of the mechanical, electrical, HVAC,
plumbing or fire/life/safety systems of the Project. The construction of initial
improvements to the Premises shall be governed by the terms of the Tenant Work
Letter and not the terms of this Article 9.
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(b) TENANT'S RIGHT TO MAKE REPAIRS.
(i) TENANT'S ACTIONS. If Tenant provides notice to Landlord of
an event or circumstance which requires the action of Landlord with respect to
an obligation of Landlord under the terms of this Lease (hereinafter, a
"Required Action"), and Landlord fails to provide such action as required by the
terms of this Lease, then Tenant may proceed to take the required action upon
delivery of an additional fifteen (15) days notice to Landlord specifying that
Tenant is taking such required action, and if such action was required under the
terms of Article 9 or 11 of this Lease to be taken by Landlord, then Tenant
shall be entitled to prompt reimbursement by Landlord of Tenant's reasonable
costs and expenses in taking such action. In the event Tenant takes such action
and such work will affect the systems and equipment, structure of the Project or
exterior appearance of the Project, Tenant shall use only those contractors used
by Landlord in the Project for such work unless such contractors are unwilling
or unable to perform such work, in which event Tenant may utilize the services
of any other qualified contractor which normally and regularly performs similar
work in comparable projects.
(ii) PAYMENT OF COSTS. If Landlord does not deliver a detailed
written objection to Tenant, within thirty (30) days after receipt of an invoice
by Tenant of its costs of taking action under Section 9(b)(i), above, which
Tenant claims should have been taken by Landlord, and if such invoice from
Tenant sets forth a reasonably particularized breakdown of its costs and
expenses in connection with taking such action on behalf of Landlord, then
Tenant shall be entitled to deduct from the Monthly Basic Rental payable by
Tenant under this Lease the amount set forth in such invoice. If, however,
Landlord delivers to Tenant within thirty (30) days after receipt of Tenant's
invoice, a written objection to the payment of such invoice, setting forth with
reasonable particularity Landlord's reasons for its claim that such action did
not have to be taken by Landlord pursuant to the terms of this Lease or that the
charges are excessive (in which case Landlord shall pay the amount it contends
would not have been excessive), then Tenant shall not be entitled to such
deduction from the Monthly Basic Rental, but as Tenant's sole remedy (except as
set forth in Article 16, below), Tenant may proceed to institute legal
proceedings against Landlord to collect the amount set forth in the subject
invoice. In the event Tenant prevails in such legal proceedings and receives a
judgment against Landlord, then Landlord shall pay such judgment to Tenant
within thirty (30) days of such judgment being entered. If such judgment is not
so paid, then Tenant shall be entitled to deduct from Monthly Basic Rental
payable by Tenant under this Lease in the amount of such judgment together with
interest thereon at the Interest Rate from the date Tenant advanced the funds
until the date of such deduction.
(iii) Notwithstanding the foregoing, if there exists an
emergency such that the Premises or a material portion thereof are rendered
untenantable and Tenant's personnel are forced to vacate the Premises or such
material portion thereof and if Tenant gives the Project's management office
written notice (the "Emergency Notice") of Tenant's intention to take action
with respect thereto (the "Necessary Action") and the Necessary Action is also a
Required Action, Tenant may take the Necessary Action if Landlord does not
commence the Necessary Action prior to the end of the business day which is one
(1) day following the day of Landlord's receipt of the Emergency Notice (the
"Emergency Cure Period") and thereafter use its commercially reasonably efforts
and due diligence to complete the Necessary Action as soon as reasonably
practicable. To the extent Tenant is entitled to recover damages from Landlord
by reason of Landlord's failure timely to commence and/or complete the Necessary
Action, Tenant's damages may include, without limitation, the fully documented,
reasonable, out-of-pocket costs incurred, during the period ending on the
substantial completion of the Necessary Action, in any relocation of Tenant's
personnel previously located in such untenantable space which shall have
occurred, including by way of example only, higher rent, brokers' commissions,
fees of consultants and other reasonable costs of moving to other premises. If
Tenant takes any Necessary Action hereunder, Tenant shall use only those
contractors used by Landlord in the Project for such work unless such
contractors are unwilling or unable to perform such work, in which event Tenant
may utilize the services of any other qualified contractor which normally and
regularly performs similar work in comparable projects.
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ARTICLE 10 - LIENS
- ------------------
Tenant shall keep the Premises and the Project free from any mechanics'
liens, vendors' liens, or any other liens arising out of any work performed,
materials furnished, or obligations incurred by Tenant, and agrees to defend,
indemnify and hold harmless Landlord from and against any such lien or claim or
action thereon, together with costs of suit and reasonable attorneys' fees
incurred by Landlord in connection with any such claim or action. Before
commencing any work of alteration, addition or improvement to the Premises,
Tenant shall give Landlord at least ten (10) business days' written notice of
the proposed commencement of such work (to afford Landlord an opportunity to
post appropriate notices of non-responsibility). In the event that there shall
be recorded against the Premises or the Project or the Property of which the
Premises is a part any claim or lien arising out of any such work performed,
materials furnished or obligations incurred by Tenant and such claim or lien
shall not be removed or discharged or a bond with a face amount equal to one
hundred fifty percent (150%) of such claim posted within ten (10) business days
of filing, Landlord shall have the right but not the obligation to pay and
discharge said lien without regard to whether such lien shall be lawful or
correct or to require that Tenant deposit with Landlord in cash, lawful money of
the United States, one hundred fifty percent (150%) of the amount of such claim,
which sum may be retained by Landlord until such claim shall have been removed
of record or until judgment shall have been rendered on such claim and such
judgment shall have become final, at which time Landlord shall have the right to
apply such deposit in discharge of the judgment on said claim and any costs,
including attorneys' fees, incurred by Landlord, and shall remit the balance
thereof to Tenant.
ARTICLE 11 - PROJECT SERVICES
- -----------------------------
(a) Landlord agrees to furnish to the Premises, at a cost to be
included in Operating Costs, from 8:00 a.m. to 6:00 p.m., Mondays through
Fridays, and 9:00 a.m. to 1:00 p.m. on Saturdays, excepting local and national
holidays, air conditioning and heat, all in such reasonable quantities as in the
judgment of Landlord is reasonably necessary for the comfortable occupancy of
the Premises and consistent with similar quality office buildings in the general
vicinity of the Project. In addition, Landlord shall provide electric current
for normal lighting and normal office machines, elevator service and water on
the same floor as the Premises for lavatory and drinking purposes in such
reasonable quantities as in the judgment of Landlord is reasonably necessary for
general, normal office use. Janitorial and maintenance services shall be
furnished five (5) days per week, after regular business hours, excepting local
and national holidays. Tenant shall comply with all rules and regulations which
Landlord may reasonably establish for the proper functioning and protection of
the common area air conditioning, heating, elevator, electrical intrabuilding
network cable and plumbing systems, provided such rules are consistently applied
to all tenants of the Project. Landlord shall not be liable for, and there shall
be no rent abatement as a result of, any stoppage, reduction or interruption of
any such services caused by governmental rules, regulations or ordinances, riot,
strike, labor disputes, breakdowns, accidents, necessary repairs or other cause,
unless such stoppage, reduction or interruption materially and adversely
interferes with Tenant's use of the Premises and continues for a period in
excess of five (5) consecutive business days. Except as specifically provided in
this Article 11, Tenant agrees to pay for all utilities and other services
utilized by Tenant and additional building services furnished to Tenant not
uniformly furnished to all tenants of the Project at the rate generally charged
by Landlord to tenants of the Project.
(b) Tenant will not, without the prior written consent of Landlord, use
any apparatus or device in the Premises, which will in any way increase the
amount of electricity or water usually furnished or supplied for use of the
Premises as general office space; nor connect any apparatus, machine or device
with water pipes or electric current (except through existing electrical outlets
in the Premises) for the purpose of using electric current or water.
(c) If Tenant shall require electric current in excess of that which
Landlord is obligated to furnish under Article 11(a) above, Tenant shall first
obtain the written consent of Landlord, which Landlord may refuse in its
reasonable discretion, to the use thereof and
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Landlord may cause an electric current meter or submeter to be installed in the
Premises to measure the amount of such excess electric current consumed by
Tenant in the Premises. The cost of any such meter and of installation,
maintenance and repair thereof, shall be paid for by Tenant, and Tenant agrees
to pay to Landlord promptly upon demand therefor by Landlord, for all such
excess electric current consumed by any such use as shown by said meter at the
rates charged for such service by the city in which the Project is located or
the local public utility, as the case may be, furnishing the same, plus any
additional expense incurred by Landlord in keeping account of the electric
current so consumed.
(d) If any lights, machines or equipment (including, but not limited to
computers) are used by Tenant in the Premises which materially affect the
temperature otherwise maintained by the air conditioning system, or generate
substantially more heat in the Premises than would be generated by the building
standard lights and usual office equipment, Landlord shall have the right to
install any machinery and equipment which Landlord reasonably deems necessary to
restore temperature balance, including, but not limited to, modifications to the
standard air conditioning equipment, and the cost thereof, including the cost of
installation and any additional cost of operation and maintenance occasioned
thereby, shall be paid by Tenant to Landlord upon demand by Landlord. Landlord
shall not be liable under any circumstances for loss of or injury to property,
however occurring, through or in connection with, or incidental to, failure to
furnish any of the foregoing.
(e) If Tenant requires heating, ventilation and/or air conditioning
during times other than the times provided in Article 11(a) above in areas other
than Tenant's Network Room or its customer care area (which shall be separately
controlled and paid for by Tenant pursuant to Article 11(d) above), Tenant shall
give Landlord no less than 24 hours notice prior to the time such services are
required (provided, however, that in the event such systems are remotely
controlled via a telephone system or other Tenant accessible system, then no
such notice shall be required) and Landlord shall provide such services as
requested. Tenant shall pay Landlord's standard charge for such after-hours use
(which charge shall not exceed $25.00 per hour during the Term). Without
limiting the generality of the foregoing. Tenant shall be solely responsible for
all utility costs incurred by Landlord in connection with providing HVAC to a
portion of the Premises from the Supplemental HVAC Unit (as defined in the Work
Letter Agreement attached hereto as Exhibit "D").
(f) Landlord may impose a reasonable charge for any utilities or
services (other than electric current and heating, ventilation and/or air
conditioning which shall be governed by Articles 11(c) and (e) above) utilized
by Tenant in excess of the amount or type that is typical for general office
use.
(g) Subject to the terms and conditions of this Lease, Tenant and
Tenant's employees, agents and invitees may access the Premises twenty-four (24)
hours per day, seven (7) days per week, three hundred sixty-five (365) days per
year.
ARTICLE 12 - RIGHTS OF LANDLORD
- -------------------------------
Upon not less than twenty-four (24) hours prior notice (except in cases
of emergency and for ordinary scheduled cleaning) Landlord and its agents shall
have the right to enter the Premises at all reasonable times for the purpose of
cleaning the Premises, examining or inspecting the same, serving or posting and
keeping posted thereon notices as provided by law, or which Landlord deems
necessary for the protection of Landlord or the Property, showing the same to
prospective tenants (but only during the last six (6) months of the Term),
lenders or purchasers of the Project, in the case of an emergency, and for
making such alterations, repairs, improvements or additions to the Premises or
to the Project as Landlord may deem reasonably necessary or desirable. If Tenant
shall not be personally present to open and permit an entry into the Premises at
any time when such an entry by Landlord is necessary or permitted hereunder,
Landlord may enter by means of a master key or may enter forcibly, only in the
case of an emergency, without liability to Tenant except for any failure to
exercise due care for Tenant's property, and without affecting this Lease.
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ARTICLE 13 - INDEMNITY; EXEMPTION OF LANDLORD FROM LIABILITY
- ------------------------------------------------------------
(a) INDEMNITY BY TENANT. Tenant shall indemnify, defend and hold
Landlord harmless from and against any and all claims arising from Tenant's use
of the Premises or the Project or from the conduct of its business or from any
activity, work or thing which may be permitted or suffered by Tenant in or about
the Premises or the Project and shall further indemnify, defend and hold
Landlord harmless from and against any and all claims arising from any breach or
default in the performance of any obligation on Tenant's part to be performed
under this Lease or arising from any negligence of Tenant or any of its agents,
contractors, employees or invitees, patrons, customers or members in or about
the Project and from any and all costs, attorneys' fees, expenses and
liabilities incurred in the defense of any claim or any action or proceeding
brought thereon, including negotiations in connection therewith. Tenant hereby
assumes all risk of damage to property or injury to persons in or about the
Premises from any cause, and Tenant hereby waives all claims in respect thereof
against Landlord, excepting where the damage is caused by the negligence or
willful misconduct of Landlord.
(b) INDEMNITY BY LANDLORD. Landlord shall indemnify, defend and hold
Tenant harmless from and against any and all claims arising from any negligence
of Landlord or any of its agents, contractors, employees or invitees, patrons,
customers or members in or about the Project and from any and all costs,
attorneys' fees, expenses and liabilities incurred in the defense of any claim
or any action or proceeding brought thereon, including negotiations in
connection therewith.
(c) EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not be liable
for injury to Tenant's business, or loss of income therefrom, or for damage that
may be sustained by the person, goods, wares, merchandise or property of Tenant,
its employees, invitees, customers, agents, or contractors, or any other person
in, on or about the Premises directly or indirectly caused by or resulting from
fire, steam, electricity, gas, water, or rain which may leak or flow from or
into any part of the Premises, or from the breakage, leakage, obstruction or
other defects of the pipes, sprinklers, wires, appliances, plumbing, air
conditioning, light fixtures, or mechanical or electrical systems or from
intrabuilding network cable, whether such damage or injury results from
conditions arising upon the Premises or upon other portions of the Project or
from other sources or places and regardless of whether the cause of such damage
or injury or the means or repairing the same is inaccessible to Tenant, except
in connection with damage or injury resulting from the negligence or willful
misconduct of Landlord, or its authorized agents. Landlord shall not be liable
to Tenant for any damages arising from any act or neglect of any other tenant of
the Project.
Tenant acknowledges that Landlord's election to provide
mechanical surveillance or to post security personnel in the Project is solely
within Landlord's discretion; Landlord shall have no liability in connection
with the decision whether or not to provide such services, and Tenant hereby
waives all claims based thereon. Landlord shall not be liable for losses due to
theft, vandalism, or like causes.
ARTICLE 14 - INSURANCE
- ----------------------
(a) TENANT'S INSURANCE. Tenant, shall at all times during the term of
this Lease, and at its own cost and expense, procure and continue in force the
following insurance coverage: (i) Commercial General Liability Insurance with a
combined single limit for bodily injury and property damages of not less than
Two Million Dollars ($2,000,000) per occurrence and Three Million Dollars
($3,000,000) in the annual aggregate, including products liability coverage if
applicable, covering the insuring provisions of this Lease and the performance
of Tenant of the indemnity and exemption of Landlord from liability agreements
set forth in Article 13 hereof; (ii) a policy of standard fire, extended
coverage and special extended coverage insurance (all risks), including a
vandalism and malicious mischief endorsement, sprinkler leakage coverage and
earthquake sprinkler leakage, where sprinklers are provided, in an amount equal
to the full replacement value new without deduction for depreciation of all (A)
Alterations, fixtures and other improvements in the Premises which are the
property of
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Tenant during the term hereof (but specifically excluding the initial Tenant
Improvements), and (B) trade fixtures, furniture, equipment and other personal
property installed by or at the expense of Tenant; and (iii) Workers'
Compensation coverage as required by law. Tenant shall carry and maintain during
the entire Lease term (including any option periods, if applicable), at Tenant's
sole cost and expense, increased amounts of the insurance required to be carried
by Tenant pursuant to this Article 14, and such other reasonable types of
insurance coverage and in such reasonable amounts covering the Premises and
Tenant's operations therein, as may be reasonably required by Landlord, to the
extent such insurance is customarily required by landlords of office buildings
comparable to the Project.
(b) FORM OF POLICIES. The aforementioned minimum limits of policies
and Tenant's procurement and maintenance thereof shall in no event limit the
liability of Tenant hereunder. The Commercial General Liability Insurance policy
shall name Landlord, Landlord's property manager, Landlord's lender(s) and such
other persons or firms as Landlord reasonably specifies from time to time, as
additional insureds with an appropriate endorsement to the policy(s). All such
insurance policies carried by Tenant shall be with companies having a rating of
not less than A-VIII in Best's Insurance Guide. Tenant shall furnish to
Landlord, from the insurance companies, or cause the insurance companies to
furnish, certificates of coverage. Tenant shall have the right to carry
reasonable deductible amounts under all insurance policies required to be
carried by Tenant. No such policy shall be cancelable or subject to reduction of
coverage or other modification or cancellation except after thirty (30) days'
prior written notice to Landlord by the insurer. All such policies shall be
endorsed to agree that Tenant's policy is primary and that any insurance covered
by Landlord is excess and not contributing with any Tenant insurance requirement
hereunder. Tenant shall, at least twenty (20) days prior to the expiration of
such policies, furnish Landlord with renewals or binders. Tenant agrees that if
Tenant does not take out and maintain such insurance or furnish Landlord with
renewals or binders, Landlord may (but shall not be required to) procure said
insurance on Tenant's behalf and charge Tenant the cost thereof, which amount
shall be payable by Tenant upon demand with interest (at the rate set forth in
Section 20(e) below) from the date such sums are extended. Tenant shall have the
right to provide such insurance coverage, pursuant to blanket policies obtained
by Tenant, provided such blanket policies expressly afford coverage to the
Premises and to Tenant as required by this Lease.
(c) LANDLORD'S INSURANCE. Landlord shall, as a cost to be included in
Operating Costs, procure and maintain at all times during the term of this
Lease, a policy or policies of insurance covering loss or damage to the Project
in the amount of the full replacement costs without deduction for depreciation
thereof (exclusive of Tenant's trade fixtures, inventory, personal property and
equipment), providing protection against all perils included within the
classification of fire and extended coverage, vandalism coverage, and malicious
mischief, sprinkler leakage, water damage, and special extended coverage on
buildings. Additionally, Landlord may (but shall not be required to) carry: (i)
bodily injury and property damage liability insurance and/or excess liability
coverage insurance; and (ii) rental income insurance (for not more than twelve
(12) months) at its election or if required by its lender from time to time
during the term hereof, in such amounts and with such limits as Landlord or its
lender may deem appropriate. The costs of such insurance shall be included in
Operating Costs (subject to the gross-up provisions of Article 3 above).
Landlord's policies of insurance shall be reasonably comparable to insurance
being carried by prudent landlords of commercial office properties in the
general area surrounding the Project.
(d) WAIVER OF SUBROGATION. Landlord and Tenant shall each obtain a
waiver of subrogation from its insurer(s) with respect to any policy of
insurance required under Section 14(a) or Section 14(c). If either party shall
fail to obtain a waiver of subrogation as required hereunder, such party shall
indemnify, defend and save the other party harmless from and against any and all
claims, demands, actions, suits, losses, damages, costs, expenses and
liabilities attributable to such failure. Tenant hereby waives any right that
Tenant may have against Landlord and Landlord hereby waives any right that
Landlord may have against Tenant as a result of any loss or damage to the extent
such loss or damage is paid by insurance under such policies.
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(e) COMPLIANCE WITH LAW. Tenant agrees that it will not, at any time,
during the term of this Lease, carry any stock of goods or do anything in or
about the Premises which will in any way tend to increase the insurance rates
upon the Project. Tenant agrees to pay Landlord forthwith upon demand the amount
of any increase in premiums for insurance against loss by fire that may be
charged during the term of this Lease on the amount of insurance to be carried
by Landlord on the Project resulting from the foregoing, or from Tenant doing
any act in or about said Premises which does so increase the insurance rates,
whether or not Landlord shall have consented to such act on the part of Tenant.
If Tenant installs upon the Premises any electrical equipment which constitutes
an overload of electrical lines of the Premises, Tenant shall, at its own cost
and expense in accordance with all other Lease provisions, and subject to the
provisions of Articles 9, 10 and 11 hereof, make whatever changes are necessary
to comply with requirements of the insurance underwriters and any governmental
authority having jurisdiction thereover, but nothing herein contained shall be
deemed to constitute Landlord's consent to such overloading. Tenant shall, at
its own expense, comply with all requirements of the insurance authority having
jurisdiction over the Project necessary for the maintenance of reasonable fire
and extended coverage insurance for the Premises, including, without limitation
thereto, the installation of fire extinguishers or an automatic dry chemical
extinguishing system.
ARTICLE 15 - ASSIGNMENT AND SUBLETTING
- --------------------------------------
Tenant shall have no power to, either voluntarily, involuntarily, by
operation of law or otherwise, sell, assign, transfer or hypothecate this Lease,
or sublet the Premises or any part thereof, or permit the Premises or any part
thereof to be used or occupied by anyone other than Tenant or Tenant's employees
without the prior written consent of Landlord which shall not be unreasonably
withheld or delayed. If Tenant is a corporation, unincorporated association,
partnership or limited liability company, the sale, assignment, transfer or
hypothecation of any class of stock or other ownership interest in such
corporation, association, partnership or limited liability company in excess of
fifty percent (50%) in the aggregate shall be deemed an assignment within the
meaning and provisions of this Article 15. Notwithstanding the above, Tenant
shall have the right to assign this Lease or sublet all or a portion of the
Premises to, WITHOUT LANDLORD'S CONSENT, any of the following (each a "Tenant
Affiliate"): (1) any corporation which controls, is controlled by or under
common control with Tenant, (2) any corporation resulting from the merger or
consolidation of Tenant, or (3) any person or entity which acquires all of the
assets of Tenant as a going concern of the business that is being conducted on
the Premises, provided, however, that (i) said Tenant Affiliate assumes in full
the obligations of Tenant under the Lease, and (ii) the net worth of said Tenant
Affiliate is no less than that of Tenant immediately prior to such transfer. The
term "control" or "controlled" as used herein shall mean the ownership, directly
or indirectly, of at least fifty percent (50%) of the voting securities of, or
possession of the right to vote, in the ordinary direction of its affairs, of at
least 50% of the voting interest in, an entity. Tenant may transfer its interest
pursuant to this Lease only upon the following express conditions, which
conditions are agreed by Landlord and Tenant to be reasonable:
(a) That the proposed transferee shall be subject to the prior written
consent of Landlord, which consent will not be unreasonably withheld but,
without limiting the generality of the foregoing, it shall be reasonable for
Landlord to deny such consent if:
(i) The use to be made of the Premises by the proposed
transferee is (a) not generally consistent with the character and nature of all
other tenancies in the Project, or (b) a use which conflicts with any so-called
"exclusive" then in favor of, or for any use which is the same as that stated in
any percentage rent lease to, another tenant of the Project, or (c) a use which
would be prohibited by any other portion of this Lease (including, but not
limited to, any rules and regulations then in effect);
(ii) The financial responsibility of the proposed transferee
is not at least equal to those which were possessed by Tenant as of the date of
execution of this Lease;
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(iii) The proposed transferee is either a governmental agency
or instrumentality thereof; or
(iv) Either the proposed transferee or any person or entity
which directly or indirectly controls, is controlled by or is under common
control with the proposed transferee (A) occupies space in the Project at the
time of the request for consent, or (B) is negotiating with Landlord or has
negotiated with Landlord during the six (6) month period immediately preceding
the date of the proposed transfer, to lease space in the Project.
(b) Whether or not Landlord consents to any such transfer, Tenant shall
pay to Landlord Landlord's then standard processing fee and reasonable
attorneys' fees incurred in connection with the proposed transfer up to the
aggregate sum of One Thousand Dollars ($1,000.00);
(c) That the proposed transferee shall execute an agreement pursuant to
which it shall agree to perform faithfully and be bound by all of the terms,
covenants, conditions, provisions and agreements of this Lease applicable to
that portion of the Premises so transferred; and
(d) That an executed duplicate original of said assignment and
assumption agreement or other transfer on a form reasonably approved by
Landlord, shall be delivered to Landlord within five (5) days after the
execution thereof, and that such transfer shall not be binding upon Landlord
until the delivery thereof to Landlord and the execution and delivery of
Landlord's consent thereto. Except for any subleasing, assignment or other
transfer of all of Tenant's interest in this Lease or the Premises (hereinafter
referred to as a "Transfer") to a Tenant Affiliate, it shall be a condition to
Landlord's consent to any Transfer that (i) upon Landlord's consent to any
Transfer, Tenant shall pay and continue to pay fifty percent (50%) of any
"Transfer Premium" (defined below), received by Tenant from the transferee after
payment to Tenant of all costs and expenses paid by Tenant in connection with
said Transfer, including, without limitation, leasing commissions and attorneys'
fees directly relating to the assignment of this Lease; (ii) any sublessee of
part or all of Tenant's interest in the Premises shall agree that in the event
Landlord gives such sublessee notice that Tenant is in default under this Lease,
such sublessee shall thereafter make all sublease or other payments directly to
Landlord, which will be received by Landlord without any liability whether to
honor the sublease or otherwise (except to credit such payments against sums due
under this Lease), and any sublessee shall agree to attorn to Landlord or its
successors and assigns at their request should this Lease be terminated for any
reason, except that in no event shall Landlord or its successors or assigns be
obligated to accept such attornment; (iii) any such Transfer and consent shall
be effected on forms reasonably satisfactory to Landlord and/or its legal
counsel; (iv) Landlord may require that Tenant not then be in default hereunder
in any respect (after applicable notice and cure period); and (v) Tenant or the
proposed subtenant or assignee (collectively, "Transferee") shall agree to pay
Landlord, upon demand, as additional rent, a sum equal to the additional costs,
if any, incurred by Landlord for maintenance and repair as a result of any
change in the nature of occupancy caused by such subletting or assignment.
"Transfer Premium" shall mean all rent, additional rent or other consideration
paid by a Transferee in connection with a Transfer in excess of the rent and
Additional Rent payable by Tenant under this Lease during the term of the
Transfer and if such Transfer is less than all of the Premises, the Transfer
Premium shall be calculated on a rentable square foot basis. "Transfer Premium"
shall also include, but not be limited to, key money, bonus money or other cash
consideration paid by a transferee to Tenant in connection with such Transfer,
and any payment in excess of fair market value for services rendered by Tenant
to the Transferee and any payment in excess of fair market value for assets,
fixtures, inventory, equipment, or furniture transferred by Tenant to the
Transferee in connection with such Transfer. Any sale, assignment,
hypothecation, transfer or subletting of this Lease which is not in compliance
with the provisions of this Article 15 shall be void and shall, at the option of
Landlord, terminate this Lease. In no event shall the consent by Landlord to an
assignment or subletting be construed as relieving Tenant, any assignee, or
sublessee from obtaining the express written consent of Landlord to any further
assignment or subletting, or as releasing Tenant from any
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liability or obligation hereunder whether or not then accrued and Tenant shall
continue to be fully liable therefor. No collection or acceptance of rent by
Landlord from any person other than Tenant shall be deemed a waiver of any
provision of this Article 15 or the acceptance of any assignee or subtenant
hereunder, or a release of Tenant (or of any successor of Tenant or any
subtenant). Notwithstanding anything to the contrary in this Lease, if Tenant or
any proposed Transferee claims that Landlord has unreasonably withheld or
delayed its consent under this Article 15 or otherwise has breached or acted
unreasonably under this Article 15, their sole remedies shall be a declaratory
judgment and an injunction for the relief sought, including an action for
monetary damages, and Tenant hereby waives all other remedies, including,
without limitation, any right at law or equity to terminate this Lease, on its
own behalf and, to the extent permitted under all applicable laws, on behalf of
the proposed Transferee.
Notwithstanding anything to the contrary contained in this
Article 15, Landlord shall have the option by giving written notice to Tenant
within fifteen (15) days after Landlord's receipt of a request for consent to a
proposed Transfer, to terminate this Lease as to the portion of the Premises
which is the subject of the Transfer. If this Lease is so terminated with
respect to less than the entire Premises, the Basic Rental and Tenant's
Proportionate Share shall be prorated based on the number of rentable square
feet retained by Tenant as compared to the total number of rentable square feet
contained in the original Premises, and this Lease as so amended shall continue
thereafter in full force and effect, and upon the request of either party, the
parties shall execute written confirmation of the same. Notwithstanding the
above, Tenant shall have the right to rescind Landlord's notice of termination
by withdrawing Tenant's request for Landlord's consent within three (3) days of
receiving Landlord's notice of termination, and in such event this Lease shall
continue in full force and effect. The provisions of this paragraph SHALL NOT
AFFECT A TRANSFER TO a Tenant Affiliate.
ARTICLE 16 - DAMAGE OR DESTRUCTION
- ----------------------------------
If the Project is damaged by fire or other insured casualty and the
insurance proceeds have been made available therefor by the holder or holders of
any mortgages or deeds of trust covering the Premises or the Project, the damage
shall be repaired by Landlord to the extent such insurance proceeds are
available therefor and provided such repairs can, in Landlord's reasonable
opinion, be completed within 240 days after the necessity for repairs as a
result of such damage becomes known to Landlord without the payment of overtime
or other premiums. Until such repairs are completed, rent shall be abated in
proportion to the part of the Premises which is unusable by Tenant in the
conduct of its business (but there shall be no abatement of rent by reason of
any portion of the Premises being unusable for a period equal to one (1) day or
less). However, if the damage is due to the negligence or willful misconduct of
Tenant, its employees or agents, there shall be no abatement of rent, unless and
to the extent Landlord receives rental income insurance proceeds. Upon the
occurrence of any damage to the Premises, Tenant shall assign to Landlord (or to
any party designated by Landlord) all insurance proceeds payable to Tenant under
Section 14(a)(ii)(A) above; provided, however, that if the cost of repair of
improvements within the Premises by Landlord exceeds the amount of insurance
proceeds received by Landlord from Tenant's insurance carrier, as so assigned by
Tenant, such excess costs shall be paid by Tenant to Landlord prior to
Landlord's repair of such damage. If repairs cannot, in Landlord's opinion, be
completed within 240 days after the necessity for repairs as a result of such
damage becomes known to Landlord without the payment of overtime or other
premiums, either Landlord or Tenant may elect to terminate this Lease by
notifying the other party in writing of such termination within sixty (60) days
after Landlord notifies Tenant of its determination that such repair cannot be
made within the 240-day period, such notice to include a termination date which
is sixty (60) days after the date of such notice (without affecting Tenant's
rights, if any, to abate rent). If neither Landlord nor Tenant elects to
terminate this Lease pursuant to the preceding sentence, Landlord shall make
such repairs in a reasonable time and in such event this Lease shall continue in
effect and the rent shall be abated, if at all, in the manner provided in this
Article 16. In addition, Landlord may elect to terminate this Lease if the
Project shall be damaged by fire or other casualty or cause, whether or not the
Premises are affected, and the damage is not fully covered, except for
deductible amounts, by Landlord's insurance policies. Finally, if the Premises
or the
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Project is damaged to any substantial extent during the last eighteen (18)
months of the Term, then notwithstanding anything contained in this Article 16
to the contrary, either Tenant or Landlord shall have the option to terminate
this Lease by giving written notice to the other party of the exercise of such
option within sixty (60) days after Landlord learns of the necessity for repairs
as the result of such damage. A total destruction of the Project shall
automatically terminate this Lease. Except as provided in this Article 16, there
shall be no abatement of rent and no liability of Landlord by reason of any
injury to or interference with Tenant's business or property arising from such
damage or destruction or the making of any repairs, alterations or improvements
in or to any portion of the Project or the Premises or in or to fixtures,
appurtenances and equipment therein. Tenant understands that Landlord will not
carry insurance of any kind on Tenant's furniture, furnishings, trade fixtures
or equipment, and that Landlord shall not be obligated to repair any damage
thereto or replace the same. Except for proceeds relating to Tenant's furniture,
furnishings, trade fixtures and equipment, Tenant acknowledges that Tenant shall
have no right to any proceeds of insurance relating to property damage. With
respect to any damage which Landlord is obligated to repair or elects to repair,
Tenant, as a material inducement to Landlord entering into this Lease,
irrevocably waives and releases its rights under the provisions of Sections 1932
and 1933 of the California Civil Code.
ARTICLE 17 - SUBORDINATION
- --------------------------
This Lease is subject and subordinate to all ground or underlying
leases, mortgages and deeds of trust of record as of the date of this Lease
which affect the Property or the Project, including all renewals, modifications,
consolidations, replacements and extensions thereof; provided, however, if the
lessor under any such lease or the holder or holders of any such mortgage or
deed of trust shall advise Landlord that they desire or require this Lease to be
prior and superior thereto, upon written request of Landlord to Tenant, Tenant
agrees to promptly execute, acknowledge and deliver any and all documents or
instruments which Landlord or such lessor, holder or holders deem necessary or
desirable for purposes thereof. Landlord shall have the right to cause this
Lease to be and become and remain subject and subordinate to any and all ground
or underlying leases, mortgages or deeds of trust which may hereafter be
executed covering the Premises, the Project or the property or any renewals,
modifications, consolidations, replacements or extensions thereof, for the full
amount of all advances made or to be made thereunder and without regard to the
time or character of such advances, together with interest thereon and subject
to all the terms and provisions thereof; provided, however, that Landlord
obtains from the lender or other party in question a written undertaking in
favor of Tenant to the effect that such lender or other party will not disturb
Tenant's right of possession under this Lease if Tenant is not then or
thereafter in breach of any covenant or provision of this Lease. Tenant agrees,
within twenty (20) days after Landlord's written request therefor, to execute,
acknowledge and deliver upon request any and all documents or instruments
reasonably requested by Landlord or reasonably necessary or proper to assure the
subordination of this Lease to any such mortgages, deed of trust, or leasehold
estates; provided that no such document shall otherwise alter any of the terms
or provisions hereof. Tenant agrees that in the event any proceedings are
brought for the foreclosure of any mortgage or deed of trust or any deed in lieu
thereof, to attorn to the purchaser or any successors thereto upon any such
foreclosure sale or deed in lieu thereof as so requested to do so by such
purchaser and to recognize such purchaser as the lessor under this Lease so long
as such purchaser or successor agrees not to disturb Tenant's right of
possession hereunder except pursuant to the terms of this Lease. Tenant shall,
within ten (10) days after request execute such further instruments or
assurances as such purchaser may reasonably deem necessary to evidence or
confirm such attornment. Concurrently with its delivery to Landlord, Tenant
agrees to provide copies of any notices of Landlord's default under this Lease
to any mortgagee or deed of trust beneficiary whose address has been provided to
Tenant and Tenant shall provide such mortgagee or deed of trust beneficiary the
right to cure any such default on behalf of Landlord within the time periods set
forth in this Lease. Tenant waives the provisions of any current or future
statute, rule or law which may give or purport to give Tenant any right or
election to terminate or otherwise adversely affect this Lease and the
obligations of the Tenant hereunder in the event of any foreclosure proceeding
or sale.
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ARTICLE 18 - EMINENT DOMAIN
- ---------------------------
If the whole of the Premises or the Project or so much thereof as to
render the balance unusable by Tenant shall be taken under power of eminent
domain, or is sold, transferred or conveyed in lieu thereof, this Lease shall
automatically terminate as of the date of such condemnation, or as of the date
possession is taken by the condemning authority, at either Landlord or Tenant's
option. No award for any partial or entire taking shall be apportioned, and
Tenant hereby assigns to Landlord any award which may be made in such taking or
condemnation, together with any and all rights of Tenant now or hereafter
arising in or to the same or any part thereof; provided, however, that nothing
contained herein shall be deemed to give Landlord any interest in or to require
Tenant to assign to Landlord any award made to Tenant for the taking of personal
property and trade fixtures belonging to Tenant and removable by Tenant at the
expiration of the term hereof as provided hereunder, for relocation costs, for
the interruption of, or damage to, Tenant's business and goodwill, or any other
amount in addition to the foregoing which does not reduce the amount of the
award payable to Landlord. In the event of a partial taking described in this
Article 18, or a sale, transfer or conveyance in lieu thereof which does not
result in a termination of this Lease, the rent shall be apportioned according
to the ratio that the part of the Premises remaining useable by Tenant bears to
the total area of the Premises and Landlord shall restore the Premises as close
as reasonably practicable to its prior condition. Tenant hereby waives any and
all rights it might otherwise have pursuant to Section 1265.130 of the
California Code of Civil Procedure.
ARTICLE 19 - DEFAULT
- --------------------
Each of the following acts or omissions of Tenant or of any guarantor
of Tenant's performance hereunder, or occurrences, shall constitute an "Event of
Default":
(a) Failure or refusal to pay Basic Rental, Additional Rent or any
other amount to be paid by Tenant to Landlord hereunder within five (5) calendar
days after written notice that the same is due or payable hereunder; said five
(5) day period shall be in lieu of, and not in addition to, the notice
requirements of Section 1161 of the California Code of Civil Procedure or any
similar or successor law;
(b) Except as set forth in Subparagraphs (a) above and (c) through and
including (g) below, failure to perform or observe any other covenant or
condition of this Lease to be performed or observed within thirty (30) days
following written notice to Tenant of such failure; provided, however, that if
such failure cannot reasonably be cured within said thirty-day period, then so
long as Tenant commences to cure within said thirty-day period and diligently
pursues such cure to completion, then the same shall not be an Event of Default.
Such thirty (30) day notice shall be in lieu of, and not in addition to, any law
required under Section 1161 of the California Code of Civil Procedure or any
similar or successor law;
(c) The taking in execution or by similar process or law (other than
by eminent domain) of the estate hereby created;
(d) The filing by Tenant or any guarantor hereunder in any court
pursuant to any statute of a petition in bankruptcy or insolvency or for
reorganization or arrangement for the appointment of a receiver of all or a
portion of Tenant's property; the filing against Tenant or any guarantor
hereunder of any such petition, or the commencement of a proceeding for the
appointment of a trustee, receiver or liquidator for Tenant, or for any
guarantor hereunder, or of any of the property of either, or a proceeding by any
governmental authority for the dissolution or liquidation of Tenant or any
guarantor hereunder, if such proceeding shall not be dismissed or trusteeship
discontinued within sixty (60) days after commencement of such proceeding or the
appointment of such trustee or receiver; or the making by Tenant or any
guarantor hereunder of an assignment for the benefit of creditors;
(e) Tenant's failure to cause to be released or post a bond over any
mechanics liens filed against the Premises or the Project within twenty (20)
days after the date the same shall have been filed or recorded; or
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(f) Tenant's failure to observe or perform according to the provisions
of Articles 17 or 25 within five (5) business days after written notice from
Landlord.
All defaults by Tenant of any covenant or condition of this Lease shall
be deemed by the parties hereto to be material.
ARTICLE 20 - REMEDIES
- ---------------------
(a) Upon the occurrence of an Event of Default under this Lease as
provided in Article 19 hereof, Landlord may exercise all of its remedies as may
be permitted by law, including, but not limited to, the remedy provided by
Section 1951.4 of the California Civil Code, and including, without limitation,
terminating this Lease, re-entering the Premises and removing all persons and
property therefrom, which property may be stored by Landlord at a warehouse or
elsewhere at the risk, expense and for the account of Tenant. If Landlord elects
to terminate this Lease, Landlord shall be entitled to recover from Tenant the
aggregate of all amounts permitted by law, including, but not limited to (i) the
worth at the time of the amount of any unpaid rent which had been earned at the
time of such termination; plus (ii) the worth at the time of award of the amount
by which the unpaid rent which would have been earned after termination until
the time of award exceeds the amount of such rental loss that Tenant proves
could have been reasonably avoided; plus (iii) the worth at the time of award of
the amount by which the unpaid rent for the balance of the Lease Term after the
time of award exceeds the amount of such rental loss that Tenant proves could
have been reasonably avoided; plus (iv) any other amount necessary to compensate
Landlord for all the detriment proximately caused by Tenant's failure to perform
its obligations under this Lease or which in the ordinary course of things would
be likely to result therefrom, specifically including, but not limited to,
brokerage commissions and advertising expenses incurred, expenses of remodeling
the Premises or any portion thereof for a new tenant, whether for the same or a
different use, and any special concessions made to obtain a new tenant; and (v)
at Landlord's election, such other amounts in addition to or in lieu of the
foregoing as may be permitted from time to time by applicable law. The term
"rent" as used in this Article 20(a) shall be deemed to be and to mean all sums
of every nature required to be paid by Tenant pursuant to the terms of this
Lease, whether to Landlord or to others. As used in Items (i) and (ii), above,
the "worth at the time of award" shall be computed by allowing interest at the
rate set forth in Item (e), below, but in no case greater than the maximum
amount of such interest permitted by law. As used in Item (iii), above, the
"worth at the time of award" shall be computed by discounting such amount at the
discount rate of the Federal Reserve Bank of San Francisco at the time of award
plus one percent (1%).
(b) Nothing in this Article 20 shall be deemed to affect Landlord's
right to indemnification for liability or liabilities arising prior to the
termination of this Lease for personal injuries or property damage under the
indemnification clause or clauses contained in this Lease.
(c) Notwithstanding anything to the contrary set forth herein,
Landlord's re-entry to perform acts of maintenance or preservation of or in
connection with efforts to relet the Premises or any portion thereof, or the
appointment of a receiver upon Landlord's initiative to protect Landlord's
interest under this Lease shall not terminate Tenant's right to possession of
the Premises or any portion thereof and, until Landlord does elect to terminate
this Lease, this Lease shall continue in full force and effect, and Landlord may
enforce all of Landlord's rights and remedies hereunder including, without
limitation, the remedy described in California Civil Code Section 1951.4 (lessor
may continue lease in effect after lessee's breach and abandonment and recover
rent as it becomes due, if lessee has the right to sublet or assign, subject
only to reasonable limitations). Accordingly, if Landlord does not elect to
terminate this Lease on account of any default by Tenant, Landlord may, from
time to time, without terminating this Lease, enforce all of its rights and
remedies under this Lease, including the right to recover all rent as it becomes
due.
(d) All rights, powers and remedies of Landlord hereunder and under any
other agreement now or hereafter in force between Landlord and Tenant shall be
cumulative and not
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alternative and shall be in addition to all rights, powers and remedies given to
Landlord by law, and the exercise of one (1) or more rights or remedies shall
not impair Landlord's right to exercise any other right or remedy.
(e) Any amount due from Tenant to Landlord hereunder which is not paid
when due shall bear interest at the lower of ten percent (10%) per annum, or the
maximum lawful rate of interest from the due date (subject to applicable cure
periods, if any) until paid, unless otherwise specifically provided herein, but
the payment of such interest shall not excuse or cure any default by Tenant
under this Lease. In addition to such interest: (i) if Basic Rental is not paid
within ten (10) days after written notice that the same is due, a late charge
equal to five percent (5%) of the amount overdue or Five Hundred Dollars
($500.00), whichever is greater, shall be assessed and shall accrue for each
calendar month or part thereof until such rental, including the late charge, is
paid in full, which late charge Tenant hereby agrees is a reasonable estimate of
the damages Landlord shall suffer as a result of Tenant's late payment; and (ii)
a charge of Twenty-Five Dollars ($25.00) shall be assessed for any check given
to Landlord by or on behalf of Tenant which is not honored by the drawee
thereof, which damages include Landlord's additional administrative and other
costs associated with such late payment and unsatisfied checks, and the parties
agree that it would be impracticable or extremely difficult to fix Landlord's
actual damage in such event. Such charges for interest and late payments and
unsatisfied checks are separate and cumulative and are in addition to and shall
not diminish or represent a substitute for any or all of Landlord's rights or
remedies under any other provision of this Lease.
ARTICLE 21 - TRANSFER OF LANDLORD'S INTEREST
- --------------------------------------------
In the event of any transfer or termination of Landlord's interest in
the Premises or the Project by sale, assignment, transfer, foreclosure, deed in
lieu of foreclosure, or otherwise, whether voluntary or involuntary, Landlord
shall be automatically relieved of any and all obligations and liabilities on
the part of Landlord from and after the date of such transfer or termination,
including furthermore without limitation the obligation of Landlord under
Article 4 above and California Civil Code 1950.7 to return the security deposit,
provided said security deposit is transferred to said transferee. Tenant agrees
to attorn to the transferee upon any such transfer and to recognize such
transferee as the lessor under this Lease so long as such transferee assumes the
obligations of Landlord arising under this Lease from and after the date of such
transfer and Tenant shall, within five (5) days after request, execute such
further instruments or assurances as such transferee may reasonably deem
necessary to evidence or confirm such attornment.
ARTICLE 22 - BROKER
- -------------------
In connection with this Lease, Landlord and Tenant each warrants and
represents to the other that it has had dealings only with firm(s) set forth in
Article 1.H. of the Basic Lease Provisions and that it knows of no other person
or entity who is or might be entitled to a commission, finder's fee or other
like payment in connection herewith and Landlord and Tenant each does hereby
indemnify and agree to hold the other party, its agents, members, partners,
representatives, officers, affiliates, shareholders, employees, successors and
assigns harmless from and against any and all loss, liability and expenses which
such other party may incur should such warranty and representation prove
incorrect, inaccurate or false.
ARTICLE 23 - PARKING
- --------------------
Tenant shall have the right (but not the obligation) to use, free of
charge, the number of reserved and/or unreserved parking passes set forth in
Article 1(I) of the Basic Lease Provisions, which parking passes shall pertain
to the Project parking facility. Tenant's continued right to use the parking
passes is conditioned upon Tenant abiding by all rules and regulations which are
prescribed from time to time for the orderly operation and use of the parking
facility where the parking passes are located, including any sticker or other
identification system reasonably established by Landlord, Tenant's cooperation
in seeing that Tenant's employees and visitors also comply with such rules and
regulations, and Tenant not
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being in default under this Lease, after applicable notice and cure provisions.
Landlord specifically reserves the right to change the size, configuration,
design, layout and all other aspects of the Project parking facility at any time
and Tenant acknowledges and agrees that Landlord may, without incurring any
liability to Tenant and without any abatement of rent under this Lease, from
time to time, close-off or restrict access to the Project parking facility for
purposes of permitting or facilitating any such construction, alteration or
improvements; provided that Landlord agrees to use its commercially reasonable
efforts to minimize any interference or disruption to Tenant as a result of any
such change. Landlord may delegate its responsibilities hereunder to a parking
operator or a lessee of the parking facility in which case such parking operator
or lessee shall have all the rights of control attributed hereby to the
Landlord. The parking passes used by Tenant pursuant to this Article 23 are
provided to Tenant solely for use by Tenant's own personnel and such passes may
not be transferred, assigned, subleased or otherwise alienated by Tenant without
Landlord's prior approval (except in connection with assignments and subleases
not requiring Landlord's prior approval).
ARTICLE 24 - WAIVER
- -------------------
No waiver by Landlord of any provision of this Lease shall be deemed to
be a waiver of any other provision hereof or of any subsequent breach by Tenant
of the same or any other provision. No provision of this Lease may be waived by
Landlord, except by an instrument in writing executed by Landlord. Landlord's
consent to or approval of any act by Tenant requiring Landlord's consent or
approval shall not be deemed to render unnecessary the obtaining of Landlord's
consent to or approval of any subsequent act of Tenant, whether or not similar
to the act so consented to or approved. No act or thing done by Landlord or
Landlord's agents during the term of this Lease shall be deemed an acceptance of
a surrender of the Premises, and no agreement to accept such surrender shall be
valid unless in writing and signed by Landlord. Any payment by Tenant or receipt
by Landlord of an amount less than the total amount then due hereunder shall be
deemed to be in partial payment only thereof and not a waiver of the balance due
or an accord and satisfaction, notwithstanding any statement or endorsement to
the contrary on any check or any other instrument delivered concurrently
therewith or in reference thereto. Accordingly, Landlord may accept any such
amount and negotiate any such check without prejudice to Landlord's right to
recover all balances due and owing and to pursue its other rights against Tenant
under this Lease, regardless of whether Landlord makes any notation on such
instrument of payment or otherwise notifies Tenant that such acceptance or
negotiation is without prejudice to Landlord's rights.
ARTICLE 25 - ESTOPPEL CERTIFICATE
- ---------------------------------
Tenant shall, at any time and from time to time, upon not less than
twenty (20) days' prior written notice from Landlord, execute, acknowledge and
deliver to Landlord a statement in writing certifying the following information
(but not limited to the following information in the event further information
is requested by Landlord): (a) that this Lease is unmodified and in full force
and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as modified, is in full force and effect); (b) the
dates to which the rental and other charges are paid in advance, if any; (c) the
amount of Tenant's security deposit, if any; and (d) acknowledging that there
are not, to the best of Tenant's knowledge, any uncured defaults on the part of
Landlord hereunder, and no events or conditions then in existence which, with
the passage of time or notice or both, would constitute a default on the part of
Landlord hereunder, or specifying such defaults, events or conditions, if any
are claimed. It is expressly understood and agreed that any such statement may
be relied upon by any prospective purchaser or encumbrancer of all or any
portion of the Real Property. Tenant's failure to deliver such statement within
such time shall constitute an admission by Tenant that all statements contained
therein are true and correct. Tenant agrees to execute all documents required in
accordance with this Article 25 within twenty (20) days after delivery of said
documents.
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ARTICLE 26 - LIABILITY OF LANDLORD
- ----------------------------------
Notwithstanding anything in this Lease to the contrary, any remedy of
Tenant for the collection of a judgment (or other judicial process) requiring
the payment of money by Landlord in the event of any default by Landlord
hereunder or any claim, cause of action, obligation, contractual statutory or
otherwise by Tenant against Landlord concerning, arising out of or relating to
any matter relating to this Lease and all of the covenants and conditions or any
obligations, contractual, statutory, or otherwise set forth herein, shall be
limited solely and exclusively to an amount which is equal to the interest of
Landlord in and to the Project. No other property or assets of Landlord, or any
member, officer, director, shareholder, partner, trustee, agent, servant or
employee of Landlord ("Representative") shall be subject to levy, execution or
other enforcement procedure for the satisfaction of Tenant's remedies under or
with respect to this Lease, Landlord's obligations to Tenant, whether
contractual, statutory or otherwise, the relationship of Landlord and Tenant
hereunder, or Tenant's use or occupancy of the Premises. Tenant further
understands that Landlord shall not incur any additional liability, duty or
obligation to Tenant arising from and after the date that Landlord or any of
Landlord's Representatives no longer have any right, title or interest in or to
the Project.
ARTICLE 27 - INABILITY TO PERFORM
- ---------------------------------
This Lease and the obligations of Landlord and Tenant hereunder shall
not be affected or impaired because Landlord or Tenant, as the case may be, is
unable to fulfill any of its obligations hereunder or is delayed in doing so, if
such inability or delay is caused by reason of any prevention, delay, stoppage
due to strikes, lockouts, acts of God, or any other cause previously, or at such
time, beyond the reasonable control or anticipation of such party (collectively,
a "Force Majeure"), and such party's obligations under this Lease shall be
forgiven and suspended by any such Force Majeure.
ARTICLE 28 - HAZARDOUS WASTE
- ----------------------------
(a) Tenant shall not cause or permit any Hazardous Material (as defined
in Article 28(d) below) to be brought, kept or used in or about the Project by
Tenant, its agents, employees, contractors, or invitees except for small
quantities of normal office supplies (i.e., liquid paper, toner fluid, . . . )
used in compliance with all Hazardous Materials Laws. Tenant indemnifies
Landlord from and against any breach by Tenant of the obligations stated in the
preceding sentence, and agrees to defend and hold Landlord harmless from and
against any and all claims, judgments, damages, penalties, fines, costs,
liabilities, or losses (including, without limitation, diminution in value of
the Project, damages for the loss or restriction or use of rentable or usable
space or of any amenity of the Project, damages arising from any adverse impact
or marketing of space in the Project, and sums paid in settlement of claims,
attorneys' fees, consultant fees, and expert fees) which arise during or after
the term of this Lease as a result of such breach. This indemnification of
Landlord by Tenant includes, without limitation, costs incurred in connection
with any investigation of site conditions or any cleanup, remedial, removal, or
restoration work required by any federal, state, or local governmental agency or
political subdivision because of Hazardous Material present in the soil or
ground water on or under the Project. Without limiting the foregoing, if the
presence of any Hazardous Material on the Project caused or permitted by Tenant
results in any contamination of the Project and subject to the provisions of
Articles 9, 10 and 11 hereof, Tenant shall promptly take all actions at its sole
expense as are necessary to return the Project to the condition existing prior
to the introduction of any such Hazardous Material and the contractors to be
used by Tenant for such work must be approved by Landlord, which approval shall
not be unreasonably withheld so long as such actions would not potentially have
any material adverse long-term or short-term effect on the Project and so long
as such actions do not materially interfere with the use and enjoyment of the
Project by the other tenants thereof.
(b) Intentionally Omitted
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(c) It shall not be unreasonable for Landlord to withhold its consent
to any proposed transfer if (i) the proposed transferee's anticipated use of the
Premises involves the generation, storage, use, treatment, or disposal of
Hazardous Material (other than as permitted above); (ii) the proposed transferee
has been required by any prior landlord, lender, or governmental authority to
take remedial action in connection with Hazardous Material contaminating a
property if the contamination resulted from such transferee's actions or use of
the property in question; or (iii) the proposed transferee is subject to an
Enforcement Order issued by any governmental authority in connection with the
use, disposal, or storage of a Hazardous Material.
(d) As used herein, the term "Hazardous Material" means any hazardous
or toxic substance, material, or waste which is or becomes regulated by any
local governmental authority, the State of California or the United States
Government. The term "Hazardous Material" includes, without limitation, any
material or substance which is (i) defined as "Hazardous Waste", "Extremely
Hazardous Waste", or "Restricted Hazardous Waste" under Sections 25115, 25117 or
25122.7, or listed pursuant to Section 25140 of the California Health and Safety
Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law); (ii) defined as a
"Hazardous Substance" under Section 25316 of the California Health and Safety
Code, Division 20, Chapter 6.8 (Carpenter-Presley-Tanner Hazardous Substance
Account Act); (iii) defined as a "Hazardous Material", "Hazardous Substance", or
"Hazardous Waste" under Section 25501 of the California Health and Safety Code,
Division 20, Chapter 6.95 (Hazardous Materials Release Response Plans and
Inventory); (iv) defined as a "Hazardous Substance" under Section 25281 of the
California Health and Safety Code, Division 20, Chapter 6.7 (Underground Storage
of Hazardous Substances); (v) petroleum; (vi) asbestos; (vii) listed under
Article 9 or defined as "Hazardous" or "Extremely Hazardous" pursuant to Article
11 of Title 22 of the California Administrative Code, Division 4, Chapter 20;
(viii) designated as a "Hazardous Substance" pursuant to Section 311 of the
Federal Water Pollution Control Act (33 U.S.C. Section 1317); (ix) defined as a
"Hazardous Waste" pursuant to Section 1004 of the Federal Resource Conservation
and Recovery Act, 42 U.S.C. Section 6901, et seq. (42 U.S.C. Section 6903); or
(x) defined as a "Hazardous Substance" pursuant to Section 101 of the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
Section 9601, et seq. (42 U.S.C. Section 9601).
(e) As used herein, the term "laws" means any applicable federal, state
or local law, ordinance, or regulation relating to any Hazardous Material
affecting the Project, including, without limitation, the laws, ordinances, and
regulations referred to in Article
28 (d) above.
(f) Landlord represents to Tenant that, to the best of Landlord's
actual knowledge (without any independent inquiry or investigation), Landlord
has not received any notice from any governmental authority that the Premises or
the Project are in violation of any laws as of the date of this Lease. Landlord
shall indemnify, defend and hold harmless Tenant, its officers, directors,
employees and agents harmless from and against any and all claims, judgments,
damages, penalties, fines, costs, liabilities or losses and attorneys' fees
arising out of (i) any hazardous materials in, on or about the Project or the
Premises as of the dates of this Lease, and (ii) any Hazardous Materials which
were created, handled, placed, stored, used, transported or disposed of by
Landlord or Landlord's agents, after the dates of this Lease, excluding,
however, any Hazardous Materials whose presence was caused by Tenant or any of
Tenant's agents, employees, representatives or invitees.
ARTICLE 29 - SURRENDER OF PREMISES; REMOVAL OF PROPERTY
- -------------------------------------------------------
(a) The voluntary or other surrender of this Lease by Tenant to
Landlord, or a mutual termination hereof, shall not work a merger, and shall at
the option of Landlord, operate as an assignment to it of any or all subleases
or subtenancies affecting the Premises.
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(b) Upon the expiration of the term of this Lease, or upon any earlier
termination of this Lease, Tenant shall quit and surrender possession of the
Premises to Landlord in as good order and condition as the same are now and
hereafter may be improved by Landlord or Tenant, reasonable wear and tear,
casualty and repairs which are Landlord's obligation excepted, and shall,
without expense to Landlord, remove or cause to be removed from the Premises all
debris and rubbish, all furniture, equipment, business and trade fixtures,
free-standing cabinet work, moveable partitioning and other articles of personal
property owned by Tenant or installed or placed by Tenant at its own expense in
the Premises, and all similar articles of any other persons claiming under
Tenant unless Landlord exercises its option to have any subleases or
subtenancies assigned to it, and Tenant shall repair all damage to the Premises
resulting from the installation and removal of such items to be removed.
(c) Whenever Landlord shall re-enter the Premises as provided in
Article 12 hereof, or as otherwise provided in this Lease, any property of
Tenant not removed by Tenant upon the expiration of the term of this Lease (or
within forty-eight (48) hours after a termination by reason of Tenant's
default), as provided in this Lease, shall be considered abandoned, and Landlord
may remove any or all of such items and dispose of the same in any manner
permitted by law or store the same in a public warehouse or elsewhere for the
account and at the expense and risk of Tenant, and if Tenant shall fail to pay
the cost of storing any such property after it has been stored for a period of
ninety (90) days or more, Landlord may sell any or all of such property at
public or private sale, in such manner and at such times and places as Landlord,
in its sole discretion, may deem proper, without notice or to demand upon
Tenant, for the payment of all or any part of such charges or the removal of any
such property, and shall apply the proceeds of such sale as follows: first, to
the cost and expense of such sale, including reasonable attorneys' fees for
services rendered; second, to the payment of the cost of or charges for storing
any such property; third, to the payment of any other sums of money which may
then or thereafter be due to Landlord from Tenant under any of the terms hereof;
and fourth, the balance, if any, to Tenant.
(d) All fixtures, equipment, Alterations and/or appurtenances attached
to or built into the Premises prior to or during the term of the Lease (other
than Tenant's personal property and trade fixtures), whether by Landlord or
Tenant and whether at the expense of Landlord or Tenant, or of both, shall be
and remain part of the Premises and shall not be removed by Tenant at the end of
the term unless otherwise expressly provided for in this Lease or unless such
removal is required by Landlord pursuant to the provisions of Article 9 above.
Such fixtures, equipment, alterations, additions, improvements and/or
appurtenances shall include, but not be limited to all floor coverings, drapes,
paneling, built-in cabinetry, molding, doors, vaults (including vault doors),
plumbing systems, electrical systems, lighting systems, silencing equipment,
communication systems, all fixtures and outlets for the systems mentioned above
and for all telephone, radio, telegraph and television purposes, and any special
flooring or ceiling installations.
ARTICLE 30 - MISCELLANEOUS
- --------------------------
(a) SEVERABILITY; ENTIRE AGREEMENT. Any provision of this Lease which
shall prove to be invalid, void, or illegal shall in no way affect, impair or
invalidate any other provision hereof, and any such other provisions shall
remain in full force and effect. This Lease and the exhibits and any Addendum
attached hereto constitute the entire agreement between the parties hereto with
respect to the subject matter hereof, and no prior agreement or understanding
pertaining to any such matter shall be effective for any purpose. No provision
of this Lease may be amended or supplemented except by an agreement in writing
signed by the parties hereto or their successor-in-interest.
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(b) ATTORNEYS' FEES; WAIVER OF JURY TRIAL.
(i) In any action to enforce the terms of this Lease,
including any suit by Landlord for the recovery of rent or possession of the
Premises, the losing party shall pay the successful party a reasonable sum for
attorneys' fees in such suit and such attorneys' fees shall be deemed to have
accrued prior to the commencement of such action and shall be paid whether or
not such action is prosecuted to judgment.
(ii) Should Landlord, without fault on Landlord's part, be
made a party to any litigation instituted by Tenant or by any third party
against Tenant, or by or against any person holding under or using the Premises
by license of Tenant, or for the foreclosure of any lien for labor or material
furnished to or for Tenant or any such other person or otherwise arising out of
or resulting from any act or transaction of Tenant or of any such other person,
Tenant covenants to save and hold Landlord harmless from any judgment rendered
against Landlord or the Premises or any part thereof and from all costs and
expenses, including reasonable attorneys' fees incurred by Landlord in
connection with such litigation.
(iii) When legal services are rendered by an attorney at law
who is an employee of a party, attorneys' fees incurred by that party shall be
deemed to include an amount based upon the number of hours spent by such
employee on such matters multiplied by an appropriate billing rate determined by
taking into consideration the same factors, including but not limited by, the
importance of the matter, seniority, qualifications, time applied, difficulty
and results, as are considered when an attorney not in the employ of a party is
engaged to render such service.
(iv) EACH PARTY HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN
ANY ACTION SEEKING SPECIFIC PERFORMANCE OF ANY PROVISION OF THIS LEASE, FOR
DAMAGES FOR ANY BREACH UNDER THIS LEASE, OR OTHERWISE FOR ENFORCEMENT OF ANY
RIGHT OR REMEDY HEREUNDER.
(c) TIME OF ESSENCE. Each of Tenant's covenants herein is a condition,
and time is of the essence with respect to the performance of every provision of
this Lease.
(d) HEADINGS; JOINT AND SEVERAL. The article headings contained in
this Lease are for convenience only and do not in any way limit or amplify any
term or provision hereof. The terms "Landlord" and "Tenant" as used herein shall
include the plural as well as the singular, the neuter shall include the
masculine and feminine genders and the obligations herein imposed upon Tenant
shall be joint and several as to each of the persons, firms or corporations of
which Tenant may be composed.
(e) RESERVED AREA. Tenant hereby acknowledges and agrees that the
exterior walls of the Premises and the area between the finished ceiling of the
Premises and the slab of the floor of the Project thereabove have not been
demised hereby, and the use thereof, together with the right to install,
maintain, use, repair and replace pipes, ducts, conduits and wires leading
through, under or above the Premises in locations which will not materially
interfere with Tenant's use of the Premises and serving other parts of the
Project, are hereby excepted and reserved unto Landlord.
(f) NO OPTION. The submission of this Lease by Landlord, its agent or
representative for examination or execution by Tenant does not constitute an
option or offer to Lease the Premises upon the terms and conditions contained
herein or a reservation of the Premises in favor of Tenant, it being intended
hereby that this Lease shall only become effective upon the execution hereof by
Landlord and delivery of a fully executed lease to Tenant.
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(g) USE OF PROJECT NAME; IMPROVEMENTS. Tenant shall not be allowed to
use the name, picture or representation of the Project, or words to that effect,
in connection with any business carried on in the Premises or otherwise (except
at Tenant's address) without the prior written consent of Landlord. In the event
that Landlord undertakes any additional improvements on the Real Property,
including but not limited to new construction or renovation or additions to the
existing improvements, Landlord shall not be liable to Tenant for any noise,
dust, vibration or interference with access to the Premises or disruption in
Tenant's business caused thereby; provided, however, in the event such
disruption or interference materially and adversely interferes with the
operation of Tenant's business in the Premises for more than five (5)
consecutive business days, then from and after such fifth (5th) business day,
the Basic Rental shall be equitably abated during the continuance of such
disruption or interference.
(h) RULES AND REGULATIONS. Tenant shall observe faithfully and comply
strictly with the Rules and Regulations attached to this Lease as Exhibit "B"
and made a part hereof, and such other rules and regulations as Landlord may
from time to time reasonably adopt for the safety, care and cleanliness of the
Project, the facilities thereof, or the preservation of good order therein.
Landlord shall not be liable to Tenant for violation of any such rules and
regulations, or for the breach of any covenant or condition in any Lease by any
other tenant in the Project; provided, however, that Landlord shall enforce the
Rules and Regulations in a non-discriminatory manner. A waiver by Landlord of
any rule or regulation for any other tenant shall not constitute nor be deemed a
waiver of the rules or regulations for this Tenant. Landlord agrees to enforce
said Rules and Regulations in a non-discriminatory manner against all tenants of
the Project.
(i) QUIET POSSESSION. Upon Tenant's paying the Basic Rent, Additional
Rent and other sums provided hereunder and observing and performing all of the
covenants, conditions and provisions on Tenant's part to be observed and
performed hereunder, Tenant shall have quiet possession of the Premises for the
entire term hereof, subject to all of the provisions of this Lease.
(j) RENT. All payments required to be made hereunder to Landlord shall
be deemed to be rent, whether or not described as such.
(k) SUCCESSORS AND ASSIGNS. Subject to the provisions of Article 15
hereof, all of the covenants, conditions and provisions of this Lease shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective heirs, personal representatives, successors and assigns.
(l) NOTICES. Any notice required or permitted to be given hereunder
shall be in writing and may be given by personal service evidenced by a signed
receipt or sent by registered or certified mail, return receipt requested,
addressed to Tenant at the Premises or to Landlord at the address of the place
from time to time established for the payment of rent and which shall be
effective upon proof of delivery. Either party may by notice to the other
specify a different address for notice purposes except that, upon Tenant's
taking possession of the Premises, the Premises shall constitute Tenant's
address for notice purposes. A copy of all notices to be given to Landlord
hereunder shall be concurrently transmitted by Tenant to such party hereafter
designated by notice from Landlord to Tenant. Any notices sent by Landlord
regarding or relating to eviction procedures, including without limitation three
day notices, may be sent by regular mail.
(m) PERSISTENT DELINQUENCIES. In the event that Tenant shall be
delinquent by more than fifteen (15) days in the payment of rent on three (3)
separate occasions in any twelve (12) month period, Landlord shall have the
right to collect rent quarterly in advance.
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(n) RIGHT OF LANDLORD TO PERFORM. All covenants and agreements to be
performed by Tenant under any of the terms of this Lease shall be performed by
Tenant at Tenant's sole cost and expense and without any abatement of rent,
except as provided herein. If Tenant shall fail to pay any sum of money, other
than rent, required to be paid by it hereunder or shall fail to perform any
other act on its part to be performed hereunder, and such failure shall continue
beyond any applicable cure period set forth in this Lease, Landlord may, but
shall not be obligated to, without waiving or releasing Tenant from any
obligations of Tenant, make any such payment or perform any such other act on
Tenant's part to be made or performed as is in this Lease provided. All sums so
paid by Landlord and all reasonable incidental costs, together with interest
thereon at the rate of ten percent (10%) per annum from the date of such payment
by Landlord, shall be payable to Landlord on demand, and Tenant covenants to pay
any such sums, and Landlord shall have (in addition to any other right or remedy
of Landlord) the same rights and remedies in the event of the non-payment
thereof by Tenant as in the case of default by Tenant in the payment of the
rent.
(o) ACCESS, CHANGES IN PROJECT, FACILITIES, NAME.
(i) Every part of the Project except the inside surfaces of
all walls, windows and doors bounding the Premises (including exterior building
walls, core corridor walls and doors and any core corridor entrance), and any
space in or adjacent to the Premises used for shafts, stacks, pipes, conduits,
fan rooms, ducts, electric or other utilities, sinks or other building
facilities, and the use thereof, as well as access thereto through the Premises
for the purposes of operation, maintenance, decoration and repair, are reserved
to Landlord.
(ii) Tenant shall permit Landlord to install, use and maintain
pipes, ducts and conduits within the walls, columns and ceilings of the
Premises.
(iii) Landlord reserves the right, without incurring any
liability to Tenant therefor, to make such changes in or to the Project and the
fixtures and equipment thereof, as well as in or to the street entrances, halls,
passages, elevators, stairways and other improvements thereof, as it may deem
reasonably necessary or desirable, provided such changes do not materially and
adversely impair Tenant's ability to conduct its business operations from the
Premises.
(iv) Landlord may adopt any name for the Project, and Landlord
reserves the right to change the name or address of the Project at any time.
(p) SIGNING AUTHORITY. If a party is a corporation, partnership or
limited liability company, each individual executing this Lease on behalf of
said entity represents and warrants that this Lease is binding upon said entity
in accordance with its terms, and that he or she is duly authorized to execute
and deliver this Lease on behalf of said entity in accordance with: (i) if such
party is a corporation, a duly-adopted resolution of the Board of Directors of
said corporation or in accordance with the by-laws of said corporation, (ii) if
such party is a partnership, the terms of the partnership agreement, and (iii)
if such party is a limited liability company, the terms of its operating
agreement. Concurrently with Tenant's execution of this Lease, Tenant shall
provide to Landlord a copy of: (a) if Tenant is a corporation, such resolution
of the Board of Directors authorizing the execution of this Lease on behalf of
such corporation, which copy of resolution shall be duly certified by the
secretary or an assistant secretary of the corporation to be a true copy of a
resolution duly adopted by the Board of Directors of said corporation and shall
be in the form of Exhibit "E" or in some other form reasonably acceptable to
Landlord, (b) if Tenant is a partnership, a copy of the provisions of the
partnership agreement granting the requisite authority to each individual
executing this Lease on behalf of said partnership, and (c) if Tenant is a
limited liability company, a copy of the provisions of its operating agreement
granting the requisite authority to each individual executing this Lease on
behalf of said limited liability company.
(q) INTENTIONALLY OMITTED.
(r) INTENTIONALLY OMITTED
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(s) SURVIVAL OF OBLIGATIONS. Any obligations of Tenant occurring prior
to the expiration or earlier termination of this Lease shall survive such
expiration or earlier termination.
(t) CONFIDENTIALITY. Tenant and Landlord acknowledge that the content
of this Lease and any related documents are confidential information. Each party
shall keep such confidential information strictly confidential and shall not
disclose such confidential information to any person or entity other than its
financial, legal and space planning consultants, any proposed subtenants,
assignees, lenders or purchasers.
(u) GOVERNING LAW. This Lease shall be governed by and construed in
accordance with the laws of the State of California. No conflicts of law rules
of any state or country (including, without limitation, California conflicts of
law rules) shall be applied to result in the application of any substantive or
procedural laws of any state or country other than California. All
controversies, claims, actions or causes of action arising between the parties
hereto and/or their respective successors and assigns shall be brought, heard
and adjudicated by the courts of the State of California, with venue in the
County of Los Angeles. Each of the parties hereto hereby consents to personal
jurisdiction by the courts of the State of California in connection with any
such controversy, claim, action or cause of action, and each of the parties
hereto consents to service of process by any means authorized by California law
and consent to the enforcement of any judgment so obtained in the courts of the
State of California on the same terms and conditions as if such controversy,
claim, action or cause of action had been originally heard and adjudicated to a
final judgment in such courts. Each of the parties hereto further acknowledges
that the laws and courts of California were freely and voluntarily chosen to
govern this Lease and to adjudicate any claims or disputes hereunder.
(v) EXHIBITS AND ADDENDUM. The Exhibits and Addendum, if applicable,
attached hereto are incorporated herein by this reference as if fully set forth
herein.
ARTICLE 31 - OPTION TO EXTEND
- -----------------------------
(a) OPTION RIGHT. Landlord hereby grants the Tenant named in this Lease
and to any Tenant Affiliate ("Original Tenant") one (1) option (the "Option") to
extend the Lease term for a period of five (5) years (the "Option Term"), which
Option shall be exercisable only by written notice delivered by Tenant to
Landlord as set forth below. The rights contained in this Article 31 shall be
personal to the Original Tenant and may only be exercised by the Original Tenant
(and not any assignee, sublessee or other transferee of the Original Tenant's
interest in this Lease).
(b) OPTION RENT. The rent payable by Tenant during the Option Term
("Option Rent") shall be equal to the "Market Rent" (defined below) but in no
event shall the Option Rent be less than Tenant is paying under the Lease on the
month immediately preceding the Option Term for Monthly Basic Rental, including
all escalations, any Excess, additional rent and other charges. "Market Rent"
shall mean the applicable Monthly Basic Rental, including all escalations, any
Excess, additional rent and other charges at which tenants, as of the
commencement of the Option Term, are leasing non-sublease, non-encumbered, space
comparable in size, location and quality to the Premises in renewal transactions
for a term comparable to the Option Term, which comparable space is located in
office buildings comparable to the Project in the Thousand Oaks/Westlake Village
office market area, taking into consideration the value of the existing
improvements in the Premises to Tenant, as compared to the value of the existing
improvements in such comparable space, with such value to be based upon the age,
quality and layout of the improvements and the extent to which the same could be
utilized by Tenant with consideration given to the fact that the improvements
existing in the Premises are specifically suitable to Tenant.
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(c) EXERCISE OF OPTIONS. The Option shall be exercised by Tenant only
in the following manner: (i) Tenant shall not be in default on the delivery date
of the Interest Notice and Tenant's Acceptance; (ii) Tenant shall deliver
written notice ("Interest Notice") to Landlord not more than ten (10) months nor
less than eight (8) months prior to the expiration of the Lease Term, stating
that Tenant is interested in exercising the Option, (iii) within fifteen (15)
business days of Landlord's receipt of Tenant's written notice, Landlord shall
deliver notice ("Option Rent Notice") to Tenant setting forth the Option Rent;
and (iv) if Tenant desires to exercise such Option, Tenant shall provide
Landlord written notice within five (5) business days after receipt of the
Option Rent Notice ("Tenant's Acceptance") and upon, and concurrent with such
exercise, Tenant may, at its option, object to the Option Rent contained in the
Option Rent Notice. Tenant's failure to deliver the Interest Notice or Tenant's
Acceptance on or before the dates specified above shall be deemed to constitute
Tenant's election not to exercise the Option. If Tenant timely and properly
exercises its Option, the Lease Term shall be extended for the Option Term upon
all of the terms and conditions set forth in this Lease, except that the rent
for the Option Term shall be as indicated in the Option Rent Notice unless
Tenant, concurrently with Tenant's Acceptance, objects to the Option Rent
contained in the Option Rent Notice, in which case the parties shall follow the
procedure and the Option Rent shall be determined, as set forth in Section 31(d)
below.
(d) DETERMINATION OF MARKET RENT. If Tenant timely and appropriately
objects to the Option Rent in Tenant's Acceptance, Landlord and Tenant shall
attempt to agree upon the Market Rent using their best good-faith efforts. If
Landlord and Tenant fail to reach agreement within twenty-one (21) days
following Tenant's Acceptance ("Outside Agreement Date"), then each party shall
make a separate determination of the Market Rent which shall be submitted to
each other and to arbitration in accordance with the following items (i) through
(vii):
(i) Landlord and Tenant shall each appoint, within ten (10)
days of the Outside Agreement Date, one arbitrator who shall by profession be a
current real estate broker or appraiser of comparable properties in the
immediate vicinity of the Project, and who has been active in such field over
the last five (5) years, and who has not been retained or employed by either
party during the prior twelve (12) months. The determination of the arbitrators
shall be limited solely to the issue of whether Landlord's or Tenant's submitted
Market Rent is the closest to the actual Market Rent as determined by the
arbitrators, taking into account the requirements of item (b), above.
(ii) The two (2) arbitrators so appointed shall within five
(5) business days of the date of the appointment of the last appointed
arbitrator agree upon and appoint a third arbitrator who shall be qualified
under the same criteria set forth hereinabove for qualification of the initial
two (2) arbitrators.
(iii) The three (3) arbitrators shall within fifteen (15) days
of the appointment of the third arbitrator reach a decision as to whether the
parties shall use Landlord's or Tenant's submitted Market Rent, and shall notify
Landlord and Tenant thereof.
(iv) The decision of the majority of the three (3) arbitrators
shall be binding upon Landlord and Tenant.
(v) If either Landlord or Tenant fails to appoint an
arbitrator within ten (10) days after the applicable Outside Agreement Date, the
arbitrator appointed by one of them shall reach a decision, notify Landlord and
Tenant thereof, and such arbitrator's decision shall be binding upon Landlord
and Tenant.
(vi) If the two arbitrators fail to agree upon and appoint a
third arbitrator, or both parties fail to appoint an arbitrator, then the
appointment of the third arbitrator shall be dismissed and the matter to be
decided shall be forthwith submitted to arbitration under the provisions of the
American Arbitration Association, but subject to the instruction set forth in
this item (vi).
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(vii) The cost of arbitration shall be paid by Landlord and
Tenant equally.
ARTICLE 32 - RIGHT OF FIRST OFFER
- ---------------------------------
(a) Landlord hereby grants to Tenant a right of first offer with
respect to any available space in the balance of the Project (but not in the
office building located at 2535 Townsgate Road, Westlake Village) ("First Offer
Space"). Notwithstanding the foregoing, (i) such first offer right of Tenant
shall commence only following the expiration or earlier termination of (A) any
existing lease pertaining to the First Offer Space, and (B) as to any First
Offer Space which is vacant as of the date of this Lease, the first lease
pertaining to any portion of such First Offer Space entered into by Landlord
after the date of this Lease (collectively, the "Superior Leases"), including
any renewal of such existing or future lease, whether or not such renewal is
pursuant to an express written provision in such lease, and regardless of
whether any such renewal is consummated pursuant to a lease amendment or a new
lease, and (ii) such first offer right shall be subordinate and secondary to all
rights of expansion, first refusal, first offer or similar rights granted to (A)
the tenants of the Superior Leases and (B) any other tenant of the project and
identified on Exhibit "H" attached hereto (the rights described in items (i) and
(ii), above to be known collectively as "Superior Rights"). Tenant's right of
first offer shall be on the terms and conditions set forth in this Article 32.
(i) Procedure for Offer. Landlord shall notify Tenant ("First
Offer Notice") from time to time when Landlord determines that Landlord shall
commence the marketing of any First Offer Space because such space shall become
available for lease to third parties, where no holder of a Superior Right
desires to lease such space. The First Offer Notice shall describe the space so
offered to Tenant and shall set forth Landlord's proposed economic terms and
conditions applicable to Tenant's lease of such space (collectively, the
"Economic Terms"). Notwithstanding the foregoing, Landlord's obligation to
deliver the First Offer Notice shall not apply during the last eight (8) months
of the initial Lease Term unless Tenant has timely delivered Tenant's Acceptance
to Landlord pursuant to Article 31 above.
(ii) Procedure for Acceptance. If Tenant wishes to exercise
Tenant's right of first offer with respect to the space described in the First
Offer Notice, then within five (5) business days after delivery of the First
Offer Notice to Tenant, Tenant shall deliver notice to Landlord of Tenant's
exercise its right of first offer with respect to the entire space described in
the First Offer Notice. If concurrently with Tenant's exercise of the first
offer right, Tenant notifies Landlord that it does not accept the Economic Terms
set forth in the First Offer Notice, Landlord and Tenant shall, for a period of
fifteen (15) days after Tenant's exercise, negotiate in good faith to reach
agreement as to such Economic Terms. If Tenant does not so notify Landlord that
it does not accept the Economic Terms set forth in the First Offer Notice
concurrently with Tenant's exercise of the first offer right, the Economic Terms
shall be as set forth in the First Offer Notice. In addition, if Tenant does not
exercise its right of first offer within the five (5) business day period, or,
if Tenant exercises its first offer right but timely objects to Landlord's
determination of the Economic Terms and if Landlord and Tenant are unable to
reach agreement on such Economic Terms within said fifteen (15) day period, then
Landlord shall be free to lease the space described in the First Offer Notice to
anyone to whom Landlord desires on any terms Landlord desires and Tenant's right
of first offer shall terminate as to the First Offer Space described in the
First Offer Notice. Notwithstanding anything to the contrary contained herein,
Tenant must elect to exercise its right of first offer, if at all, with respect
to all of the space offered by Landlord to Tenant at any particular time, and
Tenant may not elect to lease only a portion thereof.
(iii) Construction of First Offer Space. Except as otherwise
included in the Economic Terms, Tenant shall take the First Offer Space in its
"as-is" condition, and Tenant shall be entitled to construct improvements in the
First Offer Space in accordance with the provisions of Article 9 of this Lease.
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(iv) Lease of First Offer Space. If Tenant timely exercises
Tenant's right to lease the First Offer Space as set forth herein, Landlord and
Tenant shall execute an amendment adding such First Offer Space to this Lease
upon the same non-economic terms and conditions as applicable to the initial
Premises, and the economic terms and conditions as provided in this Article 32.
Tenant shall commence payment of rent for the First Offer Space and the Lease
Term of the First Offer Space shall commence upon the date of delivery of such
space to Tenant. The Lease Term for the First Offer Space shall expire
co-terminously with Tenant's lease of the initial Premises.
(v) No Defaults. The rights contained in this Article 32 shall
be personal to the Original Tenant, and may only be exercised by the Original
Tenant (and not any assignee, sublessee or other transferee of the Original
Tenant's interest in this Lease) if Tenant occupies the entire Premises as of
the date of the First Offer Notice. Tenant shall not have the right to lease
First Offer Space as provided in this Article 32 if, as of the date of the First
Offer Notice, or, at Landlord's option, as of the scheduled date of delivery of
such First Offer Space to Tenant, Tenant is in default under this Lease, after
the expiration of applicable notice and cure periods, or Tenant has previously
been in default under this Lease more than two times.
ARTICLE 33 - MUST TAKE SPACE
- ----------------------------
Commencing on the Must Take Commencement Date (defined below), Tenant
hereby agrees to add to the Premises the Must Take Space. Tenant's lease of the
Must Take Space shall be on the same terms and conditions as affect the original
Premises throughout the Lease Term, including, without limitation, the same
Basic Rental rate (per rentable square foot) as then applies to the original
Premises (as set forth in Article 1.C. of the Basic Lease Provisions above);
provided, however, that (a) Tenant's Proportionate Share shall be increased to
take into account the additional number of rentable square feet of the Must Take
Space, and (b) except for the performance of the Tenant Improvements, the Must
Take Space shall be leased to Tenant in its then "as is" condition. The term
"Must Take Commencement Date" shall mean the earlier of (i) the date Tenant
first commences to conduct business from at least twenty-five percent (25%) of
the Must Take Space, or (ii) October 1, 1999. The term "Must Take Space" shall
mean the balance of that portion of the Premises which is located on the second
floor (other than the 4,000 rentable square feet referred to herein as Suite
200), which balance contains 13,048 rentable square feet (which square footage
Landlord and Tenant stipulate and agree is true and correct).
ARTICLE 34 - TOP OF BUILDING SIGNAGE
- ------------------------------------
(i) Subject to the approval of all necessary governmental or
regulatory agencies with jurisdiction over the Project, and provided (a)
Original Tenant directly leases from Landlord and occupies no less than fifty
percent (50%) of the total rentable square footage of the Project, and (b)
Original Tenant is not in default under this Lease, after the expiration of
applicable notice and cure periods, Original Tenant (and not any assignee,
sublessee, or other transferee of the Original Tenant's interest in this Lease)
shall have the right to install one (1) non-exclusive exterior sign at the top
of the Project (the "Top of Building Signage"), the size, location, method of
attachment, design and all other aspects of said signage to be subject to the
approval of Landlord. Original Tenant shall be solely responsible for all costs
incurred in connection with the purchase and initial installation of said Top of
Building Signage. Original Tenant shall furthermore be solely responsible for
all costs associated with maintaining, operating or otherwise repairing said Top
of Building Signage. At the expiration or earlier termination of this Lease, or
in the event the conditions precedent to the grant of said Top of Building
Signage to Original Tenant are no longer satisfied, Original Tenant shall remove
said signage, at its sole expense, and repair any damage to the Project or
otherwise caused by said removal. Tenant's Top of Building signage shall be
subject to the rules and regulations attached hereto as Exhibit "G".
(ii) Provided Tenant is not in default under this Lease,
Tenant, at Tenant's expense, shall have the right to (A) a building standard
number of lines on the directory board in the lobby of the Project, and (B)
building standard suite entrance signage.
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ARTICLE 35 - GENERATOR
- ----------------------
(a) Subject to obtaining any necessary governmental and regulatory
approvals and the approval of Landlord, in Landlord's sole discretion, as to its
design, location and construction, Tenant shall have the right to install an
emergency power generator at the Project, together with the cabling or wiring
necessary to connect the generator to the Premises (collectively, the
"Generator"). All costs and expenses for the equipment, installation, connection
to and the maintenance, repair and operation of the Generator during the Term
shall be the sole responsibility of Tenant. Tenant shall not be charged any rent
or other fees for the location in which the Generator is placed, provided that
if the Generator is located on one (1) or more parking stalls, the number of
reserved parking stalls otherwise allocated to Tenant pursuant to Article 1.I.
of the Basic Lease Provisions shall be reduced by the number of parking stalls
used to accommodate the Generator. Tenant shall be entitled to install battery
backup systems in the Premises.
(b) Landlord shall have the right from time to time during the Term to
have Tenant relocate the Generator, provided Landlord shall give Tenant prior
notice of the need to relocate the Generator, and shall coordinate such
relocation with Tenant so as not to interfere with or interrupt Tenant's use of
the Generator. The cost of any such relocation shall be borne by Tenant to the
extent such relocation is required by any act or omission by Tenant or as a
result of any law, ordinance, rule, regulation or statute affecting the Project
which was not in effect as of the date of this Lease; otherwise, said relocation
cost shall be borne by Landlord. Landlord may require, in Landlord's sole and
absolute discretion, that the Generator be screened from view by a screen which
shall be constructed by Tenant, at Tenant's cost, in accordance with the
specifications provided to Tenant by Landlord. To the extent Landlord
determines, in its reasonable discretion, that the plans and specifications for
the installation of the Generator need to be reviewed by an outside consultant,
Tenant shall reimburse Landlord for all out-of-pocket costs incurred by Landlord
in connection with such review. Tenant agrees that upon the expiration or
earlier termination of this Lease, Tenant shall remove the Generator, all
related cabling and/or wiring in accordance with all applicable governmental and
regulatory requirements and repair all damage to the Project where the Generator
was installed caused thereby and restore all such items in the area to the
extent reasonably necessary to effect a complete and effective repair to their
condition prior to the installation of the Generator, ordinary wear and tear
excepted.
(c) The installation of the Generator shall be completed in a good and
workmanlike manner and in accordance with all laws, ordinances, rules,
regulations and orders affecting the Project, as well as the requirements set
forth in Article 9 above.
(d) Tenant shall be responsible for obtaining, if required, any
building permits and any licenses or permits required by any governmental agency
having jurisdiction over the Project. Landlord agrees to reasonably assist and
cooperate, at no expense to Landlord, with Tenant to obtain any appropriate
licenses or permits. Notwithstanding anything to the contrary contained herein,
the engineering with respect to the installation of the Generator shall be
coordinated through the Project's designated engineers.
ARTICLE 36 - TERMINATION OPTION
- -------------------------------
TERMINATION RIGHT.
(a) Tenant shall have the one-time option (the "Termination Option") to
terminate the entire Lease, but not any portion of the Lease. Such termination
shall be effective at any time after the last day of the month which is
forty-two (42) months after the month in which the Commencement Date falls (the
"Termination Date"), upon the following terms and conditions:
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(i) Tenant gives Landlord written notice (the "Termination
Notice") of Tenant's election to exercise the Termination Option on or before
5:00 p.m. Pacific Standard Time on or before the date which is no less than
seven (7) months prior to the Termination
Date (the "Termination Notice Date");
(ii) There exists no Event of Default under the Lease on the
date of the Termination Notice or on the Termination Date;
(iii) Tenant shall pay to Landlord no later than the date
which is four (4) months prior to the Termination Date an amount equal to the
Termination Fee (defined below). The "Termination Fee" shall mean the sum of (I)
the then total Basic Rental for the five (5) month period immediately following
the Termination Date, plus (II) the unamortized Leasing Costs (defined below) as
of the Termination Date, based upon an amortization period from the Commencement
Date until the Expiration Date, with interest accruing on said unamortized
Leasing Costs at 8% per annum from the date they were paid. The term "Leasing
Costs" shall mean the sum of (A) all costs and expenses incurred by Landlord in
connection with the Tenant Improvements, and (B) the brokerage commissions paid
by Landlord in connection with this Lease. Landlord agrees to provide to Tenant
the amount of the Termination Fee within 5 business days of Tenant's request for
such amount.
(b) In the event Tenant timely and properly exercises the Termination
Option, the term of the Lease shall terminate effective as of the Termination
Date. Basic Rental and all other monetary obligations under the Lease shall be
paid through and apportioned as of the Termination Date, and neither Landlord
nor Tenant shall have any rights, liabilities or obliga tions accruing under the
Lease after the Termination Date, except for such rights and liabilities which,
by the terms of the Lease are obligations of the Tenant or Landlord which
expressly survive the expiration of the Lease. The Termination Option shall
automatically terminate and become null and void upon (a) the failure of Tenant
to timely or properly exercise the Termination Option; or (b) Tenant's right to
possession of the Premises being terminated prior to the exercise of the
Termination Option.
IN WITNESS WHEREOF, the parties have executed this Lease, consisting of
the foregoing provisions and Articles, including all exhibits and other
attachments referenced therein, as of the date first above written.
"TENANT" "LANDLORD"
NETZERO, INC., a California corporation WESTLAKE GARDENS, LLC, a
California limited liability company
By: /s/ RONALD T. BURR By:________________________________
-------------------
Name: Ronald T. Burr Name:___________________________
--------------
Title: CEO Its:____________________________
--------------
By: /s/ ANDREA L. ROSCHKE By:________________________________
----------------------
Name: Andrea L. Roschke Name:___________________________
-----------------
Title: CFO Its:____________________________
-----------------
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FIRST AMENDMENT TO STANDARD OFFICE LEASE
This First Amendment to Standard Office Lease (this "Amendment") is
made and entered into as of this 6th day of May, 1999, by and between ARDEN
REALTY LIMITED PARTNERSHIP, a Maryland limited partnership ("Landlord"), and
NETZERO, INC., a California corporation ("Tenant"), with reference to the
following facts:
RECITALS
A. Landlord's predecessor-in-interest and Tenant entered into that
certain Standard Office Lease dated as of March 6, 1999 (the "Original
Lease") for (i) certain premises (the "Initial Premises") commonly known as
Suite No. 200 (consisting of approximately 4,000 rentable square feet) and
Suite No. 300 (consisting of approximately 13,114 rentable square feet), and
(ii) certain "Must Take Space" (as defined in the Original Lease), both
located in that certain project (the "Project") commonly known as 2555
Townsgate Road, Westlake Village, California, as more particularly described
in the Original Lease (the Initial Premises and Must Take Space are herein
collectively referred to as the "Original Premises").
B. Landlord has succeeded to the interests of Landlord's
predecessor-in-interest under the Original Lease.
C. Landlord and Tenant desire to, among other things, add to
the Original Premises (i) that certain additional space (the "Initial Expansion
Premises") containing approximately 5,467 rentable square feet, and (ii) that
certain additional space containing approximately 13,245 rentable square feet
(the "Second Must Take Space"), containing a total of approximately 18,712
rentable square feet), located on the 1st floor of the Project, as such space is
further identified on Exhibit "A" attached hereto (collectively, the "Expansion
Space").
D. All capitalized terms used herein but not specifically defined in
this Amendment shall have the meanings ascribed to such terms in the Original
Lease. The term "Lease" shall hereinafter refer to the Original Lease, as
amended by this Amendment.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are acknowledged, Landlord and Tenant hereby agree as
follows:
1. EXPANSION PREMISES. Subject to the terms and conditions of this
Amendment, Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord the Initial Expansion Premises and, commencing on the Second Must
Take Commencement Date (defined below), the Second Must Take Space. The
square footage of the Expansion Premises set forth in Recital Paragraph C
above is hereby stipulated by Landlord and Tenant to be true and correct.
Except as expressly set forth in this Amendment, from and after the Expansion
<PAGE>
Premises Commencement Date (defined below), all references in the Lease to
the term "Premises" shall be deemed to include the Expansion Premises.
2. EXPANSION PREMISES COMMENCEMENT DATE; TERM. The "Expansion
Premises Commencement Date" shall mean the earlier of (i) the date that
Tenant first commences to conduct business in any portion of the Initial
Expansion Premises, or (ii) the date of substantial completion (as defined in
the Tenant Work Letter attached to the Original Lease as Exhibit "D" (the
"Work Letter Agreement")) of the tenant improvements to be constructed by
Landlord in the Initial Expansion Premises pursuant to the Work Letter
Agreement. Upon Tenant's occupancy of each of the Initial Expansion Premises
and the Second Must Take Space, Landlord and Tenant agree to execute and
deliver a Commencement Letter in a form substantially similar to that
attached to the Original Lease as Exhibit "C". The term of Tenant's lease of
the Expansion Premises (the "Expansion Term") shall commence on the Expansion
Premises Commencement Date and shall expire upon the Expiration Date (defined
below).
3. EXPIRATION DATE. That portion of Article 1.A of the Original
Lease entitled "Expiration Date" is hereby deleted in its entirety and
replaced with the following:
"Expiration Date: The date immediately preceding the tenth
(10th) anniversary of the Commencement Date;
provided, however, that if the Commencement Date
is a date other than the first day of a month, the
Expiration Date shall be the last day of the month
which is one hundred twenty (120) months after the
month in which the Commencement Date falls, unless
extended or earlier terminated pursuant to the
Lease."
4. RENT. (a) Effective as of the Expansion Premises Commencement
Date until the Expiration Date, and in addition to its obligations under the
Original Lease with respect to the Original Premises, Tenant's payments of
Monthly Basic Rental with respect to the Expansion Premises only shall be as
follows:
<TABLE>
<CAPTION>
Monthly Basic Rental per
Lease Months Monthly Basic Rental Rentable Square Foot
------------ -------------------- ------------------------
<S> <C> <C>
Period from Expansion $9,567.25 $1.75
Premises Commencement
Date until day immediately
preceding Second Must
Take Commencement
Date
Second Must Take $32,746.00 $1.75
Commencement Date
Month 9 following
Commencement Date
</TABLE>
-2-
<PAGE>
<TABLE>
<S> <C> <C>
Months 10-48 following $39,669.44 $2.12
Commencement Date
Months 49-60 following $41,166.40 $2.20
Commencement Date
Months 61-84 following $43,037.60 $2.30
Commencement Date
</TABLE>
(b) Commencing at the end of the 84th month of the Term, Tenant's
payments of Monthly Basic Rental with respect to both the Original Premises
and the Expansion Premises shall be as follows:
<TABLE>
<CAPTION>
Monthly Basic Rental per
Lease Months Monthly Basic Rental Rentable Square Foot
------------ -------------------- ------------------------
<S> <C> <C>
Months 85-120 $117,297.60 $2.40
</TABLE>
5. OPERATING EXPENSES. Effective as of the Expansion Premises
Commencement Date, and prior to the Must Take Commencement Date and the
Second Must Take Commencement Date, "Tenant's Proportionate Share" (defined
in Article 1E of the Original Lease) shall equal 45.49%. Effective after the
Second Must Take Commencement Date, and prior to the Must Take Commencement
Date, Tenant's Proportionate Share shall equal 72.17%. Effective after the
Must Take Commencement Date, Tenant's Proportionate Share shall equal 100%.
6. SECURITY DEPOSIT; LETTER OF CREDIT.
(a) Concurrently with the execution of this Amendment, Tenant shall
pay to Landlord a sum equal to $32,746.00 which amount shall be retained by
Landlord as an additional security deposit to be held by Landlord in
accordance with Article 4 of the Original Lease (thereby increasing the total
security deposit to be held by Landlord to $85,529.50).
(b) Concurrently with the execution of this Amendment, Tenant shall
increase the amount of the Letter of Credit (defined in the Original Lease)
by the sum of $595,019.27, so that the total amount of the Letter of Credit
shall equal $1,388,979.27.
7. SECOND MUST TAKE COMMENCEMENT DATE. The "Second Must Take
Commencement Date" shall mean the earlier of (i) the date Tenant first
commences to conduct business from at least 25% of the Second Must Take
Space, or (ii) August 1, 1999.
8. TERMINATION OPTION. (a) In addition to Tenant's Termination Option
contained in the Original Lease with respect to the Original Premises, Tenant
shall have the one-time option (the "Expansion Termination Option") to terminate
the Lease with respect to the
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<PAGE>
Expansion Premises only, but not any portion of the Expansion Premises. Such
termination shall be effective at any time after the last day of the month
which is twenty four (24) months after the Termination Date (defined in the
Original Lease) (the "Expansion Termination Date"), upon the following terms
and conditions:
(i) Tenant gives Landlord written notice (the "Expansion Termination
Notice") of Tenant's election to exercise the Expansion Termination Option on
or before 5:00 p.m. Pacific Standard Time on or before the date which is no
less than seven (7) months prior to the Expansion Termination Date (the
"Expansion Termination Notice Date");
(ii) There exists no Event of Default under the Lease on the date of
the Expansion Termination Notice or on the Expansion Termination Date; and
(iii) Tenant shall pay to Landlord no later than the date which is
four (4) months prior to the Expansion Termination Date an amount equal to
the Expansion Termination Fee (defined below). The "Expansion Termination
Fee" shall mean the sum of (I) the then total Basic Rental for the five (5)
month period immediately following the Expansion Termination Date, plus (II)
the unamortized Expansion Leasing Costs (defined below) as of the Expansion
Termination Date, based upon an amortization period from the Expansion
Premises Commencement Date until the Expiration Date, with interest accruing
on said unamortized Expansion Leasing Costs at 8% per annum from the date
they were paid. The term "Expansion Leasing Costs" shall mean the sum of (A)
all costs and expenses incurred by Landlord in connection with the Expansion
Improvements (defined below) for the Expansion Premises, and (B) the
brokerage commissions paid by Landlord in connection with this Amendment.
Landlord agrees to provide to Tenant a statement of the amount of the
Expansion Termination Fee within five (5) business days of Tenant's request
for such amount.
(b) In the event that Tenant timely and properly exercises the
Expansion Termination Option:
(i) the term of the Lease with respect to the Expansion Premises
only shall terminate effective as of the Expansion Termination Date. Basic
Rental and all other monetary obligations under the Lease with respect to the
Expansion Premises only shall be paid through and apportioned as of the
Expansion Termination Date, and neither Landlord nor Tenant shall have any
rights, liabilities or obligations accruing under the Lease after the
Expansion Termination Date, except for such rights and liabilities which, by
the terms of the Lease are obligations of the Tenant or Landlord which
expressly survive the expiration of the Lease; and
(ii) Tenant shall, at its expense, prior to the Expansion
Termination Date, restore the Initial Expansion Premises to the same
condition which existed prior to the date of the Original Lease (i.e., the
condition which existed prior to the date that any work in connection with
the Expansion Improvements was commenced at the Project), and repair any
damage to the Project or Initial Expansion Premises as a result of such
restoration.
-4-
<PAGE>
(c) The Expansion Termination Option shall automatically terminate
and become null and void upon (i) the failure of Tenant to timely or properly
exercise the Expansion Termination Option; or (ii) Tenant's right to
possession of the Expansion Premises being terminated prior to the exercise
of the Expansion Termination Option.
(d) Notwithstanding the length of the amortization period set forth
in paragraph 8(a)(iii) above with respect to the Expansion Termination Fee,
Article 36(a)(iii) of the Lease shall be amended to provide that the length
of the amortization period with respect to the "Termination Fee" shall be
seven (7) years, commencing on the Commencement Date and expiring on the
seven (7) year anniversary of the Commencement Date.
9. PARKING. Commencing on the Expansion Premises Commencement Date,
the number of unreserved parking passes which Tenant is entitled to use
within the Project's parking structure shall be increased by sixteen (16)
passes, and after the Second Must Take Commencement Date, the number of
unreserved parking passes shall be increased by an additional fifty-nine (59)
passes [total increase of 75 passes]. The use of such additional passes shall
be subject to the terms of the Original Lease, including without limitation,
Articles 1.I and 23 of the Original Lease.
10. "AS-IS." (a) Except as provided in Section 10(b) below, and
except for any latent defects and minor punch-list items, the Expansion
Premises shall be delivered to Tenant as of the Expansion Premises
Commencement Date in its "as-is, where-is condition", with all faults.
(b) In addition to the Tenant Improvement Allowance under Exhibit
"D" of the Original Lease, Tenant shall be entitled to a one-time tenant
improvement allowance (the "Expansion Allowance") in the amount of
$383,275.00 (based on $25.00 per usable square foot of the Expansion
Premises) for the costs relating to the initial design and construction of
Tenant's improvements which are permanently affixed to the Expansion Premises
(the "Expansion Improvements"). The Expansion Improvements shall include,
without limitation, the installation of (i) the Network Room (defined in
paragraph 12 below) in the Initial Expansion Premises, and (ii) the HVAC Unit
(defined in paragraph 12 below). In no event shall Landlord be obligated to
make disbursements pursuant to this provision in a total amount which exceeds
the Expansion Allowance. Subject to the following exceptions, the Work Letter
Agreement attached to the Original Lease shall apply to the construction of
the Expansion Improvements with full force and effect:
(i) The second sentence of Section 2.1 of the Work Letter
Agreement shall not apply to the construction of the Expansion Improvements;
(ii) The terms "Tenant Improvement Allowance" and "Tenant
Improvements" in the Work Letter Agreement shall be replaced with the terms
"Expansion Allowance" and "Expansion Improvements", respectively (as such
terms are defined above);
-5-
<PAGE>
(iii) The reference to $3,996.73 in Section 2.2 of the Work Letter
shall be replaced with "$2,299.65";
(iv) Section 4.1 of the Work Letter shall be modified to provide
that the "Contractor" shall be Silagi Development; and
(v) Landlord shall pay Tenant up to an amount equal to (y) the sum
of the Tenant Improvement Allowance plus the Expansion Allowance
(collectively, the "Total Allowance") less (z) the total amount spent for the
costs relating to the initial design and construction of the Tenant
Improvements and Expansion Improvements (the "FF&E Allowance"). The FF&E
Allowance shall be used to compensate Tenant for Tenant's actual
out-of-pocket costs paid to third-parties for (i) the purchase and
installation of any furniture, fixtures and equipment in the Premises, and
(ii) telephone and data cabling installation and hook-up in the Premises.
Such payment shall be made by Landlord to Tenant within a reasonable period
of time following a written request therefor from Tenant to Landlord,
provided that Tenant has performed all of its obligations under the Lease up
to and including the date of the proposed payment, and provided Tenant has
delivered to Landlord invoices from such third-parties covering items
included in Tenant's request for payment. Any such payment by Landlord
hereunder shall be applied against the Total Allowance. Tenant shall be
entitled to a rental credit in the event that the FF&E Allowance exceeds the
actual out-of-pocket costs paid by Tenant in connection with the items
referenced above.
11. BUILDING SIGNAGE. Subject to the approval of all necessary
governmental or regulatory agencies with jurisdiction over the Project, and
provided (a) Original Tenant directly leases from Landlord and occupies at
least two (2) of the three (3) floors of the Project, and (b) Original Tenant
is not in default under the Lease, after the expiration of applicable notice
and cure periods, Original Tenant (and not any assignee, sublessee, or other
transferee of the Original Tenant's interest in the Lease) shall have the
right to install one (1) sign in the lobby of the Project identifying
Original Tenant (the "Lobby Signage"), the size, location, method of
attachment, design and all other aspects of said signage to be subject to the
approval of Landlord. Original Tenant shall be solely responsible for all
costs incurred in connection with the purchase and installation of said Lobby
Signage. Original Tenant shall furthermore be solely responsible for all
costs associated with maintaining, operating or otherwise repairing said
Lobby Signage. At the expiration or earlier termination of the Lease, or in
the event the conditions precedent to the grant of said Lobby Signage to
Original Tenant are no longer satisfied, Original Tenant shall remove said
signage, at its sole expense, and repair any damage to the Project or
otherwise caused by said removal.
12. PROJECT SERVICES. Landlord hereby acknowledges and agrees that
Tenant, at Tenant's expense, is installing a computer network room ("Network
Room") within the Initial Expansion Premises that will house computers and
other equipment that will demand a greater use of electric current than
normal, and Landlord hereby consents to the placement of such equipment
within the Initial Expansion Premises. All plans and specifications relating
to the Network Room shall be subject to approval by Landlord and the Network
Room shall be
-6-
<PAGE>
constructed in accordance with the terms of the Work Letter Agreement, as
modified by paragraph 10 above.
The parties hereby acknowledge and agree that the Network Room will
be separately metered, at Tenant's expense, and that Tenant shall pay the
costs of any electric current consumed therein. The parties also hereby
acknowledge and agree that the Network Room and Tenant's customer care area
will be monitored and cooled by a separate air conditioning and heating
package unit, (the "HVAC Unit"), the operating costs of which shall be
separately metered and paid by Tenant.
13. ORIGINAL LEASE DELETION. Article 32 of the Original Lease is
hereby deleted in its entirety and shall be of no further force and effect.
14. ASSIGNMENT/SUBLETTING. The last paragraph of Article 15 of the
Original Lease is hereby amended to provide that Landlord shall have no right
to terminate the Lease pursuant to said paragraph as a result of any request
by Tenant to sublease all or any portion of the Second Must Take Space for a
term not exceeding the end of the eighteen (18) month period immediately
following the date of this Amendment.
15. ESTOPPEL. Tenant warrants, represents and certifies to Landlord,
to the best of Tenant's actual knowledge, that as of the date of this
Amendment, (a) Landlord is not in default under the Lease, and (b) Tenant
does not have any defenses or offsets to payment of rent and performance of
its obligations under the Lease as and when same becomes due.
16. BROKERS. Tenant and Landlord each represents and warrants to the
other that, other than Grubb & Ellis, it has not dealt with any other broker
with respect to this Amendment. If Tenant or Landlord has dealt with any
other broker, Tenant or Landlord, as applicable, shall be solely responsible
for the payment of any fees due said person or firm and Tenant or Landlord,
as applicable, shall protect, indemnify, hold harmless and defend the other
from any liability in respect thereto.
17. AUTHORITY. Tenant has full power and authority to enter into
this Amendment and the person signing on behalf of Tenant has been fully
authorized to do so by all necessary corporate or partnership action on the
part of Tenant.
18. LEASE IN FULL FORCE. Except for those provisions which are
inconsistent with this Amendment and those terms, covenants and conditions
for which performance has heretofore been completed, all other terms,
covenants and conditions of the Original Lease shall remain in full force and
effect and Tenant hereby ratifies the Original Lease, as amended hereby.
IN WITNESS WHEREOF, this Amendment is executed as of the date first
written above.
"LANDLORD" "TENANT"
-7-
<PAGE>
ARDEN REALTY LIMITED NETZERO, INC., a California corporation
PARTNERSHIP, a Maryland limited
partnership
By: /s/ Andrea L. Roschke
By: ARDEN REALTY, INC. Name: Andrea L. Roschke
a Maryland corporation Title: V.P. Acctg./Admin.
Its: Sole General Partner
By: /s/ Stacy Haitsuka
By: /s/ Victor J. Coleman Name:
VICTOR J. COLEMAN Title:_______________________
Its: President and COO
By: /s/ Andrew J. Sobel
ANDREW J. SOBEL
Its: Exec. V.P. and Assistant
Secretary
-8-
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and
entered into effective as of the 20th day of March, 1999, by and between
NetZero, Inc., a California corporation (the "Company"), with principal
corporate offices at 31416 Agoura Road #150, Westlake Village, CA 91362, and
Frederic A. Randall, Jr., whose address is ___________________, California
________ ("Employee").
1. EMPLOYMENT.
1.1 The Company hereby agrees to employ Employee, and Employee
hereby accepts such employment, on the terms and conditions
set forth herein, commencing March 20, 1999 (the "Effective
Date"), and continuing through March 20, 2003 (the "Term"),
unless such employment is terminated earlier as provided in
Section 4 below.
2. DUTIES OF EMPLOYEE.
2.1 Employee shall serve as Senior Vice President and General
Counsel of the Company. In this capacity, Employee shall
perform such customary, appropriate and reasonable executive
duties as are usually performed by the General Counsel,
including such duties as are delegated to him from time to
time by the Board of Directors of the Company (the "Board").
Employee shall report directly to the Company's Chief
Executive Officer.
2.2 Employee agrees to devote Employee's full time, attention,
skill and efforts to the performance of his duties for the
Company during the Term.
3. COMPENSATION AND OTHER BENEFITS.
3.1 BASE SALARY. During the Term, the Company shall pay to
Employee a base salary of One Hundred Thirty-Five Thousand
Dollars ($135,000) per fiscal year (the "Base Salary"),
payable at the rate of Eleven Thousand Two Hundred Fifty
Dollars ($11,250.00) per month, with payments to be made in
accordance with the Company's standard payment policy and
subject to such withholding as may be required by law.
3.2 BONUS. During the Term, the Employee shall also be eligible to
receive an annual cash bonus of up to 50% of Employee's base
salary for each fiscal year (the "Annual Bonus"), less
withholding required by law, based on performance criteria
established by the Board. Employee shall not be eligible to
receive any unpaid Annual Bonus if his employment hereunder is
terminated pursuant to either Section 4.1, or if Employee
voluntarily resigns.
1
<PAGE>
3.3 VACATION. Employee shall be entitled to four (4) weeks
paid vacation in accordance with the Company's standard
vacation policies.
3.4 OTHER BENEFITS. Employee shall be eligible to participate, as
of the date of Employee's employment, in all group life,
health, medical, dental or disability insurance or other
employee, health and welfare benefits made available generally
to other executives of the Company. If Employee elects to
participate in any of such plans, Employee's portion of the
premium(s) will be deducted from Employee's paycheck.
3.5 BUSINESS EXPENSES. The Company shall promptly reimburse
Employee for all reasonable and necessary business expenses
incurred by Employee in connection with the business of the
Company and the performance of his duties under this
Agreement, subject to Employee providing the Company with
reasonable documentation thereof.
3.6 OPTION GRANT. Employee shall be granted an immediately
exercisable, non-qualified stock option (the "1999 Option")
under the Company's 1999 Stock Option/Stock Incentive Plan for
72,000 shares of the Company's Common Stock, and an
immediately exercisable, non-qualified stock option (the "1998
Option") under the Company's 1998 Stock Option/Stock Incentive
Plan for 628,000 shares of the Company's Common Stock. The
1998 Option and the 1999 Option shall each have an exercise
price of $0.15 per share and shall be herein collectively
referred to as the "Option." Employee shall acquire a vested
interest in twenty-five percent of the Option shares upon the
first-year anniversary of the commencement of Employee's
employment with the Company and in the remaining seventy-five
percent of the Option shares in thirty-six (36) equal monthly
installments, beginning one month following such first-year
anniversary. The Option shall also be subject to accelerated
vesting as set forth below.
4. TERMINATION.
4.1 TERMINATION FOR CAUSE.
(a) Termination "for cause" is defined as follows: the
Company terminates Employee's employment with the
Company (1) if Employee is convicted of a felony
or commits an act of moral turpitude, in either
case which adversely impacts the Company, (2) if
Employee materially breaches the Company's
Confidentiality and Proprietary Agreement, or (3)
if Employee fails, after receipt of detailed
written notice and after receiving a period of at
least thirty (30) days following such notice to
cure such failure, to use his reasonable good
faith efforts to follow the direction of the
Company's Board of Directors and to perform his
obligations hereunder.
(b) The Company may terminate this Agreement for any
of the reasons stated in Section 4.1(a) by giving
written notice to Employee without prejudice
2
<PAGE>
to any other remedy to which the Company may be
entitled. The notice of termination shall specify
the grounds for termination. If Employee's
employment hereunder is terminated "for cause"
pursuant to this Section 4.1, Employee shall be
entitled to receive hereunder his accrued but
unpaid Base Salary and vacation pay through the
date of termination, and reimbursement for any
expenses as set forth in Section 3.5, through the
date of termination, but shall not be entitled to
receive any unpaid portion of the Annual Bonus or
any other amount.
4.2 TERMINATION WITHOUT CAUSE. If Employee's employment is
terminated without "cause" as defined in Section 4.1(a), or if
Employee is Involuntarily Terminated (as defined below), the
Company (or its successor, as the case may be) shall pay to
Employee (i) any accrued but unpaid Base Salary and vacation
through the date of termination, (ii) reimbursement for any
expenses as set forth in Section 3.5, through the date of
termination, (iii) Employee's Annual Bonus, prorated through
the date of termination, and (iv) a severance payment in an
amount equal to Two Hundred Seventy Thousand Dollars
($270,000.00), payable in one lump sum, subject to withholding
as may be required by law. In addition, if Employee's
employment is terminated without cause (other than if Employee
is Involuntarily Terminated) or if Employee's employment is
terminated due to death or permanent disability, Employee will
be credited with an additional twelve (12) months of service
toward vesting in the Option shares in addition to the service
he has accrued toward vesting through the date of termination.
If Employee is Involuntarily Terminated, vesting of the Option
shares will be accelerated in full; provided, however,
Employee will only vest in 75% of the Option shares if the
Corporate Transaction takes place in the first nine months
following the date of commencement of Employee's employment.
As used in this Section 4.2, Employee shall be deemed
"Involuntarily Terminated" if (i) the Company or any successor
to the Company terminates Employee's employment without cause
in connection with or following a Corporate Transaction (as
defined in the Company's stock option plan); or (ii) in
connection with or following a Corporate Transaction there is
(a) a decrease in Employee's title or responsibilities (it
being deemed to be a decrease in title and/or responsibilities
if Employee is not offered the position of Senior Vice
President and General Counsel of the Company or its successor
as well as the acquiring and ultimate parent entity, if any,
following the Corporate Transaction), (b) a decrease in pay
and/or benefits from those provided by the Company immediately
prior to the Corporate Transaction or (c) a requirement that
Employee re-locate out of the greater Los Angeles metropolitan
area.
5. ASSIGNMENT. Neither the Company nor Employee may assign this
Agreement or any rights or obligations hereunder. This
Agreement will be binding upon the Company and its successors
and assigns. In the event of a Corporate Transaction,
3
<PAGE>
the Company shall cause this Agreement to be assumed by the
Company's successor as well as any acquiring or ultimate
parent entity, if any, following any Corporate Transaction.
6. MISCELLANEOUS.
6.1 This Agreement supersedes any and all other agreements, either
oral or in writing, between the parties hereto with respect to
the employment of Employee by the Company, other than the
Confidentiality and Proprietary Agreement, and constitutes the
entire agreement between the Company and the Employee with
respect to its subject matter.
6.2 This Agreement may not be amended, supplemented, modified or
extended, except by written agreement which expressly refers
to this Agreement, which is signed by each of the parties
hereto and which is authorized by the Company's Board of
Directors.
6.3 This Agreement is made in and shall be governed by the laws of
California, without giving effect to its conflicts-of-law
principles.
6.4 In the event that any provision of this Agreement is
determined to be illegal, invalid or void for any reason, the
remaining provisions hereof shall continue in full force and
effect.
6.5 Employee represents and warrants to the Company that there is
no restriction or limitation, by reason of any agreement or
otherwise, upon Employee's right or ability to enter into this
Agreement and fulfill his obligations under this Agreement.
6.6 All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by
first-class mail, postage prepaid, registered or certified, or
delivered either by hand, by messenger or by overnight courier
service, and addressed to the receiving party at the
respective address set forth in the heading of this Agreement,
or at such other address as such party shall have furnished to
the other party in accordance with this Section 6.6 prior to
the giving of such notice or other communication.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the first date written above.
NETZERO, INC.
By: /s/ MARK GOLDSTON
---------------------------------
Mark Goldston, Chief Executive
Officer
/s/ FREDERIC A. RANDALL, JR.
------------------------------------
Frederic A. Randall, Jr.
5
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and
entered into effective as of the 20th day of March, 1999, by and between
NetZero, Inc., a California corporation (the "Company"), with principal
corporate offices at 31416 Agoura Road #150, Westlake Village, CA 91362, and
Mark Goldston, whose address is 14139 Beresford Road, Beverly Hills, California
90210 ("Employee").
1. EMPLOYMENT.
1.1 The Company hereby agrees to employ Employee, and Employee
hereby accepts such employment, on the terms and conditions
set forth herein, commencing March 20, 1999 (the "Effective
Date"), and continuing through March 19, 2003 (the "Term"),
unless terminated earlier as provided in Section 4 below.
2. DUTIES OF EMPLOYEE.
2.1 Employee shall serve as the Chief Executive Officer and
Chairman of the Company. In this capacity, Employee shall
perform such customary, appropriate and reasonable executive
duties as are usually performed by the Chief Executive Officer
and Chairman, including such duties as are delegated to him
from time to time by the Board of Directors of the Company
(the "Board"). Employee shall report directly to the Company's
Board.
2.2 Employee agrees to devote Employee's good faith, full time,
attention, skill and efforts to the performance of his duties
for the Company during the Term; provided, however, that the
Company acknowledges that Employee has certain
responsibilities to and involvement with other entities and
agrees to allow Employee to continue his involvement with such
entities in the following manner without in anyway
jeopardizing his employment with the Company:
(a) SILICON GRAPHICS. Employee has certain
responsibilities to Silicon Graphics that will
require Employee's attention for several days a month
through June 30, 1999;
(b) CALIFORNIA CONCEPTS. Employee has certain
responsibilities to California Concepts that will
require his attention through December 31, 1999. In
addition, Employee may serve on California Concept's
Board of Directors for an indefinite period, once
such a Board is established; and
(c) PATENT SERVICE CORPORATION AND CLUB MOM, INC.
Employee has an ownership interest in the Patent
Service Corporation and Club Mom, Inc. Employee shall
be allowed to continue his involvement with these
organizations, both as a partial owner, and as his
services are needed to promote the organizations'
interests.
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<PAGE>
In addition to the organizations specifically referenced
above, Employee currently sits on two academic boards which
only require a minimal time commitment but which will be
ongoing into the future. Moreover, this Agreement shall not be
interpreted to prohibit Employee from making passive personal
investments if those activities do not materially interfere
with the services required under this Agreement.
3. COMPENSATION AND OTHER BENEFITS.
3.1 BASE SALARY. During the first two years of the Term, the
Company shall pay to Employee a base salary of Two Hundred
Thousand Dollars ($200,000) per calendar year (the "Base
Salary"), prorated for any portion thereof during the first
two years of the Term, payable at the rate of Sixteen Thousand
Six Hundred Sixty-Six and 67/100 Dollars ($16,666.67) per
month, with payments to be made in accordance with the
Company's standard payment policy and subject to such
withholding as may be required by law.
3.2 BONUS. During the first two years of the Term, the Company
shall also pay to Employee a cash bonus in a gross amount
equal to Two Hundred Thousand Dollars ($200,000) per calendar
year (the "Annual Bonus"), less withholding required by law,
one quarter of which is payable on each of the last business
days of March, June, September and December of each year
during the first two years of the Term. The first payment of
this bonus is due to Employee on March 31, 1999. Employee
shall not be eligible to receive any unpaid Annual Bonus if
his employment hereunder is terminated pursuant to either
Section 4.1, or if Employee voluntarily resigns.
3.3 SIGNING BONUS. The Company shall also pay to Employee a cash
bonus of Three Hundred Thousand Dollars ($300,000), less
withholding required by law, in one lump sum on January 1,
2000, provided, such bonus shall only be paid if Employee is
employed by the Company on such date.
3.4 NEGOTIATION OF COMPENSATION TERMS FOR FINAL TWO YEARS OF
EMPLOYMENT AGREEMENT. At one month prior to the end of his
second year of employment, I.E., by February 19, 2001, the
Company and Employee shall negotiate in good faith for a
period of 30 days regarding the terms of Employee's
compensation package for the final two years of the Employment
Term. The terms of the compensation package shall include
equity and cash compensation (salary and bonus) and benefits,
and such terms shall be at least commensurate with the terms
of compensation packages of similarly situated executives
(I.E., Chairmen and Chief Executive Officers) of similar
companies. In the event the Company and Employee do not reach
agreement on the terms of such compensation package within the
30-day period, this Employment Agreement will terminate
effective as of March 20, 2001. Furthermore, if this
Employment Agreement is so terminated and Company did not
offer Employee, during such negotiations, an annual base
salary in an amount greater than Two Hundred Thousand Dollars
($200,000) and a guaranteed annual bonus in an amount greater
than Two Hundred Thousand
2
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Dollars ($200,000), payable quarterly, then Employee shall
be entitled to receive the severance payment and other
benefits set forth in Section 4.3 below.
3.5 VACATION. Employee shall be entitled to a minimum of four (4)
weeks paid vacation per year.
3.6 OTHER BENEFITS. During the Term, Employee shall be entitled to
participate in all group life, health, medical, dental or
disability insurance or other employee, health and welfare
benefits made available generally to other executives of the
Company, when and as Employee becomes eligible therefor. If
Employee elects to participate in any of such plans,
Employee's portion of the premium(s) will be deducted from
Employee's paycheck.
3.7 BUSINESS EXPENSES. The Company shall promptly reimburse
Employee for all reasonable and necessary business expenses
incurred by Employee in connection with the business of the
Company and the performance of his duties under this
Agreement, subject to Employee providing the Company with
reasonable documentation thereof.
3.8 OPTION GRANT. Employee shall be granted a stock option (the
"Option") under the Company's 1999 Stock Option/Stock
Incentive Plan, for 4,190,922 shares of the Company's Common
Stock, at an exercise price of $0.15 per share. Such stock
option shall have such other terms and conditions as specified
in the Notice of Grant (the "Notice") attached hereto as
Exhibit A.
3.9 LOAN. The Company will lend Employee such amount as is
necessary to exercise the Option. The loan will be 50%
recourse with respect to the Employee as provided in the
Promissory Note executed by Employee in favor of the Company
of even date herewith.
3.10 BOARD OF DIRECTORS. Employee shall be appointed as Chairman of
the Company and also to the Company's Board of Directors.
Employee's appointments as Chairman and as a member of the
Board will automatically terminate upon the termination of
Employee's employment with the Company for any reason.
3.11 REGISTRATION RIGHTS. By or before April 9, 1999, the Company
and Employee will reach agreement on Employee's registration
rights applicable to shares of the Company's common stock held
by Employee as of the date hereof or issuable upon exercise of
those options granted pursuant to that Stock Option Agreement
dated March 20, 1999, which registration rights shall be
"piggy back" registration rights comparable to those held by
existing investors in the Company, and at least as favorable
as those held by idealab Capital Partners I-A, L.P. and
idealab Capital Partners I-B, L.P.
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4. TERMINATION.
4.1 TERMINATION FOR CAUSE.
(a) Termination "for cause" is defined as follows: (1) if
Employee is convicted of a felony, including any act
of moral turpitude, or (2) if Employee materially
breaches the Company's Confidentiality and
Proprietary Agreement.
(b) The Company may terminate this Agreement immediately
for any of the reasons stated in Section 4.1(a) by
giving written notice to Employee without prejudice
to any other remedy to which the Company may be
entitled. The notice of termination shall specify the
grounds for termination. If Employee's employment
hereunder is terminated "for cause" pursuant to this
Section 4.1, Employee shall be entitled to receive
hereunder his accrued but unpaid Base Salary and
vacation pay through the date of termination, and
reimbursement for any expenses as set forth in
Section 3.5, through the date of termination, but
shall not be entitled to receive any unpaid portion
of the Annual Bonus or any other amount.
4.2 TERMINATION WITHOUT CAUSE. If Employee's employment is
terminated without "cause" as defined in Section 4.1(a), he
will be eligible for the severance benefits set forth in
Section 4.3.
4.3 SEVERANCE PAYMENTS AND OTHER BENEFITS UPON TERMINATION WITHOUT
CAUSE OR INVOLUNTARY TERMINATION. If the Company terminates
Employee's employment hereunder without cause, or if Employee
is Involuntarily Terminated, the Company (or its successor, as
the case may be) shall pay to Employee (i) any accrued but
unpaid Base Salary and vacation through the date of
termination, (ii) reimbursement for any expenses as set forth
in Section 3.5, through the date of termination, (iii)
Employee's Annual Bonus, prorated through the date of
termination, and (iv) a severance payment in an amount equal
to One Million Dollars ($1,000,000.00), payable in one lump
sum, subject to withholding as may be required by law. In
addition, Employee shall be entitled to accelerated vesting of
the Option, as set forth in the Notice. As used in this
Section 4.3, "Involuntarily Terminated" shall mean (a)
Employee's voluntary resignation following a Corporate
Transaction in which Employee is not offered a position of
comparable pay and responsibilities in the greater Los
Angeles, California metropolitan area, or (b) where, within
twelve (12) months of a Corporate Transaction, Employee
voluntarily resigns following either (X) a reduction of
Employee's salary or (Y) a material change of Employee's
responsibilities. As used in this Section 4.3, "Corporate
Transaction" shall mean (i) a merger or consolidation or other
reorganization or transaction in which securities possessing
more than fifty percent (50%) of the total combined voting
power of the Company's outstanding securities are transferred
or issued to a person or persons different from the persons
holding those securities immediately prior to such
transaction, or (ii) the sale, transfer or other disposition
of all or substantially all
4
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of the Company's assets in complete liquidation or
dissolution of the Company. As used in this Section 4.3, a
"material change" in Employee's responsibilities includes
any decrease in Employee's compensation or benefits or any
material change in Employee's job duties, title, or
location of employment (out of the greater Los Angeles,
California metropolitan area).
5. EXCISE TAX. If any payments or transfers of property to be made to
Employee hereunder are subject, in whole or in part, to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, ("the
Excise Tax") and application of Section 280G of such Code, can be
avoided by an appropriate shareholder vote, pursuant to Section
280G(b)(5)(A) of the Code, the Company and Employee agree that they
will respectively take all steps necessary or appropriate to obtain a
favorable shareholder vote to assure that the Excise Tax and the
provisions of Section 280G are not applicable with respect to such
compensation.
6. ASSIGNMENT. Employee may not assign this Agreement or any rights or
obligations hereunder. The Company may assign this Agreement to any of
its subsidiaries or affiliates or in connection with any Corporate
Transaction or reincorporation of the Company.
7. MISCELLANEOUS.
7.1 This Agreement supersedes any and all other agreements, either
oral or in writing, between the parties hereto with respect to
the employment of Employee by the Company and constitutes the
entire agreement between the Company and the Employee with
respect to its subject matter.
7.2 This Agreement may not be amended, supplemented, modified or
extended, except by written agreement which expressly refers
to this Agreement, which is signed by of the parties hereto
and which is authorized by the Company's Board of Directors.
7.3 This Agreement is made in and shall be governed by the laws of
California, without giving effect to its conflicts-of-law
principles.
7.4 In the event that any provision of this Agreement is
determined to be illegal, invalid or void for any reason, the
remaining provisions hereof shall continue in full force and
effect.
7.5 Employee represents and warrants to the Company that there is
no restriction or limitation, by reason of any agreement or
otherwise, upon Employee's right or ability to enter into this
Agreement and fulfill his obligations under this Agreement.
7.6 All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by
first-class mail, postage prepaid, registered or certified, or
delivered either by hand, by messenger or by overnight courier
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service, and addressed to the receiving party at the
respective address set forth in the heading of this Agreement,
or at such other address as such party shall have furnished to
the other party in accordance with this Section 7.6 prior to
the giving of such notice or other communication.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the first date written above.
NETZERO, INC.
By: /s/ RONALD T. BURR
------------------------------
Ronald T. Burr, President
/s/ MARK GOLDSTON
------------------------------------
Mark Goldston
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NETZERO, INC.
STOCK PLEDGE AGREEMENT
AGREEMENT made as of this 20th day of March, 1999 by and
between NetZero, Inc., a California corporation (the "Corporation") and Mark
Goldston ("Pledgor").
RECITALS
A. In connection with the purchase of 4,190,922 shares of the
Corporation's Common Stock (the "Purchased Shares") on the date of this
Agreement from the Corporation, Pledgor has issued that certain promissory note
(the "Note") dated March 20, 1999 payable to the order of the Corporation in the
principal amount of Six Hundred Twenty-Eight Thousand Six Hundred Thirty-Eight
Dollars and Thirty Cents ($628,638.30).
B. Such Note is secured by the Purchased Shares and other
collateral upon the terms set forth in this Agreement.
NOW, THEREFORE, it is hereby agreed as follows:
1. 1. GRANT OF SECURITY INTEREST. Pledgor hereby grants the
Corporation a security interest in, and assigns, transfers to and pledges with
the Corporation, the following securities and other property (collectively, the
"Collateral"):
(i) (i) the Purchased Shares delivered to and
deposited with the Corporation as collateral for the Note;
(ii) (ii) any and all new, additional or different
securities or other property subsequently distributed with respect to
the Purchased Shares which are to be delivered to and deposited with
the Corporation pursuant to the requirements of Paragraph 3 of this
Agreement;
(iii) (iii) any and all other property and money which is
delivered to or comes into the possession of the Corporation pursuant
to the terms of this Agreement; and
(iv) (iv) the proceeds of any sale, exchange or
disposition of the property and securities described in subparagraphs
(i), (ii) or (iii) above.
2. 2. WARRANTIES. Pledgor hereby warrants that Pledgor is the
owner of the Collateral and has the right to pledge the Collateral and that the
Collateral is free from all liens, adverse claims and other security interests
(other than those created hereby).
1.
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3. 3. DUTY TO DELIVER. Any new, additional or different
securities or other property (other than regular cash dividends) which may now
or hereafter become distributable with respect to the Collateral by reason of
(i) any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the Common Stock as a class without
the Corporation's receipt of consideration or (ii) any merger, consolidation or
other reorganization affecting the capital structure of the Corporation shall,
upon receipt by Pledgor, be promptly delivered to and deposited with the
Corporation as part of the Collateral hereunder. Any such securities shall be
accompanied by one or more properly endorsed stock power assignments.
4. 4. PAYMENT OF TAXES AND OTHER CHARGES. Pledgor shall pay,
prior to the delinquency date, all taxes, liens, assessments and other charges
against the Collateral, and in the event of Pledgor's failure to do so, the
Corporation may at its election pay any or all of such taxes and other charges
without contesting the validity or legality thereof. The payments so made shall
become part of the indebtedness secured hereunder and until paid shall bear
interest at the minimum per annum rate required to avoid the imputation of
interest income to the Corporation and compensation income to Pledgor under the
federal tax laws.
5. 5. SHAREHOLDER RIGHTS. So long as there exists no event of
default under Paragraph 10 of this Agreement, Pledgor may exercise all
shareholder voting rights and be entitled to receive any and all regular cash
dividends paid on the Collateral and all proxy statements and other shareholder
materials pertaining to the Collateral.
6. 6. RIGHTS AND POWERS OF CORPORATION. The Corporation may,
without obligation to do so, exercise at any time and from time to time one or
more of the following rights and powers with respect to any or all of the
Collateral:
(i) (i) subject to the applicable limitations of
Paragraph 9, accept in its discretion other property of Pledgor in
exchange for all or part of the Collateral and release Collateral to
Pledgor to the extent necessary to effect such exchange, and in such
event the other property received in the exchange shall become part of
the Collateral hereunder;
(ii) (ii) perform such acts as are necessary to
preserve and protect the Collateral and the rights, powers and remedies
granted with respect to such Collateral by this Agreement; and
(iii) (iii) transfer record ownership of the Collateral
to the Corporation or its nominee and receive, endorse and give receipt
for, or collect by legal proceedings or otherwise, dividends or other
distributions made or paid with respect to the Collateral, PROVIDED AND
ONLY IF there exists at the time an outstanding event of default under
Paragraph 10 of this Agreement. Any cash sums which the Corporation may
so receive shall be applied to the payment of the Note and any other
indebtedness secured hereunder, in such order of application as the
Corporation deems appropriate. Any remaining cash shall be paid over to
Pledgor.
Any action by the Corporation pursuant to the provisions of
this Paragraph 6 may be taken without notice to Pledgor. Expenses reasonably
incurred in connection with such action
2.
<PAGE>
shall be payable by Pledgor and form part of the indebtedness secured
hereunder as provided in Paragraph 12.
7. 7. CARE OF COLLATERAL. The Corporation shall exercise
reasonable care in the custody and preservation of the Collateral. However, the
Corporation shall have no obligation to (i) initiate any action with respect to,
or otherwise inform Pledgor of, any conversion, call, exchange right, preemptive
right, subscription right, purchase offer or other right or privilege relating
to or affecting the Collateral, (ii) preserve the rights of Pledgor against
adverse claims or protect the Collateral against the possibility of a decline in
market value or (iii) take any action with respect to the Collateral requested
by Pledgor unless the request is made in writing and the Corporation determines
that the requested action will not unreasonably jeopardize the value of the
Collateral as security for the Note and other indebtedness secured hereunder.
Subject to the limitations of Paragraph 9, the Corporation may
at any time release and deliver all or part of the Collateral to Pledgor.
8. 8. TRANSFER OF COLLATERAL. In connection with the transfer
or assignment of the Note (whether by negotiation, discount or otherwise), the
Corporation may transfer all or any part of the Collateral, and the transferee
shall thereupon succeed to all the rights, powers and remedies granted the
Corporation hereunder with respect to the Collateral so transferred. Upon such
transfer, the Corporation shall be fully discharged from any further
responsibility for the transferred Collateral and all liability for the
Collateral arising after the date of such transfer.
9. 9. RELEASE OF COLLATERAL. Provided all indebtedness
secured hereunder (other than payments not yet due and payable under the Note)
shall at the time have been paid in full and there does not otherwise exist any
event of default under Paragraph 10, the Purchased Shares, together with any
additional Collateral which may hereafter be pledged and deposited hereunder,
shall be released from pledge and returned to Pledgor in accordance with the
following provisions:
(i) (i) Promptly following (a) payment or prepayment
of principal of the Note, together with payment of all accrued interest
to date, one or more of the Purchased Shares held as Collateral
hereunder shall (subject to the applicable limitations of Paragraphs
9(iii) and 9(v) below) be released to Pledgor or (b) a determination
that Excess Value exists, one or more of the Purchased Shares held as
Collateral hereunder shall (subject to the applicable limitations of
Paragraphs 9(iii) and 9(v) below) be released to Pledgor; provided that
if any Purchased Shares are released pursuant to the immediately
preceding clause and if the fair market value of the Common Stock and
all other Collateral which would otherwise remain in pledge hereunder
after such release at any time falls below one hundred and fifty
percent (150%) of the unpaid principal and accrued interest under the
Note, Pledgor shall contribute additional collateral hereunder to raise
such fair market value of the Purchased Shares and all other Collateral
in pledge up to such 150% level; provided, further, that in no event
shall Pledgor be required to make any additional contributions
hereunder in any amount greater than the amount which the fair market
value of that the original number of Purchased Shares would represent
as of the date of such contribution. The number of shares to be so
released shall
3.
<PAGE>
be equal to the number obtained, as the case may be, by (x)
multiplying (i) the total number of Purchased Shares held under this
Agreement at the time of the payment or prepayment, by (ii) a
fraction, the numerator of which shall be the amount of the
principal paid or prepaid and the denominator of which shall be the
unpaid principal balance of the Note immediately prior to such
payment or prepayment, or (y) multiplying (i) the total number of
Purchased Shares held under this Agreement at the time of the
payment or prepayment, by (ii) a fraction, the numerator of which
shall be the Excess Value and the denominator of which shall be the
fair market value of the Purchased Shares and all other Collateral
held in pledge hereunder immediately prior to any such release. In
no event, however, shall any fractional shares be released. For
purposes of this Agreement, "Excess Value" shall mean the excess
amount, if any, that the fair market value of the Purchased Shares
and Collateral then held in pledge is over 150% of the total unpaid
principal and accrued interest of the Note, as such foregoing
amounts are determined each time that Optionee requests a release of
shares from pledge.
(ii) (ii) Any additional Collateral which may hereafter
be pledged and deposited with the Corporation (pursuant to the
requirements of Paragraph 3) with respect to the Purchased Shares shall
be released at the same time the particular shares of Common Stock to
which the additional Collateral relates are to be released in
accordance with the applicable provisions of Paragraph 9(i).
(iii) (iii) Under no circumstances, however, shall any
Purchased Shares or any other Collateral be released if previously
applied to the payment of any indebtedness secured hereunder. In
addition, in no event shall any Purchased Shares or other Collateral be
released pursuant to the provisions of Paragraph 9(i) or 9(ii) if, and
to the extent, the fair market value of the Common Stock and all other
Collateral which would otherwise remain in pledge hereunder after such
release were effected would be less than the unpaid principal and
accrued interest under the Note.
(iv) (iv) For all valuation purposes under this
Agreement, the fair market value per share of Common Stock on any
relevant date shall be determined in accordance with the following
provisions:
(A) (A) If the Common Stock is at the time
traded on the Nasdaq National Market, the fair market value
shall be the closing selling price per share of Common Stock
on the date in question, as such prices are reported by the
National Association of Securities Dealers on its Nasdaq
system or any successor system. If there is no reported
closing selling price for the Common Stock on the date in
question, then the closing selling price on the last preceding
date for which such quotation exists shall be determinative of
fair market value.
(B) (B) If the Common Stock is at the time
listed on the New York Stock Exchange or any other securities
exchange, then the fair market value shall be the closing
selling price per share of Common Stock on the date in
question on the securities exchange serving as the primary
market for the Common Stock, as such price is officially
quoted in the composite tape of transactions on such exchange.
If there is no reported sale of Common Stock on such exchange
on the date in question, then the fair market value shall be
the
4.
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closing selling price on the exchange on the last preceding
date for which such quotation exists.
(C) (C) If the Common Stock is at the time
neither listed on any securities exchange nor traded on the
Nasdaq National Market, the fair market value shall be
determined by the Corporation's Board of Directors after
taking into account such factors as the Board shall deem
appropriate; provided, however that in the event Pledgor
disagrees with the Board's determination, Pledgor and the
Board shall agree in good faith on such valuation. If the
Pledgor and Corporation do not so agree, Pledgor shall have
the right, but not more often than once every six (6) months
on a rolling basis, to require the appraisal of the
Corporation. If Corporation and Pledgor cannot promptly agree
upon an independent, experienced appraiser who is a member of
a recognized professional association of business appraisers
(an "appraiser"), then each of the Corporation and Pledgor
shall appoint such independent, experienced appraiser who
shall determine the value of the Common Stock. If the higher
of the two appraisals is not more than 10 percent more than
the lower of the appraisals, the fair market value shall be
the average of the two appraisals (which determination shall
be final and binding on the parties and enforceable in any
court of competent jurisdiction); provided that if the two
appraisals are more than 10 percent apart the two appraisers
shall appoint a third appraiser who shall determine the value
of the Common Stock, which determination shall be final and
binding on the parties and enforceable in any court of
competent jurisdiction. All costs of such appraisal shall be
equally shared by the Corporation and Employee.
(v) (v) In the event the Collateral becomes in whole
or in part comprised of "margin securities" within the meaning of
Section 207.2(i) of Regulation G of the Federal Reserve Board, then no
Collateral shall thereafter be substituted for any Collateral under the
provisions of Paragraph 6(i) or be released under Paragraph 9(i) or
(ii), unless there is compliance with each of the following additional
requirements:
(A) (A) The substitution or release must
not increase the amount by which the indebtedness secured
hereunder at the time of such substitution or release exceeds
the maximum loan value (as defined below) of the Collateral
immediately prior to such substitution or release.
(B) (B) The substitution or release must
not cause the amount of indebtedness secured hereunder at the
time of such substitution or release to exceed the maximum
loan value of the Collateral remaining after such substitution
or release is effected.
(C) (C) For purposes of this Paragraph
9(v), the maximum loan value of each item of Collateral shall
be determined on the day the substitution or release is to be
effected and shall, in the case of the shares of Common Stock
and any additional Collateral (other than margin securities),
equal the good faith loan value thereof (as defined in Section
207.2(e)(1) of Regulation G) and shall, in the case of all
margin securities (other than the Common Stock), equal fifty
percent (50%) of the current market value of such securities.
5.
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10. 10. EVENTS OF DEFAULT. The occurrence of one or more of the
following events shall constitute an event of default under this Agreement:
(i) (i) the failure of Pledgor to pay, when due under
the Note, any installment of principal or accrued interest after any
grace period set forth in the Note has expired, if any; or
(ii) (ii) the wilful failure of Pledgor to perform any
material obligation imposed upon Pledgor by reason of this Agreement
within 30 days following written notice to Pledgor detailing such
failure; or
(iii) (iii) the material breach of any warranty of
Pledgor contained in Paragraph 2 of this Agreement.
Upon the occurrence of any such event of default, the
Corporation may, at its election, declare the Note and all other indebtedness
secured hereunder to become immediately due and payable and may exercise any or
all of the rights and remedies granted to a secured party under the provisions
of the California Uniform Commercial Code (as now or hereafter in effect),
including (without limitation) the power to dispose of the Collateral by public
or private sale or to accept the Collateral in full payment of the Note and all
other indebtedness secured hereunder.
Any proceeds realized from the disposition of the Collateral
pursuant to the foregoing power of sale shall be applied first to the payment of
reasonable expenses incurred by the Corporation in connection with the
disposition and then to the payment of the Note and finally to any other
indebtedness secured hereunder. Any surplus proceeds shall be paid over to
Pledgor. However, in the event such proceeds prove insufficient to satisfy all
obligations of Pledgor under the Note which are recourse to Pledgor, then
Pledgor shall remain personally liable for the remaining obligations under the
Note which are recourse to Pledgor.
11. 11. OTHER REMEDIES. The rights, powers and remedies granted
to the Corporation pursuant to the provisions of this Agreement shall be in
addition to all rights, powers and remedies granted to the Corporation under any
statute or rule of law. Any forbearance, failure or delay by the Corporation in
exercising any right, power or remedy under this Agreement shall not be deemed
to be a waiver of such right, power or remedy. Any single or partial exercise of
any right, power or remedy under this Agreement shall not preclude the further
exercise thereof, and every right, power and remedy of the Corporation under
this Agreement shall continue in full force and effect unless such right, power
or remedy is specifically waived by an instrument executed by the Corporation.
12. 12. COSTS AND EXPENSES. All costs and expenses (including
reasonable attorneys fees) incurred by the Corporation in the exercise or
enforcement of any right, power or remedy granted it under this Agreement shall
become part of the indebtedness secured hereunder and shall constitute a
personal liability of Pledgor payable immediately upon demand and bearing
interest until paid at the minimum per annum rate required to avoid the
imputation of interest income to the Corporation and compensation income to
Pledgor under the federal tax laws.
6.
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13. 13. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California without resort
to that State's conflict-of-laws rules.
14. 14. SUCCESSORS. This Agreement shall be binding upon the
Corporation and its successors and assigns and upon Pledgor and the executors,
heirs and legatees of Pledgor's estate.
15. 15. SEVERABILITY. If any provision of this Agreement is
held to be invalid under applicable law, then such provision shall be
ineffective only to the extent of such invalidity, and neither the remainder of
such provision nor any other provisions of this Agreement shall be affected
thereby.
IN WITNESS WHEREOF, this Agreement has been executed by
Pledgor and the Corporation on this 20th day of March, 1999.
NETZERO PLEDGOR
/s/ RONALD T. BURR /s/ MARK GOLDSTON
- ------------------------------- --------------------------
By: Ronald T. Burr Mark Goldston
Title: President
Address:
------------------
--------------------------
--------------------------
7.
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NETZERO, INC.
AMENDMENT TO STOCK PLEDGE AGREEMENT
THIS AMENDMENT TO STOCK PLEDGE AGREEMENT (this "Amendment") is dated as
of May 14, 1999, between Mark Goldston ("Goldston") and NetZero, Inc. (the
"Company"). All capitalized terms used herein without definition shall have the
meanings ascribed to them in that certain Stock Pledge Agreement dated as of
March 20, 1999 (the "Stock Pledge Agreement"), between Goldston and the Company.
In consideration of good and valuable consideration, the receipt of
which is hereby acknowledged, the parties hereto agree as follows:
1. Paragraph 1 of the Stock Pledge Agreement is hereby amended
and restated in its entirety as follows:
"GRANT OF SECURITY INTEREST. Pledgor hereby grants the
Corporation a security interest in, and assigns, transfers to
and pledges with the Corporation, the following securities and
other property (collectively, the "Collateral"):
(i) the Purchased Shares delivered to and deposited with the
Corporation as collateral for the Note;
(ii) 36,232 shares of the Corporation's Series D Preferred
Stock (the "Pledged Series D Stock");
(iii) any and all new, additional or different securities or
other property subsequently distributed with respect to the
Purchased Shares or the Pledged Series D Stock which are to be
delivered to and deposited with the Corporation pursuant to
the requirements of Paragraph 3 of this Agreement;
(iv) any and all other property and money which is delivered
to or comes into the possession of the Corporation pursuant to
the terms of this Agreement; and
(v) the proceeds of any sale, exchange or disposition of the
property and securities described in subparagraphs (i), (ii),
(iii) or (iv) above."
2. Paragraphs 9(i) through (iv) of the Stock Pledge Agreement are
hereby amended and restated in their entirety as follows:
"RELEASE OF COLLATERAL. Provided all indebtedness secured
hereunder (other than payments not yet due and payable under
the Note) shall at the time have been paid in full and there
does not otherwise exist any event of default under Paragraph
10, the Purchased Shares and the Pledged Series
1.
<PAGE>
D Stock, together with any additional Collateral which may
hereafter be pledged and deposited hereunder, shall be
released from pledge and returned to Pledgor in accordance
with the following provisions:
(i) Promptly following (a) payment or prepayment of principal
of the Note, together with payment of all accrued interest to
date, one or more of the Purchased Shares or the Pledged
Series D Stock held as Collateral hereunder shall (subject to
the applicable limitations of Paragraphs 9(iii), (v) and (vi)
below) be released to Pledgor or (b) a determination that
Excess Value exists, one or more of the Purchased Shares or
the Pledged Series D Stock held as Collateral hereunder shall
(subject to the applicable limitations of Paragraphs 9(iii),
(v) and (vi) below) be released to Pledgor; provided that if
any Purchased Shares or Pledged Series D Stock are released
pursuant to the immediately preceding clause and if the fair
market value of the Purchased Shares, Pledged Series D Stock
and all other Collateral which would otherwise remain in
pledge hereunder after such release at any time falls below
one hundred and fifty percent (150%) of the unpaid principal
and accrued interest under the Note, Pledgor shall contribute
additional collateral hereunder to raise such fair market
value of the Purchased Shares, the Pledged Series D Stock, and
all other Collateral in pledge up to such 150% level;
provided, further, that in no event shall Pledgor be required
to make any additional contributions hereunder in any amount
greater than the amount which the fair market value of the
original number of Purchased Shares would represent as of the
date of such contribution. The number of shares to be so
released shall be equal to the number obtained, as the case
may be, by (x) multiplying (i) the total number of shares of
Common Stock represented by the Purchased Shares and the
Pledged Series D Stock (on an as-converted basis) held under
this Agreement at the time of the payment or prepayment, by
(ii) a fraction, the numerator of which shall be the amount of
the principal paid or prepaid and the denominator of which
shall be the unpaid principal balance of the Note immediately
prior to such payment or prepayment, or (y) multiplying (i)
the total number of shares of Common Stock represented by the
Purchased Shares and the Pledged Series D Stock (on an
as-converted basis) held under this Agreement at the time of
the payment or prepayment, by (ii) a fraction, the numerator
of which shall be the Excess Value and the denominator of
which shall be the fair market value of the Purchased Shares,
the Pledged Series D Stock and all other Collateral held in
pledge hereunder immediately prior to any such release. In no
event, however, shall any fractional shares be released. For
purposes of this Agreement, "Excess Value" shall mean the
excess amount, if any, that the fair market value of the
Purchased Shares, the Pledged Series D Stock and Collateral
then held in pledge is over 150% of the total unpaid principal
and accrued interest of the Note, as such foregoing amounts
are determined each time that Optionee requests a release of
shares from pledge.
2.
<PAGE>
(ii) Any additional Collateral which may hereafter be pledged
and deposited with the Corporation (pursuant to the
requirements of Paragraph 3) with respect to the Purchased
Shares or the Pledged Series D Stock shall be released at the
same time the particular shares of Purchased Shares or Pledged
Series D Stock to which the additional Collateral relates are
to be released in accordance with the applicable provisions of
Paragraph 9(i).
(iii) Under no circumstances, however, shall any Purchased
Shares, Pledged Series D Stock or any other Collateral be
released if previously applied to the payment of any
indebtedness secured hereunder. In addition, in no event shall
any Purchased Shares, Pledged Series D Stock, or other
Collateral be released pursuant to the provisions of Paragraph
9(i) or 9(ii) if, and to the extent, the fair market value of
the Purchased Shares, Pledged Series D Stock and all other
Collateral which would otherwise remain in pledge hereunder
after such release were effected would be less than the unpaid
principal and accrued interest under the Note.
(iv) For all valuation purposes under this Agreement, the fair
market value per share of Purchased Shares and/or Pledged
Series D Stock on any relevant date shall be determined in
accordance with the following provisions:
(A) If the security is at the time traded on the Nasdaq
National Market, the fair market value shall be the closing
selling price per share of such security on the date in
question, as such prices are reported by the National
Association of Securities Dealers on its Nasdaq system or any
successor system. If there is no reported closing selling
price for the security on the date in question, then the
closing selling price on the last preceding date for which
such quotation exists shall be determinative of fair market
value.
(B) If the security is at the time listed on the New York
Stock Exchange or any other securities exchange, then the fair
market value shall be the closing selling price per share of
such security on the date in question on the securities
exchange serving as the primary market for such security, as
such price is officially quoted in the composite tape of
transactions on such exchange. If there is no reported sale of
such security on such exchange on the date in question, then
the fair market value shall be the closing selling price on
the exchange on the last preceding date for which such
quotation exists.
(C) If the security is at the time neither listed on any
securities exchange nor traded on the Nasdaq National Market,
the fair market value shall be determined by the Corporation's
Board of Directors after taking into account such factors as
the Board shall deem appropriate; provided, however that in
the event Pledgor disagrees with the Board's determination,
Pledgor and the Board shall agree in good faith on such
valuation. If the Pledgor and Corporation do not so agree,
Pledgor shall
3.
<PAGE>
have the right, but not more often than once every six (6)
months on a rolling basis, to require the appraisal of the
Corporation. If the Corporation and Pledgor cannot promptly
agree upon an independent, experienced appraiser who is a
member of a recognized professional association of business
appraisers (an "appraiser"), then each of the Corporation
and Pledgor shall appoint such independent, experienced
appraiser who shall determine the value of the security. If
the higher of the two appraisals is not more than 10
percent more than the lower of the appraisals, the fair
market value shall be the average of the two appraisals
(which determination shall be final and binding on the
parties and enforceable in any court of competent
jurisdiction); provided that if the two appraisals are more
than 10 percent apart the two appraisers shall appoint a
third appraiser who shall determine the value of the
security, which determination shall be final and binding on
the parties and enforceable in any court of competent
jurisdiction. All costs of such appraisal shall be equally
shared by the Corporation and Employee."
3. Paragraph 9(vi) is hereby added to the Stock Pledge Agreement as
follows:
"(vi) If any Purchased Shares or Pledged Series D Stock are to
be released from their pledge hereunder pursuant to Paragraph
9(i), the order of such release shall be Purchased Shares
first, and then Pledged Series D Stock. No shares of Pledged
Series D Stock shall be released from the pledge hereunder
until all Purchased Shares have been released from their
pledge hereunder."
4. In all other respects, the Stock Pledge Agreement shall remain
unchanged and in full force and effect in accordance with the terms thereof.
IN WITNESS WHEREOF, each of the parties hereto has executed
this Amendment as of the date first above written.
NETZERO, INC.
By: /s/ RONALD T. BURR
------------------------------
Ronald T. Burr, President
/s/ MARK R. GOLDSTON
---------------------------------
MARK R. GOLDSTON
4.
<PAGE>
NETZERO, INC.
NOTE SECURED BY STOCK PLEDGE AGREEMENT
$628,638.30 March 20, 1999
Westlake Village, California
FOR VALUE RECEIVED, Mark Goldston ("Maker") promises to pay to
the order of NetZero, Inc. (the "Corporation"), at its corporate offices at 3835
East Thousand Oaks Boulevard, #338, Westlake Village, California, the principal
sum of Six Hundred Twenty-Eight Thousand Six Hundred Thirty-Eight Dollars and
Thirty Cents ($628,638.30) together with all accrued interest thereon, upon the
terms and conditions specified below.
1. INTEREST. Interest shall accrue on the unpaid balance
outstanding from time to time under this Note at the rate of 4.83% per annum,
compounded annually.
2. PRINCIPAL. The entire principal balance of this Note, together
with all accrued and unpaid interest, shall become due and payable in one lump
sum on March 20, 2004.
3. PAYMENT. Payment shall be made in lawful tender of the United
States and shall be applied first to the payment of all accrued and unpaid
interest and then to the payment of principal. Prepayment of the principal
balance of this Note, together with all accrued and unpaid interest, may be made
in whole or in part at any time without penalty.
4. EVENTS OF ACCELERATION. The entire unpaid principal balance of
this Note, together with all accrued and unpaid interest, shall become
immediately due and payable prior to the specified due date of this Note upon
the occurrence of one or more of the following events:
A. the insolvency of the Maker, the commission of any
act of bankruptcy by the Maker, the execution by the Maker of a general
assignment for the benefit of creditors, the filing by or against the
Maker of any petition in bankruptcy or any petition for relief under
the provisions of the Federal Bankruptcy Act or any other state or
Federal law for the relief of debtors and the continuation of such
petition without dismissal for a period of thirty (30) days or more,
the appointment of a receiver or trustee to take possession of any
property or assets of the Maker or the attachment of or execution
against any property or assets of the Maker; or
B. the occurrence of any event of default under the
Stock Pledge Agreement securing this Note or any obligation secured
thereby which default is not cured within the applicable cure periods
set forth therein.
5. Intentionally omitted.
6. SECURITY. The proceeds of the loan evidenced by this Note
shall be applied solely to the payment of the purchase price of 4,190,922 shares
of the Corporation's common stock and payment of this Note shall be secured by a
pledge of those shares with the Corporation pursuant to the Stock Pledge
Agreement to be executed this date by the Maker. All amounts due under this Note
shall be 50% recourse to Maker and 50% non-recourse to Maker. If
1.
<PAGE>
Maker prepays any principal amounts hereunder, the recourse and nonrecourse
portions of this Note shall be proportionately reduced.
7. COLLECTION. If action is instituted to collect this Note, the
Maker promises to pay all costs and expenses (including reasonable attorneys'
fees) incurred in connection with such action.
8. WAIVER. A waiver of any term of this Note, the Stock Pledge
Agreement or of any of the obligations secured thereby must be made in writing
and signed by a duly-authorized officer of the Corporation and any such waiver
shall be limited to its express terms. No delay by the Corporation in acting
with respect to the terms of this Note or the Stock Pledge Agreement shall
constitute a waiver of any breach, default or failure of a condition under this
Note, the Stock Pledge Agreement or the obligations secured thereby.
The Maker waives presentment, demand, notice of dishonor, notice of
default or delinquency, notice of acceleration, notice of protest and
nonpayment, notice of costs, expenses or losses and interest thereon, notice of
interest on interest and diligence in taking any action to collect any sums
owing under this Note or in proceeding against any of the rights or interests in
or to properties securing payment of this Note.
9. CONFLICTING AGREEMENTS. In the event of any inconsistencies
between the terms of this Note and the terms of any other document related to
the loan evidenced by this Note, the terms of this Note shall prevail.
10. GOVERNING LAW. This Note shall be construed in accordance with
the laws of the State of California without regard to conflict of laws
principles.
/s/ MARK GOLDSTON
-----------------------------
MAKER: MARK GOLDSTON
2.
<PAGE>
NETZERO, INC.
AMENDMENT TO NOTE
THIS AMENDMENT TO NOTE (this "Amendment") is dated as of May 14, 1999,
between Mark Goldston ("Goldston") and NetZero, Inc. (the "Company"). All
capitalized terms used herein without definition shall have the meanings
ascribed to them in that certain Note Secured by Stock Pledge Agreement dated
March 20, 1999 (the "Note"), made by Goldston in favor of the Company,
evidencing a loan in the amount of $628,638.30.
In consideration of good and valuable consideration, the receipt of
which is hereby acknowledged, the parties hereto agree as follows:
1. Paragraph 6 of the Note is hereby amended and restated in its
entirety as follows:
"SECURITY. The proceeds of the loan evidenced by this Note
shall be applied solely to the payment of the purchase price
of 4,190,922 shares of the Corporation's common stock and
payment of this Note shall be secured by a pledge of (a) those
shares, and (b) 36,232 shares of the Corporation's Series D
Preferred Stock. Such pledge shall be with the Corporation
pursuant to that certain Stock Pledge Agreement dated as of
March 20, 1999, between the Corporation and the Maker, as
amended from time to time. All amounts due under this Note
shall be 100% recourse to Maker."
2. In all other respects, the Note shall remain unchanged and in
full force and effect in accordance with the terms thereof.
IN WITNESS WHEREOF, each of the parties hereto has executed
this Amendment as of the date first above written.
NETZERO, INC.
By: /s/ RONALD T. BURR
---------------------------
Ronald T. Burr, President
/s/ MARK R. GOLDSTON
------------------------------
MARK R. GOLDSTON
1.
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and
entered into effective as of the 17th day of April, 1999, by and between
NetZero, Inc., a California corporation (the "Company"), with principal
corporate offices at 31416 Agoura Road #150, Westlake Village, CA 91362, and
Charles Hilliard, whose address is ___________________, California ________
("Employee").
1. EMPLOYMENT.
1.1 The Company hereby agrees to employ Employee, and Employee
hereby accepts such employment, on the terms and conditions
set forth herein, commencing April 17, 1999 (the "Effective
Date"), and continuing through April 17, 2003 (the "Term"),
unless such employment is terminated earlier as provided in
Section 4 below.
2. DUTIES OF EMPLOYEE.
2.1 Employee shall serve as the Senior Vice President, Finance and
Chief Financial Officer of the Company. In this capacity,
Employee shall perform such customary, appropriate and
reasonable executive duties as are usually performed by a
Chief Financial Officer, including such duties as are
delegated to him from time to time by the Board of Directors
of the Company (the "Board"). Employee shall report directly
to the Company's Chief Executive Officer.
2.2 Employee agrees to devote Employee's full time, attention,
skill and efforts to the performance of his duties for the
Company during the Term.
3. COMPENSATION AND OTHER BENEFITS.
3.1 BASE SALARY. During the Term, the Company shall pay to
Employee a base salary of One Hundred Forty Thousand Dollars
($140,000) per fiscal year (the "Base Salary"), payable at
the rate of Eleven Thousand Six Hundred Sixty-Six and 67/100
Dollars ($11,666.67) per month, with payments to be made in
accordance with the Company's standard payment policy and
subject to such withholding as may be required by law.
3.2 BONUS. During the Term, the Employee shall also be eligible to
receive an annual cash bonus of up to 50% of Employee's base
salary for each fiscal year (the "Annual Bonus"), less
withholding required by law, based on performance criteria
established by the Board. Employee shall not be eligible to
receive any unpaid Annual Bonus if his employment hereunder is
terminated pursuant to either Section 4.1, or if Employee
voluntarily resigns.
1
<PAGE>
3.3 VACATION. Employee shall be entitled to four (4) weeks paid
vacation in accordance with the Company's standard vacation
policies.
3.4 OTHER BENEFITS. Employee shall be eligible to participate, as
of the date of Employee's employment, in all group life,
health, medical, dental or disability insurance or other
employee, health and welfare benefits made available generally
to other executives of the Company. If Employee elects to
participate in any of such plans, Employee's portion of the
premium(s) will be deducted from Employee's paycheck.
3.5 BUSINESS EXPENSES. The Company shall promptly reimburse
Employee for all reasonable and necessary business expenses
incurred by Employee in connection with the business of the
Company and the performance of his duties under this
Agreement, subject to Employee providing the Company with
reasonable documentation thereof.
3.6 OPTION GRANT. Employee shall be granted an immediately
exercisable, non-qualified stock option (the "Option") under
the Company's 1999 Stock Option/Stock Incentive Plan (the
"Plan"), for 800,000 shares of the Company's Common Stock, at
an exercise price of $0.50 per share. Employee shall acquire a
vested interest in twenty-five percent of the Option shares
upon the first-year anniversary of the commencement of
Employee's employment with the Company and in the remaining
seventy-five percent of the Option shares in thirty-six (36)
equal monthly installments, beginning one month following such
first-year anniversary. The Option shall also be subject to
accelerated vesting as set forth below.
3.7 LOAN. The Company will lend Employee up to such amount as is
necessary to exercise the Option in full. The loan (a) will
bear interest at the minimum interest rate required to avoid
imputation of interest under applicable IRS guidelines, (b)
will become due and payable five (5) years from the date the
loan is made and Employee shall use the proceeds received by
him from the sale of the Option shares to repay the loan, (c)
will be secured by the underlying Option shares, and (d) will
be recourse with respect to the personal assets of Employee
with respect to at least 50% of the principal amount of the
loan.
3.8 PARTICIPATION IN FINANCING. The Company will allow Employee to
purchase up to 150,000 shares of the Company's Preferred Stock
in the Company's next round of financing, if and when such
stock is issued, at the same price per share paid by other
purchasers participating in such financing.
4. TERMINATION.
4.1 TERMINATION FOR CAUSE.
2
<PAGE>
(a) Termination "for cause" is defined as
follows: the Company terminates Employee's
employment with the Company (1) if Employee
is convicted of a felony or commits an act
of moral turpitude, in either case which
adversely impacts the Company, (2) if
Employee materially breaches the Company's
Confidentiality and Proprietary Agreement,
or (3) if Employee fails, after receipt of
detailed written notice and after receiving
a period of at least thirty (30) days
following such notice to cure such failure,
to use his reasonable good faith efforts to
follow the direction of the Company's Board
of Directors and to perform his obligations
hereunder.
(b) The Company may terminate this Agreement for any of
the reasons stated in Section 4.1(a) by giving
written notice to Employee without prejudice to any
other remedy to which the Company may be entitled.
The notice of termination shall specify the grounds
for termination. If Employee's employment hereunder
is terminated "for cause" pursuant to this Section
4.1, Employee shall be entitled to receive hereunder
his accrued but unpaid Base Salary and vacation pay
through the date of termination, and reimbursement
for any expenses as set forth in Section 3.5, through
the date of termination, but shall not be entitled to
receive any unpaid portion of the Annual Bonus or any
other amount.
4.2 TERMINATION WITHOUT CAUSE. If Employee's employment is
terminated without "cause" as defined in Section 4.1(a), or if
Employee is Involuntarily Terminated (as defined below), the
Company (or its successor, as the case may be) shall pay to
Employee (i) any accrued but unpaid Base Salary and vacation
through the date of termination, (ii) reimbursement for any
expenses as set forth in Section 3.5, through the date of
termination, (iii) Employee's Annual Bonus, prorated through
the date of termination, and (iv) a severance payment in an
amount equal to Two Hundred Eighty Thousand Dollars
($280,000.00), payable in one lump sum, subject to withholding
as may be required by law. In addition, if Employee's
employment is terminated without cause (other than if Employee
is Involuntarily Terminated) or if Employee's employment is
terminated due to death or permanent disability, Employee will
be credited with an additional twelve (12) months of service
toward vesting in the Option shares in addition to the service
he has accrued toward vesting through the date of termination.
If Employee is Involuntarily Terminated, vesting of the Option
shares will be accelerated in full; provided, however,
Employee will only vest in 75% of the Option shares if the
Corporate Transaction takes place in the first nine months
following the date of commencement of Employee's employment.
As used in this Section 4.2, Employee shall be deemed
"Involuntarily Terminated" if (i) the Company or any successor
to the Company terminates
3
<PAGE>
Employee's employment without cause in connection with or
following a Corporate Transaction (as defined in the
Company's stock option plan); or (ii) in connection with or
following a Corporate Transaction there is (a) a decrease
in Employee's title or responsibilities (it being deemed to
be a decrease in title and/or responsibilities if Employee
is not offered the position of Senior Vice President and
Chief Financial Officer of the Company or its successor as
well as the acquiring and ultimate parent entity, if any,
following the Corporate Transaction), (b) a decrease in pay
and/or benefits from those provided by the Company
immediately prior to the Corporate Transaction or (c) a
requirement that Employee re-locate out of the greater Los
Angeles metropolitan area.
5. ASSIGNMENT. Neither the Company nor Employee may assign this
Agreement or any rights or obligations hereunder. This
Agreement will be binding upon the Company and its successors
and assigns. In the event of a Corporate Transaction, the
Company shall cause this Agreement to be assumed by the
Company's successor as well as any acquiring or ultimate
parent entity, if any, following any Corporate Transaction.
6. MISCELLANEOUS.
6.1 This Agreement supersedes any and all other agreements, either
oral or in writing, between the parties hereto with respect to
the employment of Employee by the Company, other than the
Confidentiality and Proprietary Agreement, and constitutes the
entire agreement between the Company and the Employee with
respect to its subject matter.
6.2 This Agreement may not be amended, supplemented, modified or
extended, except by written agreement which expressly refers
to this Agreement, which is signed by each of the parties
hereto and which is authorized by the Company's Board of
Directors.
6.3 This Agreement is made in and shall be governed by the laws of
California, without giving effect to its conflicts-of-law
principles.
6.4 In the event that any provision of this Agreement is
determined to be illegal, invalid or void for any reason, the
remaining provisions hereof shall continue in full force and
effect.
6.5 Employee represents and warrants to the Company that there is
no restriction or limitation, by reason of any agreement or
otherwise, upon Employee's right or ability to enter into this
Agreement and fulfill his obligations under this Agreement.
6.6 All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by
first-class mail, postage prepaid, registered or certified, or
delivered either by hand, by messenger or by overnight courier
4
<PAGE>
service, and addressed to the receiving party at the
respective address set forth in the heading of this Agreement,
or at such other address as such party shall have furnished to
the other party in accordance with this Section 6.6 prior to
the giving of such notice or other communication.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the first date written above.
NETZERO, INC.
By: /s/ MARK GOLDSTON
------------------------------
Mark Goldston, Chief Executive Officer
/s/ CHARLES HILLIARD
----------------------------------
Charles Hilliard
5
<PAGE>
NETZERO, INC.
STOCK PLEDGE AGREEMENT
AGREEMENT made as of this 17th day of April, 1999 by and
between NetZero, Inc., a California corporation (the "Corporation") and
Charles S. Hilliard ("Pledgor").
RECITALS
A. In connection with the purchase of 800,000 shares of the
Corporation's Common Stock (the "Purchased Shares") on the date of this
Agreement from the Corporation, Pledgor has issued that certain promissory
note (the "Note") dated April 17, 1999 payable to the order of the
Corporation in the principal amount of Four Hundred Thousand Dollars
($400,000.00).
B. Such Note is secured by the Purchased Shares and other
collateral upon the terms set forth in this Agreement.
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF SECURITY INTEREST. Pledgor hereby grants the
Corporation a security interest in, and assigns, transfers to and pledges
with the Corporation, the following securities and other property
(collectively, the "Collateral"):
(i) the Purchased Shares delivered to and deposited with the
Corporation as collateral for the Note;
(ii) any and all new, additional or different securities or
other property subsequently distributed with respect to the Purchased
Shares which are to be delivered to and deposited with the Corporation
pursuant to the requirements of Paragraph 3 of this Agreement;
(iii) any and all other property and money which is
delivered to or comes into the possession of the Corporation pursuant to
the terms of this Agreement; and
(iv) the proceeds of any sale, exchange or disposition of
the property and securities described in subparagraphs (i), (ii) or (iii)
above.
2. WARRANTIES. Pledgor hereby warrants that Pledgor is the
owner of the Collateral and has the right to pledge the Collateral and that
the Collateral is free from all liens, adverse claims and other security
interests (other than those created hereby).
1
<PAGE>
3. DUTY TO DELIVER. Any new, additional or different securities
or other property (other than regular cash dividends) which may now or
hereafter become distributable with respect to the Collateral by reason of
(i) any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the Common Stock as a class
without the Corporation's receipt of consideration or (ii) any merger,
consolidation or other reorganization affecting the capital structure of the
Corporation shall, upon receipt by Pledgor, be promptly delivered to and
deposited with the Corporation as part of the Collateral hereunder. Any such
securities shall be accompanied by one or more properly endorsed stock power
assignments.
4. PAYMENT OF TAXES AND OTHER CHARGES. Pledgor shall pay, prior
to the delinquency date, all taxes, liens, assessments and other charges
against the Collateral, and in the event of Pledgor's failure to do so, the
Corporation may at its election pay any or all of such taxes and other
charges without contesting the validity or legality thereof. The payments so
made shall become part of the indebtedness secured hereunder and until paid
shall bear interest at the minimum per annum rate required to avoid the
imputation of interest income to the Corporation and compensation income to
Pledgor under the federal tax laws.
5. SHAREHOLDER RIGHTS. So long as there exists no event of
default under Paragraph 10 of this Agreement, Pledgor may exercise all
shareholder voting rights and be entitled to receive any and all regular cash
dividends paid on the Collateral and all proxy statements and other
shareholder materials pertaining to the Collateral.
6. RIGHTS AND POWERS OF CORPORATION. The Corporation may,
without obligation to do so, exercise at any time and from time to time one
or more of the following rights and powers with respect to any or all of the
Collateral:
(i) subject to the applicable limitations of Paragraph 9,
accept in its discretion other property of Pledgor in exchange for all or
part of the Collateral and release Collateral to Pledgor to the extent
necessary to effect such exchange, and in such event the other property
received in the exchange shall become part of the Collateral hereunder;
(ii) perform such acts as are necessary to preserve and
protect the Collateral and the rights, powers and remedies granted with
respect to such Collateral by this Agreement; and
(iii) transfer record ownership of the Collateral to the
Corporation or its nominee and receive, endorse and give receipt for, or
collect by legal proceedings or otherwise, dividends or other distributions
made or paid with respect to the Collateral, PROVIDED AND ONLY IF there
exists at the time an outstanding event of default under Paragraph 10 of
this Agreement. Any cash sums which the Corporation may so receive shall be
applied to the payment of the Note and any other indebtedness secured
hereunder, in such order of application as the Corporation deems
appropriate. Any remaining cash shall be paid over to Pledgor.
Any action by the Corporation pursuant to the provisions of
this Paragraph 6 may be taken without notice to Pledgor. Expenses reasonably
incurred in connection with such action
2
<PAGE>
shall be payable by Pledgor and form part of the indebtedness secured
hereunder as provided in Paragraph 12.
7. CARE OF COLLATERAL. The Corporation shall exercise
reasonable care in the custody and preservation of the Collateral. However,
the Corporation shall have no obligation to (i) initiate any action with
respect to, or otherwise inform Pledgor of, any conversion, call, exchange
right, preemptive right, subscription right, purchase offer or other right or
privilege relating to or affecting the Collateral, (ii) preserve the rights
of Pledgor against adverse claims or protect the Collateral against the
possibility of a decline in market value or (iii) take any action with
respect to the Collateral requested by Pledgor unless the request is made in
writing and the Corporation determines that the requested action will not
unreasonably jeopardize the value of the Collateral as security for the Note
and other indebtedness secured hereunder.
Subject to the limitations of Paragraph 9, the Corporation may
at any time release and deliver all or part of the Collateral to Pledgor, and
the receipt thereof by Pledgor shall constitute a complete and full
acquittance for the Collateral so released and delivered. The Corporation
shall accordingly be discharged from any further liability or responsibility
for the collateral, and the release Collateral shall no longer be subject to
the provision of this Agreement.
8. TRANSFER OF COLLATERAL. In connection with the transfer or
assignment of the Note (whether by negotiation, discount or otherwise), the
Corporation may transfer all or any part of the Collateral, and the
transferee shall thereupon succeed to all the rights, powers and remedies
granted the Corporation hereunder with respect to the Collateral so
transferred. Upon such transfer, the Corporation shall be fully discharged
from all liability and any further responsibility for the transferred
Collateral.
9. RELEASE OF COLLATERAL. Provided all indebtedness secured
hereunder (other than payments not yet due and payable under the Note) shall
at the time have been paid in full and there does not otherwise exist any
event of default under Paragraph 10, the Purchased Shares, together with any
additional Collateral which may hereafter be pledged and deposited hereunder,
shall be released from pledge and returned to Pledgor in accordance with the
following provisions:
(i) Promptly following (a) payment or prepayment of
principal of the Note, together with payment of all accrued interest to
date, one or more of the Purchased Shares held as Collateral hereunder
shall (subject to the applicable limitations of Paragraphs 9(iii) and
9(v) below) be released to Pledgor. The number of shares to be so released
shall be equal to the number obtained by multiplying (i) the total number
of Purchased Shares held under this Agreement at the time of the payment or
prepayment, by (ii) a fraction, the numerator of which shall be the amount
of the principal paid or prepaid and the denominator of which shall be the
unpaid principal balance of the Note immediately prior to such payment or
prepayment. In no event, however, shall any fractional shares be released.
(ii) Any additional Collateral which may hereafter be
pledged and deposited with the Corporation (pursuant to the requirements of
Paragraph 3) with respect to the Purchased Shares shall be released at the
same time the particular shares of
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Common Stock to which the additional Collateral relates are to be released
in accordance with the applicable provisions of Paragraph 9(i).
(iii) Under no circumstances, however, shall any Purchased
Shares or any other Collateral be released if previously applied to the
payment of any indebtedness secured hereunder. In addition, in no event
shall any Purchased Shares or other Collateral be released pursuant to the
provisions of Paragraph 9(i) or 9(ii) if, and to the extent, the fair
market value of the Common Stock and all other Collateral which would
otherwise remain in pledge hereunder after such release were effected would
be less than the unpaid principal and accrued interest under the Note.
(iv) For all valuation purposes under this Agreement, the
fair market value per share of Common Stock on any relevant date shall be
determined in accordance with the following provisions:
(A) If the Common Stock is at the time traded
on The Nasdaq National Market, the fair market value shall be
the closing selling price per share of Common Stock on the
date in question, as such prices are reported by the National
Association of Securities Dealers on its Nasdaq system or any
successor system. If there is no reported closing selling
price for the Common Stock on the date in question, then the
closing selling price on the last preceding date for which
such quotation exists shall be determinative of fair market
value.
(B) If the Common Stock is at the time listed
on the New York Stock Exchange or any other securities
exchange, then the fair market value shall be the closing
selling price per share of Common Stock on the date in
question on the securities exchange serving as the primary
market for the Common Stock, as such price is officially
quoted in the composite tape of transactions on such exchange.
If there is no reported sale of Common Stock on such exchange
on the date in question, then the fair market value shall be
the closing selling price on the exchange on the last
preceding date for which such quotation exists.
(C) If the Common Stock is at the time
neither listed on any securities exchange nor traded on The
Nasdaq National Market, the fair market value shall be
determined by the Corporation's Board of Directors after
taking into account such factors as the Board shall deem
appropriate.
(v) In the event the Collateral becomes in whole
or in part comprised of "margin securities" within the meaning
of Section 207.2(i) of Regulation G of the Federal Reserve
Board, then no Collateral shall thereafter be substituted for
any Collateral under the provisions of Paragraph 6(i) or be
released under Paragraph 9(i) or (ii), unless there is
compliance with each of the following additional requirements:
(A) The substitution or release must not
increase the amount by which the indebtedness secured
hereunder at the time of such substitution or release exceeds
the maximum loan value (as defined below) of the Collateral
immediately prior to such substitution or release.
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(B) The substitution or release must not
cause the amount of indebtedness secured hereunder at the time
of such substitution or release to exceed the maximum loan
value of the Collateral remaining after such substitution or
release is effected.
(C) For purposes of this Paragraph 9(v),
the maximum loan value of each item of Collateral shall be
determined on the day the substitution or release is to be
effected and shall, in the case of the shares of Common Stock
and any additional Collateral (other than margin securities),
equal the good faith loan value thereof (as defined in Section
207.2(e)(1) of Regulation G) and shall, in the case of all
margin securities (other than the Common Stock), equal fifty
percent (50%) of the current market value of such securities.
10. EVENTS OF DEFAULT. The occurrence of one or more of the
following events shall constitute an event of default under this Agreement:
(i) the failure of Pledgor to pay, when due under the Note,
any installment of principal or accrued interest after any grace period set
forth in the Note has expired, if any; or
(ii) the wilful failure of Pledgor to perform any material
obligation imposed upon Pledgor by reason of this Agreement within 30 days
following written notice to Pledgor detailing such failure; or
(iii) the material breach of any warranty of Pledgor
contained in Paragraph 2 of this Agreement.
Upon the occurrence of any such event of default, the
Corporation may, at its election, declare the Note and all other indebtedness
secured hereunder to become immediately due and payable and may exercise any
or all of the rights and remedies granted to a secured party under the
provisions of the California Uniform Commercial Code (as now or hereafter in
effect), including (without limitation) the power to dispose of the
Collateral by public or private sale or to accept the Collateral in full
payment of the Note and all other indebtedness secured hereunder.
Any proceeds realized from the disposition of the Collateral
pursuant to the foregoing power of sale shall be applied first to the payment
of reasonable expenses incurred by the Corporation in connection with the
disposition and then to the payment of the Note and finally to any other
indebtedness secured hereunder. Any surplus proceeds shall be paid over to
Pledgor. However, in the event such proceeds prove insufficient to satisfy
all obligations of Pledgor under the Note which are recourse to Pledgor, then
Pledgor shall remain personally liable for the remaining obligations under
the Note which are recourse to Pledgor.
11. OTHER REMEDIES. The rights, powers and remedies granted to
the Corporation pursuant to the provisions of this Agreement shall be in
addition to all rights, powers and remedies granted to the Corporation under
any statute or rule of law. Any forbearance, failure or delay by the
Corporation in exercising any right, power or remedy under this Agreement
shall not be deemed to be a waiver of such right, power or remedy. Any single
or partial exercise of any right, power or remedy under this Agreement shall
not preclude the
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further exercise thereof, and every right, power and remedy of the Corporation
under this Agreement shall continue in full force and effect unless such right,
power or remedy is specifically waived by an instrument executed by the
Corporation.
12. COSTS AND EXPENSES. All costs and expenses (including
reasonable attorneys fees) incurred by the Corporation in the exercise or
enforcement of any right, power or remedy granted it under this Agreement
shall become part of the indebtedness secured hereunder and shall constitute
a personal liability of Pledgor payable immediately upon demand and bearing
interest until paid at the minimum per annum rate required to avoid the
imputation of interest income to the Corporation and compensation income to
Pledgor under the federal tax laws.
13. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California without
resort to that State's conflict-of-laws rules.
14. SUCCESSORS. This Agreement shall be binding upon the
Corporation and its successors and assigns and upon Pledgor and the
executors, heirs and legatees of Pledgor's estate.
15. SEVERABILITY. If any provision of this Agreement is held to
be invalid under applicable law, then such provision shall be ineffective
only to the extent of such invalidity, and neither the remainder of such
provision nor any other provisions of this Agreement shall be affected
thereby.
IN WITNESS WHEREOF, this Agreement has been executed by Pledgor
and the Corporation on this 17th day of April, 1999.
NETZERO PLEDGOR
/s/ MARK R. GOLDSTON /s/ CHARLES S. HILLIARD
- ------------------------------- -------------------------------
By: Mark R. Goldston Charles S. Hilliard
Title: Chairman and Chief Executive Officer
Address:
-----------------------
-------------------------------
-------------------------------
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NETZERO, INC.
NOTE SECURED BY STOCK PLEDGE AGREEMENT
$400,000 April 17, 1999
Westlake Village, California
FOR VALUE RECEIVED, Charles S. Hilliard ("Maker") promises to
pay to the order of NetZero, Inc. (the "Corporation"), at its corporate
offices at 3835 East Thousand Oaks Boulevard, Suite 338, Westlake Village,
California, the principal sum of Four Hundred Thousand Dollars ($400,000.00)
together with all accrued interest thereon, upon the terms and
conditions specified below.
1. INTEREST. Interest shall accrue on the unpaid balance
outstanding from time to time under this Note at the rate of 5.28% per
annum, compounded annually.
2. PRINCIPAL. The entire principal balance of this Note,
together with all accrued and unpaid interest, shall become due and
payable in one lump sum on April 16, 2004.
3. PAYMENT. Payment shall be made in lawful tender of
the United States and shall be applied first to the payment of all accrued
and unpaid interest and then to the payment of principal. Prepayment of
the principal balance of this Note, together with all accrued and unpaid
interest, may be made in whole or in part at any time without penalty.
4. EVENTS OF ACCELERATION. The entire unpaid principal
balance of this Note, together with all accrued and unpaid interest, shall
become immediately due and payable prior to the specified due date of this
Note upon the occurrence of one or more of the following events:
A. the insolvency of the Maker, the commission of
any act of bankruptcy by the Maker, the execution by the Maker of a
general assignment for the benefit of creditors, the filing by
or against the Maker of any petition in bankruptcy or any petition
for relief under the provisions of the Federal Bankruptcy Act or
any other state or Federal law for the relief of debtors and the
continuation of such petition without dismissal for a period of
thirty (30) days or more, the appointment of a receiver or
trustee to take possession of any property or assets of the Maker or
the attachment of or execution against any property or assets of
the Maker; or
B. the occurrence of any event of default under
the Stock Pledge Agreement securing this Note or any obligation
secured thereby which default is not cured within the applicable
cure periods set forth therein.
5. SPECIAL ACCELERATION EVENT. In the event the Maker sells
or otherwise transfers for value one or more shares of the Corporation's common
stock purchased with the proceeds of this Note, then any unpaid portion of the
principal balance of this Note attributable to the purchase price of those
shares shall become immediately due and payable, together with all accrued and
unpaid interest on that principal portion.
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6. SECURITY. The proceeds of the loan evidenced by this Note
shall be applied solely to the payment of the purchase price of 800,000 shares
of the Corporation's common stock and payment of this Note shall be secured by a
pledge of those shares with the Corporation pursuant to the Stock Pledge
Agreement to be executed this date by the Maker. The Maker, however, shall
remain personally liable for payment of this Note and assets of the Maker,
in addition to the collateral under the Stock Pledge agreement, may be applied
to the satisfaction of the Maker's obligations hereunder. All amounts due under
this Note shall be 100% recourse to the personal assets of Maker.
7. COLLECTION. If action is instituted to collect this Note,
the Maker promises to pay all costs and expenses (including reasonable
attorneys' fees) incurred in connection with such action.
8. WAIVER. A waiver of any term of this Note, the Stock
Pledge Agreement or of any of the obligations secured thereby must be made in
writing and signed by a duly-authorized officer of the Corporation and any such
waiver shall be limited to its express terms. No delay by the Corporation in
acting with respect to the terms of this Note or the Stock Pledge Agreement
shall constitute a waiver of any breach, default or failure of a condition under
this Note, the Stock Pledge Agreement or the obligations secured thereby.
The Maker waives presentment, demand, notice of dishonor, notice
of default or delinquency, notice of acceleration, notice of protest and
nonpayment, notice of costs, expenses or losses and interest thereon, notice of
interest on interest and diligence in taking any action to collect any sums
owing under this Note or in proceeding against any of the rights or interests in
or to properties securing payment of this Note.
9. CONFLICTING AGREEMENTS. In the event of any
inconsistencies between the terms of this Note and the terms of any other
document related to the loan evidenced by this Note, the terms of this Note
shall prevail.
10. Governing Law. This Note shall be construed in accordance
with the laws of the State of California without regard to conflict of laws
principles.
/s/ CHARLES S. HILLIARD
---------------------------
MAKER: CHARLES S. HILLIARD
2.
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DISTRIBUTION, LICENSE AND ALLIANCE AGREEMENT
This Distribution, License and Alliance Agreement (the "Agreement") between
Compaq Computer Corporation, with its principal business office at 20555 S.H.
240, Houston, Texas 77070, a Delaware corporation ("Compaq"), and NetZero,
Inc., with its principal business office at 2555 Townsgate Road, Westlake
Village, CA 91361, a California corporation ("NETZERO"), is made effective as
of this 30th day of April, 1999. Compaq and NetZero are sometimes referred
to individually as a "Party," and collectively as the "Parties."
RECITALS
WHEREAS, Compaq and NetZero wish to enter into a business alliance to,
among other things, market, promote and offer NetZero branded Internet access
service (the "NetZero ISP Service") which shall be free to the Compaq enduser
at the time the Licensed Product associated with such service is distributed
with the Presario Product Line.
WHEREAS, Compaq and NetZero each acknowledge that the keys to developing
the desired program are a good faith commitment to solve business and
operational issues through open communication and a willingness to employ
flexible procedures to address any such issues which may arise during the
performance of this Agreement.
NOW, THEREFORE, AND IN CONSIDERATION of the foregoing premises and for
other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the Parties agree as follows:
1.0 PURPOSE
The intent of the Parties is to work together to allow Compaq to market,
offer and distribute the Licensed Product on the Presario Product Line
commencing with the 2C Product Run (the "Products") during the term of this
Agreement with the goal and purpose of consumer adoption of the NetZero ISP
Service by purchasers of the Products. Compaq and NetZero agree to work
together to understand the demands on an ISP service that could be made by
Compaq customers and identify what may be required by both parties to
anticipate and handle such demands.
2.0 WORK EFFORT
This Agreement shall describe:
a) the terms and conditions under which Compaq shall have the right and
obligation to distribute the Licensed Product and Compaq's marketing
obligations in connection with the distribution of the Licensed
Products,
b) the license terms by which such distribution rights are granted,
c) the parties' obligations as they relate to the development, testing
and integration of the Licensed Product to allow the Licensed Product
to be
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bundled or shipped with the Products shipped during the term of
this Agreement (the Products which are shipped with or which
incorporate the Licensed Product pursuant to this Agreement are
referred to herein as the "Combined Products"), and
d) Compaq's ability to designate an initial start page from Alta Vista
solely for the Compaq enduser who uses the Licensed Product on the
Combined Products.
2.1 DISTRIBUTION; EXCLUSIVITY; PROMINENCE
a) Commencing with the 2C Run and during the term of this Agreement,
Compaq shall distribute the Licensed Product with all the Products to
enable purchasers of the Products to choose and sign-up to NetZero as
their free ISP. The parties agree that, as soon as technically
feasible and subject to NetZero's Licensed Product passing quality
assurance testing and integration issues as discussed more fully
below, the Licensed Product shall be incorporated into the Products in
the same manner as Compaq incorporates the AOL and Compaq branded ISP
offerings.
b) NetZero agrees that it shall not enter into an agreement with any
other personal computer manufacturer to permit such manufacturer to
distribute or combine in any manner the Licensed Product in
conjunction with the personal computers of such manufacturer where
such distribution takes place during the period commencing June 1,
1999 and ending February 28, 2000 (the "Exclusivity Period"). In
addition, NetZero agrees not to enter into an agreement with any of
Compaq's authorized dealers for the Products to permit such retailers
to distribute copies of the Licensed Product where such distribution
takes place in North America during the Exclusivity Period.
c) Compaq agrees that it shall not distribute during the Exclusivity
Period, or enter into any agreement permitting a third party to
distribute during the Exclusivity Period, Products bundled or combined
in any manner with any Free ISP Service (including any service offered
by Compaq) other than the Licensed Product, excluding (i) Compaq may
offer America Online as a Free ISP Service if required to by AOL and
(ii) Compaq may sell Products to or in support of Affinity Partners.
The phrase "Free ISP Service" for the purpose of this Agreement shall
mean any internet access service, including a service offered or
provided by Compaq, which requires the purchaser of such service to
pay less than five dollars ($5.00) per month, excluding any free
limited trial period of three (3) months or less. The intention of
the foregoing is to make NetZero the exclusive Free ISP on the
Products.
d) If America Online commences offering a Free ISP Service on or in
connection with the Products, then neither party shall be bound by the
restrictions set forth in Sections 2.1(b) and 2.1(c) above. In
addition, NetZero will have the option to terminate the restrictions
on both Parties set forth in Sections 2.1(b) and 2.1(c) above if the
conversion rate for the Licensed Product on the Combined Products is
less than twenty percent (20%) during the Measurement Period
determined as follows. The
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conversion rate shall mean the percentage of purchasers of Combined
Products who subscribe to the NetZero ISP Service as determined
during a particular period. Compaq shall prepare weekly summaries
of Combined Product sales to end-users which shall contain such
information as shall be mutually acceptable to the Parties but
which must, at a minimum, provide NetZero with enough information
to determine how many Combined Products were sold to end-users in a
particular week and what percentage of the purchasers of such
Combined Products subscribed to the NetZero ISP Service. The
Parties shall review the conversion rate on a weekly basis and, if
the conversion rate for the Combined Products in the 3C run during
August 1999 is less than 20%, the Parties shall meet to mutually
determine what additional methods should be implemented to increase
the conversion rate and shall use commercially reasonable efforts
to implement such methods during the month of September. If the
conversion rate during the first two weeks of the month of October,
1999 (the "Measurement Period") is not at least 20%, then NetZero
shall thereafter have the option to terminate the restrictions on
both Parties (but not just on one Party) in Sections 2.1(b) and
2.1(c) above effective upon the delivery of written notice to
Compaq.
e) To the extent the Licensed Product is required to be distributed with
Products pursuant to this Agreement, the NetZero ISP Service offering
shall be prominently displayed on screen as well as in marketing
materials in a manner which shall be mutually agreed to between the
Parties but which shall, subject to (i) Compaq's contractual
restrictions set forth below with respect to AOL and (ii) Compaq's
right to be displayed more prominently than AOL, result in the
NetZero ISP Service being the most prominently displayed ISP service.
NetZero acknowledges that America Online is a business partner with
Compaq in providing Internet access and that Compaq is subject to
certain pre-existing contractual relationships with America Online
which may result in AOL being displayed more prominently in accordance
with such preexisting contractual obligations. However, at a minimum,
NetZero shall have at least equal space with the most prominently
displayed ISP offering (and in no event less than 1/3 of the page) on
the first page that displays either the Compaq or the AOL Internet
access offers on the Products, an example of which is graphically
shown on Schedule 2.1(e)(1) attached hereto. The content in such
space shall be provided by NetZero, and shall be subject to Compaq's
approval and such approval shall not be unreasonably withheld. With
respect to the button (or any replacement button) on such page that
prompts the user to "Next" in the experience, such button may either
take the user to the NetZero sign up, will complete the registration
process (which shall not include any ISP sign-up offers), or to
another page that will have NetZero and Compaq as the only brands from
which to choose. Such page will provide equal prominence to the Net
Zero and Compaq offerings. The desktop shall also include an icon
for the NetZero ISP service which will launch to the Licensed Product.
Until web-based registration is available
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from NetZero enabling the end-user to launch NetZero from the page
referenced above, acceptance of the NetZero service on such page
shall guide the end-user to the site or icon through mutually
acceptable instructions.
2.2 DEVELOPMENT, TESTING AND TECHNICAL REQUIREMENTS
a) Compaq and NetZero agree to work together in the development, testing,
and integration of the current and future versions of the Licensed
Product, as may be made available during the Term of this Agreement.
The intent of the development effort will be to make the Licensed
Product available in a manner to optimize distribution with the retail
marketing cycles of the Product.
b) The work effort shall consist of two phases. The first phase shall be
to test, validate, and reproduce the NetZero 1.6.x version of the
Licensed Product so it can be distributed with the Products in the
form of a CD in the box. The second phase will be the integration of
the Licensed Product into the Compaq Out of Box Experience ("OoBE")
for the 3C Run and the other distributions during the Term of this
Agreement. This integration is intended to be implemented by
incorporating the Licensed Product into the Products in the same
manner other ISP Services are incorporated into the Products
(including web-based registration when available), subject to the
Licensed Product meeting reasonable technical specifications in
accordance with reasonable timelines related to the 3C Run required to
meet the retail marketing cycles.
PHASE 1
Compaq and NetZero shall work together to test and qualify the NetZero
version 1.6.x of the Licensed Product. In order for
Compaq to be obligated to include the Licensed Product in the Products, the
Licensed Product when included with a Product must meet the following basic
quality standards: (i) it must allow a customer who has purchased a
Product to load the Licensed Product from a CD, (ii) the CD shall install
the program either through an auto load or by providing writing
instructions on how to install the program, (i.e. insert disk, click on
the Windows Start key, click on Run, etc), and (iii) shall not cause any
of the Compaq standard features or functions of the Product to fail or
cease to function.
The parties shall work together to ensure that the Licensed Product or any
of its Updates, Enhancements, Modifications or Versions shall not cause any
of the features or functions of the Product to fail or cease to function.
To the extent that NetZero is not having to respond to a security or other
critical customer care issue relating to the NetZero ISP Service, NetZero
shall be required to provide Compaq with advance notice of any changes to
the Licensed Product by email to specified individuals within Compaq and
Compaq shall have the opportunity to test all such Updates, Enhancements,
Modifications and Versions to ensure they function properly with the
Products. The Parties understand that NetZero will effect changes to the
Licensed Product on a regular basis and that it is important
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for Compaq to test promptly. Compaq agrees to perform testing within 48
hours of delivery of the changes. If at any point in the testing of a
Licensed Product or any Update, Modification, Enhancement or Version,
Compaq determines that there is a material problem attributable to the
Licensed Product that would prevent the Licensed Product from achieving
basic quality standards, Compaq shall not have an obligation to ship the
Licensed Product, until such time as the material problems are cured.
NetZero shall be immediately notified in writing and the Parties shall
use their commercially reasonable efforts to resolve the issue as
expeditiously as possible. NetZero acknowledges that if there is a
functionality problem in the Licensed Product (other than a problem
attributable to the Product, any change to the Products or any other
third party software included in the Product) which causes it to fail to
achieve basic quality standards, and if the parties use commercially
reasonable efforts to resolve the same after written notice and a thirty
(30) day period to cure, either party may terminate this Agreement by
delivering written notice to the other. The Parties agree that
termination is a last resort and agree to work together to make the
project a success
PHASE 2
Compaq and NetZero will complete and mutually agree to the Deliverables,
test plans, development process, defect reporting and correction process
and other technical delivery and acceptance requirements to complete Phase
2, which shall be more fully described in a Schedule 2.2 to be attached to
this Agreement. Compaq and NetZero agree that within ten (10) working
days of execution of this Agreement, they shall engage to complete this
Schedule. The failure of the parties to engage and complete the
Schedule shall not be a breach of this Agreement. One of the purposes of
this Schedule is to ensure the Parties do not miss the deliverable dates.
Compaq and NetZero shall consider the following as guidelines when
developing the requirements:
a. process to develop, test and certify the Licensed Product, and to
integrate the Licensed Product with the Product.
b. required resources for both parties to certify that the NetZero
product shall meet Compaq quality and technical requirements
c. establish a process for on-going updating and incorporation of the
Licensed Product into the Product.
d. a sign-up process, so that the enduser may only have to enter their
information a single time.
e. the process for receipt of Gold Master and error correction.
2.3 DEFAULT START PAGE & ADVANTAGE WINDOW; DISPLAY OF COMPETITOR ADS
a) Compaq and NetZero agree that during the Term of this Agreement that
the designated default start page for the Licensed Products on the
Combined Products (the "Default Start Page") shall be the AltaVista
start page, and Compaq shall be responsible for procuring all rights
required to
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enable and permit NetZero to implement the same. Compaq shall have
the right to determine at Compaq's sole discretion that the Default
Start Page shall no longer be an AltaVista start page. To ensure a
smooth transition for the consumer, Compaq shall provide reasonable
notice of its intent that the Default Start Page shall no longer be
an AltaVista start page. In the event that Compaq chooses not to
use an AltaVista start page as the Default Start Page NetZero shall
be entitled to replace the Default Start Page with such other start
page as it selects, it being understood that NetZero may be
contractually limited in its choices
b) NetZero agrees that within the Advantage Window that Compaq shall be
provided an area in which a "Q" button or link designed with a Q
symbol shall be displayed. The prominence shall, at a minimum, be as
set forth in Schedule 2.3. This link shall be directed to a Compaq
site currently designated as "My Presario." Compaq shall within five
(5) working days of execution of this Agreement provide NetZero with
the appropriate URL for the Default Start Page, as well as for the
graphic for the "Q."
c) NetZero agrees that during the Term of this Agreement it shall not
display ads of other personal computer manufacturers in the Advantage
Window on the Combined Product as a result of the user accessing a
Compaq URL.
The Advantage Window is a persistent window, which is controlled and
maintained by NetZero and which, among other features, is used to display
advertisements. Compaq acknowledges that NetZero shall determine the
function, look, and feel of such window. NetZero and Compaq agree to
coordinate to minimize material inconsistencies between the icons and the
functionality of the buttons on the keyboard and in the Advantage Window,
although the parties understand that there will be some inconsistencies.
The Advantage Window is displayed only when the Compaq enduser is logging
on or actively logged onto the Internet.
2.4 SERVICE AND SUPPORT
Within five (5) days of the execution of this Agreement, the Parties shall
mutually agree to a service and support schedule, which will be attached
hereto as Schedule 2.4. The failure of the parties to prepare and attach a
Schedule shall not be deemed to be a breach of this Agreement. In the
event a Schedule is not attached NetZero agrees that the level of service
and support provided to a purchaser of Combined Products using NetZero's
ISP Service shall be at least the same level as provided to other users of
the NetZero ISP Service.
2.5 EQUITY INVESTMENT
The Parties acknowledge that they are currently in negotiations for Compaq
to participate in an equity investment in NetZero. Compaq agrees to
promptly perform its necessary due diligence and to sign a definitive
agreement within ten (10) days of the date hereof. Failure to execute such
agreement shall give NetZero the option to cancel this Agreement.
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2.6 MARKETING
Compaq agrees to advertise and promote the NetZero ISP Service through its
retail channels. Compaq and NetZero agree to the Schedule attached hereto
as Schedule 2.6 and agree to create additional Marketing Schedules for each
product cycle to describe the marketing plans and marketing materials to
implement the same which shall then be attached hereto as Schedule 2.6.
The failure of the parties to attach and prepare a Schedule shall not be
deemed a breach of this Agreement.
The parties shall consider the following as guidelines for the Marketing
Schedule
1. Reference to this Agreement,
2. Product cycle that the market Addendum is in support of,
3. Description of the promotion,
4. Technical development or modifications if any required,
5. Reliance on NetZero for implementation if required,
6. Perceived impact or change on current level of service or
obligations being provided by either party,
7. Required Deliverables if any;
8. Schedule for implementation;
9. Party's Executive that will be approving the Marketing
Addendum.
Each party shall be provided with reasonable advance written notice to
approve, which approval shall not be unreasonably withheld, any marketing
materials which such party intends to use that references the other party's
trademarks or services or products.
2.7 FORECASTING
The parties acknowledge that analysis of the timing of Product sales by
geographic region and the accurate forecasting of consumer acceptance of
the NetZero ISP Service will be critical in ensuring the quality of the
consumer experience. The parties agree to work together in good faith to
develop procedures and processes to anticipate and ameliorate issues caused
by periodic increases in customer demand.
2.8 TECHNOLOGY REVIEW BOARD
It is NetZero's current intention to establish a Technology Review Board
("TRB") for the purpose of implementing this Agreement. Upon establishment
of the TRB, NetZero shall invite Compaq to sit on and participate as a
non-voting member of the TRB.
2.9 PAYMENT OF EXPENSES
Compaq agrees to source and to pay the cost and expenses of a CD to be
placed in the Products during the 2C Run. The expenses Compaq shall pay
are a CD (four color), a feature guide,/brochure (8.5"x10", four colors/2
sides), bar code label, packaging material and kitting process.
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Compaq may invoice NetZero fifty thousand dollars ($50,000) for expenses
incurred by Compaq for providing CDs in the Products.
NetZero agrees to provide Compaq with all artwork for the CD, packaging
material and feature guide/brochure in a format which can be used by a
commercial replicator. The packaging material and feature guide/brochure
shall be subject to Compaq approval, which approval shall not be
unreasonably withheld.
The parties acknowledge that any additional cost for mutually agreed to
marketing collateral or promotional activities shall be described in a
Marketing Schedule and approved in writing by an authorized executive of
the parties.
3.0 DEFINITIONS.
Unless the context clearly requires otherwise or unless otherwise defined
herein, the capitalized terms used within CONTRACT DOCUMENTS shall have the
same meaning as ascribed to the terms below.
a. Run shall mean the Product distribution by Compaq commencing in May
1999 and ending in September 1999.
b. Run shall mean the Product distribution by Compaq commencing in August
1999 and ending in December 1999.
c. Affinity Partner shall mean a group or company which provides unique
products or services on or in conjunction with the Products, and which
unique products or services are not made generally available on all of
the models of the Products so as to materially impair the purposes of
this Agreement. To be able to receive such product or services the
enduser must be a customer of the group or company sponsoring the
program. Affinity Partners shall not include any group or company
that is a retailer, a dealer or provider of Internet access services.
The Licensed Products shall be included on the Products when such
inclusion is not inconsistent with the objectives of the Affinity
Partner. An example of an Affinity Partner is FreePC.
d. Advantage Window - as defined in Section 2.3.
e. Presario Product Line - shall mean the Compaq Presario branded
personal computers which include a Microsoft Windows 98 or successor
operating system, or any successor, additional line or replacement
line of personal computers which are designated for the consumer
market and which include a Microsoft 98 or successor operating system.
f. Licensed Product(s) shall mean the Executable Code and Object Code
which comprise the Advantage Window and the underlying client
component programs that form the basis of that portion of the NetZero
ISP Service to be installed on the Products pursuant to this
Agreement, and which incorporate the NetZero trademarks (including
name and logo).
g. CODE- shall mean computer-programming instructions. Unless
specifically stated otherwise, Code shall include Executable Code,
Object Code, and
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any Maintenance Modifications or Enhancements in existence from
time to time during a relevant Work Effort.
(1) EXECUTABLE CODE - shall mean Code that loads and executes
without further processing by a software compiler or linker.
(2) OBJECT CODE - shall mean the Code that results when Source
Code is processed by a software compiler, but is not
Executable Code.
(3) SOURCE CODE - shall mean the human-readable form of the
Code and related system documentation, including all
comments and any procedural language.
(4) COMPAQ CODE, NETZERO CODE, OR THIRD-PARTY CODE - shall
mean Code in which Compaq, NetZero, or another,
respectively owns the copyrights and other intellectual
property rights or otherwise has sufficient
authorization to grant or assert rights in such Code.
h. CONTRACT DOCUMENTS - shall mean this Agreement, and its attachments,
any schedules, attachments or addenda referred to in Work Effort, and
any amendments to the foregoing in effect from time to time during the
term or terms of the applicable Contract Documents.
i. DELIVERABLES - shall mean any Materials which result from performance
under the Work Effort and which are required to be delivered by virtue
of their description or specification in the Work Effort.
j. DOCUMENTATION - shall mean user manuals and other written materials
that relate to Documentation shall include any Maintenance
Modifications or Enhancements to such Documentation in existence from
time to time during the term of the Work Effort, and shall include new
Versions of such Documentation.
k. ENHANCEMENTS - shall mean changes or additions, other than Maintenance
Modifications, to Code and related Documentation, including all new
releases, that improve functions, add new functions, or improve
performance by changes in system design or coding.
l. MODIFICATIONS - shall mean any modifications or revisions, other than
Enhancements, to Licensed Product or Documentation that correct errors
or provide other incidental corrections.
m. MATERIALS- shall mean Code, Documentation, other written materials or
tangible media, including machine-readable media with Code or
Documentation recorded thereon, hardware, or any combination of the
foregoing.
n. SUBSIDIARY- shall mean a corporation, company or other entity (1) more
than fifty percent (50%) of whose outstanding shares or securities
(representing the right to vote for the election of directors or other
managing authority) are, or (2) which does not have outstanding shares
or securities, as may be the case in a partnership, joint venture or
unincorporated association, but more than fifty percent (50%) of whose
ownership interest representing the right to make the decisions for
such
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corporation, company or other entity is, now or hereafter, owned
or controlled, directly or indirectly, by a party hereto. However,
such corporation, company or other entity shall be deemed to be a
SUBSIDIARY only so long as such ownership or control exists.
o. VERSION - shall mean Derivative Works that result from changes or
additions to Code and related Documentation that (1) provide
additional value and utility and, as a practical matter, may be priced
and offered separately as optional additions to the Code and
Documentation, or (2) are not made available without separate charge.
p. COMPAQ - shall mean Compaq Computer Corporation. operating by and
through its Consumer Products Group
q. NETZERO - shall mean NetZero and any of its Subsidiaries.
4.0 LICENSE GRANTS
4.1 NetZero grants to Compaq, for the term of this Agreement, a
non-exclusive, non-transferable, worldwide (except as set forth
herein) license to use the Licensed Products with or in the Products
(but only in conjunction with NetZero logo and trademarks) and to
market, sublicense and distribute, electronically or otherwise, the
Licensed Products and Upgrades of Licensed Products with or in the
Products, all in accordance with the intent of, and pursuant to the
terms of, this Agreement. As used herein, the term "use" includes the
right to make, have made, use, have used, copy, reproduce, perform,
display, and distribute the Licensed Products.
NetZero further grants to Compaq a non-exclusive, non-transferable
worldwide (except as set forth herein) license to publicly perform and
publicly display the Licensed Products at trade shows, exhibitions,
and to prospective Customers.
4.2 Compaq may distribute and sublicense the Licensed Products only in
conjunction with the Products, and to third party contractors used by
Compaq to install, configure and otherwise adapt and prepare the
Licensed Products for distribution with the Products. Compaq will not
alter, reverse-engineer, decompile, or disassemble the Licensed
Products without the written consent of NetZero.
4.3 NetZero and Compaq hereby grant to each other a non-exclusive,
non-transferable, worldwide right to use the other's trademarks, trade
names and logos in connection with marketing and distributing the
Licensed Products in conjunction with the Products. Each party's
usual trademark guidelines, including any third party licensed
programs shall apply to the use of the marks. Each party will use
commercially reasonable efforts to avoid any action that diminishes
the value of such marks.
4.4 NetZero has and shall retain all rights of ownership, or rights to
license in and to the Licensed Product and all copies thereof provided
to or created
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by Compaq under this Agreement, any and all Modifications, and
derivative works thereof and the Intellectual Property Rights
embodied therein and related thereto. No right or license to
Compaq, except as specifically set forth herein, shall be implied.
4.5 NetZero hereby grants to Compaq a non-exclusive, non-transferable,
royalty-free worldwide right and license to modify only in respect to
visual and formatting changes, without any change in substantive
content and in the following manner: (1) use, copy, modify,
nationalize, translate and reproduce the Documentation; (2) have the
Documentation copied, modified, nationalized, translated and
reproduced; (3) merge the Documentation with other materials, as
necessary, to meet Compaq's form factor and /or packaging
requirements; and (4) distribute the Documentation in any manner in
connection with Licensed Products, including, without limitation,
eye-readable and/or machine readable form. It is understood that
NetZero is the sole owner of the Documentation.
5.0 COMPENSATION
NetZero will compensate Compaq by providing Compaq with the right to
utilize up to 10% of the advertising inventory of the banner portion of the
Advantage Window displayed on the Combined Products ("Ad Inventory") during
the term of this Agreement. The allocation of such inventory shall be
determined on a weekly basis and the failure to utilize such inventory
shall result in the loss of the same. Compaq may utilize the banner
portion of the Advantage window for its own internal ads, ads for a Compaq
retailer, Compaq partners, direct sells by Compaq, placement of the Ad
Inventory with a third party or other manner which is consistent with the
process by which NetZero sells or monetizes the remaining NetZero ninety
percent (90%) of the banner portion of the Advantage Window displayed on
the Combined Products. In the event that Compaq desires to utilize URL
targeting, it shall inform NetZero of the same. While NetZero shall use
commercially reasonable efforts to permit Compaq to utilize URL targeting,
Compaq's ability to utilize the same shall be in all respects limited to
any existing or future arrangements, contracts or programs of NetZero
relating to the utilization of URL targeted marketing or the protection
therefrom, and the technical limitations associated with the provisioning
of URL targeted marketing.
If Compaq desires to sell its allocation through demographic or other
targeting to specific groups, NetZero agrees to assist Compaq and to
provide Compaq with up to 10% of the Ad inventory associated with a
particular group that Compaq wishes to target. NetZero agrees to use
commercially reasonable efforts to accommodate Compaq's request to help
place any unsold or unused portions of Compaq's allocation. Compaq and
NetZero agree to discuss a process by which NetZero would assist Compaq in
being able to maximize the ability to use the targeting advertising ability
within the Advantage Window to obtain a high ad rate.
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6.0 REPORTS; DEMOGRAPHIC DATA
Unless otherwise provided and to the extent agreed to by the Parties, the
Project Manager of one party shall provide to the Project Manager of the
other party monthly written progress reports for such Work Effort
specifying the current work progress level and identifying any problems
that have been resolved and any problems that are unresolved, along with a
projected date of resolution. The Project Managers shall also notify the
appropriate executives in writing at the earliest possible time of any
factor, event or anticipated event that may affect the ability to meet the
requirements of the Work Effort, including changes in the assignment of its
key employees, strikes and labor unrest, or unavailability of critical
resources. The issuance of such a notice shall not excuse the Party from
any default or performance obligation, unless the other Party consents.
Except as provided below and excluding personal identifying information,
NetZero agrees to provide Compaq on a weekly basis with the demographic
and consumer data which NetZero collects during registration and compiles
from its subscribers who utilize the Combined Products for the sole purpose
of enabling Compaq to better target advertising opportunities to NetZero's
subscribers. Compaq agrees that such data is proprietary to NetZero and
in no event shall Compaq disclose, analyze, compile, sell or otherwise use
such data for any other purpose; provided, however, the foregoing shall not
be interpreted to limit Compaq's rights to the information it derives from
Compaq's registration and support process. Furthermore, NetZero's
obligation to provide such data and Compaq's use of such data shall be
subject in all respects to, and shall comply with, all current and future
applicable laws, rules, regulations and orders regarding the collection,
retention, use, dissemination and confidentiality of such data, and to
all current and future policies and procedures of NetZero regarding the
same.
7.0 CONFIDENTIALITY AND INFORMATION EXCHANGE
a. EXCHANGE It is the intention of Compaq and NetZero to transfer and/or
exchange information as may be essential for completing the Work
Effort under this Agreement and to explore other business
relationships between the parties. Such information may be disclosed
in oral, visual, or written form (including magnetic media). The
obligations of the parties regarding confidentiality under this
Agreement and the Work Effort entered into by the parties pursuant to
the Agreement shall be governed by the Confidentiality and
Nondisclosure Agreement between the parties with an effective date of
February 2, 1999 or any renewals thereof.
b. DISCLOSURE TO OTHERS Neither party shall, without the prior written
authorization of the other party, disclose to any third-party the
terms and conditions of these CONTRACT DOCUMENTS, except as may be
necessary to establish or assert rights hereunder, or as may be
required by law or governmental regulations. The parties agree that
this Agreement may be disclosed to potential investors in NetZero and
their agents (including underwriters, brokers, attorneys and
accountants), and may be disclosed in filings with the Securities
Exchange Commission. As
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one purpose of this Agreement is to publicize the relationship
created by this Agreement, it is the Parties intention to effect
press releases and to create marketing materials regarding the
distribution of the Licensed Product by Compaq. The Parties agree
to coordinate their efforts in this regard, and all press releases
shall be upon mutual agreement of the Parties and such approval
shall not be unreasonably withheld...
8.0 INTERNATIONAL ISSUES
The NetZero ISP Service is not available outside of the United States and
is not available in Hawaii or Alaska. Compaq, however, may be distributing
Combined Products in such states as well as in Puerto Rico and Canada.
Compaq agrees that the rights hereunder extend only to distribution of the
Licensed Product in the United States, Canada and Puerto Rico. To the
extent the Combined Product are distributed in jurisdictions where NetZero
does not provide the NetZero ISP Service, the Parties agree to indicate so
in a manner as to not confuse the consumer.
9.0 WARRANTIES, DISCLAIMERS, AND LIMITS ON LIABILITY
9.1 NetZero warrants that:
1. It has the right to grant the licenses granted to Compaq in this
Agreement.
2. It has not made and will not make any commitments to any third
party inconsistent with or in derogation of the rights and
licenses granted to Compaq and that it is free of any
obligation that would prevent it from entering into this
Agreement or performing its obligations hereunder.
3. To NetZero's knowledge, the Licensed Products and/or their use
and distribution alone and/or in combination with Products
will not infringe any patent, copyright, trade secret,
trademark or any other legal or equitable rights of any third
party.
9.2 Compaq warrants that:
1. It has the right to grant the rights granted to NetZero in
this Agreement.
2. Except as specifically set forth herein, It has not made and
will not make any commitments to any third party inconsistent
with or in derogation of the rights and licenses granted to
NetZero and that it is free of any obligation that would
prevent it from entering into this Agreement or performing its
obligations hereunder.
3. To Compaq's knowledge, the Products and/or their use and
distribution alone and/or in combination with the Products
will not infringe any patent, copyright, trade secret,
trademark or any other legal or equitable rights of any third
party.
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9.3 THE WARRANTIES STATED HEREIN ARE EXPRESSLY IN LIEU OF ALL OTHER
WARRANTIES, AND UNLESS OTHERWISE EXPRESSLY STATED HEREIN, NEITHER
PARTY MAKES ANY OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT
NOT LIMITED TO, ANY EXPRESS OR IMPLIED WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE.
9.4 Each party shall indemnify, defend and hold the other (and its
officers and employees) harmless against all suits, actions, costs,
expenses, damages, settlements, judgments, and all other liabilities
resulting from claims by third parties that, with respect to Compaq,
the Products and with respect to NetZero the Licensed Products (or
their marketing, distribution, combination or use as allowed by this
Agreement) infringe any United States patent, copyright, trade secret,
trademark, or any other proprietary rights., The foregoing indemnity
shall not apply to the extent the claim is based on the manner in
which the parties have incorporated their products together. NetZero
shall indemnify, defend and hold Compaq (and its officers and
employees) harmless against all suits, actions, costs, expenses,
damages, settlements, judgments, and all other liabilities resulting
from claims by third parties that the collection or use of information
about NetZero's subscribers by NetZero violates any privacy or other
right of such subscriber. Compaq shall indemnify, defend and hold
NetZero (and its officers and employees) harmless against all suits,
actions, costs, expenses, damages, settlements, judgments, and all
other liabilities resulting from claims by third parties that the use
of information about NetZero's subscribers by Compaq violates any
privacy or other right of such subscriber. Each party shall promptly
notify the other in writing when it becomes aware of any claim upon
which a request for indemnity may be made hereunder, provided that the
failure to give such notice shall only constitute a waiver of an
indemnified party's rights hereunder to the extent the indemnifying
party is materially prejudiced by the failure to promptly provide such
notice. The indemnifying party shall assume and thereafter have
control of any suit involving such claim and any settlement
negotiations. The indemnifying party shall promptly pay any such
settlement or final judgment entered against the indemnified party.
If a court determines that a Licensed Product or a Product, as the
case may be, or any part thereof, infringes any United States patent,
copyright, trade secret, trademark or other right covered by this
indemnity, and the sale or use of the Licensed Product or the Product,
as the case may be, or any part thereof, is, as a result, enjoined,
then the indemnifying party may, at its option and expense (but in
addition to its obligations above): (i) procure for the other the
right under such patent, copyright, trade secret, trademark or other
right to sell or use as appropriate, the Licensed Product or Product
or such parts thereof; (ii) replace the Licensed Product or Product,
or parts thereof, with other suitable, functionally equivalent and
non-infringing product or parts; or (iii) suitably modify the Licensed
Product or Product or parts thereof.
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9.5 EXCEPT FOR THE UNAUTHORIZED USE OF A PARTY'S PROPRIETARY RIGHTS
HEREUNDER, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY
INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES,
INCLUDING LOST PROFITS, ARISING OUT OR RESULTING FROM THIS AGREEMENT
EVEN IF THE OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. THE FOREGOING SHALL APPLY REGARDLESS OF THE NEGLIGENCE OR
OTHER FAULT OF EITHER PARTY AND REGARDLESS OF WHETHER SUCH LIABILITY
SOUNDS IN CONTRACT, NEGLIGENCE, TORT, OR ANY OTHER THEORY OF LEGAL
LIABILITY.
10.0 TERM AND TERMINATION OF AGREEMENT
10.1 Unless earlier terminated as provided below, the term of this
Agreement shall be for one (1) year from the date of execution of this
Agreement. At either Party's request, the Parties shall commence
meeting prior to the end of the term to determine whether to extend
the term of this Agreement.
10.2 If either party hereto materially breaches any of the terms and
conditions of this Agreement, the other party may give written notice
to the defaulting party specifying the actions or omissions which
constitute a breach of this Agreement, and in the event that any
breach so indicated shall not be remedied by the defaulting party
within thirty (30) days after such notice, the party not in default
may by further written notice to the defaulting party terminate this
Agreement, and, except as expressly provided otherwise in this
Agreement, this Agreement and all the rights herein granted shall
terminate five (5) days after date of mailing of such notice of
termination. Failure of either party to so terminate this Agreement
due to a breach on the part of the other party shall not prejudice its
rights to terminate for a subsequent breach by the other.
10.3 All sublicenses granted to Customers under this Agreement, and all
obligations with respect thereto set forth in Sections, 4 and 9 shall
survive the expiration or termination of this Agreement. Thereafter,
Compaq agrees to return or destroy all additional copies of the
Licensed Software in its possession and to make no further use of
NetZero's trademarks or trade names.
10.4 Upon termination or otherwise, neither party shall have an obligation
to reimburse the other for any expenses or costs incurred by such
party in performing hereunder. Any costs or expenses incurred by
either party in connection with performing under this Agreement shall,
unless otherwise expressly provided herein, be at that party's sole
risk and based upon its own independent business judgment.
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11.0 MISCELLANEOUS
11.1 The licenses granted herein by NetZero to Compaq shall automatically
extend to include Compaq Subsidiaries and affiliates (other than
AltaVista) owned or controlled by Compaq, and Compaq's contractors and
consultants, but only to the extent necessary to fulfill the specific
intent of this Agreement.. This Agreement may be assigned or
transferred to and shall be binding upon and inure to the benefit of
any corporation or other legal entity with which NetZero or Compaq may
be merged or consolidated, or to the assignee of the entire assets of
either party to which this Agreement relates. Except as allowed by
the foregoing, this Agreement shall not be assignable without the
prior written consent of the other party.
11.2 Neither party is the legal representative or agent of the other, nor
shall either party have the right or authority to assume, create, or
incur any liability or any obligation of any kind, expressed or
implied, against, or in the name of or on behalf of the other party.
11.3 The parties understand and acknowledge that they may be subject to
regulation by agencies of the U.S. government, including the U.S.
Department of Commerce, which prohibit export or diversion of certain
products and technology to certain countries. Any and all obligations
of the parties shall be subject in all respects to such United States
laws and regulations as may apply to the Licensed Products, their use,
distribution, and the like, which may include the Export
Administration Act of 1979, as amended, any successor legislation, and
the Export Administration Regulations issued by the Department of
Commerce. Upon Compaq's request, NetZero shall immediately and fully
cooperate with Compaq in properly identifying and classifying the
Licensed Products according to U.S. Department of Commerce coding
conventions.
11.4 Any and all written notices, communications and deliveries between
NetZero and Compaq with reference to this Agreement shall be deemed
made two days following deposit with the US Postal Service if sent by
registered or certified mail, or one day following deposit with a
reputable overnight courier for overnight delivery to the respective
address of the other party (or such other address as a party may
designate by written notice) as follows:
In the case of Compaq Compaq Computer Corporation
20555 SH 249
Houston, Texas 77070
Attn: Software Commodity Manager
Corporate Procurement MS060217
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In the case of NetZero: 3835 R. East Thousand Oaks Blvd, Suite 338
Westlake Village, California 91362
Attn: Chief Executive Officer;
General Counsel
11.5 THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK, EXCLUDING ITS CONFLICTS OF LAW
RULES WHICH MIGHT REFER TO THE LAWS OF ANOTHER JURISDICTION.
11.6 The section headings appearing in this Agreement are inserted only as
a matter of convenience and in no way define, limit, construe or
describe the scope or intent of a section, nor in any way affect this
Agreement.
11.7 This Agreement sets forth the entire agreement and understanding of
the parties relating to the subject matter contained herein, and
merges all prior discussions and agreements between them. Neither
party shall be bound by any definition, condition, warranty or
representation other than as expressly set forth in this Agreement or
its Schedules, or as subsequently set forth in writing signed by an
authorized representative of the party to be bound thereby. Nothing
in any invoice, order acknowledgment, or other document of NetZero or
Compaq shall affect, alter or modify the terms and conditions in this
Agreement unless signed as provided in the preceding sentence. The
provisions in any Schedule subsequently attached to this Agreement
shall have no legal effect and shall not be deemed to be incorporated
herein unless signed by authorized representatives of both Parties to
this Agreement. Authorized representatives of NetZero for the
purposes of the foregoing are the Chief Executive Officer, President
and Chief Financial Officer.
11.8 In the event that any terms or conditions within this Agreement
conflict with any Schedule, this Agreement shall take precedence.
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12.0 SIGNATURES
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement by
their authorized representatives.
COMPAQ COMPUTER CORPORATION NETZERO, INC.
Signature /s/ Michael J. Larson Signature /s/ Mark R. Goldston
-------------------------- --------------------------
Name: Michael J. Larson Name: Mark R. Goldston
Title: GM & V.P. Consumer Title: Chairman & CEO
Products Group
Date Date
------------------------------- -------------------------------
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NETZERO, INC.
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
MAY 10, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. Purchase and Sale of Stock...........................................1
1.1 Restated Articles...........................................1
1.2 Sale and Issuance of Series D Preferred Stock...............1
1.3 Closing.....................................................1
2. Representations and Warranties of the Company........................1
2.1 Organization, Good Standing and Qualification...............1
2.2 Capitalization and Voting Rights............................1
2.3 Subsidiaries................................................3
2.4 Authorization...............................................3
2.5 Valid Issuance of Preferred and Common Stock................3
2.6 Governmental Consents.......................................3
2.7 Offering....................................................3
2.8 Litigation..................................................3
2.9 Proprietary Information and Employee Agreements.............4
2.10 Patents and Trademarks......................................4
2.11 Compliance with Other Instruments...........................5
2.12 Agreements; Action..........................................5
2.13 Related-Party Transactions..................................6
2.14 Permits.....................................................6
2.15 Environmental and Safety Laws...............................6
2.16 Disclosure..................................................6
2.17 Registration Rights.........................................6
2.18 Corporate Documents.........................................6
2.19 Title to Property and Assets................................6
2.20 Liabilities.................................................7
2.21 Changes.....................................................7
2.22 Employee Benefit Plans......................................8
2.23 Tax Returns, Payments and Elections.........................8
2.24 Insurance...................................................8
2.25 Labor Agreements and Actions................................8
2.26 Merger Negotiations.........................................8
2.27 Qualified Small Business Stock..............................8
3. Representations and Warranties of the Investors......................9
3.1 Authorization...............................................9
3.2 Purchase Entirely for Own Account...........................9
3.3 Disclosure of Information...................................9
3.4 Investment Experience.......................................9
3.5 Accredited Investor.........................................9
3.6 Restricted Securities.......................................9
3.7 Further Limitations on Disposition..........................9
3.8 Legends....................................................10
4. California Commissioner of Corporations.............................11
<PAGE>
TABLE OF CONTENTS (CONTINUED)
PAGE
----
<S> <C> <C>
4.1 Corporate Securities Law...................................11
5. Conditions of Investors' Obligations at Closing.....................11
5.1 Closing....................................................11
6. Conditions of the Company's Obligations at Closing..................12
6.1 Closing....................................................12
7. Miscellaneous.......................................................12
7.1 Survival of Warranties.....................................12
7.2 Successors and Assigns.....................................12
7.3 Governing Law..............................................12
7.4 Counterparts...............................................13
7.5 Titles and Subtitles.......................................13
7.6 Notices....................................................13
7.7 Finder's Fee...............................................13
7.8 Expenses...................................................13
7.9 Amendments and Waivers.....................................13
7.10 Disputes...................................................13
7.11 Severability...............................................14
7.12 Aggregation of Stock.......................................14
7.13 Entire Agreement...........................................14
</TABLE>
SCHEDULE A Investors
SCHEDULE OF EXCEPTIONS
EXHIBIT A Restated Articles of Incorporation
EXHIBIT B Amended Investors' Rights Agreement
EXHIBIT C Opinion of Counsel for the Company
EXHIBIT D Amended Voting Agreement
EXHIBIT E Amended Right of First Refusal and Co-Sale Agreement
EXHIBIT F List of Shareholders
<PAGE>
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES D PREFERRED STOCK PURCHASE AGREEMENT is made as of
the 10th day of May, 1999, among NetZero, Inc., a California corporation (the
"Company"), and the investors listed on Schedule A hereto (the "Investors").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF STOCK.
1.1 RESTATED ARTICLES. The Company shall adopt and file with the
Secretary of the State of California on or before the Closing (as defined
below) the Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A (the "Restated Articles").
1.2 SALE AND ISSUANCE OF SERIES D PREFERRED STOCK. Subject to the
terms and conditions of this Agreement, each Investor agrees to purchase at
the Closing, and the Company agrees to sell and issue to each such Investor
at the Closing, that number of shares of the Company's Series D Preferred
Stock (as defined below) set forth opposite each such Investor's name on
Schedule A for a purchase price of $2.76 per share.
1.3 CLOSING. The purchase and sale of the Series D Preferred Stock
(the "Closing") shall take place at the offices of Brobeck, Phleger &
Harrison LLP ("BPH"), 38 Technology Drive, Irvine, California, at 10:00 a.m.,
on May 13, 1999, or at such other time and place as the Company and Investors
mutually agree upon orally or in writing (the "Closing Date"). At the
Closing, the Company shall deliver to each Investor a certificate
representing the Series D Preferred Stock that such Investor is purchasing
against payment of the purchase price therefor by check or wire transfer;
provided, the Company may, at its sole discretion, accept subscriptions from
additional investors (who shall also be deemed Investors hereunder) and the
payment of all or part of the purchase price from any Investor within ten
(10) days of the Closing Date.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to each Investor that, except as set forth on a
Schedule of Exceptions (the "Schedule of Exceptions") furnished to each
Investor and counsel for the Investors, specifically identifying the relevant
subparagraph hereof, which exceptions shall be deemed to be representations
and warranties as if made hereunder:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the State of California and has all requisite corporate power and
authority to carry on its business as now conducted and as proposed to be
conducted. The Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure to so qualify would have a
material adverse effect on its business or properties.
2.2 CAPITALIZATION AND VOTING RIGHTS. The authorized capital
of the Company consists, or will consist immediately prior to the
Closing, of:
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(a) PREFERRED STOCK. Fifty Million (50,000,000) shares of
Preferred Stock (the "Preferred Stock"), of which (A) Seven Million Nine
Hundred Seventy Thousand Seven Hundred Forty-Eight (7,970,748) shares have
been designated Series A Preferred Stock (the "Series A Preferred Stock") and
of which Seven Million Five Hundred One Thousand Eight Hundred and Eighty-One
(7,501,881) shares are issued and outstanding; (B) Four Million Eight Hundred
Fifty Thousand (4,850,000) shares have been designated Series B Preferred
Stock (the "Series B Preferred Stock") of which Four Million Five Hundred
Sixty-Seven Thousand Nine Hundred Fifty-Eight (4,567,958) shares are issued
and outstanding; (C) Eighteen Million Four Hundred Fifty-Four Thousand
(18,454,000) shares have been designated Series C Preferred Stock (the
"Series C Preferred Stock") of which Eighteen Million Sixty-Six Thousand Five
Hundred Thirty-Nine (18,066,539) shares are issued and outstanding; and (D)
Thirteen Million (13,000,000) shares have been designated Series D Preferred
Stock (the "Series D Preferred Stock"), up to all of which may be sold
pursuant to this Agreement. The rights, privileges, preferences and
restrictions of the Series D Preferred Stock will be as stated in the
Company's Restated Articles.
(b) COMMON STOCK. One Hundred Million (100,000,000) shares of
common stock ("Common Stock"), of which Eighteen Million Six Hundred
Ninety-Seven Thousand Three-Hundred Eighty-Eight (18,697,388) shares are
issued and outstanding.
(c) SHAREHOLDERS. The outstanding shares of Common Stock and
Preferred Stock are owned by the shareholders and in the numbers specified in
Exhibit F hereto.
(d) VALID ISSUANCE. The outstanding shares of Common Stock and
Preferred Stock are all duly and validly authorized and issued, fully paid
and non-assessable, and were issued in accordance with the registration or
qualification provisions of the Securities Act of 1933, as amended (the
"Act") and any relevant state securities laws or pursuant to valid exemptions
therefrom.
(e) Except for (A) the conversion privileges of the Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock
and the Series D Preferred Stock, (B) the rights provided in the Amended
Investors' Rights Agreement (as defined in Section 2.4 below), (C) an
aggregate of ten million (10,000,000) shares of Common Stock reserved for
issuance under the Company's 1998 Stock Option Plan (the "1998 Option Plan")
and the Company's 1999 Stock Option Plan (the "1999 Option Plan"), of which
8,697,388 shares have been issued pursuant to the exercise of options, and
(D) contractual rights to sell and obligations to purchase 468,867 shares of
Series A Preferred Stock and 281,278 shares of Series B Preferred Stock,
there are not outstanding any options, warrants, rights (including conversion
or preemptive rights) or agreements for the purchase or acquisition from the
Company of any shares of its capital stock. Except for the Amended Voting
Agreement (as defined in Section 2.4 below), the Company is not a party or
subject to any agreement or understanding and, to the Company's knowledge,
there is no agreement or understanding between any persons and/or entities,
which affects or relates to the voting or giving of written consents with
respect to any security or by a director of the Company.
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2.3 SUBSIDIARIES. The Company does not presently own or control,
directly or indirectly, any interest in any other corporation, association,
or other business entity. The Company is not a participant in any joint
venture, partnership, or similar arrangement.
2.4 AUTHORIZATION. All corporate action on the part of the Company,
its officers, directors and shareholders necessary for the authorization,
execution and delivery of this Agreement, the Amended and Restated Investors'
Rights Agreement in the form attached hereto as Exhibit B (the "Amended
Investors' Rights Agreement"), the Amended and Restated Right of First
Refusal and Co-Sale Agreement in the form attached hereto as Exhibit E (the
"Amended Right of First Refusal and Co-Sale Agreement"), and the Amended and
Restated Voting Agreement in the form attached hereto as Exhibit D (the
"Amended Voting Agreement") (collectively, the "Transaction Agreements"), the
performance of all obligations of the Company hereunder and thereunder, and
the authorization, issuance, sale and delivery of the Series D Preferred
Stock being sold hereunder has been taken or will be taken prior to the
Closing, and the Transaction Agreements constitute valid and legally binding
obligations of the Company, enforceable in accordance with their respective
terms, except (I) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by laws relating
to the availability of specific performance, injunctive relief, or other
equitable remedies, and (iii) to the extent the indemnification provisions
contained in the Amended Investors' Rights Agreement may be limited by
applicable federal or state securities laws.
2.5 VALID ISSUANCE OF PREFERRED AND COMMON STOCK. The Series D
Preferred Stock that is being purchased by the Investors hereunder, when
issued, sold and delivered in accordance with the terms of this Agreement for
the consideration expressed herein, will be duly and validly issued, fully
paid, and nonassessable, and will be free of restrictions on transfer other
than restrictions on transfer under the Transaction Agreements and under
applicable state and federal securities laws. The Common Stock issuable upon
conversion of the Series D Preferred Stock purchased under this Agreement has
been duly and validly reserved for issuance and, upon issuance in accordance
with the terms of the Restated Articles, will be duly and validly issued,
fully paid, and nonassessable and will be free of restrictions on transfer
other than restrictions on transfer under the Transaction Agreements and
under applicable state and federal securities laws.
2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part
of the Company is required in connection with the consummation of the
transactions contemplated by this Agreement, except for any filings required
by federal and state securities laws.
2.7 OFFERING. Subject in part to the truth and accuracy of each
Investor's representations set forth in Section 3 of this Agreement, the
offer, sale and issuance of the Series D Preferred Stock as contemplated by
this Agreement are exempt from the registration requirements of the Act.
2.8 LITIGATION. There is no action, suit, proceeding or
investigation pending or currently threatened against the Company that
questions the validity of the Transaction Agreements or the right of the
Company to enter into such agreements, or to consummate the
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transactions contemplated hereby or thereby, or that might result, either
individually or in the aggregate, in any material adverse changes in the
assets, condition, affairs or prospects of the Company, financially or
otherwise, or any change in the current equity ownership of the Company. The
foregoing includes, without limitation, actions, suits, proceedings or
investigations pending or threatened involving the prior employment of any of
the Company's employees, their use in connection with the Company's business
of any information or techniques allegedly proprietary to any of their former
employers, or their obligations under any agreements with prior employers.
The Company is not a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company currently pending or that the Company intends to initiate.
2.9 PROPRIETARY INFORMATION AND EMPLOYEE AGREEMENTS. Each employee,
officer and consultant of the Company has executed a Confidentiality and
Proprietary Agreement. To the Company's knowledge, without investigation, no
employee of the Company is in violation of any term of any employment
contract, non-disclosure agreement or any other similar contract or agreement
relating to the relationship of the employee with the Company, any former
employer or any other party.
2.10 PATENTS AND TRADEMARKS. The Company has no patents or pending
patent applications. There are no outstanding options, licenses, or
agreements of any kind relating to the foregoing, nor is the Company bound by
or a party to any options, licenses or agreements of any kind with respect to
the patents, trademarks, service marks, trade names, copyrights, trade
secrets, licenses, information, proprietary rights and processes of any other
person or entity. Except as disclosed in the Schedule of Exceptions, and
without having performed any investigation, the Company is not aware of any
violation or infringement by a third party of any of the Company's patents,
trademarks, service marks, trade names, copyrights, trade secrets, licenses
or other proprietary rights in a manner that could reasonably be expected to
materially and adversely affect the Company's business. To the Company's
knowledge, without investigation, the Company's businesses as now conducted
and as proposed to be conducted will not infringe or conflict with the rights
of others, including rights under patents, trademarks, service marks,
trademarks, service marks, trade names, copyrights, trade secrets, licenses
and other proprietary rights, in any manner that could reasonably be expected
to materially and adversely affect the Company's business. The Company has
not received any communications alleging that the Company has violated or, by
conducting its business as proposed, would violate any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other
proprietary rights of any other person or entity. The Company is not aware
that any of its employees is obligated under any contract (including
licenses, covenants or commitments of any nature) or other agreement, or
subject to any judgment, decree or order of any court or administrative
agency, that would interfere with the use of his or her best efforts to
promote the interests of the Company or that would conflict with the
Company's business as now conducted and as proposed to be conducted. Neither
the execution nor delivery of the Transaction Agreements, nor the carrying on
of the Company's business by the employees of the Company will, to the
Company's knowledge, conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any of such employees is now obligated.
The Company does not believe it is or will be
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necessary to utilize any inventions of any of its employees (or people it
currently intends to hire) made prior to their employment by the Company.
2.11 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
violation or default in any material respect of any provision of its Restated
Articles or Bylaws, or in any material respect of any instrument, judgment,
order, writ, decree, mortgage, indebtedness, indenture or contract to which
it is a party or by which it is bound, or, to its knowledge, of any provision
of any federal or state statute, rule or regulation applicable to the
Company. The execution, delivery and performance of the Transaction
Agreements and the consummation of the transactions contemplated thereby will
not result in any such violation or be in conflict with or constitute, with
or without the passage of time and giving of notice, either a default under
any such provision, instrument, judgment, order, writ, decree, mortgage,
indebtedness, indenture, or contract or an event that results in the creation
of any mortgage, pledge, lien, charge or encumbrance upon any assets of the
Company or the suspension, revocation, impairment, forfeiture, or nonrenewal
of any material permit, license, authorization, or approval applicable to the
Company, its business or operations or any of its assets or properties.
2.12 AGREEMENTS; ACTION.
(a) Except for agreements explicitly contemplated by the
Transaction Agreements, there are no agreements between the Company and any
of its officers, directors, affiliates, or any affiliate thereof.
(b) There are no agreements, instruments, contracts, judgments,
orders, writs or decrees to which the Company is a party or by which it is
bound that may involve (i) obligations (contingent or otherwise) of, or
payments to the Company in excess of, $100,000, or (ii) the license of any
material patent, copyright, trade secret or other proprietary right to or
from the Company. All the contracts and agreements listed in Sections
2.12(b)(i) and (ii) of the Schedule of Exceptions have been duly authorized
by the Company and, to the Company's knowledge, are binding and in full force
and effect in all material respects, subject to laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable
remedies. The Company has not received any written notice of an intention to
terminate any such contract or agreement from any of the other parties to
such contracts and agreements.
(c) The Company has not (i) declared or paid any dividends or
authorized or made any distribution upon or with respect to any class or
series of its capital stock, (ii) incurred any indebtedness for money
borrowed individually in excess of $100,000, (iii) made any loans or advances
to any person, other than ordinary advances for travel expenses, or (iv)
sold, exchanged or otherwise disposed of any of its assets or rights in any
material respect.
(d) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including
persons or entities the Company has reason to believe are affiliated
therewith) shall be aggregated for the purpose of meeting the individual
minimum dollar amounts of such subsections.
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(e) The Company is not a party to and is not bound by any
contract, agreement or instrument, or subject to any restriction under its
Restated Articles or Bylaws that is likely to materially and adversely affect
its business.
2.13 RELATED-PARTY TRANSACTIONS. No employee, officer, or director
of the Company or member of his or her immediate family is indebted to the
Company, nor is the Company indebted (or committed to make loans or extend or
guarantee credit) to any of them. To the Company's knowledge, no employee or
officer has any direct or indirect ownership interest in any firm or
corporation with which the Company is affiliated or with which the Company
has a business relationship, or any firm or corporation that competes with
the Company, except that employees and officers of the Company and members of
their immediate families may own stock in publicly traded companies that may
compete with the Company. No member of the immediate family of any officer of
the Company is directly or indirectly interested in any material contract
with the Company.
2.14 PERMITS. The Company has all franchises, permits, licenses, and
any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties or financial condition of the Company, and the Company
believes it can obtain, without undue burden or expense, any similar
authority for the conduct of its business as planned to be conducted. The
Company is not in default in any material respect under any of such
franchises, permits, licenses, or other similar authority.
2.15 ENVIRONMENTAL AND SAFETY LAWS. To its knowledge, the Company is
not in violation of any applicable statute, law or regulation relating to the
environment or occupational health and safety, and to its knowledge, no
material expenditures are or will be required in order to comply with any
such existing statute, law or regulation.
2.16 DISCLOSURE. The Company has fully provided each Investor with
all the information that such Investor has requested for deciding whether to
purchase the Series D Preferred Stock. To its knowledge, neither the
Transaction Agreements nor any other statements or certificates made or
delivered in connection herewith or therewith contains any untrue statement
of a material fact or omits to state a material fact necessary to make the
statements herein or therein not misleading.
2.17 REGISTRATION RIGHTS. Except as provided in the Amended
Investors' Rights Agreement, the Company has not granted or agreed to grant
any registration rights, including piggyback rights, to any person or entity.
2.18 CORPORATE DOCUMENTS. Except for amendments necessary to satisfy
representations and warranties or conditions contained herein, the Restated
Articles and Bylaws of the Company are in the form previously provided to
counsel for the Investors.
2.19 TITLE TO PROPERTY AND ASSETS. The Company has good and
marketable title to its property and assets free and clear of all mortgages,
liens, loans and encumbrances, except such encumbrances and liens that arise
in the ordinary course of business and do not, individually or in the
aggregate, materially impair the Company's ownership or use of such
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property or assets. With respect to the property and assets it leases, the
Company is in compliance with such leases and, to its knowledge, holds a
valid leasehold interest free of any liens, claims or encumbrances.
2.20 LIABILITIES. The Company has made available to each Investor
its unaudited financial statements (balance sheet, income statement and
statement of cash flows) at and for the nine months ended March 31, 1999 (the
"Financial Statements"). Such Financial Statements have been prepared in good
faith in accordance with the books and records of the Company and fairly
present the financial position of the Company as of such date and the
financial results of the Company for such period, subject to normal year end
adjustments. Except as set forth in the Financial Statements, the Company has
no material liabilities, contingent or otherwise, other than (I) liabilities
incurred in the ordinary course of business subsequent to March 31, 1999 and
(ii) obligations under contracts and commitments incurred in the ordinary
course of business, which, in both cases, individually or in the aggregate,
are not materially adverse to the financial condition or operating results of
the Company.
2.21 CHANGES. Since March 31, 1999, there has not been:
(a) any change in the assets, liabilities, financial condition
or operating results of the Company from that reflected in the Financial
Statements, except changes in the ordinary course of business, which are not
individually or in the aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties,
financial condition, operating results, prospects or business of the Company;
(c) any waiver by the Company of a valuable right or of a
material debt owed to it;
(d) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Company, except in the
ordinary course of business and that is not material to the assets,
properties, financial condition, operating results or business of the Company;
(e) any material change in any compensation arrangement or
agreement with any employee;
(f) any sale, assignment or transfer of any patents,
trademarks, copyrights, trade secrets or other intangible assets;
(g) any resignation or termination of employment of any key
officer of the Company; and the Company, to its knowledge, does not know of
the impending resignation or termination of employment of any such officer;
(h) to the Company's knowledge, any other event or condition of
any character that is likely to materially and adversely affect the assets,
properties, financial condition, operating results or business of the
Company; or
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(i) any agreement or commitment by the Company to do any of the
things described in this Section 2.21.
2.22 EMPLOYEE BENEFIT PLANS. The Company does not have any Employee
Benefit Plan as defined in the Employee Retirement Income Security Act of
1974.
2.23 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company has filed all
tax returns and reports as required by law. These returns and reports are
true and correct in all material respects. The Company has paid all taxes and
other assessments due, except those contested by it in good faith that are
listed in the Schedule of Exceptions. The Company has not elected pursuant to
the Internal Revenue Code of 1986, as amended (the "Code"), to be treated as
a Subchapter S corporation or a collapsible corporation pursuant to Section
1362(a) or Section 341(f) of the Code, nor has it made any other elections
pursuant to the Code (other than elections that relate solely to methods of
accounting, depreciation or amortization) that would have a material effect
on the Company, its business, financial condition, or any of its properties
or material assets.
2.24 INSURANCE. The Company has in full force and effect fire and
casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its
properties that might be damaged or destroyed. The Company has in full force
and effect products liability and errors and omissions insurance in amounts
customary for companies similarly situated.
2.25 LABOR AGREEMENTS AND ACTIONS. The Company is not bound by or
subject to (and none of its assets or properties is bound by or subject to)
any written or oral, express or implied, contract, commitment or arrangement
with any labor union, and no labor union has requested or, to the Company's
knowledge, has sought to represent any of the employees, representatives or
agents of the Company. There is no strike or other labor dispute involving
the Company pending, or to the Company's knowledge, threatened, that is
likely to have a material adverse effect on the assets, properties, financial
condition, operating results, or business of the Company, nor is the Company
aware of any labor organization activity involving its employees. The Company
is not aware that any officer or key employee, or that any group of key
employees, intends to terminate their employment with the Company, nor does
the Company have a present intention to terminate the employment of any of
the foregoing. The employment of each officer and employee of the Company is
terminable at the will of the Company. To its knowledge, the Company has
complied in all material respects with all applicable state and federal equal
employment opportunity and other laws related to employment.
2.26 MERGER NEGOTIATIONS. The Company has not entered into
negotiations with any entity regarding the merger, consolidation or sale of
substantially all the assets of the Company.
2.27 QUALIFIED SMALL BUSINESS STOCK. To the best of the Company's
knowledge, the Series D Preferred Stock issued hereunder to the Investors
qualify as "qualified small business stock" as defined in Section 1202(c) of
the Internal Revenue Code of 1986, as amended as of the date hereof.
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3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each Investor hereby
represents and warrants that:
3.1 AUTHORIZATION. Such Investor has full power and authority to
enter into the Transaction Agreements, and each such agreement constitutes
its valid and legally binding obligation, enforceable in accordance with its
terms.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with
such Investor in reliance upon such Investor's representation to the Company,
which by such Investor's execution of this Agreement such Investor hereby
confirms, that the Series D Preferred Stock to be received by such Investor
and the Common Stock issuable upon conversion thereof (collectively, the
"Securities") will be acquired for investment for such Investor's own
account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that such Investor has no present
intention of selling, granting any participation in, or otherwise
distributing the same. By executing this Agreement, such Investor further
represents that such Investor does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of
the Securities.
3.3 DISCLOSURE OF INFORMATION. Such Investor represents that it has
had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Series D Preferred
Stock and the business, properties, prospects and financial condition of the
Company.
3.4 INVESTMENT EXPERIENCE. Such Investor is an investor in
securities of companies in the development stage and acknowledges that it is
able to fend for itself, can bear the economic risk of its investment, and
has such knowledge and experience in financial or business matters that it is
capable of evaluating the merits and risks of the investment in the Series D
Preferred Stock. If other than an individual, Investor also represents it has
not been organized for the purpose of acquiring the Series D Preferred Stock.
3.5 ACCREDITED INVESTOR. Such Investor is an "accredited investor"
within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of
Regulation D, as presently in effect.
3.6 RESTRICTED SECURITIES. Such Investor understands that the
Securities it is purchasing are characterized as "restricted securities"
under the federal securities laws inasmuch as they are being acquired from
the Company in a transaction not involving a public offering and that under
such laws and applicable regulations such securities may be resold without
registration under the Act only in certain limited circumstances. In this
connection, such Investor represents that it is familiar with SEC Rule 144,
as presently in effect, and understands the resale limitations imposed
thereby and by the Act.
3.7 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting
the representations set forth above, such Investor further agrees not to make
any disposition of all or any portion of the Securities unless and until the
transferee has agreed in writing for the benefit of the Company to be bound
by this Section 3, the Amended Investors' Rights Agreement and
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the Amended Voting Agreement provided and to the extent this Section and such
agreements are then applicable, and:
(a) There is then in effect a Registration Statement under the
Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or
(b) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii)
if reasonably requested by the Company, such Investor shall have furnished
the Company with an opinion of counsel, reasonably satisfactory to the
Company that such disposition will not require registration of such
securities under the Act. It is agreed that the Company will not require
opinions of counsel for transactions made pursuant to Rule 144 except in
unusual circumstances.
(c) (i) Notwithstanding the provisions of paragraphs (a) and
(b) above, no such registration statement or opinion of counsel shall be
necessary for (i) a transfer by an Investor that is a partnership to a
partner of such partnership or a retired partner of such partnership who
retires after the date hereof, or to the estate of any such partner or
retired partner, a transfer by gift, will or intestate succession of any
partner to his or her spouse or to the siblings, lineal descendants or
ancestors of such partner or his or her spouse or (ii) a transfer to an
Affiliate (as such term is defined in Rule 12(b)(2) promulgated under the
Securities Exchange Act of 1934, as amended), if the transferee agrees in
writing to be subject to the terms hereof to the same extent as if he or she
were an original Investor hereunder.
3.8 LEGENDS. It is understood that the certificates evidencing the
Securities may bear one or all of the following legends:
(a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT
WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS
SOLD PURSUANT TO RULE 144 OF SUCH ACT."
(b) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS SET FORTH IN AN AMENDED AND RESTATED INVESTORS' RIGHTS
AGREEMENT, AN AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE
AGREEMENT AND AN AMENDED AND RESTATED VOTING AGREEMENT, COPIES OF WHICH MAY
BE OBTAINED BY ANY SHAREHOLDER, UPON REQUEST AND WITHOUT CHARGE, AT THE
PRINCIPAL OFFICES OF THE CORPORATION."
(c) Any legend required by the laws of the State of California,
including any legend required by the California Department of Corporations
and Sections 417 and 418 of the California Corporations Code.
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4. CALIFORNIA COMMISSIONER OF CORPORATIONS.
4.1 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES THAT ARE
THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES
OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH
SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF
SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF
THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT
ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE
SALE IS SO EXEMPT.
5. CONDITIONS OF INVESTORS' OBLIGATIONS AT CLOSING.
5.1 CLOSING. The obligation of each Investor to purchase and pay for
the Series D Preferred Stock which the Investors have agreed to purchase on
the Closing Date is subject to the fulfillment on or before such Closing, of
each of the following conditions, any of which may be waived in whole or in
part by the Investors; provided, however, that no Investor shall have the
power to waive any condition for any other Investor:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in Section 2 shall be true on and as of
the Closing with the same effect as though such representations and
warranties had been made on and as of the date of such Closing, unless the
representations contained in Section 2 are made as of a specific date.
(b) PERFORMANCE. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement
that are required to be performed or complied with by it on or before the
Closing.
(c) COMPLIANCE CERTIFICATE. The President of the Company shall
deliver to each Investor at the Closing a certificate stating that the
conditions specified in Section 5.1(a) and 5.1(b) have been fulfilled and
stating that there shall have been no material adverse change in the
business, affairs, operations, properties, assets or condition of the Company
since the date of the Financial Statements.
(d) QUALIFICATIONS. All authorizations, approvals, or permits,
if any, of any governmental authority or regulatory body of the United States
or of any state that are required in connection with the lawful issuance and
sale of the Securities pursuant to this Agreement shall be duly obtained and
effective as of the Closing.
(e) PROCEEDINGS AND DOCUMENTS. All corporate and other
proceedings in connection with the transactions contemplated at the Closing
and all documents incident thereto shall be reasonably satisfactory in form
and substance to the Investors, and they shall have received all such
counterpart original and certified or other copies of such documents as they
may reasonably request.
11
<PAGE>
(f) OPINION OF COMPANY COUNSEL. Each Investor shall have
received from Brobeck, Phleger & Harrison LLP, counsel for the Company, an
opinion, dated as of the Closing, in substantially the form attached hereto
as Exhibit C.
(g) TRANSACTION AGREEMENTS. The Company, the Investors
purchasing a majority of the Series D Preferred Stock to be purchased
hereunder and the other parties necessary to make the Transaction Agreements
effective shall have entered into the Transaction Agreements.
6. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING.
6.1 CLOSING. The obligation of the Company to sell and issue the
Series D Preferred Stock which the Company has agreed to issue on the Closing
Date is subject to the fulfillment on or before such Closing of each of the
following conditions, any of which may be waived in whole or in part by the
Company:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Investors contained in Section 3 shall be true on and as of
the Closing with the same effect as though such representations and
warranties had been made on and as of such Closing, unless the
representations contained in Section 3 are made as of a specific date.
(b) PAYMENT OF PURCHASE PRICE. The Investors shall have
delivered the purchase price specified in Section 1.2.
(c) QUALIFICATIONS. All authorizations, approvals, or permits,
if any, of any governmental authority or regulatory body of the United States
or of any state that are required in connection with the lawful issuance and
sale of the Securities pursuant to this Agreement shall be duly obtained and
effective as of the Closing.
7. MISCELLANEOUS.
7.1 SURVIVAL OF WARRANTIES. The warranties, representations and
covenants of the Company and Investors contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing for a period of one (1) year from the Closing Date and shall in no
way be affected by any investigation of the subject matter thereof made by or
on behalf of the Investors or the Company.
7.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Securities). Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto
or their respective successors and assigns any rights, remedies, obligations,
or liabilities under or by reason of this Agreement, except as expressly
provided in this Agreement.
7.3 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of California as applied to agreements among
California residents entered into and to be performed entirely within
California.
12
<PAGE>
7.4 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.5 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
7.6 NOTICES. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Postal Service, by registered or certified
mail, postage prepaid and addressed to the party to be notified at the
address indicated for such party on the signature page hereof, or at such
other address as such party may designate by ten (10) days' advance written
notice to the other parties.
7.7 FINDER'S FEE. Each party represents that it neither is nor will
be obligated for any finders' fee or commission in connection with this
transaction. Each Investor agrees to indemnify and to hold harmless the
Company from any liability for any commission or compensation in the nature
of a finders' fee (and the costs and expenses of defending against such
liability or asserted liability) for which such Investor or any of its
officers, partners, employees, or representatives is responsible and the
Company agrees to indemnify and hold harmless each Investor from any
liability for any commission or compensation in the nature of a finders' fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees or
representatives is responsible.
7.8 EXPENSES. Irrespective of whether the Closing is effected, the
Company shall pay all costs and expenses that it incurs with respect to the
negotiation, execution, delivery and performance of this Agreement. If any
action at law or in equity is necessary to enforce or interpret the terms of
this Agreement, the prevailing party shall be entitled to reasonable
attorney's fees, costs and necessary disbursements in addition to any other
relief to which such party may be entitled.
7.9 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders
of a majority of the Common Stock issued upon conversion of the Series D
Preferred Stock (assuming the conversion of the Series D Preferred Stock).
Any amendment or waiver effected in accordance with this paragraph shall be
binding upon each holder of any securities purchased under this Agreement at
the time outstanding (including securities into which such securities are
convertible), each future holder of all such securities, and the Company.
7.10 DISPUTES. If the parties are unable, after good faith
negotiations, which each hereby covenants to undertake, to resolve any
dispute arising between them within fifteen (15) days after notice is given
of such dispute, then the dispute will be referred to arbitration (which the
parties agree is the exclusive means of resolving any such dispute) before
one (1) arbitrator in Los Angeles County, California, or any other place
mutually agreed upon by the
13
<PAGE>
parties hereto, in accordance with the applicable rules then in effect of the
Judicial Arbitration and Mediation Service (the "JAMS Rules") (or any other
form of arbitration mutually acceptable to the parties). The determination
made in accordance with the JAMS Rules shall be delivered in writing to the
parties hereto and shall be final, binding and conclusive on the parties
hereto, and the amount of the claim, if any, determined to exist shall be a
valid claim and no further remedy shall be available to either party with
respect to such dispute and judgment may be entered upon such decision in
accordance with applicable law in any court having jurisdiction thereof. The
arbitration award shall include (i) a provision that the prevailing party in
such arbitration recover its costs relating to the arbitration and reasonable
attorneys' fees from the other party, (ii) the amount of such costs and fees,
and (iii) an order that the losing party pay the fees and expenses of the
arbitrator.
7.11 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
7.12 AGGREGATION OF STOCK. All shares of Series D Preferred Stock
held or acquired by affiliated entities or persons shall be aggregated
together for the purpose of determining the availability of any rights under
this Agreement.
7.13 ENTIRE AGREEMENT. This Agreement and the documents referred to
herein constitute the entire agreement among the parties and no party shall
be liable or bound to any other party in any manner by any warranties,
representations, or covenants except as specifically set forth herein or
therein.
14
<PAGE>
SERIES D PREFERRED STOCK PURCHASE
AGREEMENT SIGNATURE PAGE
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMPANY:
NETZERO, INC.
By: /s/ MARK R. GOLDSTON
-----------------------------------------
Mark R. Goldston, Chief Executive Officer
Address: 2555 Townsgate Road
Westlake Village, CA 91361
INVESTORS:
CPQ HOLDINGS, INC.
By: /s/ MICHAEL J. LARSON
-----------------------------------------
Name:
-----------------------------------------
Its:
-----------------------------------------
Address: 20555 State Highway 249
MS 110701
Houston, TX 77070
Attn: Office of General Counsel
with
copies to: Compaq Computer Corporation
20555 State Highway 249
MS 110812
Houston, TX 77070
Attn: Michael J. Larson
15
<PAGE>
SERIES D PREFERRED STOCK PURCHASE
AGREEMENT SIGNATURE PAGE
DRAPER FISHER JURVETSON FUND V, L.P.
By: /s/ TIM DRAPER
-----------------------------------------
Name:
-----------------------------------------
Its:
-----------------------------------------
Address: 400 Seaport Court, Suite 350
Redwood City, CA 94063
DRAPER FISHER JURVETSON PARTNERS V, LLC
By: /s/ TIM DRAPER
-----------------------------------------
Name:
-----------------------------------------
Its:
-----------------------------------------
Address: 400 Seaport Court, Suite 350
Redwood City, CA 94063
16
<PAGE>
SERIES D PREFERRED STOCK PURCHASE
AGREEMENT SIGNATURE PAGE
FOUNDATION CAPITAL II, L.P.
BY: FOUNDATION CAPITAL MANAGEMENT II, LLC
By: /s/ PAUL G. KOONTZ
-----------------------------------------
Name:
-----------------------------------------
Its: Manager
Address: 70 Willow Road, Suite 200
Menlo Park, CA 94025
FOUNDATION CAPITAL II ENTREPRENEURS FUND, LLC
BY: FOUNDATION CAPITAL MANAGEMENT II, LLC
By: /s/ PAUL G. KOONTZ
-----------------------------------------
Name:
-----------------------------------------
Its: Manager
Address: 70 Willow Road, Suite 200
Menlo Park, CA 94025
FOUNDATION CAPITAL II PRINCIPALS FUND, LLC.
BY: FOUNDATION CAPITAL MANAGEMENT II, LLC
By: /s/ PAUL G. KOONTZ
-----------------------------------------
Name:
-----------------------------------------
Its: Manager
Address: 70 Willow Road, Suite 200
Menlo Park, CA 94025
17
<PAGE>
SERIES D PREFERRED STOCK PURCHASE
AGREEMENT SIGNATURE PAGE
IDEALAB! CAPITAL PARTNERS I-A, L.P.
By: /s/ WILLIAM S. ELKUS
-----------------------------------------
Name:
-----------------------------------------
Its:
-----------------------------------------
Address: 130 West Union Street
Pasadena, CA 91103
IDEALAB! CAPITAL PARTNERS I-B, L.P.
By: /s/ WILLIAM S. ELKUS
-----------------------------------------
Name:
-----------------------------------------
Its:
-----------------------------------------
Address: 130 West Union Street
Pasadena, CA 91103
- -
IDEALAB! HOLDINGS, L.L.C.
By: /s/ MARCIA GOLDSTEIN
-----------------------------------------
Name:
-----------------------------------------
Its:
-----------------------------------------
Address: 130 West Union Street
Pasadena, CA 91103
18
<PAGE>
SERIES D PREFERRED STOCK PURCHASE
AGREEMENT SIGNATURE PAGE
CALIFORNIA EMERGING VENTURES, LLC
By: /s/ CLINTON P. HARRIS
-----------------------------------------
Name:
-----------------------------------------
Its: Member and General Partner of Grove Street
Advisors, LLC, Manager for California
Emerging Ventures, LLC
Address: 20 Williams Street, Suite 230
Wellesley, MA 02481
19
<PAGE>
SERIES D PREFERRED STOCK PURCHASE
AGREEMENT SIGNATURE PAGE
/s/ CHARLES S. HILLIARD
-----------------------------------------
CHARLES S. HILLIARD
Address: 2555 Townsgate Road
Westlake Village, CA 91361
/s/ MARK R. GOLDSTON
-----------------------------------------
Mark R. Goldston
Address: 14139 Beresford Road
Beverly Hills, CA 90210
/s/ JAMES K. BAER
-----------------------------------------
JAMES K. BAER
Address: 848 Leonard Road
Los Angeles, CA 90049
/s/ BRAD SCHWARTZ
-----------------------------------------
BRAD SCHWARTZ
Address: 436 Paulette Place
La Canada, CA 91011
20
<PAGE>
SERIES D PREFERRED STOCK PURCHASE
AGREEMENT SIGNATURE PAGE
BROBECK, PHLEGER & HARRISON LLP
By: /s/ THOMAS W. ALLEN
-----------------------------------------
Name:
-----------------------------------------
Its:
-----------------------------------------
Address: 38 Technology Drive
Irvine, CA 92618-5312
/s/ JOHN M. MACALUSO
---------------------------------------------
JOHN M. MACALUSO
Address:
---------------------------------------------
---------------------------------------------
/s/ MICHAEL BRONNER
---------------------------------------------
MICHAEL BRONNER
Address: ---------------------------------------------
---------------------------------------------
/s/ ALLAN LEVOW
---------------------------------------------
ALLAN LEVOW
Address:
---------------------------------------------
---------------------------------------------
21
<PAGE>
Exhibit 10.24
----------------
AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
----------------
MAY 10, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<C> <C>
1. Registration Rights........................................................................1
1.1 Definitions.......................................................................1
1.2 Request for Registration..........................................................2
1.3 Company Registration..............................................................4
1.4 Obligations of the Company........................................................5
1.5 Furnish Information...............................................................6
1.6 Expenses of Demand Registration...................................................6
1.7 Expenses of Company Registration..................................................7
1.8 Underwriting Requirements.........................................................7
1.9 Delay of Registration.............................................................8
1.10 Indemnification...................................................................8
1.11 Reports Under Securities Exchange Act of 1934....................................10
1.12 Form S-3 Registration............................................................11
1.13 Assignment of Registration Rights................................................12
1.14 Limitations on Subsequent First Refusal and Registration Rights..................12
1.15 "Market Stand-Off" Agreement.....................................................13
1.16 Termination of Registration Rights...............................................13
2. Covenants of the Company..................................................................13
2.1 Delivery of Financial Statements and Other Information...........................13
2.2 Inspection. So long as an Investor (collectively with its Affiliates)
continues to own at least three hundred fifty thousand (350,000) shares
of the Company's Preferred Stock or Common Stock issued upon conversion
thereof, t.......................................................................14
2.3 Termination of Information and Inspection Covenants..............................15
3. Miscellaneous.............................................................................15
3.1 Successors and Assigns...........................................................15
3.2 Governing Law....................................................................15
3.3 Counterparts.....................................................................15
3.4 Titles and Subtitles.............................................................15
3.5 Notices..........................................................................15
3.6 Expenses.........................................................................15
3.7 Amendments and Waivers...........................................................15
3.8 Severability.....................................................................16
3.9 Aggregation of Stock.............................................................16
3.10 Entire Agreement; Amendment; Waiver..............................................16
SCHEDULES
Schedule A Schedule of Investors............................................................
Schedule B Schedule of the Officer..........................................................
Schedule C Schedule of Founders.............................................................
</TABLE>
<PAGE>
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT ("Agreement")
is made as of the 10th day of May 1999 by and between NetZero, Inc., a
California corporation (the "Company"), the investors listed on Schedule A
hereto, each of which is herein referred to as an "Investor," the officer
listed on Schedule B hereto, who shall be referred to as an "Officer" herein,
and the founders listed on Schedule C hereto, each of which is referred to
herein as a "Founder." This Agreement shall become effective upon the closing
of the Purchase Agreement as defined below.
RECITALS
WHEREAS, the Company and certain of the Investors are parties to the
Series D Preferred Stock Purchase Agreement of even date herewith (the
"Purchase Agreement");
WHEREAS, the Company previously entered into an Amended and Restated
Investors' Rights Agreement dated as of January 27, 1999 (the "Prior
Agreement") among the Company, certain Investors and the Founders; and
WHEREAS, in order to induce the Company to enter into the Purchase
Agreement and to induce certain of the Investors to invest funds in the
Company pursuant to the Purchase Agreement, the Investors, Founders and the
Company hereby agree that this Agreement shall govern the rights of the
Investors and the Founders to cause the Company to register shares of Common
Stock issued or issuable to the Investors and the Founders and certain other
matters as set forth herein and, upon the effectiveness of this Agreement,
the Prior Agreement shall be terminated and of no further force or effect.
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. REGISTRATION RIGHTS. The Company covenants and agrees as
follows:
1.1 DEFINITIONS. For purposes of this Section 1:
(a) The term "Act" means the Securities Act of 1933, as amended.
(b) The term "Affiliate" means with respect to any corporation,
entity or individual, a wholly-owned subsidiary or parent of, or any
corporation or entity that is, within the meaning of the Act, controlling,
controlled by or under common control with, such corporation, entity or
individual.
(c) The term "Form S-3" means such form under the Act as in effect
on the date hereof or any registration form under the Act subsequently
adopted by the SEC which permits inclusion or incorporation of substantial
information by reference to other documents filed by the Company with the SEC.
<PAGE>
(d) The term "Holder" means any person owning or having the right
to acquire Registrable Securities or any assignee thereof in accordance with
Section 1.13 hereof.
(e) The term "1934 Act" shall mean the Securities Exchange Act of
1934, as amended.
(f) The term "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Act, and the declaration or ordering
of effectiveness of such registration statement or document.
(g) The term "Registrable Securities" means (i) the Common Stock
issuable or issued upon conversion of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, (ii)
the shares of Common Stock issued or issuable to the Founders or the Officer;
provided, however, that as to the Founders, such shares of Common Stock shall
not be deemed Registrable Securities and the Founders shall not be deemed
Holders for the purposes of Section 1.2 or 1.12, and (iii) any Common Stock
of the Company issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of, the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
and Series D Preferred Stock and the shares referenced in (i) and (ii) above,
excluding in all cases, however, any Registrable Securities sold by a Holder
in a transaction in which such Holder's rights under this Section 1 are not
assigned.
(h) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities.
(i) The term "Relative" shall mean, with respect to an individual,
such individual's spouse, and the ancestors, lineal descendants and siblings
of such individual or such individual's spouse who acquire Registrable
Securities by gift, will or intestate succession.
(j) The term "SEC" shall mean the Securities and Exchange
Commission.
1.2 REQUEST FOR REGISTRATION.
(a) If the Company shall receive at any time after the earlier of
(i) August 15, 2000, or (ii) one (1) year after the effective date of the
first registration statement for a public offering of securities of the
Company (other than a registration statement relating either to the sale of
securities to employees of the Company pursuant to a stock option, stock
purchase or similar plan or a SEC Rule 145 transaction), a written request
from the Holders (other than the Officer) of at least twenty percent (20%) of
the Registrable Securities then outstanding (including the Holders of
Registrable Securities attributable to Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock representing at least ten
percent (10%) of the Registrable Securities then outstanding) that the
Company file a registration statement under the Act covering the registration
of at least twenty percent (20%) of such Holders' Registrable
2
<PAGE>
Securities (or any lesser percentage if the anticipated gross receipts from
the offering would exceed $5,000,000), then the Company shall:
(i) within ten (10) days of the receipt thereof, give
written notice of such request to all Holders in accordance with Section 3.5
hereof; and
(ii) use its best efforts to effect as soon as practicable,
the registration under the Act of all Registrable Securities which the
Holders request to be registered, subject to the limitations of subsections
1.2(b), (c) and (d), within twenty (20) days of the mailing of such notice by
the Company in accordance with Section 3.5.
(b) The Holders initiating the registration request hereunder
("Initiating Holders") shall, subject to subsection 1.2(f), distribute the
Registrable Securities covered by their request by means of an underwriting,
and the Company shall include such information in the written notice referred
to in subsection 1.2(a)(i). The underwriter or underwriters will be selected
by the Company and shall be reasonably acceptable to a majority in interest
of the Initiating Holders. The right of any Holder to include such Holder's
Registrable Securities in such underwritten registration shall be conditioned
upon such Holder's participation in such underwriting and the inclusion of
such Holder's Registrable Securities in the underwriting (unless otherwise
mutually agreed by a majority in interest of the Initiating Holders and such
Holder) to the extent provided herein. All Holders proposing to distribute
their securities through such underwriting shall (together with the Company
as provided in subsection 1.4(e)) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwriting. Notwithstanding any other provision of this Section 1.2, if the
managing underwriter advises the Initiating Holders in writing that marketing
factors require a limitation of the number of shares to be underwritten, then
the Company shall so advise all Holders of Registrable Securities which would
otherwise be underwritten pursuant hereto, and the number of shares of
Registrable Securities that may be included in the underwriting shall be
eliminated or allocated among all Holders thereof, including the Initiating
Holders, in proportion (as nearly as practicable) to the amount of
Registrable Securities owned by each Holder at the time of the filing of the
registration statement.
(c) Notwithstanding subsection 1.2(b), if the Company shall
furnish to Holders requesting a registration statement pursuant to this
Section 1.2, a certificate signed by the Chief Executive Officer or President
of the Company stating that in the good faith judgment of the Board of
Directors of the Company, it would be seriously detrimental to the Company
and its shareholders for such registration statement to be filed and it is
therefore essential to defer the filing of such registration statement, the
Company shall have the right to defer taking action with respect to such
filing for a period of not more than one hundred twenty (120) days after
receipt of the request of the Initiating Holders; provided, however, that the
Company may not utilize this right more than once in any twelve (12)-month
period.
(d) Notwithstanding anything else set forth in this Section 1.2, the
Company shall not be obligated to effect, or to take any action to effect, any
registration pursuant to this Section 1.2:
3
<PAGE>
(i) After the Company has effected two registrations
pursuant to this Section 1.2 and (a) such registrations have been declared or
ordered effective and did not include shares of Common Stock sold by the
Company and (b) the Initiating Holders were able to register and sell at
least fifty percent (50%) of the Registrable Securities requested by such
Holders to be included in such registration; or
(ii) During the period starting with the date sixty (60)
days prior to the Company's good faith estimate of the date of filing of, and
ending on a date one hundred eighty (180) days after the effective date of, a
registration subject to Section 1.3 hereof; provided that the Company is
actively employing in good faith all reasonable efforts to cause such
registration statement to become effective; or
(iii) Within twelve (12) months of the effective date of
another registration effected pursuant to this Section 1.2; or
(iv) If the Initiating Holders propose to dispose of shares
of Registrable Securities that may be immediately registered on Form S-3
pursuant to a request made pursuant to Section 1.12 below.
(e) The Company may include in any underwritten registration under
this Section 1.2 any other shares of Common Stock (including, without
limitation, issued and outstanding shares of Common Stock as to which the
holders thereof have contracted with the Company for "piggyback" registration
rights and all shares of Common Stock held by the Founders, so long as the
inclusion in such registration of such shares (i) will not, in the opinion of
the managing underwriter of such registration, interfere with the successful
marketing in accordance with the intended method of sale or other disposition
of all the shares of Registrable Securities sought to be registered by the
Holder or Holders of Registrable Securities pursuant to this Section 1.2 and
(ii) will not result in the exclusion from such registration of any
Registrable Securities. If it is determined as provided above that there will
be such interference, the other shares of Common Stock sought to be included
by the Company shall be excluded to the extent deemed appropriate by the
managing underwriter of such registration.
(f) Notwithstanding anything else set forth in this Agreement, the
Company shall not be required to effect a registration under this Section 1.2
unless such registration is a firm commitment underwritten offering with a
nationally recognized underwriter.
1.3 COMPANY REGISTRATION. If (but without any obligation to do so)
the Company proposes to register (including for this purpose a registration
effected by the Company for shareholders other than the Holders) any of its
stock or other securities under the Act in connection with the public
offering of such securities solely for cash (other than (i) a registration
relating solely to the sale of securities to participants in a Company stock
or stock option plan, (ii) a registration on any form which does not include
substantially the same information as would be required to be included in a
registration statement covering the sale of the Registrable Securities
(including, without limitation, a registration in connection with a bona fide
business acquisition of or by the Company), or (iii) a registration in which
the only Common Stock being registered is Common Stock issuable upon
conversion of debt securities which are also being registered), the Company
shall, at such time, promptly give each Holder written notice in
4
<PAGE>
accordance with Section 3.5 of such registration. Upon the written request of
each Holder given within twenty (20) days after mailing of such notice by the
Company, the Company shall, subject to the provisions of Section 1.8, cause
to be registered under the Act all of the Registrable Securities that each
such Holder has requested to be registered.
1.4 OBLIGATIONS OF THE COMPANY. Whenever required under this
Agreement to use its best efforts to effect the registration of any
Registrable Securities, the Company shall, as expeditiously as reasonably
possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities (but not including the
Registrable Securities held by any Founders) registered thereunder, keep such
registration statement effective for a period of up to ninety (90) days or
until the distribution contemplated in the Registration Statement has been
completed; provided, however, that (i) such 90-day period shall be extended
for a period of time equal to the period the Holder refrains from selling any
securities included in such registration at the request of the managing
underwriter of Common Stock (or other securities) of the Company; and (ii) in
the case of any registration of Registrable Securities on Form S-3 which are
intended to be offered on a continuous or delayed basis, such ninety (90)-day
period shall be extended, if necessary, to keep the registration statement
effective until all such Registrable Securities are sold, provided that Rule
415, or any successor Rule under the Act, permits an offering on a continuous
or delayed basis, and provided further that applicable rules under the Act
governing the obligation to file a post-effective amendment permit, in lieu
of filing a post-effective amendment which (i) includes any prospectus
required by Section 10(a)(3) of the Act or (ii) reflects facts or events
representing a material or fundamental change in the information set forth in
the registration statement, the incorporation by reference of information
required to be included in (i) and (ii) above to be contained in periodic
reports filed pursuant to Section 13 or 15(d) of the 1934 Act in the
registration statement.
(b) Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection with
such registration statement as may be necessary to comply with the provisions
of the Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders participating in such registration such
numbers of copies of a prospectus, including a preliminary prospectus, in
conformity with the requirements of the Act, and such other documents as they
may reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue
Sky laws of such jurisdictions as shall be reasonably requested by the
Holders; provided that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdictions,
unless the Company is already subject to service in such jurisdiction and
except as may be required by the Act.
5
<PAGE>
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a
result of which the registration statement, prospectus or any document
incorporated or deemed to be incorporated therein by reference includes an
untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing and, at the
written request of the holders of a majority of the Registrable Securities
registered under such Registration Statement, promptly prepare and furnish to
such Holder a reasonable number of copies of a post-effective amendment to
the registration statement or a supplement to the prospectus or any document
incorporated or deemed incorporated therein by reference so that, as
thereafter delivered to the purchasers of the Registrable Securities being
sold thereunder, such prospectus will not contain an untrue statement of
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; provided, however, the provisions
of any underwriting agreement which also deal with the subject matter of this
paragraph shall supersede in all respects the provisions of this paragraph.
(g) Cause all such Registrable Securities registered pursuant
hereto to be listed on each securities exchange on which similar securities
issued by the Company are then listed.
(h) Provide a transfer agent and registrar for all Registrable
Securities registered hereunder and a CUSIP number for all such Registrable
Securities, in each case not later than the effective date of such
registration.
1.5 FURNISH INFORMATION.
(a) It shall be a condition precedent to the obligations of the
Company to take any action pursuant to this Section 1 with respect to the
Registrable Securities of any selling Holder that such Holder shall furnish
to the Company such information regarding itself, the Registrable Securities
held by it, and the intended method of disposition of such securities as
shall be required to effect the registration of such Holder's Registrable
Securities.
(b) The Company shall have no obligation with respect to any
registration requested pursuant to Section 1.2 or Section 1.12 if the number
of shares or the anticipated aggregate offering price of the Registrable
Securities to be included in the registration does not equal or exceed the
number of shares or the anticipated aggregate offering price required to
originally trigger the Company's obligation to initiate such registration as
specified in subsection 1.2 or subsection 1.12, whichever is applicable.
1.6 EXPENSES OF DEMAND REGISTRATION. All expenses other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications
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pursuant to Section 1.2, including (without limitation) all registration,
filing and qualification fees, printers' and accounting fees, fees and
disbursements of counsel for the Company and the fees and disbursements of
one (1) counsel for the selling Holders selected by the Holders of a majority
of the Registrable Securities to be included in such registration shall be
borne by the Company; provided, however, that the Company shall not be
required to pay for any expenses of any registration proceeding begun
pursuant to Section 1.2 if the registration request is subsequently withdrawn
at the request of the Holders of a majority of the Registrable Securities to
be registered (in which case all participating Holders shall bear such
expenses), unless the Holders of a majority of the Registrable Securities
agree to forfeit their right to one demand registration pursuant to Section
1.2; provided further, however, that if at the time of such withdrawal or
failure to close, (a) the Holders proposing to participate in the
registration have learned of a material adverse change in the condition,
business, or prospects of the Company not known to such Holders at the time
of their request and other than a change resulting from market factors or
other matters over which the Company has no control, (b) the facts producing
such change were known to the Company at the time of the request or the
Company's delay in disclosing such facts resulted in substantial additional
expense, and (c) in the case of withdrawal, such Holders have withdrawn the
request with reasonable promptness following disclosure by the Company of
such material adverse change, then such Holders shall not be required to pay
any of such expenses and shall retain their rights pursuant to Section 1.2.
Notwithstanding anything herein to the contrary, any expenses in excess of
$25,000 incurred in connection with any special audit required in connection
with a demand registration pursuant to Section 1.2 shall be borne pro rata by
the selling Holders.
1.7 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and
pay all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations,
other than underwriting discounts and commissions relating to Registrable
Securities, pursuant to Section 1.3 for each Holder (which right may be
assigned as provided in Section 1.13), including (without limitation) all
registration, filing, and qualification fees, printers, and accounting fees
relating or apportionable thereto and the fees and disbursements of one (1)
counsel for the selling Holders selected by them.
1.8 UNDERWRITING REQUIREMENTS. In connection with any offering
involving an underwriting of shares of the Company's capital stock, the
Company shall not be required under Section 1.3 to include any of the
Holders' Registrable Securities in such underwriting unless they accept the
terms of the underwriting as agreed upon between the Company and the managing
underwriter(s) selected by it (or by other persons entitled to select the
underwriters), and then only in such quantity as the underwriters determine
in their sole discretion will not, jeopardize the success of the offering by
the Company. If the total amount of securities, including Registrable
Securities, requested by shareholders to be included in such offering exceeds
the amount of securities that the underwriters determine in their sole
discretion is compatible with the success of the offering, then the Company
shall be required to include in the offering only that number of such
securities, including Registrable Securities, which the underwriters
determine in their sole discretion will not jeopardize the success of the
offering (the securities so included to be apportioned (a) first, to the
Company, (b) second, pro rata among the selling Holders (other than the
Founders or transferees of the Founders), pro rata according to the total
amount of Registrable
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Securities owned by such Holders (c) third, pro rata among the selling
Founders and/or transferees of the Founders according to the total amount of
Registrable Securities owned by each such Holder, and (d) fourth, and to the
extent additional securities may be included therein, pro rata among the
other selling shareholders according to the total amount of Common Stock
owned by each such selling shareholder, or in such other proportions as shall
mutually be agreed to by such selling shareholders); provided, however, that
in no event shall (i) the amount of Registrable Securities of the Holders
(other than the Founders or transferees of the Founders) included in the
offering be reduced below thirty-three percent (33%) of the total amount of
securities included in such offering and (ii) the amount of Registrable
Securities of the Founders and/or transferees of the Founders included in the
offering be reduced below five percent (5%) of the total number of securities
included in such offering, unless such offering is the initial public
offering of the Company's securities in which case the Holders may be
excluded if the underwriters make the determination described above and no
other shareholder's securities are included. For purposes of the preceding
sentence concerning apportionment, for any selling shareholder (i) which is a
holder of Registrable Securities and which is a partnership or corporation,
the partners, retired partners and shareholders of such holder, or the
estates and family members of any such partners and retired partners and any
trusts for the benefit of any of the foregoing persons shall be deemed to be
a single Holder, and (ii) which is an individual, the Relatives or any trusts
for the benefit of the foregoing persons shall be deemed to be a single
Holder. Any pro-rata reduction with respect to such Holder shall be based
upon the aggregate amount of shares carrying registration rights owned by all
entities and individuals included in such Holder, as defined in the preceding
sentence. Furthermore, in each case of (B), (C) and (D) above, any pro rata
apportionment shall be made according to the total amount of Registrable
Securities owned by each applicable Holder at the time of the filing of such
Registration Statement.
1.9 DELAY OF REGISTRATION. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect
to the interpretation or implementation of this Section 1.
1.10 INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, any underwriter (as defined in the Act) for such
Holder and each person, if any, who controls such Holder or underwriter
within the meaning of the Act or the 1934 Act, against any losses, claims,
damages, or liabilities (joint or several) to which they may become subject
under the Act, the 1934 Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto and any document incorporated or deemed
incorporated therein by reference, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Act, the 1934 Act, any state securities law
or any Rule or regulation promulgated under the Act, the 1934 Act or any
state securities law; and the Company will pay to each such Holder,
underwriter or controlling person, as incurred, any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
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such loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this subsection 1.10(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability, or
action if such settlement is effected without the consent of the Company
(which consent shall not be unreasonably withheld), nor shall the Company be
liable in any such case for any such loss, claim, damage, liability, or
action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by any such Holder,
underwriter or controlling person; further, that if any losses, claims,
damages or liabilities arise out of or are based upon a Violation which did
not appear in the final prospectus, the Company shall not have any liability
with respect thereto to (i) the Holder or any person who controls such Holder
within the meaning of Section 15 of the Act if the Holder delivered a copy of
the preliminary prospectus to the person alleging such losses, claims,
damages or liabilities and failed to deliver a copy of the final prospectus,
as amended or supplemented if it has been amended or supplemented, to such
person at or prior to the written confirmation of the sale to such person or
(ii) any underwriter or any person who controls such underwriter within the
meaning of Section 15 of the Act, if such underwriter delivered a copy of the
preliminary prospectus to the person alleging such losses, claims, damages or
liabilities and failed to deliver a copy of the final prospectus, as amended
or supplemented, if it has been amended or supplemented, to such person at or
prior to the written confirmation of the sale to such person.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Act, any underwriter, any
other Holder selling securities in such registration statement and any
controlling person of any such underwriter or other Holder, against any
losses, claims, damages, or liabilities (joint or several) to which any of
the foregoing persons may become subject, under the Act, the 1934 Act or
other federal or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereto) arise out of or are based upon
any Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with such
registration; and each such Holder will pay, as incurred, any legal or other
expenses reasonably incurred by any person intended to be indemnified
pursuant to this subsection 1.10(b), in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided,
however, that the indemnity agreement contained in this subsection 1.10(b)
shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the
consent of the Holder, which consent shall not be unreasonably withheld;
provided, that, in no event shall any indemnity under this subsection 1.10(b)
exceed the gross proceeds from the offering received by such Holder.
(c) Promptly after receipt by an indemnified party under this
Section 1.10 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 1.10,
deliver to the indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to participate in,
and, to the extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume the defense thereof with
counsel mutually satisfactory to the parties; provided, however, that an
indemnified party (together with all other indemnified parties which may be
represented
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without conflict by one counsel) shall have the right to retain one separate
counsel, with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential
differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 1.10, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section
1.10.
(d) If the indemnification provided for in this Section 1.10 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage, or expense referred
to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or payable
by such indemnified party as a result of such loss, liability, claim, damage,
or expense in such proportion as is appropriate to reflect the relative fault
of the indemnifying party on the one hand and of the indemnified party on the
other in connection with the statements or omissions that resulted in such
loss, liability, claim, damage, or expense as well as any other relevant
equitable considerations; provided, that, in no event shall any such
contribution under this subsection 1.10(d) exceed the gross proceeds from the
offering received by such indemnifying party. The relative fault of the
indemnifying party and of the indemnified party shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates
to information supplied by the indemnifying party or by the indemnified party
and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering
are in conflict with the foregoing provisions, the provisions in the
underwriting agreement shall control.
(f) The obligations of the Company and Holders under this Section
1.10 shall survive the completion of any offering of Registrable Securities
in a registration statement under this Section 1, and otherwise.
1.11 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to
making available to the Holders the benefits of Rule 144 promulgated under
the Act and any other Rule or regulation of the SEC that may at any time
permit a Holder to sell securities of the Company to the public without
registration or pursuant to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public or after the
Company becomes subject to the reporting requirements of the 1934 Act;
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(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act; and
(c) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144
(at any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Act and the 1934 Act (at
any time after it has become subject to such reporting requirements), or that
it qualifies as a registrant whose securities may be resold pursuant to Form
S-3 (at any time after it so qualifies), (ii) a copy of the most recent
annual or quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information as may be
reasonably requested in availing any Holder of any Rule or regulation of the
SEC which permits the selling of any such securities without registration or
pursuant to such form.
1.12 FORM S-3 REGISTRATION. In case the Company shall receive from
any Holder or Holders (other than the Officer) a written request or requests
that the Company effect a registration on Form S-3 and any related
qualification or compliance with respect to all or a part of the Registrable
Securities owned by such Holder or Holders, the Company will:
(a) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holders; and
(b) as soon as practicable, use its best efforts to effect such
registration and all such qualifications and compliances as may be so
requested and as would permit or facilitate the sale and distribution of all
or such portion of such Holder's or Holders' Registrable Securities as are
specified in such request, together with all or such portion of the
Registrable Securities of any other Holder or Holders joining in such request
as are specified in a written request given within fifteen (15) days after
receipt of such written notice from the Company; provided, however, that the
Company shall not be obligated to effect any such registration, qualification
or compliance, pursuant to this Section 1.12: (1) if Form S-3 is not
available for such offering by the Holders; (2) if the Holders (other than
the Officer), together with the holders of any other securities of the
Company entitled to inclusion in such registration, propose to sell
Registrable Securities and such other securities (if any) at an aggregate
price to the public (including any underwriters' discounts or commissions) of
less than $500,000; (3) if the Company shall furnish to the Holders a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its shareholders for such Form S-3
Registration to be effected at such time, in which event the Company shall
have the right to defer the filing of the Form S-3 registration statement for
a period of not more than sixty (60) days after receipt of the request of the
Holder or Holders under this Section 1.12; provided, however, that the
Company shall not utilize this right more than once in any twelve (12)-month
period; (4) if the Company has, within the twelve (12)-month period preceding
the date of such request, already effected two (2) registrations on Form S-3
for the Holders pursuant to this Section 1.12; or (5) in any particular
jurisdiction in which the Company would be required to qualify to do business
or to execute a general consent to service of process in effecting such
registration, qualification or compliance unless the Company is already
subject to service in such jurisdiction and except as may be required by the
Act.
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(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other
securities so requested to be registered as soon as practicable after receipt
of the request or requests of the Holder or Holders. All expenses incurred in
connection with the first three (3) registrations requested pursuant to this
Section 1.12, including (without limitation) all registration, filing,
qualification, printer's and accounting fees and the reasonable fees and
disbursements of counsel for the selling Holder or Holders and counsel for
the Company, but excluding any underwriters' discounts or commissions
associated with Registrable Securities, shall be borne by the Company.
Registrations effected pursuant to this Section 1.12 shall not be counted as
demands for registration or registrations effected pursuant to Section 1.2.
1.13 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the
Company to register Registrable Securities pursuant to this Section 1 may be
assigned (but only with all related obligations) by a Holder to a transferee
or assignee of such securities provided: (a) the Company is, within a
reasonable time after such transfer or assignment, furnished with written
notice of the name and address of such transferee or assignee and the
securities with respect to which such registration rights are being
transferred or assigned; (b) such transferee or assignee agrees in writing to
be bound by and subject to the terms and conditions of this Agreement,
including without limitation the provisions of Section 1.15 below; (c) such
transferee or assignee (i) is a stockholder, constituent partner (including
limited partner), Affiliate or Relative of the transferring Holder (or trust
for the benefit of one of the foregoing) and agrees to act through a single
representative with the Holder for the purpose of exercising rights,
receiving notices and taking action hereunder, or (ii) acquires all of the
shares of Registrable Securities held by such Holder or at least one hundred
thousand (100,000) shares of such Registrable Securities (subject to
appropriate adjustment for stock splits, stock dividends, combinations and
other recapitalizations), and (d) such transfer or assignment shall be
effective only if immediately following such transfer or assignment the
further disposition of such securities by the transferee or assignee is
restricted under the Act. Any such transferee or assignee shall be subject to
all rights and obligations hereunder and, if requested by the Company, shall
agree in writing to be bound by the terms of this Agreement.
1.14 LIMITATIONS ON SUBSEQUENT FIRST REFUSAL AND REGISTRATION RIGHTS.
(a) From and after the date of this Agreement, the Company shall
not, without the prior written consent of the Holders of a majority of the
outstanding Registrable Securities (but not including the Registrable
Securities held by the Founders), enter into any agreement with any holder or
prospective holder of any securities of the Company which would (i) allow
such holder or prospective holder (a) to include such securities in any
registration filed under Section 1.2 hereof, unless under the terms of such
agreement, such holder or prospective holder may include such securities in
any such registration only to the extent that the inclusion of its or his
securities will not reduce the amount of the Registrable Securities of the
Holders which is included or (b) to make a demand registration which could
result in such registration statement being declared effective prior to the
earlier of either of the dates set forth in subsection 1.2(a) or within one
hundred twenty (120) days of the effective date of any registration effected
pursuant to Section 1.2; or (ii) give such holder or prospective holder any
"piggy-back" registration rights superior to those provided to the Holders by
Section 1.3 of this Agreement.
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(b) From and after the date of this Agreement, the Company shall
grant the Holders any registration rights and any rights of first refusal
granted to subsequent purchasers of the Company's equity securities to the
extent that such subsequent rights are superior, in the good faith judgment
of the Board of Directors, to those granted to the Holders by this Agreement.
1.15 "MARKET STAND-OFF" AGREEMENT. Each Investor, each Founder and
the Officer hereby agrees that, during the period of duration specified by
the Company and the managing underwriter of Common Stock or other securities
of the Company but not to exceed one hundred eighty (180) days, following the
effective date of a registration statement of the Company filed under the
Act, it shall not, to the extent requested by the Company and such
underwriter, directly or indirectly sell, offer to sell, contract to sell
(including, without limitation, any short sale), grant any option to purchase
or otherwise transfer or dispose of (other than to donees who agree to be
similarly bound) any securities of the Company held by it at any time during
such period except Common Stock included in such registration and any
securities acquired in the first registered public offering of the Company's
common stock or in an open market transaction thereafter; provided, however,
that such Holder shall be subject to the market stand-off provisions of this
Section 1.15 only if the officers and directors of the Company are also
subject to similar arrangements.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period. Notwithstanding the
foregoing, the obligations described in this Section 1.15 shall not apply to
a registration relating solely to employee benefit plans on Form S-1 or Form
S-8 or similar forms which may be promulgated in the future, or a
registration relating solely to a Commission Rule 145 transaction on Form S-4
or a similar form which may be promulgated in the future.
1.16 TERMINATION OF REGISTRATION RIGHTS.
(a) No Holder shall be entitled to exercise any right provided for
in this Section 1 and such Holder's securities shall no longer be deemed to
be Registrable Securities after four (4) years following the consummation of
the first underwritten public offering of shares of Common Stock, registered
under the Securities Act of 1933, as amended, in connection with which the
Company's Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock are converted into Common Stock.
(b) In addition, the right of any Holder to request registration
or inclusion in any registration pursuant to Section 1.3 shall be terminated
at such time as all of the shares of Registrable Securities held or entitled
to be held upon conversion by such Holder are eligible to be sold under Rule
144 during any ninety (90)-day period, regardless of whether such sale is
otherwise restricted pursuant to any contractual obligations.
2. COVENANTS OF THE COMPANY.
2.1 DELIVERY OF FINANCIAL STATEMENTS AND OTHER INFORMATION. So
long as an Investor and/or an Affiliate thereof continues to own at least
three hundred fifty thousand
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(350,000) shares of the Company's Preferred Stock or Common Stock issued upon
conversion thereof, the Company shall deliver to each such Investor:
(a) as soon as practicable, but in any event within ninety (90)
days after the end of each fiscal year of the Company, a consolidated
statement of operations and consolidated statement of cash flows for such
fiscal year, a consolidated balance sheet of the Company and statement of
shareholder's equity as of the end of such year, such year-end financial
reports to be in reasonable detail, prepared in accordance with generally
accepted accounting principles ("gaap"), and audited and certified by
independent public accountants selected by the Company;
(b) as soon as practicable, but in any event within forty-five
(45) days after the end of each of the first three (3) quarters of each
fiscal year of the Company, an unaudited consolidated balance sheet of the
Company and its subsidiaries (if any), as of the end of each such quarterly
period, and unaudited consolidated statements of operations and statements of
cash flows of the Company and its subsidiaries (if any), for such quarterly
period, prepared in accordance with generally accepted accounting principles
(other than accompanying notes), subject to changes resulting from year-end
adjustments;
(c) as soon as practicable, but in any event at least thirty (30)
days prior to the end of each fiscal year, a budget and business plan for the
next fiscal year and, as soon as prepared, any other budgets or revised
budgets, reports of adverse developments, management letters, communications
with shareholders, press releases, registration statements and any other such
information; and
(d) as soon as practicable, after the end of the first and second
month of each quarterly accounting period, if available, a consolidated
balance sheet of the Company and its subsidiaries (if any), as of the end of
each such monthly period, and, if available, consolidated statements of
operations and consolidated statements of cash flows of the Company and its
subsidiaries (if any), for such period, prepared in accordance with generally
accepted accounting principles (other than accompanying notes), subject to
changes resulting from quarter-end and year-end adjustments;
(e) provided, however, that the Company shall not be obligated
under any subsection of this Section 2.1 to provide information which it
deems in good faith to be a trade secret.
2.2 INSPECTION. So long as an Investor (collectively with its
Affiliates) continues to own at least three hundred fifty thousand (350,000)
shares of the Company's Preferred Stock or Common Stock issued upon
conversion thereof, the Company shall permit such Investor, at such
Investor's expense, to visit and inspect the Company's properties, to examine
its books of account and records and to discuss the Company's affairs,
finances and accounts with its officers, all at such reasonable times as may
be requested by the Investor; provided, however, that the Company shall not
be obligated pursuant to this Section 2.2 to provide access to any
information which it reasonably considers to be a trade secret or similar
confidential information.
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2.3 TERMINATION OF INFORMATION AND INSPECTION COVENANTS. The
covenants set forth in Sections 2.1 and 2.2 shall be suspended as to the
Investors and have no force or effect for so long as the Company is subject
to the periodic reporting requirements of Sections 12(g) or 15(d) of the 1934
Act.
3. MISCELLANEOUS.
3.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein,
the terms and conditions of this Agreement shall inure to the benefit of and
be binding upon the respective successors and assigns of the parties
(including transferees of any shares of Registrable Securities). Nothing in
this Agreement, express or implied, is intended to confer upon any party
other than the parties hereto or their respective successors and assigns any
rights, remedies, obligations, or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.
3.2 GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California.
3.3 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.4 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
3.5 NOTICES. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other
address as such party may designate by ten (10) days' advance written notice
to the other parties.
3.6 EXPENSES. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall
be entitled to reasonable attorneys' fees, costs and necessary disbursements
in addition to any other relief to which such party may be entitled.
3.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders
of a majority of the Registrable Securities then held by the Investors;
provided, however, any amendment or waiver that would affect the rights of
any Holder of Registrable Securities in a manner different than the Holders
of other Registrable Securities shall also require the written consent of
such differently affected Holder. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each holder of any
Registrable
15
<PAGE>
Securities then outstanding, each future holder of all such Registrable
Securities, and the Company.
3.8 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
3.9 AGGREGATION OF STOCK. All shares of Registrable Securities
held or acquired by Affiliated entities or persons shall be aggregated
together for the purpose of determining the availability of any rights under
this Agreement.
3.10 ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement (including
the Exhibits hereto, if any) constitutes the full and entire understanding
and agreement between the parties with regard to the subjects hereof and
thereof and supersedes any prior agreement or understanding with respect
thereto. Upon the effectiveness of this Agreement, the Prior Agreement shall
be terminated and of no further force or effect.
16
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
COMPANY:
NETZERO, INC.
By: /s/ MARK R. GOLDSTON
-----------------------------------------
Mark R. Goldston, Chief Executive Officer
Address: 2555 Townsgate Road
Westlake Village, CA 91361
INVESTORS:
CPQ HOLDINGS, INC.
By: /s/ MICHAEL J. LARSON
-----------------------------------------
Its:
-----------------------------------------
By:
-------------------------------------
Name:
------------------------------------
Its:
-------------------------------------
Address: 20555 State Highway 249
MS 110701
Houston, TX 77070
Attn: Office of General Counsel
with
copies to: Compaq Computer Corporation
20555 State Highway 249
MS 110812
Houston, TX 77070
Attn: Michael J. Larson
17
<PAGE>
IDEALAB! CAPITAL PARTNERS I-A, L.P.
By: /s/ WILLIAM S. ELKUS
--------------------------------------------
William S. Elkus, Manager Member
idealab! Capital Management I, LLC
General Partner of idealab! Capital Partners
I-A, L.P.
Address: 130 West Union Street
Pasadena, CA 91103
IDEALAB! CAPITAL PARTNERS I-B, L.P.
By: /s/ WILLIAM S. ELKUS
--------------------------------------------
William S. Elkus, Manager Member
idealab! Capital Management I, LLC
General Partner of idealab! Capital Partners
I-B, L.P.
Address: 130 West Union Street
Pasadena, CA 91103
IDEALAB! HOLDINGS, L.L.C.
By: /s/ MARCIA GOLDSTEIN
--------------------------------------------
Name:
--------------------------------------------
Its:
--------------------------------------------
Address: 130 West Union Street
Pasadena, CA 91103
18
<PAGE>
DRAPER FISHER JURVETSON FUND V, L.P.
By: /s/ TIM DRAPER
-------------------------------------------
Name:
-------------------------------------------
Its:
-------------------------------------------
Address: 400 Seaport Court, Suite 350
Redwood City, CA 94063
DRAPER FISHER JURVETSON PARTNERS V, LLC
By: /s/ TIM DRAPER
-------------------------------------------
Name:
-------------------------------------------
Its:
-------------------------------------------
Address: 400 Seaport Court, Suite 350
Redwood City, CA 94063
19
<PAGE>
FOUNDATION CAPITAL II, L.P.
BY: FOUNDATION CAPITAL MANAGEMENT II, LLC
By: /s/ PAUL G. KOONTZ
-------------------------------------------
Name:
-------------------------------------------
Its: Manager
Address: 70 Willow Road, Suite 200
Menlo Park, CA 94025
FOUNDATION CAPITAL II ENTREPRENEURS FUND, LLC
BY: FOUNDATION CAPITAL MANAGEMENT II, LLC
By: /s/ PAUL G. KOONTZ
-------------------------------------------
Name:
-------------------------------------------
Its: Manager
Address: 70 Willow Road, Suite 200
Menlo Park, CA 94025
FOUNDATION CAPITAL II PRINCIPALS FUND, LLC
BY: FOUNDATION CAPITAL MANAGEMENT II, LLC
By: /s/ PAUL G. KOONTZ
-------------------------------------------
Name:
-------------------------------------------
Its: Manager
Address: 70 Willow Road, Suite 200
Menlo Park, CA 94025
20
<PAGE>
CALIFORNIA EMERGING VENTURES, LLC
By: /s/ CLINTON P. HARRIS
-------------------------------------------
Name:
-------------------------------------------
Its Member and General Partner of Grove Street
Advisors, LLC, Manager for California Emerging
Ventures, LLC
Address: 20 Williams Street, Suite 230
Wellesley, MA 02481
/s/ CHARLES S. HILLIARD
-----------------------------------------------
Charles S. Hilliard
Address: 2555 Townsgate Road
Westlake Village, CA 91361
21
<PAGE>
/s/ MICHAEL BRONNER
-----------------------------------------------
Michael Bronner
Address:
----------------------------
----------------------------
/s/ JOHN M. MACALUSO
-----------------------------------------------
John M. Macaluso
Address: ----------------------------
----------------------------
/s/ ALLAN LEVOW
-----------------------------------------------
Allan Levow
Address: ----------------------------
----------------------------
22
<PAGE>
OFFICER:
/s/ MARK GOLDSTON
-----------------------------------------------
MARK GOLDSTON
FOUNDERS:
/s/ RONALD T. BURR
-----------------------------------------------
RONALD T. BURR
/s/ STACY A. HAITSUKA
-----------------------------------------------
STACY A. HAITSUKA
/s/ MARWAN A. ZEBIAN
-----------------------------------------------
MARWAN A. ZEBIAN
/s/ HAROLD R. MACKENZIE
-----------------------------------------------
HAROLD R. MACKENZIE
23
<PAGE>
NETZERO, INC.
1998 STOCK OPTION/STOCK ISSUANCE PLAN
-------------------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1998 Stock Option/Stock Issuance Plan is intended to promote
the interests of NetZero, Inc., a California corporation, by providing
eligible persons in the Corporation's employ or service with the opportunity
to acquire a proprietary interest, or otherwise increase their proprietary
interest, in the Corporation as an incentive for them to continue in such
employ or service.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two (2) separate equity
programs:
(i) the Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock, and
(ii) the Stock Issuance Program under which eligible
persons may, at the discretion of the Plan Administrator, be
issued shares of Common Stock directly, either through the
immediate purchase of such shares or as a bonus for services
rendered the Corporation (or any Parent or Subsidiary).
B. The provisions of Articles One and Four shall apply to both
equity programs under the Plan and shall accordingly govern the interests of
all persons under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Board. However, any or
all administrative functions otherwise exercisable by the Board may be
delegated to the Committee. Members of the Committee shall serve for such
period of time as the Board may determine and shall be subject to removal by
the Board at any time. The Board may also at any time terminate the functions
of the Committee and reassume all powers and authority previously delegated
to the Committee.
B. The Plan Administrator shall have full power and authority
(subject to the provisions of the Plan) to establish such rules and
regulations as it may deem appropriate for proper administration of the Plan
and to make such determinations under, and issue such
<PAGE>
interpretations of, the Plan and any outstanding options or stock issuances
thereunder as it may deem necessary or advisable. Decisions of the Plan
Administrator shall be final and binding on all parties who have an interest
in the Plan or any option or stock issuance thereunder.
IV. ELIGIBILITY
A. The persons eligible to participate in the Plan are as follows:
(i) Employees,
(ii) non-employee members of the Board or the non-employee
members of the board of directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who
provide services to the Corporation (or any Parent or Subsidiary).
B. The Plan Administrator shall have full authority to
determine, (i) with respect to the grants made under the Option Grant
Program, which eligible persons are to receive the option grants, the time or
times when those grants are to be made, the number of shares to be covered by
each such grant, the status of the granted option as either an Incentive
Option or a Non-Statutory Option, the time or times when each option is to
become exercisable, the vesting schedule (if any) applicable to the option
shares and the maximum term for which the option is to remain outstanding,
and (ii) with respect to stock issuances made under the Stock Issuance
Program, which eligible persons are to receive such stock issuances, the time
or times when those issuances are to be made, the number of shares to be
issued to each Participant, the vesting schedule (if any) applicable to the
issued shares and the consideration to be paid by the Participant for such
shares.
C. The Plan Administrator shall have the absolute discretion
either to grant options in accordance with the Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock. The maximum number of
shares of Common Stock which may be issued over the term of the Plan shall
not exceed 4,000,000 shares.
B. Shares of Common Stock subject to outstanding options shall
be available for subsequent issuance under the Plan to the extent (i) the
options expire or terminate for any reason prior to exercise in full or (ii)
the options are cancelled in accordance with the cancellation-regrant
provisions of Article Two. Unvested shares issued under the Plan and
subsequently repurchased by the Corporation, at the option exercise or direct
issue price paid per share, pursuant to the Corporation's repurchase rights
under the Plan shall be added back to the number of shares of Common Stock
reserved for issuance under the Plan and shall accordingly be available for
reissuance through one or more subsequent option grants or direct stock
issuances under the Plan.
<PAGE>
C. Should any change be made to the Common Stock by reason of
any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as
a class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and/or class of
securities issuable under the Plan and (ii) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option in order to prevent the dilution or enlargement of benefits
thereunder. The adjustments determined by the Plan Administrator shall be
final, binding and conclusive. In no event shall any such adjustments be made
in connection with the conversion of one or more outstanding shares of the
Corporation's preferred stock into shares of Common Stock.
<PAGE>
ARTICLE TWO
OPTION GRANT PROGRAM
--------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; PROVIDED, however, that each such
document shall comply with the terms specified below. Each document
evidencing an Incentive Option shall, in addition, be subject to the
provisions of the Plan applicable to such options.
A. EXERCISE PRICE.
1. The exercise price per share shall be fixed by the
Plan Administrator in accordance with the following provisions:
(i) The exercise price per share shall not be
less than eighty-five percent (85%) of the Fair Market Value per share
of Common Stock on the option grant date.
(ii) If the person to whom the option is granted
is a 10% Shareholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per
share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Four and the documents evidencing the option, be payable in cash or
check made payable to the Corporation. Should the Common Stock be registered
under Section 12 of the 1934 Act at the time the option is exercised, then
the exercise price may also be paid as follows:
(i) in shares of Common Stock held for the
requisite period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued at Fair Market
Value on the Exercise Date, or
(ii) to the extent the option is exercised for
vested shares, through a special sale and remittance procedure
pursuant to which the Optionee shall concurrently provide
irrevocable instructions (A) to a Corporation-designated brokerage
firm to effect the immediate sale of the purchased shares and remit
to the Corporation, out of the sale proceeds available on the
settlement date, sufficient funds to cover the aggregate exercise
price payable for the purchased shares plus all applicable Federal,
state and local income and employment taxes required to be withheld
by the Corporation by reason of such exercise and (B) to the
Corporation to deliver the certificates for the purchased shares
directly to such brokerage firm in order to complete the sale.
<PAGE>
Except to the extent such sale and remittance
procedure is utilized, payment of the exercise price for the purchased
shares must be made on the Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be
exercisable at such time or times, during such period and for such number of
shares as shall be determined by the Plan Administrator and set forth in the
documents evidencing the option grant. However, no option shall have a term
in excess of ten (10) years measured from the option grant date.
C. EFFECT OF TERMINATION OF SERVICE.
1. The following provisions shall govern the exercise
of any options held by the Optionee at the time of cessation of Service or
death:
(i) Should the Optionee cease to remain in
Service for any reason other than death, Disability or Misconduct,
then the Optionee shall have a period of three (3) months following
the date of such cessation of Service during which to exercise each
outstanding option held by such Optionee.
(ii) Should Optionee's Service terminate by
reason of Disability, then the Optionee shall have a period of
twelve (12) months following the date of such cessation of Service
during which to exercise each outstanding option held by such
Optionee.
(iii) If the Optionee dies while holding an
outstanding option, then the personal representative of his or her
estate or the person or persons to whom the option is transferred
pursuant to the Optionee's will or the laws of inheritance shall
have a twelve (12)-month period following the date of the
Optionee's death to exercise such option.
(iv) Under no circumstances, however, shall any
such option be exercisable after the specified expiration of the
option term.
(v) During the applicable post-Service
exercise period, the option may not be exercised in the aggregate
for more than the number of vested shares for which the option is
exercisable on the date of the Optionee's cessation of Service.
Upon the expiration of the applicable exercise period or (if
earlier) upon the expiration of the option term, the option shall
terminate and cease to be outstanding for any vested shares for
which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and
cease to be outstanding with respect to any and all option shares
for which the option is not otherwise at the time exercisable or in
which the Optionee is not otherwise at that time vested.
(vi) Should Optionee's Service be terminated
for Misconduct, then all outstanding options held by the Optionee
shall terminate immediately and cease to remain outstanding.
<PAGE>
2. The Plan Administrator shall have the discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the
option is to remain exercisable following Optionee's
cessation of Service or death from the limited period otherwise in
effect for that option to such greater period of time as the Plan
Administrator shall deem appropriate, but in no event beyond the
expiration of the option term, and/or
(ii) permit the option to be exercised,
during the applicable post-Service exercise period, not only with
respect to the number of vested shares of Common Stock for which
such option is exercisable at the time of the Optionee's cessation
of Service but also with respect to one or more additional
installments in which the Optionee would have vested under the
option had the Optionee continued in Service.
D. SHAREHOLDER RIGHTS. The holder of an option shall have no
shareholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become the
recordholder of the purchased shares.
E. UNVESTED SHARES. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of
Common Stock. Should the Optionee cease Service while holding such unvested
shares, the Corporation shall have the right to repurchase, at the exercise
price paid per share, any or all of those unvested shares. The terms upon
which such repurchase right shall be exercisable (including the period and
procedure for exercise and the appropriate vesting schedule for the purchased
shares) shall be established by the Plan Administrator and set forth in the
document evidencing such repurchase right. The Plan Administrator may not
impose a vesting schedule upon the option grant or any shares of Common Stock
subject to that option which is more restrictive than twenty percent (20%)
per year vesting, with the initial vesting to occur not later than one (1)
year after the option grant date. However, such limitation shall not be
applicable to any option grants made to individuals who are officers of the
Corporation, non-employee Board members or independent consultants.
F. FIRST REFUSAL RIGHTS. Until such time as the Common
Stock is first registered under Section 12 of the 1934 Act, the Corporation
shall have the right of first refusal with respect to any proposed
disposition by the Optionee (or any successor in interest) of any shares of
Common Stock issued under the Plan. Such right of first refusal shall be
exercisable in accordance with the terms established by the Plan
Administrator and set forth in the document evidencing such right.
G. LIMITED TRANSFERABILITY OF OPTIONS. During the
lifetime of the Optionee, the option shall be exercisable only by the
Optionee and shall not be assignable or transferable other than by will or by
the laws of descent and distribution following the Optionee's death.
H. WITHHOLDING. The Corporation's obligation to deliver
shares of Common Stock upon the exercise of any options granted under the
Plan shall be subject to the satisfaction of all applicable Federal, state
and local income and employment tax withholding requirements.
<PAGE>
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all
Incentive Options. Except as modified by the provisions of this Section II,
all the provisions of the Plan shall be applicable to Incentive Options.
Options which are specifically designated as Non-Statutory Options shall NOT
be subject to the terms of this Section II.
A. ELIGIBILITY. Incentive Options may only be granted to
Employees.
B. EXERCISE PRICE. The exercise price per share shall not
be less than one hundred percent (100%) of the Fair Market Value per share of
Common Stock on the option grant date.
C. DOLLAR LIMITATION. The aggregate Fair Market Value of
the shares of Common Stock (determined as of the respective date or dates of
grant) for which one or more options granted to any Employee under the Plan
(or any other option plan of the Corporation or any Parent or Subsidiary) may
for the first time become exercisable as Incentive Options during any one (1)
calendar year shall not exceed the sum of One Hundred Thousand Dollars
($100,000). To the extent the Employee holds two (2) or more such options
which become exercisable for the first time in the same calendar year, the
foregoing limitation on the exercisability of such options as Incentive
Options shall be applied on the basis of the order in which such options are
granted.
D. 10% SHAREHOLDER. If any Employee to whom an Incentive
Option is granted is a 10% Shareholder, then the option term shall not exceed
five (5) years measured from the option grant date.
III. CORPORATE TRANSACTION
A. The shares subject to each option outstanding under
the Plan at the time of a Corporate Transaction shall automatically vest in
full so that each such option shall, immediately prior to the effective date
of the Corporate Transaction, become fully exercisable for all of the shares
of Common Stock at the time subject to that option and may be exercised for
any or all of those shares as fully-vested shares of Common Stock. However,
the shares subject to an outstanding option shall NOT vest on such an
accelerated basis if and to the extent: (i) such option is assumed by the
successor corporation (or parent thereof) in the Corporate Transaction and
the Corporation's repurchase rights with respect to the unvested option
shares are concurrently assigned to such successor corporation (or parent
thereof) or (ii) such option is to be replaced with a cash incentive program
of the successor corporation which preserves the spread existing on the
unvested option shares at the time of the Corporate Transaction and provides
for subsequent payout in accordance with the same vesting schedule applicable
to those unvested option shares or (iii) the acceleration of such option is
subject to other limitations imposed by the Plan Administrator at the time of
the option grant.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated
rights shall immediately vest in full, in the event of any Corporate
Transaction, except to the extent: (i) those repurchase rights are assigned
to the successor corporation (or parent thereof) in connection with such
Corporate
<PAGE>
Transaction or (ii) such accelerated vesting is precluded by other
limitations imposed by the Plan Administrator at the time the repurchase
right is issued.
C. Immediately following the consummation of the
Corporate Transaction, all outstanding options shall terminate and cease to
be outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a
Corporate Transaction shall be appropriately adjusted, immediately after such
Corporate Transaction, to apply to the number and class of securities which
would have been issuable to the Optionee in consummation of such Corporate
Transaction, had the option been exercised immediately prior to such
Corporate Transaction. Appropriate adjustments shall also be made to (i) the
number and class of securities available for issuance under the Plan
following the consummation of such Corporate Transaction and (ii) the
exercise price payable per share under each outstanding option, provided the
aggregate exercise price payable for such securities shall remain the same.
E. The Plan Administrator shall have the discretion,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to provide for the automatic acceleration (in
whole or in part) of one or more outstanding options (and the immediate
termination of the Corporation's repurchase rights with respect to the shares
subject to those options) upon the occurrence of a Corporate Transaction,
whether or not those options are to be assumed in the Corporate Transaction.
F. The Plan Administrator shall also have full power and
authority, exercisable either at the time the option is granted or at any
time while the option remains outstanding, to structure such option so that
the shares subject to that option will automatically vest on an accelerated
basis should the Optionee's Service terminate by reason of an Involuntary
Termination within a designated period (not to exceed eighteen (18) months)
following the effective date of any Corporate Transaction in which the option
is assumed and the repurchase rights applicable to those shares do not
otherwise terminate. Any option so accelerated shall remain exercisable for
the fully-vested option shares until the EARLIER of (i) the expiration of the
option term or (ii) the expiration of the one (1)-year period measured from
the effective date of the Involuntary Termination. In addition, the Plan
Administrator may provide that one or more of the Corporation's outstanding
repurchase rights with respect to shares held by the Optionee at the time of
such Involuntary Termination shall immediately terminate on an accelerated
basis, and the shares subject to those terminated rights shall accordingly
vest at that time.
G. The portion of any Incentive Option accelerated in
connection with a Corporate Transaction shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand
Dollar limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Non-Statutory Option under the Federal tax laws.
H. The grant of options under the Plan shall in no way
affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
<PAGE>
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at
any time and from time to time, with the consent of the affected option
holders, the cancellation of any or all outstanding options under the Plan
and to grant in substitution therefor new options covering the same or
different number of shares of Common Stock but with an exercise price per
share based on the Fair Market Value per share of Common Stock on the new
option grant date.
<PAGE>
ARTICLE THREE
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below.
A. PURCHASE PRICE.
1. The purchase price per share shall be fixed by
the Plan Administrator but shall not be less than eighty-five percent (85%)
of the Fair Market Value per share of Common Stock on the issue date.
However, the purchase price per share of Common Stock issued to a 10%
Shareholder shall not be less than one hundred and ten percent (110%) of such
Fair Market Value.
2. Subject to the provisions of Section I of Article
Four, shares of Common Stock may be issued under the Stock Issuance Program
for any of the following items of consideration which the Plan Administrator
may deem appropriate in each individual instance:
(i) cash or check made payable to the Corporation,
or
(ii) past services rendered to the Corporation
(or any Parent or Subsidiary).
B. VESTING PROVISIONS.
1. Shares of Common Stock issued under the Stock
Issuance Program may, in the discretion of the Plan Administrator, be fully
and immediately vested upon issuance or may vest in one or more installments
over the Participant's period of Service or upon attainment of specified
performance objectives. However, the Plan Administrator may not impose a
vesting schedule upon any stock issuance effected under the Stock Issuance
Program which is more restrictive than twenty percent (20%) per year vesting,
with initial vesting to occur not later than one (1) year after the issuance
date. Such limitation shall not apply to any Common Stock issuances made to
the officers of the Corporation, non-employee Board members or independent
consultants.
2. Any new, substituted or additional securities
or other property (including money paid other than as a regular cash
dividend) which the Participant may have the right to receive with respect to
the Participant's unvested shares of Common Stock by reason of any stock
dividend, stock split, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration shall be issued subject to
(i) the same vesting requirements applicable to
<PAGE>
the Participant's unvested shares of Common Stock and (ii) such escrow
arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full shareholder
rights with respect to any shares of Common Stock issued to the Participant
under the Stock Issuance Program, whether or not the Participant's interest
in those shares is vested. Accordingly, the Participant shall have the right
to vote such shares and to receive any regular cash dividends paid on such
shares.
4. Should the Participant cease to remain in
Service while holding one or more invested shares of Common Stock issued
under the Stock Issuance Program or should the performance objectives not be
attained with respect to one or more such unvested shares of Common Stock,
then those shares shall be immediately surrendered to the Corporation for
cancellation, and the Participant shall have no further shareholder rights
with respect to those shares. To the extent the surrendered shares were
previously issued to the Participant for consideration paid in cash or cash
equivalent (including the Participant's purchase-money indebtedness), the
Corporation shall repay to the Participant the cash consideration paid for
the surrendered shares and shall cancel the unpaid principal balance of any
outstanding purchase-money note of the Participant attributable to such
surrendered shares.
5. The Plan Administrator may in its discretion
waive the surrender and cancellation of one or more unvested shares of Common
Stock (or other assets attributable thereto) which would otherwise occur upon
the non-completion of the vesting schedule applicable to such shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
C. FIRST REFUSAL RIGHTS. Until such time as the Common
Stock is first registered under Section 12 of the 1934 Act, the Corporation
shall have the right of first refusal with respect to any proposed
disposition by the Participant (or any successor in interest) of any shares
of Common Stock issued under the Stock Issuance Program. Such right of first
refusal shall be exercisable in accordance with the terms established by the
Plan Administrator and set forth in the document evidencing such right.
II. CORPORATE TRANSACTION
A. Upon the occurrence of a Corporate Transaction, all
outstanding repurchase rights under the Stock Issuance Program shall
terminate automatically, and the shares of Common Stock subject to those
terminated rights shall immediately vest in full, except to the extent: (i)
those repurchase rights are assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such
accelerated vesting is precluded by other limitations imposed by the Plan
Administrator at the time the repurchase right is issued.
B. The Plan Administrator shall have the discretionary
authority, exercisable either at the time the unvested shares are issued or
any time while the Corporation's repurchase rights with respect to those
shares remain outstanding, to provide that those rights shall
<PAGE>
automatically terminate on an accelerated basis, and the shares of Common
Stock subject to those terminated rights shall immediately vest, in the event
the Participant's Service should subsequently terminate by reason of an
Involuntary Termination within a designated period (not to exceed eighteen
(18) months) following the effective date of any Corporate Transaction in
which those repurchase rights are assigned to the successor corporation (or
parent thereof).
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion,
be held in escrow by the Corporation until the Participant's interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing those unvested shares.
<PAGE>
ARTICLE FOUR
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant
to pay the option exercise price or the purchase price for shares issued to
such person under the Plan by delivering a full-recourse, interest-bearing
promissory note payable in one or more installments and secured by the
purchased shares. However, any promissory note delivered by a consultant must
be secured by collateral in addition to the purchased shares of Common Stock.
In no event shall the maximum credit available to the Optionee or Participant
exceed the SUM of (i) the aggregate option exercise price or purchase price
payable for the purchased shares plus (ii) any Federal, state and local
income and employment tax liability incurred by the Optionee or the
Participant in connection with the option exercise or share purchase.
II. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan shall become effective when adopted by the
Board, but no option granted under the Plan may be exercised, and no shares
shall be issued under the Plan, until the Plan is approved by the
Corporation's shareholders. If such shareholder approval is not obtained
within twelve (12) months after the date of the Board's adoption of the Plan,
then all options previously granted under the Plan shall terminate and cease
to be outstanding, and no further options shall be granted and no shares
shall be issued under the Plan. Subject to such limitation, the Plan
Administrator may grant options and issue shares under the Plan at any time
after the effective date of the Plan and before the date fixed herein for
termination of the Plan.
B. The Plan shall terminate upon the EARLIEST of (i) the
expiration of the ten (10)-year period measured from the date the Plan is
adopted by the Board, (ii) the date on which all shares available for
issuance under the Plan shall have been issued as vested shares or (iii) the
termination of all outstanding options in connection with a Corporate
Transaction. All options and unvested stock issuances outstanding at that
time under the Plan shall continue to have full force and effect in
accordance with the provisions of the documents evidencing such options or
issuances.
III. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects. However, no
such amendment or modification shall adversely affect the rights and
obligations with respect to options or unvested stock issuances at the time
outstanding under the Plan unless the Optionee or the Participant consents to
such amendment or modification. In addition, certain amendments may require
shareholder approval pursuant to applicable laws and regulations.
B. Options may be granted under the Option Grant Program
and shares may be issued under the Stock Issuance Program which are in each
instance in excess of the number of shares of Common Stock then available for
issuance under the Plan, provided any excess
<PAGE>
shares actually issued under those programs shall be held in escrow until
there is obtained shareholder approval of an amendment sufficiently
increasing the number of shares of Common Stock available for issuance under
the Plan. If such shareholder approval is not obtained within twelve (12)
months after the date the first such excess issuances are made, then (i) any
unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price
paid for any excess shares issued under the Plan and held in escrow, together
with interest (at the applicable Short Term Federal Rate) for the period the
shares were held in escrow, and such shares shall thereupon be automatically
cancelled and cease to be outstanding.
IV. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale
of shares of Common Stock under the Plan shall be used for general corporate
purposes.
V. WITHHOLDING
The Corporation's obligation to deliver shares of Common
Stock upon the exercise of any options or upon the issuance or vesting of any
shares issued under the Plan shall be subject to the satisfaction of all
applicable Federal, state and local income and employment tax withholding
requirements.
VI. REGULATORY APPROVALS
The implementation of the Plan, the granting of any options
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits
required by regulatory authorities having jurisdiction over the Plan, the
options granted under it and the shares of Common Stock issued pursuant to it.
VII. NO EMPLOYMENT OR SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific
duration or interfere with or otherwise restrict in any way the rights of the
Corporation (or any Parent or Subsidiary employing or retaining such person)
or of the Optionee or the Participant, which rights are hereby expressly
reserved by each, to terminate such person's Service at any time for any
reason, with or without cause.
VIII. FINANCIAL REPORTS
The Corporation shall deliver a balance sheet and an income
statement at least annually to each individual holding an outstanding option
under the Plan, unless such individual is a key Employee whose duties in
connection with the Corporation (or any Parent or Subsidiary) assure such
individual access to equivalent information.
<PAGE>
APPENDIX
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The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
B. CODE shall mean the Internal Revenue Code of 1986, as
amended.
C. COMMITTEE shall mean a committee of two (2) or more
Board members appointed by the Board to exercise one or more administrative
functions under the Plan.
D. COMMON STOCK shall mean the Corporation's common stock.
E. CORPORATE TRANSACTION shall mean either of the
following shareholder-approved transactions to which the Corporation is a
party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction, or
(ii) the sale, transfer or other disposition
of all or substantially all of the Corporation's assets in complete
liquidation or dissolution of the Corporation.
F. CORPORATION shall mean NetZero, Inc., a California
corporation, and any successor corporation to all or substantially all of the
assets or voting stock of NetZero, Inc. which shall by appropriate action
adopt the Plan.
G. DISABILITY shall mean the inability of the Optionee or
the Participant to engage in any substantial gainful activity by reason of
any medically determinable physical or mental impairment and shall be
determined by the Plan Administrator on the basis of such medical evidence as
the Plan Administrator deems warranted under the circumstances.
H. EMPLOYEE shall mean an individual who is in the employ
of the Corporation (or any Parent or Subsidiary), subject to the control and
direction of the employer entity as to both the work to be performed and the
manner and method of performance.
I. EXERCISE DATE shall mean the date on which the
Corporation shall have received written notice of the option exercise.
J. FAIR MARKET VALUE per share of Common Stock on any
relevant date shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on
the Nasdaq National Market, then the Fair Market Value shall be the
closing selling price per
<PAGE>
share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the
Nasdaq National Market. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date
for which such quotation exists.
(ii) If the Common Stock is at the time listed on
any Stock Exchange, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question on
the Stock Exchange determined by the Plan Administrator to be the
primary market for the Common Stock, as such price is officially
quoted in the composite tape of transactions on such exchange. If
there is no closing selling price for the Common Stock on the date
in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation
exists.
(iii) If the Common Stock is at the time neither
listed on any Stock Exchange nor traded on the Nasdaq National
Market, then the Fair Market Value shall be determined by the Plan
Administrator after taking into account such factors as the Plan
Administrator shall deem appropriate.
K. INCENTIVE OPTION shall mean an option which satisfies
the requirements of Code Section 422.
L. INVOLUNTARY TERMINATION shall mean the termination of
the Service of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or
discharge by the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation
following (A) a change in his or her position with the Corporation
which materially reduces his or her duties and responsibilities or
the level of management to which he or she reports, (B) a reduction
in his or her level of compensation (including base salary, fringe
benefits and target bonuses under any corporate-performance based
bonus or incentive programs) by more than fifteen percent (15%) or
(C) a relocation of such individual's place of employment by more
than fifty (50) miles, provided and only if such change, reduction
or relocation is effected without the individual's consent.
M. MISCONDUCT shall mean the commission of any act of
fraud, embezzlement or dishonesty by the Optionee or Participant, any
unauthorized use or disclosure by such person of confidential information or
trade secrets of the Corporation (or any Parent or Subsidiary), or any other
intentional misconduct by such person adversely affecting the business or
affairs of the Corporation (or any Parent or Subsidiary) in a material
manner. The foregoing definition shall not be deemed to be inclusive of all
the acts or omissions which the Corporation (or any Parent or Subsidiary)
may consider as grounds for the dismissal or discharge of any
<PAGE>
Optionee, Participant or other person in the Service of the Corporation (or
any Parent or Subsidiary).
N. 1934 ACT shall mean the Securities Exchange Act of
1934, as amended.
O. NON-STATUTORY OPTION shall mean an option not intended
to satisfy the requirements of Code Section 422.
P. OPTION GRANT PROGRAM shall mean the option grant
program in effect under the Plan.
Q. OPTIONEE shall mean any person to whom an option is
granted under the Plan.
R. PARENT shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations ending with the
Corporation, provided each corporation in the unbroken chain (other than the
Corporation) owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
S. PARTICIPANT shall mean any person who is issued shares
of Common Stock under the Stock Issuance Program.
T. PLAN shall mean the Corporation's 1998 Stock
Option/Stock Issuance Plan, as set forth in this document.
U. PLAN ADMINISTRATOR shall mean either the Board or the
Committee acting in its capacity as administrator of the Plan.
V. SERVICE shall mean the provision of services to the
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in
the documents evidencing the option grant.
W. STOCK EXCHANGE shall mean either the American Stock
Exchange or the New York Stock Exchange.
X. STOCK ISSUANCE AGREEMENT shall mean the agreement
entered into by the Corporation and the Participant at the time of issuance
of shares of Common Stock under the Stock Issuance Program.
Y. STOCK ISSUANCE PROGRAM shall mean the stock issuance
program in effect under the Plan.
Z. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in
the unbroken chain owns, at the time of the determination, stock
<PAGE>
possessing fifty percent (50%) or more of the total combined voting power of
all classes of stock in one of the other corporations in such chain.
AA. 10% SHAREHOLDER shall mean the owner of stock (as
determined under Code Section 424(d)) possessing more than ten percent (10%)
of the total combined voting power of all classes of stock of the Corporation
(or any Parent or Subsidiary).
<PAGE>
NETZERO, INC.
1999 STOCK OPTION/STOCK ISSUANCE PLAN
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1999 Stock Option/Stock Issuance Plan is intended to
promote the interests of NetZero, Inc., a California corporation, by providing
eligible persons in the Corporation's employ or service with the opportunity to
acquire a proprietary interest, or otherwise increase their proprietary
interest, in the Corporation as an incentive for them to continue in such employ
or service.
Capitalized terms herein shall have the meanings assigned to
such terms in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two (2) separate equity
programs:
(i) the Option Grant Program under
which eligible persons may, at the discretion of the Plan
Administrator, be granted options to purchase shares of Common Stock,
and
(ii) the Stock Issuance Program under
which eligible persons may, at the discretion of the Plan
Administrator, be issued shares of Common Stock directly, either
through the immediate purchase of such shares or as a bonus for
services rendered the Corporation (or any Parent or Subsidiary).
B. The provisions of Articles One and Four shall apply to
both equity programs under the Plan and shall accordingly govern the
interests of all persons under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Board. However, any
or all administrative functions otherwise exercisable by the Board may be
delegated to the Committee. Members of the Committee shall serve for such period
of time as the Board may determine and shall be subject to removal by the Board
at any time. The Board may also at any time terminate the functions of the
Committee and reassume all powers and authority previously delegated to the
Committee.
B. The Plan Administrator shall have full power and
authority (subject to the provisions of the Plan) to establish such rules and
regulations as it may deem appropriate for proper administration of the Plan
and to make such determinations under, and issue such
<PAGE>
interpretations of, the Plan and any outstanding options or stock issuances
thereunder as it may deem necessary or advisable. Decisions of the Plan
Administrator shall be final and binding on all parties who have an interest
in the Plan or any option or stock issuance thereunder.
IV. ELIGIBILITY
A. The persons eligible to participate in the Plan are as
follows:
(i) Employees,
(ii) non-employee members of the Board
or the non-employee members of the board of directors of any Parent or
Subsidiary, and
(iii) consultants and other independent
advisors who provide services to the Corporation (or any Parent or
Subsidiary).
B. The Plan Administrator shall have full authority to
determine, (i) with respect to the grants made under the Option Grant Program,
which eligible persons are to receive the option grants, the time or times when
those grants are to be made, the number of shares to be covered by each such
grant, the status of the granted option as either an Incentive Option or a
Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding, and (ii) with
respect to stock issuances made under the Stock Issuance Program, which eligible
persons are to receive such stock issuances, the time or times when those
issuances are to be made, the number of shares to be issued to each Participant,
the vesting schedule (if any) applicable to the issued shares and the
consideration to be paid by the Participant for such shares.
C. The Plan Administrator shall have the absolute
discretion either to grant options in accordance with the Option Grant Program
or to effect stock issuances in accordance with the Stock Issuance Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock. The maximum number of shares
of Common Stock which may be issued over the term of the Plan shall not exceed
8,589,200 shares.
B. Shares of Common Stock subject to outstanding options
shall be available for subsequent issuance under the Plan to the extent (i) the
options expire or terminate for any reason prior to exercise in full or (ii) the
options are cancelled in accordance with the cancellation-regrant provisions of
Article Two. Unvested shares issued under the Plan and subsequently repurchased
by the Corporation, at the option exercise or direct issue price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan.
2
<PAGE>
C. Should any change be made to the Common Stock by reason
of any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as a
class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and/or class of securities
issuable under the Plan and (ii) the number and/or class of securities and the
exercise price per share in effect under each outstanding option in order to
prevent the dilution or enlargement of benefits thereunder. The adjustments
determined by the Plan Administrator shall be final, binding and conclusive. In
no event shall any such adjustments be made in connection with the conversion of
one or more outstanding shares of the Corporation's preferred stock into shares
of Common Stock.
3
<PAGE>
ARTICLE TWO
OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the
form approved by the Plan Administrator; PROVIDED, however, that each such
document shall comply with the terms specified below. Each document evidencing
an Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
1. The exercise price per share shall be fixed by the
Plan Administrator in accordance with the following provisions:
(i) The exercise price per share shall
not be less than eighty-five percent (85%) of the Fair Market Value per
share of Common Stock on the option grant date.
(ii) If the person to whom the option
is granted is a 10% Shareholder, then the exercise price per share
shall not be less than one hundred ten percent (110%) of the Fair
Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due
upon exercise of the option and shall, subject to the provisions of Section I
of Article Four and the documents evidencing the option, be payable in cash
or check made payable to the Corporation. Should the Common Stock be
registered under Section 12 of the 1934 Act at the time the option is
exercised, then the exercise price may also be paid as follows:
(i) in shares of Common Stock held for
the requisite period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued at Fair Market
Value on the Exercise Date, or
(ii) to the extent the option is
exercised for vested shares, through a special sale and remittance
procedure pursuant to which the Optionee shall concurrently provide
irrevocable instructions (A) to a Corporation-designated brokerage firm
to effect the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate exercise price payable for the
purchased shares plus all applicable Federal, state and local income
and employment taxes required to be withheld by the Corporation by
reason of such exercise and (B) to the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm
in order to complete the sale.
4
<PAGE>
Except to the extent such sale and remittance
procedure is utilized, payment of the exercise price for the purchased
shares must be made on the Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be
exercisable at such time or times, during such period and for such number of
shares as shall be determined by the Plan Administrator and set forth in the
documents evidencing the option grant. However, no option shall have a term in
excess of ten (10) years measured from the option grant date.
C. EFFECT OF TERMINATION OF SERVICE.
1. The following provisions shall govern the exercise
of any options held by the Optionee at the time of cessation of Service or
death:
(i) Should the Optionee cease to
remain in Service for any reason other than death, Disability or
Misconduct, then the Optionee shall have a period of three (3) months
following the date of such cessation of Service during which to
exercise each outstanding option held by such Optionee.
(ii) Should Optionee's Service
terminate by reason of Disability, then the Optionee shall have a
period of twelve (12) months following the date of such cessation of
Service during which to exercise each outstanding option held by such
Optionee.
(iii) If the Optionee dies while holding
an outstanding option, then the personal representative of his or her
estate or the person or persons to whom the option is transferred
pursuant to the Optionee's will or the laws of inheritance shall have
a twelve (12)-month period following the date of the Optionee's death
to exercise such option.
(iv) Under no circumstances, however,
shall any such option be exercisable after the specified expiration of
the option term.
(v) During the applicable post-Service
exercise period, the option may not be exercised in the aggregate for
more than the number of vested shares for which the option is
exercisable on the date of the Optionee's cessation of Service. Upon
the expiration of the applicable exercise period or (if earlier) upon
the expiration of the option term, the option shall terminate and cease
to be outstanding for any vested shares for which the option has not
been exercised. However, the option shall, immediately upon the
Optionee's cessation of Service, terminate and cease to be outstanding
with respect to any and all option shares for which the option is not
otherwise at the time exercisable or in which the Optionee is not
otherwise at that time vested.
(vi) Should Optionee's Service be
terminated for Misconduct, then all outstanding options held by the
Optionee shall terminate immediately and cease to remain outstanding.
5
<PAGE>
2. The Plan Administrator shall have the
discretion, exercisable either at the time an option is granted or at any
time while the option remains outstanding, to:
(i) extend the period of time for
which the option is to remain exercisable following Optionee's
cessation of Service or death from the limited period otherwise in
effect for that option to such greater period of time as the Plan
Administrator shall deem appropriate, but in no event beyond the
expiration of the option term, and/or
(ii) permit the option to be exercised,
during the applicable post-Service exercise period, not only with
respect to the number of vested shares of Common Stock for which such
option is exercisable at the time of the Optionee's cessation of
Service but also with respect to one or more additional installments in
which the Optionee would have vested under the option had the Optionee
continued in Service.
D. SHAREHOLDER RIGHTS. The holder of an option shall have no
shareholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become the
recordholder of the purchased shares.
E. UNVESTED SHARES. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right. The Plan Administrator may not impose a vesting schedule upon
the option grant or any shares of Common Stock subject to that option which is
more restrictive than twenty percent (20%) per year vesting, with the initial
vesting to occur not later than one (1) year after the option grant date.
However, such limitation shall not be applicable to any option grants made to
individuals who are officers of the Corporation, non-employee Board members or
independent consultants.
F. FIRST REFUSAL RIGHTS. Until such time as the Common Stock
is first registered under Section 12 of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Optionee (or any successor in interest) of any shares of Common Stock issued
under the Plan. Such right of first refusal shall be exercisable in accordance
with the terms established by the Plan Administrator and set forth in the
document evidencing such right.
G. LIMITED TRANSFERABILITY OF OPTIONS. During the
lifetime of the Optionee, the option shall be exercisable only by the
Optionee and shall not be assignable or transferable other than by will or by
the laws of descent and distribution following the Optionee's death.
H. WITHHOLDING. The Corporation's obligation to deliver
shares of Common Stock upon the exercise of any options granted under the
Plan shall be subject to the satisfaction of all applicable Federal, state
and local income and employment tax withholding requirements.
6
<PAGE>
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of the Plan shall be applicable to Incentive Options. Options which
are specifically designated as Non-Statutory Options shall not be subject to the
terms of this Section II.
A. ELIGIBILITY. Incentive Options may only be granted to
Employees.
B. EXERCISE PRICE. The exercise price per share shall not be
less than one hundred percent (100%) of the Fair Market Value per share of
Common Stock on the option grant date.
C. DOLLAR LIMITATION. The aggregate Fair Market Value of the
shares of Common Stock (determined as of the respective date or dates of grant)
for which one or more options granted to any Employee under the Plan (or any
other option plan of the Corporation or any Parent or Subsidiary) may for the
first time become exercisable as Incentive Options during any one (1) calendar
year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% SHAREHOLDER. If any Employee to whom an Incentive
Option is granted is a 10% Shareholder, then the option term shall not exceed
five (5) years measured from the option grant date.
III. CORPORATE TRANSACTION
A. The shares subject to each option outstanding under the
Plan at the time of a Corporate Transaction shall automatically vest in full so
that each such option shall, immediately prior to the effective date of the
Corporate Transaction, become fully exercisable for all of the shares of Common
Stock at the time subject to that option and may be exercised for any or all of
those shares as fully-vested shares of Common Stock. However, the shares subject
to an outstanding option shall NOT vest on such an accelerated basis if and to
the extent: (i) such option is assumed by the successor corporation (or parent
thereof) in the Corporate Transaction and the Corporation's repurchase rights
with respect to the unvested option shares are concurrently assigned to such
successor corporation (or parent thereof) or (ii) such option is to be replaced
with a cash incentive program of the successor corporation which preserves the
spread existing on the unvested option shares at the time of the Corporate
Transaction and provides for subsequent payout in accordance with the same
vesting schedule applicable to those unvested option shares or (iii) the
acceleration of such option is subject to other limitations imposed by the Plan
Administrator at the time of the option grant.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are assigned to the successor
corporation (or parent thereof) in connection with such Corporate
7
<PAGE>
Transaction or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a
Corporate Transaction shall be appropriately adjusted, immediately after such
Corporate Transaction, to apply to the number and class of securities which
would have been issuable to the Optionee in consummation of such Corporate
Transaction, had the option been exercised immediately prior to such
Corporate Transaction. Appropriate adjustments shall also be made to (i) the
number and class of securities available for issuance under the Plan
following the consummation of such Corporate Transaction and (ii) the
exercise price payable per share under each outstanding option, provided the
aggregate exercise price payable for such securities shall remain the same.
E. The Plan Administrator shall have the discretion,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to provide for the automatic acceleration (in whole
or in part) of one or more outstanding options (and the immediate termination of
the Corporation's repurchase rights with respect to the shares subject to those
options) upon the occurrence of a Corporate Transaction, whether or not those
options are to be assumed in the Corporate Transaction.
F. The Plan Administrator shall also have full power and
authority, exercisable either at the time the option is granted or at any time
while the option remains outstanding, to structure such option so that the
shares subject to that option will automatically vest on an accelerated basis
should the Optionee's Service terminate by reason of an Involuntary Termination
within a designated period (not to exceed eighteen (18) months) following the
effective date of any Corporate Transaction in which the option is assumed and
the repurchase rights applicable to those shares do not otherwise terminate. Any
option so accelerated shall remain exercisable for the fully-vested option
shares until the EARLIER of (i) the expiration of the option term or (ii) the
expiration of the one (1)-year period measured from the effective date of the
Involuntary Termination. In addition, the Plan Administrator may provide that
one or more of the Corporation's outstanding repurchase rights with respect to
shares held by the Optionee at the time of such Involuntary Termination shall
immediately terminate on an accelerated basis, and the shares subject to those
terminated rights shall accordingly vest at that time.
G. The portion of any Incentive Option accelerated in
connection with a Corporate Transaction shall remain exercisable as an Incentive
Option only to the extent the applicable One Hundred Thousand Dollar limitation
is not exceeded. To the extent such dollar limitation is exceeded, the
accelerated portion of such option shall be exercisable as a Non-Statutory
Option under the Federal tax laws.
H. The grant of options under the Plan shall in no way
affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
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IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at
any time and from time to time, with the consent of the affected option holders,
the cancellation of any or all outstanding options under the Plan and to grant
in substitution therefor new options covering the same or different number of
shares of Common Stock but with an exercise price per share based on the Fair
Market Value per share of Common Stock on the new option grant date.
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ARTICLE THREE
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below.
A. PURCHASE PRICE.
1. The purchase price per share shall be fixed by the
Plan Administrator but shall not be less than eighty-five percent (85%) of the
Fair Market Value per share of Common Stock on the issue date. However, the
purchase price per share of Common Stock issued to a 10% Shareholder shall not
be less than one hundred and ten percent (110%) of such Fair Market Value.
2. Subject to the provisions of Section I of Article
Four, shares of Common Stock may be issued under the Stock Issuance Program for
any of the following items of consideration which the Plan Administrator may
deem appropriate in each individual instance:
(i) cash or check made payable to the
Corporation, or
(ii) past services rendered to the
Corporation (or any Parent or Subsidiary).
B. VESTING PROVISIONS.
1. Shares of Common Stock issued under the Stock
Issuance Program may, in the discretion of the Plan Administrator, be fully
and immediately vested upon issuance or may vest in one or more installments
over the Participant's period of Service or upon attainment of specified
performance objectives. However, the Plan Administrator may not impose a
vesting schedule upon any stock issuance effected under the Stock Issuance
Program which is more restrictive than twenty percent (20%) per year vesting,
with initial vesting to occur not later than one (1) year after the issuance
date. Such limitation shall not apply to any Common Stock issuances made to
the officers of the Corporation, non-employee Board members or independent
consultants.
2. Any new, substituted or additional securities or
other property (including money paid other than as a regular cash dividend)
which the Participant may have the right to receive with respect to the
Participant's unvested shares of Common Stock by reason of any stock
dividend, stock split, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration shall be issued subject to
(i) the same vesting requirements applicable to
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the Participant's unvested shares of Common Stock and (ii) such escrow
arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full shareholder
rights with respect to any shares of Common Stock issued to the Participant
under the Stock Issuance Program, whether or not the Participant's interest
in those shares is vested. Accordingly, the Participant shall have the right
to vote such shares and to receive any regular cash dividends paid on such
shares.
4. Should the Participant cease to remain in
Service while holding one or more unvested shares of Common Stock issued
under the Stock Issuance Program or should the performance objectives not be
attained with respect to one or more such unvested shares of Common Stock,
then those shares shall be immediately surrendered to the Corporation for
cancellation, and the Participant shall have no further shareholder rights
with respect to those shares. To the extent the surrendered shares were
previously issued to the Participant for consideration paid in cash or cash
equivalent (including the Participant's purchase-money indebtedness), the
Corporation shall repay to the Participant the cash consideration paid for
the surrendered shares and shall cancel the unpaid principal balance of any
outstanding purchase-money note of the Participant attributable to such
surrendered shares.
5. The Plan Administrator may in its discretion
waive the surrender and cancellation of one or more unvested shares of Common
Stock (or other assets attributable thereto) which would otherwise occur upon
the non-completion of the vesting schedule applicable to such shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
C. FIRST REFUSAL RIGHTS. Until such time as the Common Stock
is first registered under Section 12 of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Participant (or any successor in interest) of any shares of Common Stock issued
under the Stock Issuance Program. Such right of first refusal shall be
exercisable in accordance with the terms established by the Plan Administrator
and set forth in the document evidencing such right.
II. CORPORATE TRANSACTION
A. Upon the occurrence of a Corporate Transaction, all
outstanding repurchase rights under the Stock Issuance Program shall terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, except to the extent: (i) those repurchase
rights are assigned to the successor corporation (or parent thereof) in
connection with such Corporate Transaction or (ii) such accelerated vesting is
precluded by other limitations imposed by the Plan Administrator at the time the
repurchase right is issued.
B. The Plan Administrator shall have the discretionary
authority, exercisable either at the time the unvested shares are issued or any
time while the Corporation's repurchase rights with respect to those shares
remain outstanding, to provide that those rights shall
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automatically terminate on an accelerated basis, and the shares of Common
Stock subject to those terminated rights shall immediately vest, in the event
the Participant's Service should subsequently terminate by reason of an
Involuntary Termination within a designated period (not to exceed eighteen
(18) months) following the effective date of any Corporate Transaction in
which those repurchase rights are assigned to the successor corporation (or
parent thereof).
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion,
be held in escrow by the Corporation until the Participant's interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing those unvested shares.
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ARTICLE FOUR
MISCELLANEOUS
I. FINANCING
The Plan Administrator may permit any Optionee or Participant
to pay the option exercise price or the purchase price for shares issued to such
person under the Plan by delivering a full-recourse, interest-bearing promissory
note payable in one or more installments and secured by the purchased shares.
However, any promissory note delivered by a consultant must be secured by
collateral in addition to the purchased shares of Common Stock. In no event
shall the maximum credit available to the Optionee or Participant exceed the
SUM of (i) the aggregate option exercise price or purchase price payable for the
purchased shares plus (ii) any Federal, state and local income and employment
tax liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.
II. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan shall become effective when adopted by the
Board, but no option granted under the Plan may be exercised, and no shares
shall be issued under the Plan, until the Plan is approved by the
Corporation's shareholders. If such shareholder approval is not obtained
within twelve (12) months after the date of the Board's adoption of the Plan,
then all options previously granted under the Plan shall terminate and cease
to be outstanding, and no further options shall be granted and no shares
shall be issued under the Plan. Subject to such limitation, the Plan
Administrator may grant options and issue shares under the Plan at any time
after the effective date of the Plan and before the date fixed herein for
termination of the Plan.
B. The Plan shall terminate upon the EARLIEST of (i) the
expiration of the ten (10)-year period measured from the date the Plan is
adopted by the Board, (ii) the date on which all shares available for issuance
under the Plan shall have been issued as vested shares or (iii) the termination
of all outstanding options in connection with a Corporate Transaction. All
options and unvested stock issuances outstanding at that time under the Plan
shall continue to have full force and effect in accordance with the provisions
of the documents evidencing such options or issuances.
III. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects. However, no such
amendment or modification shall adversely affect the rights and obligations with
respect to options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require shareholder approval
pursuant to applicable laws and regulations.
B. Options may be granted under the Option Grant Program and
shares may be issued under the Stock Issuance Program which are in each instance
in excess of the number of shares of Common Stock then available for issuance
under the Plan, provided any excess
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shares actually issued under those programs shall be held in escrow until
there is obtained shareholder approval of an amendment sufficiently
increasing the number of shares of Common Stock available for issuance under
the Plan. If such shareholder approval is not obtained within twelve (12)
months after the date the first such excess issuances are made, then (i) any
unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price
paid for any excess shares issued under the Plan and held in escrow, together
with interest (at the applicable Short Term Federal Rate) for the period the
shares were held in escrow, and such shares shall thereupon be automatically
cancelled and cease to be outstanding.
IV. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
V. WITHHOLDING
The Corporation's obligation to deliver shares of Common Stock
upon the exercise of any options or upon the issuance or vesting of any shares
issued under the Plan shall be subject to the satisfaction of all applicable
Federal, state and local income and employment tax withholding requirements.
VI. REGULATORY APPROVALS
The implementation of the Plan, the granting of any options
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any option or (ii) under the Stock Issuance Program shall be subject
to the Corporation's procurement of all approvals and permits required by
regulatory authorities having jurisdiction over the Plan, the options granted
under it and the shares of Common Stock issued pursuant to it.
VII. NO EMPLOYMENT OR SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
VIII. FINANCIAL REPORTS
The Corporation shall deliver a balance sheet and an income
statement at least annually to each individual holding an outstanding option
under the Plan, unless such individual is a key Employee whose duties in
connection with the Corporation (or any Parent or Subsidiary) assure such
individual access to equivalent information.
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APPENDIX
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
B. CODE shall mean the Internal Revenue Code of 1986, as
amended.
C. COMMITTEE shall mean a committee of two (2) or more
Board members appointed by the Board to exercise one or more administrative
functions under the Plan.
D. COMMON STOCK shall mean the Corporation's common stock.
E. CORPORATE TRANSACTION shall mean either of the following
shareholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of all
or substantially all of the Corporation's assets in complete
liquidation or dissolution of the Corporation.
F. CORPORATION shall mean NetZero, Inc., a California
corporation, and any successor corporation to all or substantially all of the
assets or voting stock of NetZero, Inc. which shall by appropriate action adopt
the Plan.
G. DISABILITY shall mean the inability of the Optionee or
the Participant to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment and shall be determined by
the Plan Administrator on the basis of such medical evidence as the Plan
Administrator deems warranted under the circumstances.
H. EMPLOYEE shall mean an individual who is in the employ
of the Corporation (or any Parent or Subsidiary), subject to the control and
direction of the employer entity as to both the work to be performed and the
manner and method of performance.
I. EXERCISE DATE shall mean the date on which the
Corporation shall have received written notice of the option exercise.
J. FAIR MARKET VALUE per share of Common Stock on any
relevant date shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the closing
selling price per
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share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the
Nasdaq National Market. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(iii) If the Common Stock is at the time neither listed
on any Stock Exchange nor traded on the Nasdaq National Market, then
the Fair Market Value shall be determined by the Plan Administrator
after taking into account such factors as the Plan Administrator shall
deem appropriate.
K. INCENTIVE OPTION shall mean an option which satisfies
the requirements of Code Section 422.
L. INVOLUNTARY TERMINATION shall mean the termination of
the Service of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or
discharge by the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following
(A) a change in his or her position with the Corporation which
materially reduces his or her duties and responsibilities or the level
of management to which he or she reports, (B) a reduction in his or her
level of compensation (including base salary, fringe benefits and
target bonuses under any corporate-performance based bonus or incentive
programs) by more than fifteen percent (15%) or (C) a relocation of
such individual's place of employment by more than fifty (50) miles,
provided and only if such change, reduction or relocation is effected
without the individual's consent.
M. MISCONDUCT shall mean the commission of any act of
fraud, embezzlement or dishonesty by the Optionee or Participant, any
unauthorized use or disclosure by such person of confidential information or
trade secrets of the Corporation (or any Parent or Subsidiary), or any other
intentional misconduct by such person adversely affecting the business or
affairs of the Corporation (or any Parent or Subsidiary) in a material
manner. The foregoing definition shall not be deemed to be inclusive of all
the acts or omissions which the Corporation (or any Parent or Subsidiary) may
consider as grounds for the dismissal or discharge of any
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Optionee, Participant or other person in the Service of the Corporation (or
any Parent or Subsidiary).
N. 1934 ACT shall mean the Securities Exchange Act of 1934,
as amended.
O. NON-STATUTORY OPTION shall mean an option not intended
to satisfy the requirements of Code Section 422.
P. OPTION GRANT PROGRAM shall mean the option grant program
in effect under the Plan.
Q. OPTIONEE shall mean any person to whom an option is
granted under the Plan.
R. PARENT shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations ending with the Corporation,
provided each corporation in the unbroken chain (other than the Corporation)
owns, at the time of the determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
S. PARTICIPANT shall mean any person who is issued shares
of Common Stock under the Stock Issuance Program.
T. PLAN shall mean the Corporation's 1999 Stock
Option/Stock Issuance Plan, as set forth in this document.
U. PLAN ADMINISTRATOR shall mean either the Board or the
Committee acting in its capacity as administrator of the Plan.
V. SERVICE shall mean the provision of services to the
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant.
W. STOCK EXCHANGE shall mean either the American Stock
Exchange or the New York Stock Exchange.
X. STOCK ISSUANCE AGREEMENT shall mean the agreement
entered into by the Corporation and the Participant at the time of issuance
of shares of Common Stock under the Stock Issuance Program.
Y. STOCK ISSUANCE PROGRAM shall mean the stock issuance
program in effect under the Plan.
Z. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock
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possessing fifty percent (50%) or more of the total combined voting power of
all classes of stock in one of the other corporations in such chain.
AA. 10% SHAREHOLDER shall mean the owner of stock (as
determined under Code Section 424(d)) possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the
Corporation (or any Parent or Subsidiary).
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DIRECTOR'S INDEMNIFICATION AGREEMENT
THIS DIRECTOR'S INDEMNIFICATION AGREEMENT ("Agreement") is made and
entered into as of , 1999 by and between NetZero, Inc., a Delaware
corporation (the "Company"), and ("Director").
R E C I T A L S
A. Director, as the [ ] and a member of the Board of
Directors of the Company, performs a valuable service in such capacity for
the Company;
B. The stockholders of the Company have adopted Bylaws (the
"Bylaws") providing for the indemnification of the officers, directors,
agents and employees of the Company to the maximum extent authorized by
Section 145 of the Delaware General Corporation Law, as amended (the
"Delaware Law");
C. The Bylaws and the Delaware Law, by their non-exclusive
nature, permit contracts between the Company, its officers and the members of
its Board of Directors with respect to indemnification of such persons;
D. In accordance with the authorization as provided by the
Delaware Law, the Company has purchased and presently maintains or will
shortly hereafter purchase and thereafter maintain, a policy or policies of
directors and officers liability insurance ("D & O Insurance"), covering
certain liabilities which may be incurred by its directors and officers in
the performance as directors of the Company;
E. As a result of developments affecting the terms, scope and
availability of D & O Insurance, there exists general uncertainty as to the
extent of protection afforded members of the Board of Directors and officers
of the Company by such D & O Insurance and by statutory and Bylaw
indemnification provisions; and
F. In order to induce Director to continue to serve as
[an executive officer and] a member of the Board of Directors of the Company,
the Company has determined and agreed to enter into this contract with
Director.
NOW, THEREFORE, in consideration of Director's continued service to
the Company after the date hereof, the parties hereto agree as follows:
1. INDEMNITY OF DIRECTOR. The Company hereby agrees to hold
harmless and indemnify Director to the fullest extent authorized or permitted
by the provisions of the Delaware Law, as may be amended from time to time,
and by the Bylaws as they exist as of the date hereof.
2. ADDITIONAL INDEMNITY. Subject only to the exclusions set
forth in Section 3 hereof, the Company hereby further agrees to hold harmless
and indemnify Director:
<PAGE>
(a) against any and all expenses (including reasonable
attorneys' fees), witness fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by Director in connection with
any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (including an action by or
in the right of the Company) to which Director is, was or at any time becomes
a party, or is threatened to be made a party, by reason of the fact that
Director is or was an officer or director of the Company, or is or was
serving or at any time serves at the request of the Company as an officer or
director of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise; and
(b) otherwise to the fullest extent as may be provided to
Director by the Company under the non-exclusivity provisions of Section 5 of
Article VIII of the Bylaws of the Company.
3. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to
Section 2 hereof shall be paid by the Company:
(a) except to the extent the aggregate of losses to be
indemnified thereunder exceeds the sum of such losses for which the Director
is indemnified pursuant to Section 1 hereof or pursuant to any directors and
officers liability insurance purchased and maintained by the Company;
(b) in respect to remuneration paid to Director if it shall
be determined by a final judgment or other final adjudication that such
remuneration was in violation of law;
(c) on account of any suit in which judgment is rendered
against Director for an accounting of profits, made from the purchase or sale
by Director of securities of the Company, pursuant to the provisions of
Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto
or similar provisions of any federal, state or local statutory law;
(d) on account of Director's conduct which is finally
adjudged to have been knowingly fraudulent or deliberately dishonest, or to
constitute willful misconduct;
(e) on account of Director's conduct which is the subject of
an action, suit or proceeding described in Section 7(c)(ii) hereof;
(f) on account of any action, claim or proceeding (other than
a proceeding referred to in Section 8(b) hereof) initiated by the Director
unless such action, claim or proceeding was authorized in the specific case
by action of the Board of Directors; and
(g) if a final decision by a court having jurisdiction in the
matter shall determine that such indemnification is not lawful (and, in this
respect, both the Company and Director have been advised that the Securities
and Exchange Commission believes that indemnification for liabilities arising
under the federal securities laws is against public policy and is, therefore,
unenforceable and that claims for indemnification should be submitted to
appropriate courts for adjudication).
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<PAGE>
4. CONTRIBUTION. If the indemnification provided in Sections 1
and 2 hereof is unavailable by reason of a court decision described in
Section 3(g) hereof based on grounds other than any of those set forth in
paragraphs (b) through (f) of Section 3 hereof, then in respect of any
threatened, pending or completed action, suit or proceeding in which the
Company is jointly liable with Director (or would be if joined in such
action, suit or proceeding), the Company shall contribute to the amount of
expenses (including reasonable attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred and paid or payable by
Director in such proportion as is appropriate to reflect (i) the relative
benefits received by the Company on the one hand and Director on the other
hand from the transaction from which such action, suit or proceeding arose,
and (ii) the relative fault of the Company on the one hand and of Director on
the other in connection with the events which resulted in such expenses,
judgments, fines or settlement amounts, as well as any other relevant
equitable considerations. The relative fault of the Company on the one hand
and of Director on the other shall be determined by reference to, among other
things, the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent the circumstances resulting in such
expenses, judgments, fines or settlement amounts. The Company agrees that it
would not be just and equitable if contribution pursuant to this Section 4
were determined by pro rata allocation or any other method of allocation
which does not take account of the foregoing equitable considerations.
5. CONTINUATION OF OBLIGATIONS. All agreements and obligations
of the Company contained herein shall continue during the period Director is
an executive officer or director of the Company (or is or was serving at the
request of the Company as an executive officer or director of another
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise) and shall continue thereafter so long as Director shall be
subject to any possible claim or threatened, pending or completed action,
suit or proceeding, whether civil, criminal or investigative, by reason of
the fact that Director was an executive officer or director of the Company or
serving in any other capacity referred to herein.
6. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty (30)
days after receipt by Director of notice of the commencement of any action,
suit or proceeding, Director will, if a claim in respect thereof is to be
made against the Company under this Agreement, notify the Company of the
commencement thereof, but the omission so to notify the Company will not
relieve the Company from any liability which it may have to Director
otherwise than under this Agreement. With respect to any such action, suit or
proceeding as to which Director notifies the Company of the commencement
thereof:
(a) the Company will be entitled to participate therein at
its own expense;
(b) except as otherwise provided below, to the extent that it
may wish, the Company jointly with any other indemnifying party similarly
notified will be entitled to assume the defense thereof, with counsel
reasonably satisfactory to Director. After notice from the Company to
Director of its election so as to assume the defense thereof, the Company
will not be liable to Director under this Agreement for any legal or other
expenses subsequently
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incurred by Director in connection with the defense thereof other than
reasonable costs of investigation or as otherwise provided below. Director
shall have the right to employ its counsel in such action, suit or
proceeding, but the fees and expenses of such counsel incurred after notice
from the Company of its assumption of the defense thereof shall be at the
expense of Director unless (i) the employment of counsel by Director has been
authorized by the Company, (ii) Director shall have reasonably concluded,
based on the advice of counsel, that there may be a conflict of interest
between the Company and Director in the conduct of the defense of such action
or (iii) the Company shall not in fact have employed counsel to assume the
defense of such action, in each of which cases the fees and expenses of
Director's separate counsel shall be at the expense of the Company. The
Company shall not be entitled to assume the defense of any action, suit or
proceeding brought by or on behalf of the Company or as to which Director
shall have made the conclusion provided for in (ii) above; and
(c) the Company shall not be liable to indemnify Director
under this Agreement for any amounts paid in settlement of any action or
claim effected without its written consent. Company shall be permitted to
settle any action except that it shall not settle any action or claim in any
manner which would impose any penalty or limitation on Director without
Director's written consent. Neither the Company nor Director will
unreasonably withhold its consent to any proposed settlement.
7. ADVANCEMENT AND REPAYMENT OF EXPENSES.
(a) In the event that Director employs his own counsel
pursuant to Section 6(b)(i) through (iii) above, the Company shall advance to
Director, prior to any final disposition of any threatened or pending action,
suit or proceeding, whether civil, criminal, administrative or investigative,
any and all reasonable expenses (including legal fees and expenses) incurred
in investigating or defending any such action, suit or proceeding within ten
(10) days after receiving copies of invoices presented to Director for such
expenses.
(b) Director agrees that Director will reimburse the Company
for all reasonable expenses paid by the Company in defending any civil or
criminal action, suit or proceeding against Director in the event and only to
the extent it shall be ultimately determined by a final judicial decision
(from which there is no right of appeal) that Director is not entitled, under
the provisions of the Delaware Law, the Bylaws, this Agreement or otherwise,
to be indemnified by the Company for such expenses.
(c) Notwithstanding the foregoing, the Company shall not be
required to advance such expenses to Director if Director (i) commences any
action, suit or proceeding as a plaintiff unless such advance is specifically
approved by a majority of the Board of Directors or (ii) is a party to an
action, suit or proceeding brought by the Company and approved by a majority
of the Board which alleges willful misappropriation of corporate assets by
Director, wilfull disclosure of confidential information in bad faith and in
violation of Director's fiduciary or contractual obligations to the Company,
or any other willful and deliberate breach in bad faith of Director's duty to
the Company or its stockholders.
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8. ENFORCEMENT.
(a) The Company expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on the
Company hereby in order to induce Director to continue as a director of the
Company, and acknowledges that Director is relying upon this Agreement in
continuing in such capacity.
(b) In the event Director is required to bring any action to
enforce rights or to collect moneys due under this Agreement and is
successful in such action, the Company shall reimburse Director for all
Director's reasonable fees and expenses in bringing and pursuing such action.
9. SUBROGATION. In the event of payment under this agreement,
the Company shall be subrogated to the extent of such payment to all of the
rights of recovery of Director, who shall execute all documents required and
shall do all acts that may be necessary to secure such rights and to enable
the Company effectively to bring suit to enforce such rights.
10. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Director
by this Agreement shall not be exclusive of any other right which Director
may have or hereafter acquire under any statute, provision of the Company's
Certificate of Incorporation or Bylaws, agreement, vote of stockholders or
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office.
11. SURVIVAL OF RIGHTS. The rights conferred on Director by this
Agreement shall continue after Director has ceased to be a director, officer,
employee or other agent of the Company and shall inure to the benefit of
Director's heirs, executors and administrators.
12. SEVERABILITY. Each of the provisions of this Agreement is a
separate and distinct agreement and independent of the others, so that if any
or all of the provisions hereof shall be held to be invalid or unenforceable
for any reason, such invalidity or unenforceability shall not affect the
validity or enforceability of the other provisions hereof or the obligation
of the Company to indemnify the Director to the full extent provided by the
Bylaws or the Delaware Law.
13. GOVERNING LAW; VENUE AND JURISDICTION. This Agreement shall
be interpreted and enforced in accordance with the laws of the State of
Delaware, without regard to the conflicts of law provisions thereof. The
Company and Director hereby irrevocably and unconditionally (i) agree that
any action or proceeding arising out of or in connection with this Agreement
shall be brought only in the Court of Chancery of the State of Delaware (the
"Delaware Court"), and not in any other State or federal court in the United
States of America or any court in any other country, (ii) consent to submit
to the exclusive jurisdiction of the Delaware Court for purposes of any
action or proceeding arising out of or in connection with this Agreement,
(iii) waive any objection to the laying of venue of any such action or
proceeding in the Delaware Court, and (iv) waive, and agree not to plead or
to make, any claim that any such action or proceeding brought in the Delaware
Court has been brought in an improper or otherwise inconvenient forum.
5
<PAGE>
14. BINDING EFFECT. This Agreement shall be binding upon Director
and upon the Company, its successors and assigns, and shall inure to the
benefit of Director, his heirs, personal representatives and assigns and to
the benefit of the Company, its successors and assigns.
15. AMENDMENT AND TERMINATION. No amendment, modification,
termination or cancellation of this Agreement shall be effective unless in
writing signed by both parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
on and as of the day and year first above written.
NetZero, Inc.
a Delaware corporation
----------------------------------------------
By: Mark R. Goldston
Its Chairman and Chief Executive Officer
DIRECTOR
----------------------------------------------
Name:
-----------------------------------------
6
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated May 21, 1999, except for Note 7 as to which the date is June
30, 1999 and except as to the stock split and reincorporation into Delaware as
described in Note 12, which is as of July , 1999, related to the financial
statements of NetZero, Inc. which appear in such Registration Statement. We also
consent to the reference to us under the heading "Experts" in such Registration
Statement.
Woodland Hills, California
July , 1999
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