<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 7, 1999
REGISTRATION NO. 333-82827
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3 TO 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, 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,
check the following box. / /
--------------------------
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 SEPTEMBER 7, 1999.
10,000,000 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 10,000,000 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 $9.00 and $11.00. 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 have the right to purchase up to an additional 1,500,000
shares of common stock from NetZero, at the initial public offering price less
the underwriting discount.
------------------------
The underwriters expect to deliver the shares on , 1999.
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
HAMBRECHT & QUIST
WIT CAPITAL CORPORATION
------------------------
Prospectus dated , 1999.
<PAGE>
[INSIDE FRONT COVER]
The outside gatefold page includes:
Logo at top of page with the words:
NetZero-TM-
FREE AND EASY Access to the Internet
Words down side of page read, "step-by-step"
Pictures of four computer monitors:
1. Picture of NetZero load screen with a number one adjacent with the following
text to the right of the picture: NetZero provides its users with FREE
Internet access and FREE e-mail.
2. Picture of NetZero profile window with a number two adjacent with the
following text to the right of the picture: To register with NetZero, users
complete a personal profile containing their demographic information. They
are then issued a user I.D. and password as a NetZero member. NETZERO HAS
PRIVACY POLICIES AND NO PERSONAL IDENTIFYING INFORMATION IS GIVEN OUT
WITHOUT A USER'S CONSENT.
3. Picture of The ZeroPort with a number three adjacent with the following text
to the right of the picture: The NetZero user experience is delivered via
The ZeroPort. The ZeroPort is a movable window that remains displayed on the
computer screen continuously throughout a user's online session.
4. Picture of a drop-down menu on The ZeroPort with a number four adjacent with
the following text to the right of the picture: The ZeroPort contains "speed
dial" navigation via sponsored buttons and drop-down menus allowing users to
visit select sites on the Internet without having to open a separate
browser.
Copyright symbol at bottom of page with the following text:
1997-1999 NetZero, Inc. All rights reserved. NetZero, The ZeroPort, zCast and
the NetZero logo are trademarks of NetZero, Inc.
<PAGE>
THE TWO-PAGE INSIDE GATEFOLD INCLUDES:
THE FOLLOWING TEXT IS ACROSS THE TOP OF THE GATEFOLD:
The ZeroPort-TM-... "Speed Dial" for the Web
The following text is presented on the left-edge of the gatefold:
FOR THE CONSUMER Consumers use The ZeroPort as a navigational tool to access
key sites on the Internet for activities such as shopping, auctions and
electronic commerce, and can access features such as search, e-mail, and browse,
as well as visit news, sports, stocks and weather sites.
The following text is presented on the right edge of the gatefold:
FOR THE ADVERTISER Advertisers utilize The ZeroPort to place their message,
product or service in front of NetZero users via sponsored buttons, drop-down
menus and banner ads.
The following information is centered between the left edge and right edge text,
directly below the initial text:
[screen shot of The ZeroPort]
The following text surrounds the outside of the screen shot of The ZeroPort,
starting at the left hand corner of The ZeroPort and follows clockwise around
the entire screen shot:
SEARCH: A simple click here will take you to our search and directory services.
E-MAIL BUTTON: Our E-mail button lights up when you have new e-mail. Just click
on the button to launch your e-mail program.
NEWS: World affairs, entertainment news, local weather, and other news worthy
items are just one click away.
SPORTS: Find out about sport scores and more by clicking on our Sports button.
STOCKS: This button will take you to a choice of online stock brokers such as
AMERITRADE and DLJDIRECT.
WEATHER: Get the local weather and forecasts by clicking on our Weather button.
CUSTOMIZED TICKER: Sports, news and stock information are delivered right to
your desktop-- without having to open a browser. You can customize the data in
the ticker to keep track of your favorite sports teams, stocks, and breaking
news, whatever is most important to you. To change the "channel" just click on
any of the four buttons.
AUCTIONS: Click here to go to online auction sites such as eBay or uBid.
SHOPPING: Send flowers, order office supplies, buy a CD or even a new car.
Click here for a drop-down menu of select shopping sites.
SERVICES: From mortgages to long distance phone service, click here and get a
complete listing of our available service offerings.
Across the bottom of the page are seven different boxes enclosing different
NetZero window and page views. Directly above the views is the following text,
centered across the gatefold:
NETZERO'S ZCAST-TM- TECHNOLOGY PROVIDES TRACKING, TARGETING, AND DIRECT
MARKETING FEATURES
NetZero's patent pending zCast technology provides the ability to
identify and track the online behavior of every NetZero user, enabling
advertisers to target their messages based on a user's online behavior
as well as the user's demographic, geographic and interest data.
<PAGE>
The following descriptions are ordered from left to right, starting at the left
edge of the inside gatefold.
Above the first box is the text: RUN OF SITE
Below the box is the text: Advertisers can reach NetZero's users with RUN OF
SITE banner ads.
Above the second box is the text: AFFINITY TARGETING
Below the second box is the text: Ads can be targeted to a Web-site or sites
where traffic is more relevant for a specific product or message with AFFINITY
TARGETING.
Above the third box is the text: AD MISSILE
Below the third box is the text: AD MISSILE TARGETING can be used by
advertisers to place a product, message or promotion on a competitor's Web-site
being viewed by our users.
Above the fourth box is the text: DEFENSE SHIELD
Below the fourth box is the text: Using a DEFENSE SHIELD strategy, advertisers
can control what ads are displayed in The ZeroPort when their Web-site is
displayed.
Above the fifth box is the text: START PAGE
Below the fifth box is the text: The START PAGE provides a direct link to a
specific Web-site for NetZero users when they log on to our service.
Above the sixth box is the text: END PAGE WINDOW
Below the sixth box is the text: The END PAGE WINDOW can display a product or
service offering with a direct link to a specific Web-site to NetZero users when
they exit our service.
Above the seventh box is the text: BROWSER WINDOW
Below the seventh box is the text: The Browser Window can display a product or
service every time a user engages the NetZero BROWSE feature.
<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.
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, we believe 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 August 31, 1999,
approximately 1.68 million users registered for our service. During August 1999,
approximately 891,000 of these users accessed our service and were delivered
over 1.15 billion advertising impressions. Our services are offered in over
1,600 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. While we do not charge Internet access fees, we do generate
revenues by selling advertisements and sponsorships on The ZeroPort and by
referring our users to sponsors' Web-sites. We also receive fees from
advertisers when our users subscribe for services or purchase products or when
other performance criteria are satisfied. While we believe that our targeted
banner advertising will generate higher advertising rates than traditional
untargeted banner advertising, our ability to sell targeted advertising is in
its early stages and is largely untested. To date, the majority of our revenues
have been generated from untargeted banner advertising and start page referrals.
As of June 30, 1999, our accumulated deficit was approximately $15.3 million and
our net loss for the year ended June 30, 1999 was approximately $15.3 million.
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. Our
objective is to redefine the Internet access model and the way products and
services are marketed online by creating a service funded by advertising, not by
Internet access fees.
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.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by NetZero................... 10,000,000 shares
Common stock to be outstanding after this
offering........................................ 102,905,217 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
8,451,842 shares of common stock available for issuance pursuant to our stock
plans, of which 4,110,793 shares are subject to outstanding options as of August
31, 1999, at a weighted average exercise price of $2.12 per share.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth summary financial data for NetZero. This
information should be read in conjunction with the financial statements and the
notes to those financial statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 21, 1997 --------------------------------------------------------
(INCEPTION) THROUGH SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
JUNE 30, 1998 1998 1998 1999 1999
------------------- -------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................... $ -- $ -- $ 122 $ 781 $ 3,731
Gross loss.................................. -- (6) (942) (3,198) (3,646)
Loss from operations........................ (19) (217) (1,789) (5,125) (8,284)
Net loss.................................... (25) (217) (1,795) (5,095) (8,193)
Net loss per share:
Basic and diluted(1)...................... $ -- $ (0.02) $ (0.22) $ (0.50) $ (0.72)
Weighted average shares--basic and
diluted(1).............................. 15,000 13,451 8,025 10,277 11,413
Pro forma basic and diluted net loss per
share(2)................................
Shares outstanding used in pro forma basic
and diluted net loss per share
calculation(2)..........................
<CAPTION>
YEAR
ENDED
JUNE 30,
1999
-----------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................... $ 4,634
Gross loss.................................. (7,792)
Loss from operations........................ (15,415)
Net loss.................................... (15,300)
Net loss per share:
Basic and diluted(1)...................... $ (1.42)
Weighted average shares--basic and
diluted(1).............................. 10,792
Pro forma basic and diluted net loss per
share(2)................................ $ (0.44)
Shares outstanding used in pro forma basic
and diluted net loss per share
calculation(2).......................... 34,800
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-----------------------------------------
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
--------- ------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 24,035 $ 24,035 $ 115,804
Working capital..................................................................... 16,097 16,097 107,866
Total assets........................................................................ 47,501 47,501 139,270
Capital leases and notes payable, less current portion.............................. 3,527 3,527 3,527
Redeemable convertible preferred stock.............................................. 2,140 -- --
Deferred stock compensation......................................................... (7,783) (7,783) (7,783)
Total stockholders' equity.......................................................... 30,954 33,094 124,863
</TABLE>
- ------------------------
(1) See Notes 2 and 9 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 preferred stock into common stock.
(3) As adjusted to reflect the sale of 10,000,000 shares of common stock offered
hereby at an assumed initial public offering price of $10.00 per share after
deducting the underwriting discount and estimated offering expenses payable
by NetZero. See "Use of Proceeds" on page 24 for more information on our
intended use of the proceeds from this offering and "Capitalization" on page
25 for more information on our capital structure.
Except as otherwise noted, all information in this prospectus:
- 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;
- reflects the 3-for-2 stock split effected in July 1999;
- reflects our reincorporation into Delaware which we will complete prior
to the offering; and
- assumes that the underwriters do not exercise the over-allotment option
granted to them.
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 FREE INTERNET SERVICE PROVIDER
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. 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 we may encounter. 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; and
- upgrade and scale our communications network and internal server
capacity.
These risks are particularly acute in our business model because, unlike
traditional Internet service providers, we do not have a measurable and
predictable revenue stream from user access fees. If we are not able to
successfully address these risks, we will not be able to grow our business,
compete effectively or achieve profitability. These factors could cause our
stock price to fall significantly. Please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" beginning on page 28
for more detailed information on our limited operating history.
OUR BUSINESS WILL BE SERIOUSLY HARMED IF WE FAIL TO GROW OUR USER BASE.
The success of our business will depend on our ability to grow our user
base, which depends on our ability to attract new users and retain existing
users.
OUR MARKETING EFFORTS MAY NOT BE SUCCESSFUL IN ATTRACTING NEW USERS.
To date, we have relied extensively on "word-of-mouth" marketing to attract
the vast majority of our users and will continue to do so for the foreseeable
future. This type of 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, such as television, radio and print media
advertising, direct marketing campaigns, and bundling, co-branding and retail
distribution arrangements. We have little practical experience with marketing
our service through these channels. If these distribution channels prove more
costly or less effective than anticipated, it could adversely impact our ability
to grow.
5
<PAGE>
OUR EXISTING USERS MAY DISCONTINUE USING OUR SERVICE.
We would also be unable to grow our user base if a significant number of our
current registered users stopped using our service. There are a variety of
reasons why users would discontinue using our service, including:
- users may decide they do not like the always-present nature of The
ZeroPort;
- users may not like having their online activities tracked;
- reliability issues, which we have experienced in the past and may
experience in the future, may cause user dissatisfaction; and
- our limited user support may frustrate users who have difficulty using
our service.
If we are unable to address these issues and grow our user base, we may not be
able to generate revenues, decrease per-user telecommunications costs or
implement our strategy.
WE MAY BE UNABLE TO DEMONSTRATE THAT OUR REGISTERED USERS ARE ACTUALLY USING OUR
SERVICE.
Our advertising revenues depend on our ability to demonstrate to our
advertisers that our registered users are actively using our service. While
approximately 1.68 million users had registered for our service as of August 31,
1999, approximately 891,000 had used our service during that month. We believe
that a number of our users have Internet access accounts with our competitors.
As a result, these users may not use NetZero as their primary Internet service
provider. Also, some new users use the Internet only as a novelty and do not
become consistent users of Internet services and, therefore, may be less likely
to continue using our service. 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 revenues could be materially and adversely
affected.
IF WE FAIL TO GENERATE SUFFICIENT INTERNET-BASED ADVERTISING REVENUES, OUR
ABILITY TO OPERATE OUR BUSINESS WOULD BE SERIOUSLY HARMED.
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 from us. 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 factors are causing Internet advertising rates to
decline, and it is possible that rates will continue to decline in the future.
Also, our growth in users has resulted in, and in the future may result in, our
advertising inventory growing faster than our ability to sell the inventory at
reasonable rates. Therefore, we cannot assure you that we will be able to
attract sufficient advertising revenues to support our operations. 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.
OUR ABILITY TO CHARGE HIGHER RATES FOR TARGETED ADVERTISING IS UNTESTED AND MAY
NOT SUCCEED.
Our ability to generate sufficient revenues to operate our business may be
dependent on our ability to charge higher advertising rates for targeted
advertising than for traditional untargeted online advertising. Our ability to
sell targeted advertising is in its early stages and is largely untested. A
significant portion of our revenues may be dependent on our ability to sell
targeted advertising and on our ability to fulfill performance criteria, such as
having our users subscribe to specific services or purchase specific products,
through targeted advertising. The success of these efforts will depend on our
ability to effectively target users based on demographic and other
6
<PAGE>
information. We may encounter technical and other limitations on this ability,
including problems associated with the accuracy of the information provided by
our users, which we do not corroborate. We may not be able to generate higher
rates for targeted advertising or generate revenues by fulfilling performance
criteria.
OUR ADVERTISING ARRANGEMENTS AND PRICING PLANS ARE UNTESTED.
We generate, and intend to generate, revenues from a variety of different
arrangements including sales of targeted and untargeted banner advertising,
sponsorships, performance-based arrangements and referrals to third party
Web-sites. We have limited experience marketing and pricing these types of
arrangements, and have limited actual experience with respect to the performance
of such arrangements. As such, we do not know if we are appropriately pricing,
marketing or structuring these arrangements, or whether we will perform under
these arrangements to the satisfaction of the other parties. Our failure to
appropriately price, market or structure these arrangements could impact our
ability to enter into and perform under these arrangements, or to renew these
arrangements on similar or acceptable terms. Our financial results may fluctuate
and be negatively impacted as a result of these factors.
WE MAY NOT BE ABLE TO PROVIDE INTERNET ACCESS FOR OUR USERS IF OUR
TELECOMMUNICATIONS CARRIERS RAISE THEIR RATES, IF THEIR 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. 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 providers can terminate or
elect not to renew. As a result, 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. See "Business--Communications Network" on page 46
for a more complete discussion of the services provided by these carriers.
THE INTERESTS OF OUR TELECOMMUNICATIONS PROVIDERS MAY CONFLICT WITH
OURS. 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, we would not be able to provide Internet
access to our customers, which could ultimately result in a significant loss of
users and revenues.
OUR TELECOMMUNICATIONS PROVIDERS MAY DELIVER UNACCEPTABLE SERVICE
QUALITY. Our reliance on third-party telecommunications service providers also
exposes us to the risks that these 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. 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.
IF TELECOMMUNICATIONS PRICES INCREASE, OUR FINANCIAL RESULTS WOULD BE
ADVERSELY IMPACTED. 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 they will not
7
<PAGE>
increase. For example, 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
telecommunications services varies geographically, and we may not be able to
obtain new or substitute telecommunications services 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 networks on commercially acceptable price terms, or
that alternative services will be available on similar terms.
OUR ABILITY TO SERVE ADVERTISEMENTS TO THE ZEROPORT COULD BE SEVERELY LIMITED IF
THE SOFTWARE WE LICENSE FROM NETGRAVITY FAILS TO PERFORM OR IF WE ARE NOT ABLE
TO RENEW OUR LICENSE.
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 June 2001; however we have an option to renew the agreement for an
additional two year term upon initial expiration. 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 this event, our ability to
generate advertising revenues would be severely limited. In July 1999,
DoubleClick, an Internet advertising provider, and NetGravity announced that
they had entered into a merger agreement, pursuant to which DoubleClick will
acquire NetGravity. Since our agreement with NetGravity does not expire until
June 2001 and we have an option to renew for an additional two year term upon
initial expiration, we do not believe the merger will have a material effect on
our contractual rights with NetGravity.
OUR STOCK PRICE COULD FALL AS A RESULT OF FUTURE LOSSES AND NEGATIVE CASH FLOW.
As of June 30, 1999, we had an accumulated deficit of approximately $15.3
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 or positive cash flow depends upon a
number of factors, including our ability to increase revenue and 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.
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WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY FOR USERS WITH ESTABLISHED AND NEW
PROVIDERS OF INTERNET ACCESS SERVICES.
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;
- 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;
- Internet portals and search engines such as Yahoo!;
- other free Internet service providers; and
- nonprofit or educational Internet service providers.
We expect that competition for users 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 and
software, media and telecommunications companies, will continue to enter the
Internet access market. For example, AltaVista, a leading portal and search
engine, recently began offering a free Internet access solution to strengthen
its relationship with its users, and both Microsoft and CompuServe have recently
announced that they will partner with personal computer makers and consumer
electronics retailers to offer consumers up to $400 of rebates on computer
equipment when the consumer signs up for three years of their Internet access
services. New entrants have announced Internet access models similar to ours,
and the implementation of similar models by new entrants or existing competitors
could limit 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. Since these companies have their own telecommunications network
infrastructure, they have lower communications costs than we do. 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 could also put us at a significant competitive
disadvantage.
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.
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WE ALSO COMPETE FOR USERS WITH COMPANIES THAT PROVIDE BROADBAND INTERNET ACCESS
WHICH IS FASTER THAN THE ACCESS SERVICES WE CURRENTLY PROVIDE.
We also face competition from companies that provide broadband Internet
access, including local and long-distance telephone companies, cable television
companies, electric utility companies, wireless communications companies and
other Internet service providers. 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
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
which could 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.
The telephone, cable and other companies that own broadband networks may
prevent us from delivering Internet access through the wire and cable networks
that they own. The availability and terms of Internet service providers' access
to these networks are under regulatory and judicial review. Our ability to
compete with telephone and cable television companies that are able to support
broadband transmission 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. We do
not know whether 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 companies are also aligning themselves with Internet service
providers who would receive preferential or exclusive use of broadband local
connections to users. If broadband Internet access becomes the preferred mode by
which users access the Internet and we are unable to gain access to broadband
networks on reasonable terms, our ability to compete could be materially and
adversely affected.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY FOR ADVERTISING CUSTOMERS.
We compete for Internet advertising 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.
Many of our advertising competitors have longer operating histories, greater
name recognition, larger user bases, significantly greater financial, technical,
sales 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 develop, promote and sell 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
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third parties to increase the ability of their products or services to address
the needs of our prospective customers. We 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.
We also expect competition for advertising customers to increase, which may
result in price reductions, reduced gross margins and loss of market share. If
we are not able to adequately address these issues, our advertising revenues
will decrease significantly.
WE DEPEND ON A SMALL NUMBER OF KEY CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR
REVENUES.
A small number of customers have accounted for, and may in the future
account for, a significant portion of our revenues. For example, we derived
approximately 27% of our revenues for the year ended June 30, 1999 and
approximately 34% of our revenues for the quarter ended June 30, 1999 from an
agreement with LookSmart. We also derived approximately 26% of our revenues for
the year ended June 30, 1999 and approximately 28% of our revenues for the
quarter ended June 30, 1999 from an agreement with Adsmart. Our agreement with
LookSmart will expire in April 2000 and our agreement with Adsmart will expire
in February 2000. 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.
OUR REPUTATION AND ABILITY TO GENERATE REVENUES WILL BE HARMED IF USER DEMAND
FOR OUR SERVICE EXCEEDS OUR TELECOMMUNICATIONS AND SERVER CAPACITY.
We may from time to time experience increases in our telecommunications
usage which exceed our then available 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, which would
prevent us from generating advertising revenues. 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 reputation and our revenues.
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 to invest in
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, we will be unable to grow our business.
WE MAY NOT BE SUCCESSFUL IN MANAGING OUR GROWTH.
Our rapid growth has placed, and we expect it 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. If we fail to do so, we will not
be able to grow our business effectively.
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IF WE FAIL TO MANAGE OUR TELECOMMUNICATIONS CAPACITY, OUR SERVICE LEVELS MAY
SUFFER OR WE MAY EXPERIENCE INCREASED PER-USER COSTS.
We will have to accurately 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 projections regarding increased usage. In that 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.
OUR BUSINESS WILL BE SERIOUSLY HARMED IF WE ARE UNSUCCESSFUL IN ESTABLISHING AND
MAINTAINING THE NETZERO BRAND, OR IF WE INCUR EXCESSIVE EXPENSES IN PROMOTING
AND MAINTAINING OUR BRAND.
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 telecommunications 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 we may not be able to grow our user base. In addition, if we incur
excessive expenses in promoting and maintaining our brand, our financial results
could be seriously harmed.
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.
WE MAY NOT BE ABLE TO OBTAIN NEEDED TECHNOLOGY. 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 prevent us from being able
to compete effectively, which would greatly harm our business.
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WE MAY NOT BE ABLE TO RESPOND TO CHANGING INDUSTRY STANDARDS. We believe
that our ability to compete successfully will also depend upon the continued
compatibility of our services with products offered by various vendors. Although
we intend to support emerging standards in the market for Internet access, we
may not be able to conform our technology and equipment to support these new
standards in a timely fashion. 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. Our
business and prospects could be seriously harmed if we are not able to adapt to
changes in technology and industry standards, and to develop and introduce new
and enhanced products and service offerings.
NEW TECHNOLOGY COULD RENDER OUR SERVICES AND TECHNOLOGY OBSOLETE. We can
provide no assurances that future advances in technology will be beneficial to,
or compatible with, our business. Others may develop services or technologies
that render our services or technology noncompetitive or obsolete. Our ability
to remain technologically competitive may require substantial expenditures and
lead time. If we are unable to respond in a timely manner to technological
advances, our business could be materially and adversely affected.
ERRORS IN OUR SOFTWARE OR HARDWARE MAY HARM OUR BUSINESS.
The software and hardware used to operate and provide our services is
complex and, accordingly, may contain undetected errors or failures. We have in
the past, and may in the future, encounter errors in the software, firmware or
hardware used to operate and provide our services. This has resulted in, and may
in the future result in, a number of adverse consequences, including:
- users being disconnected from our service or being unable to access our
service;
- loss of data or revenue;
- injury to reputation; and
- diversion of development resources.
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
greatly reduce our ability to compete effectively and could cause significant
harm to our business.
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. These actions could adversely affect NetZero's brand name.
We have permission and, in some cases, licenses from each developer of the
software that we use in our software. 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
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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. 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. 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 ability to operate
our business.
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 telecommunications capacity 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 operations and the amounts available under lease lines, are
not sufficient to meet our cash requirements, we will need to seek additional
capital to fund our growth. 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 ability to grow our business.
OUR NETWORK 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 breaking into our computer network, which could cause losses
to us or our users. 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
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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 temporarily cease service
to our users, which could have a material adverse effect on our revenues and
could also result in increased user turnover.
SOFTWARE DEVELOPERS MAY DEVELOP PROGRAMS TO DISABLE THE ZEROPORT.
Various software programs have been developed that specifically target The
ZeroPort to disable our ability to deliver advertisements to a user. These
programs attempt to blank out, or block, banner advertisements on The ZeroPort
or completely delete The ZeroPort from users' computer screens. To date, such
programs have not interrupted our operations or caused us to fail to meet the
terms of our advertising agreements. 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 seriously damage our ability to operate our business and generate
revenues.
OUR THIRD-PARTY HARDWARE SUPPLIERS COULD PREVENT OR DELAY US FROM EXPANDING OUR
NETWORK INFRASTRUCTURE.
The expansion of our network infrastructure and 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.
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.
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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 revenues and
result in increased user turnover.
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 ability to operate
our business.
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. Please refer
to our discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Year 2000" beginning on page 34 for
further information with respect to our state of readiness on Year 2000 related
issues as well as our "worst case" scenario assessment.
WE RELY ON A RELATIVELY NEW MANAGEMENT TEAM.
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 other key personnel. Any of our
officers or employees can terminate his or her employment relationship at any
time. The loss of these 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 employees.
WE NEED ADDITIONAL PERSONNEL TO GROW OUR BUSINESS.
Our future success also depends on our ability to attract, retain and
motivate highly skilled technical, managerial, editorial, merchandising, sales,
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 ability to
operate and grow our business.
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
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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 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
or at a network hub, or within a third-party network provider's network, 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 result
in user turnover and decreased revenues. Furthermore, we do not currently have
any business disruption insurance.
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 you 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 BE
SUBJECT TO SEASONAL AND CYCLICAL PATTERNS WHICH MAY NEGATIVELY IMPACT OUR SHARE
PRICE.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, including seasonality and other factors 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" beginning on page 28 for a more
detailed discussion regarding our operating results.
17
<PAGE>
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
evolving and no clear legal precedents have been established. In addition, the
law regarding Internet advertising, including specific URL targeting, remains
unsettled. While no one has ever filed a claim against us relating to these
matters, 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 and we may be required to alter our
business practices. 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 suffer
if our defense is not successful could materially and adversely affect our
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, affect telecommunications costs or increase the likelihood or scope of
competition from regional telephone companies. These results could decrease the
demand for our services or increase our cost of doing business, each of which
would cause our gross margins and revenues to fall.
REGULATION OF CONTENT AND ACCESS COULD LIMIT OUR ABILITY TO GENERATE
REVENUES. 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 and expose us to liability. This would 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 Children's Online Privacy
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, unless access to this
material is blocked to persons under 17 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 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 ability of minors to access unsuitable
materials on the Internet. Because of these content restrictions and potential
liability to us for materials carried on or disseminated through our systems, we
may be required to implement measures to reduce our exposure to liability. These
measures may require the expenditure of substantial resources or the
discontinuation of our product or service offerings that subject us to this
liability. Further, the costs of defending against any of these claims and the
potentially adverse outcomes of these claims could have a material adverse
effect on our business, results of operations and financial condition.
18
<PAGE>
WE COULD BE EXPOSED TO 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 because 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 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
other 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 MAY LIMIT OUR ABILITY TO SELL TARGETED ADVERTISING. We
provide users with free Internet access and other free services and, in
exchange, users provide us with their demographic information when they register
with us. We have developed and adhere to a privacy policy which requires us to
provide notice to users on our Web-site concerning the types of information we
collect, how the information is used, and the extent to which such information
may be disclosed to third parties. Internet user privacy has become an issue
both in the United States and abroad. 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
Privacy Protection Act of 1998 requires, among other things, that online
operators obtain verifiable parental consent for the collection, use, or
disclosure of personal information from children. The Act further mandates that
the Federal Trade Commission publish regulations for the collection of data from
children by commercial Web-site operators. We cannot predict the exact form of
the regulations that the FTC may finally adopt. We cannot assure you that our
current information collection procedures and disclosure policies will be found
to be in compliance with existing or future laws or regulations. There can be no
assurance that the United States or foreign nations will not adopt additional
legislation to impose restrictions on the manner in which personal information
is collected, used and disclosed. Our failure to comply with existing laws, or
the adoption of new laws or regulations that require us to change the way we
conduct our business, could make it cost-prohibitive to operate our business,
and prevent us from pursuing our business strategies.
OUR BUSINESS COULD BECOME SUBJECT TO TAXATION. 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 foreign governments that
could impose taxes on the online sale of goods and services and 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 could make it cost-prohibitive to
operate our business.
TELECOMMUNICATIONS REGULATION COULD REQUIRE US TO CHANGE THE WAY WE DO
BUSINESS. 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
19
<PAGE>
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 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 the 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 gross margins and revenues.
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 these services. We cannot
assure you that state regulatory authorities will not seek to regulate aspects
of these activities as telecommunications services.
THE WORKFORCE INVESTMENT ACT OF 1998 MAY MAKE IT MORE EXPENSIVE TO RUN OUR
BUSINESS. 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 these 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 revenues and our operating results.
20
<PAGE>
IF INTERNET USAGE DOES NOT CONTINUE TO GROW, WE MAY NOT BE ABLE TO EXECUTE OUR
BUSINESS PLAN.
Substantially all of our revenues are dependent on the continued use and
expansion of the Internet. Use of the Internet has grown dramatically, but we
cannot assure you that usage of the Internet will continue to expand. 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 assumptions regarding the continued growth of use of the Internet. If these
assumptions turn out to be incorrect, we will not be able to grow our business
and increase our revenues.
WE MAY NOT BE ABLE TO PROTECT OUR DOMAIN NAMES OR ACQUIRE OTHER RELEVANT DOMAIN
NAMES.
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
WE CANNOT ASSURE YOU THAT A PUBLIC MARKET WILL EXIST FOR YOU TO SELL OUR 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 be
available for you to sell shares of our common stock that you purchase. In
addition, if an active trading market does not develop, the liquidity of our
stock may suffer and the trading price of our common stock may decline. We will
determine the initial public offering price of the shares of our common stock
through negotiations with the underwriters and this price may not be indicative
of prices that will prevail in the trading market. Please see "Underwriting" on
page U-1 for more information about these negotiations.
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 approximately 70.1% 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.
See "Principal Stockholders" on page 62 for more information on the stock
holdings of our directors and officers.
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
21
<PAGE>
approximately $8.79 per share, at an assumed initial public offering price of
$10.00 per share. Additional dilution will occur upon the exercise of
outstanding stock options and will also cause your percentage ownership of
NetZero to decrease. Please see "Dilution" on page 26 for more information on
the dilution you will incur.
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.
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 their common stock 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" on page
71 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 $91.8
million, or approximately $105.7 million if the underwriters' over-allotment
option is exercised in full, at an assumed initial public offering price of
$10.00 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 with which you may not agree. If management does not use these proceeds
effectively we may be unable to capitalize on important business opportunities.
PROVISIONS IN OUR CHARTER DOCUMENTS COULD DETER TAKEOVER EFFORTS.
Provisions in our charter and bylaws and Delaware law may have the effect of
delaying or preventing a change of control or changes in our management that a
stockholder might consider favorable. See "Description of Capital Stock" on page
67 for a detailed description of these provisions. If a change of control or
change in management is delayed or prevented, the market price of our common
stock could decline.
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", and "Business".
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.
TRADEMARKS
NetZero-TM-, The ZeroPort-TM-, zCast-TM- and SPEEDY Assistant-TM- are our
trademarks. This prospectus also includes trademarks of entities other than
NetZero.
23
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the 10,000,000 shares of common stock sold
in this offering are estimated to be approximately $91.8 million, or $105.7
million if the underwriters exercise their over-allotment option in full, based
upon an assumed offering price of $10.00 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;
- for brand marketing, advertising and user acquisition programs; and
- to fund operating losses and as additional working capital and for
general corporate purposes.
As of the date of this prospectus, we have not made any specific plans for
the proceeds of this offering. The amounts actually expended for each of the
purposes listed above 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. Therefore, we cannot specify with
certainty the particular uses of the net proceeds of this offering. Accordingly,
our management will have significant flexibility and discretion in applying the
net proceeds of this offering.
Pending any use, the net proceeds of this offering will be invested
generally in short-term, interest-bearing securities.
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 for any 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 the board 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 June 30, 1999
- on an actual basis;
- 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 and the planned reincorporation into
Delaware; and
- on an as adjusted basis to give effect to the pro forma adjustments and
the receipt of the estimated net proceeds from the sale of 10,000,000
shares of common stock at an assumed initial public offering price of
$10.00 per share.
<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------------------
<S> <C> <C> <C>
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- ------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents.................................................. $ 24,035 $ 24,035 $ 115,804
--------- ----------- ------------
--------- ----------- ------------
Capital leases and notes payable, less current portion..................... $ 3,527 $ 3,527 $ 3,527
Redeemable convertible preferred stock, no-par value; actual-- 19,231,000
shares authorized, 19,230,000 shares issued and outstanding; pro forma
and pro forma as adjusted--no shares authorized, issued or
outstanding.............................................................. 2,140 -- --
Stockholders' equity:
Convertible preferred stock, $0.001 par value; actual-- 55,769,000 shares
authorized, 45,182,000 shares issued and outstanding; pro forma and pro
forma as adjusted-- 10,000,000 shares authorized; no shares issued and
outstanding............................................................ 44,720 -- --
Common stock, $0.001 par value; actual--150,000,000 shares authorized,
28,624,000 shares issued and outstanding; pro-forma--500,000,000 shares
authorized, 93,036,000 shares issued and outstanding; pro forma as
adjusted-- 500,000,000 shares authorized, 103,036,000 shares issued and
outstanding............................................................ 1,352 93 103
Additional paid-in capital............................................... 9,019 57,138 148,897
Notes receivable from stockholders....................................... (1,029) (1,029) (1,029)
Deferred stock compensation.............................................. (7,783) (7,783) (7,783)
Accumulated deficit...................................................... (15,325) (15,325) (15,325)
--------- ----------- ------------
Total stockholders' equity................................................. 30,954 33,094 124,863
--------- ----------- ------------
Total capitalization....................................................... $ 36,621 $ 36,621 $ 128,390
--------- ----------- ------------
--------- ----------- ------------
</TABLE>
25
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was approximately
$33.1 million, or $0.36 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 June 30, 1999 after
giving pro forma effect to the automatic conversion of all outstanding shares of
preferred stock. After giving effect to our sale of 10,000,000 shares of common
stock offered by this prospectus at an assumed initial public offering price of
$10.00 per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses, the pro forma net tangible book
value as of June 30, 1999 would have been $124.9 million, or $1.21 per share.
This represents an immediate increase in pro forma net tangible book value of
$0.85 per share to existing stockholders and an immediate dilution in pro forma
net tangible book value of $8.79 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....................... $ 10.00
Pro forma net tangible book value per share as of June 30, 1999..... $ 0.36
Increase per share attributable to new investors.................... 0.85
---------
Pro forma net tangible book value per share after this offering....... 1.21
---------
Dilution per share to new investors................................... $ 8.79
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 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
$10.00 per share and before deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------------- ----------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------------- ----------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......................... 93,036,000 90% $ 48,212,000 33% $ 0.52
New investors.................................. 10,000,000 10 100,000,000 67 10.00
-------------- --- ---------------- ---
Total.......................................... 103,036,000 100% $ 148,212,000 100%
-------------- --- ---------------- ---
-------------- --- ---------------- ---
</TABLE>
The foregoing table gives pro forma effect to the automatic conversion of
all outstanding shares of preferred stock as if it had occurred at June 30,
1999, and assumes no exercise of the underwriters' over-allotment option or
shares underlying outstanding options. As of June 30, 1999, options to purchase
3,497,100 shares of common stock were outstanding at a weighted average exercise
price of $0.69 per share. To the extent that these options are exercised, new
investors will experience further dilution. See "Description of Capital Stock"
on page 67 and note 7 of the notes to our financial statements for more
information on our capital stock and further dilution you may experience.
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, the year ended June 30, 1999, and
the balance sheet data as of June 30, 1998 and 1999 are derived from the audited
financial statements of NetZero, Inc. included in the financial statements to
this prospectus. The statement of operations data for the three months ended
September 30, 1998, December 31, 1998, March 31, 1999 and June 30, 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>
JULY 21, 1997 THREE MONTHS ENDED YEAR
(INCEPTION) ------------------------------------------------------ ENDED
THROUGH SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, JUNE 30,
JUNE 30, 1998 1998 1998 1999 1999 1999
------------- -------------- -------------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $ -- $ -- $ 122 $ 781 $ 3,731 $ 4,634
Cost of revenues.............. -- 6 1,064 3,979 7,377 12,426
------------- -------------- -------------- ----------- --------- -----------
Gross loss.................... -- (6) (942) (3,198) (3,646) (7,792)
Operating expenses:
Sales and marketing......... -- 11 138 290 437 876
Product development......... -- 8 210 292 472 982
General and
administrative............ 19 77 429 1,114 2,687 4,307
Stock-based compensation.... -- 110 46 188 892 1,236
Depreciation and
amortization.............. -- 5 24 43 150 222
------------- -------------- -------------- ----------- --------- -----------
Total operating
expenses.............. 19 211 847 1,927 4,638 7,623
------------- -------------- -------------- ----------- --------- -----------
Loss from operations.......... (19) (217) (1,789) (5,125) (8,284) (15,415)
Interest and other income
(expense), net.............. (6) -- (6) 30 91 115
------------- -------------- -------------- ----------- --------- -----------
Net loss...................... $ (25) $ (217) $ (1,795) $ (5,095) $ (8,193) $ (15,300)
------------- -------------- -------------- ----------- --------- -----------
------------- -------------- -------------- ----------- --------- -----------
Basic and diluted net loss per
share....................... $ -- $ (0.02) $ (0.22) $ (0.50) $ (0.72) $ (1.42)
Shares used to calculate basic
and diluted net loss per
share....................... 15,000 13,451 8,025 10,277 11,413 10,792
Pro forma basic and diluted
net loss per share.......... $ (0.44)
Shares outstanding used in pro
forma basic and diluted net
loss per share
calculation................. 34,800
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
1998 1999
--------- ---------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................................... $ 1 $ 24,035
Working capital (deficit).................................................................... (23) 16,097
Total assets................................................................................. 1 47,501
Capital leases and notes payable, less current portion....................................... -- 3,527
Redeemable convertible preferred stock....................................................... -- 2,140
Deferred stock compensation.................................................................. -- (7,783)
Total stockholders' equity (deficit)......................................................... (23) 30,954
</TABLE>
27
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ALSO SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND
NOTES TO THE FINANCIAL 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 generate revenues through banner advertisements, sponsorships
on The ZeroPort, performance-based agreements, referrals of our users to other
Web-sites and distribution agreements. Banner advertisements are images
displayed in the window of The ZeroPort. A user can click on the image and be
routed to an advertiser's Web-site. Advertisers pay us for the number of
advertisements displayed, the number of times users click on advertisements, or
based on other criteria. Sponsorships on The ZeroPort involve providing an
advertiser the right to be displayed on the face of The ZeroPort or on a drop
down menu for a specified period of time, usually one year or less. We may
receive fees for this right alone, although many sponsorships also involve a
commitment by us to deliver banner advertisements or fulfill performance
criteria. Performance-based arrangements may involve payments dependent on the
success of an advertising campaign, which may be measured by the number of times
users visit a Web-site, purchase products or register for services. We also have
the ability to refer users to advertisers' Web-sites when they log on to our
service or when they click on buttons, drop down menus or the ticker window on
The ZeroPort. Referral payments are, in general, based upon the number of times
users are directed to advertisers' Web-sites. In distribution arrangements, we
may be paid by third parties for the right to distribute the software containing
our service with products of third parties. We do not expect distribution
agreements to be material to our overall revenues.
Historically, The ZeroPort was limited in its capabilities and our revenues
have been generated primarily from non-targeted banner advertising, a majority
of which has been sold through third parties such as Adsmart. We anticipate that
a significant portion of our banner inventory will be sold in a similar manner
in the future. We recently began generating revenues from selling targeted
banner advertisements and by referring our users to our co-branded start page
with LookSmart.
In August 1999, we released a substantially upgraded version of The ZeroPort
with features offering additional ways to generate revenues, including selling
exclusive and non-exclusive sponsorships of buttons and marquee space as well as
sponsorships of a customizable ticker tape and browser window. For example, we
entered into agreements with eBay, priceline.com, NetNation
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<PAGE>
Communications, Ameritrade and FiNet for sponsorship of services offered on The
ZeroPort or on drop-down menus on The ZeroPort. We have also entered into an
agreement with Cisco Systems for sponsored advertising on The ZeroPort. Many of
these agreements involve fee arrangements based on performance criteria. We
intend to enter into similar arrangements with other entities. However, since we
have limited experience marketing these types of arrangements, and have no
actual experience with respect to the performance of such arrangements, we
cannot predict the degree to which they will become part of our revenue mix.
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. In addition, the
growth in our user base has resulted, and may result in the future, in
situations where our advertising inventory capacity has increased faster than
our ability to sell such inventory at desired rates. While we rely on agreements
with third parties to sell a significant portion of our banner advertisements,
such agreements are short term in nature and are subject to termination and
pricing pressures. Due to increased costs associated with more users and greater
inventory, our failure to renew such agreements or the failure of the
combination of such agreements and the efforts of our in-house sales force to
sell increased inventory at reasonable rates may materially and adversely affect
our operating results. In addition, 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, including limitations
associated with privacy concerns. 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.
Banner advertising and sponsorship revenues are recognized in the periods in
which the advertisement or sponsorship placement is displayed, based upon the
lesser of impressions delivered over the total number of guaranteed impressions
or ratably over the period in which the advertisement is displayed, provided
that no significant obligations on our part remain and collection of the related
receivable is probable. Our obligations typically include the guarantee of a
minimum number of impressions or the satisfaction of other performance criteria.
The guaranteed minimum number of impressions are generally required to be
delivered over the term of the commitment which has generally averaged one to
two months. Revenues from performance-based arrangements, including
click-throughs, are recognized as the related performance criteria are met.
Referral revenues are recognized as referrals are made to advertisers' or
sponsors' Web-sites, provided that no significant obligations on our part remain
and collection of the related receivable is probable.
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
and quarter to quarter comparisons 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 or our user demographics are not
attractive to advertisers, we may be unable to attract significant commitments
from advertisers or satisfy our agreements with our advertisers relating to
performance criteria.
We do not currently anticipate that inflation will have a material impact on
our results of operations.
29
<PAGE>
COST OF REVENUES. Cost of revenues consists of telecommunications costs,
depreciation of our network equipment, occupancy costs and personnel and related
expenses of our network. We intend to expend significant amounts of capital,
which will result in increased depreciation expense associated with these
capital expenditures, and to make significant commitments to future
telecommunications capacity with the expectation of a rapidly increasing
subscriber base and anticipated usage patterns. Telecommunications costs for
network access are expensed as incurred. Our failure to accurately forecast our
users' needs could result in significant overcapacity, which would adversely
impact our results 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, employee 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, employee benefits and expenses for our executive, finance, legal and
human resources personnel. In addition, general and administrative expenses
include fees for professional services and 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 COMPENSATION. 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 year ended June 30, 1999, we recorded total deferred
compensation of approximately $9.0 million. This 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. We are amortizing this amount over the vesting periods of the
applicable options or shares, resulting in an expense of $1.2 million for the
year ended June 30, 1999. Annual amortization of deferred stock compensation for
options granted and restricted shares as of June 30, 1999 is approximately $4.0
million, $2.1 million, $1.2 million, and $500,000 for the years ending June 30,
2000, 2001, 2002 and 2003, respectively. Deferred compensation is presented as a
reduction of stockholders' equity and amortized over the vesting period of
applicable options, generally four years.
30
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data as a
percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR
---------------------------------------- ENDED
DECEMBER 31, MARCH 31, JUNE 30, JUNE 30,
1998 1999 1999 1999
-------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
AS A PERCENTAGE OF REVENUES
Revenues..................................................... 100% 100% 100% 100%
Cost of revenues............................................. 872 509 198 268
------- ----- ----- -----
Gross loss................................................... (772) (409) (98) (168)
Operating expenses:
Sales and marketing........................................ 113 37 12 19
Product development........................................ 172 37 12 21
General and administrative................................. 351 143 72 93
Stock-based compensation................................... 38 24 24 27
Depreciation and amortization.............................. 20 6 4 5
------- ----- ----- -----
Total operating expenses................................. 694 247 124 165
------- ----- ----- -----
Loss from operations......................................... (1,466) (656) (222) (333)
Interest and other income (expense), net..................... (5) 4 3 3
------- ----- ----- -----
Net loss..................................................... (1,471)% (652)% (219)% (330)%
------- ----- ----- -----
------- ----- ----- -----
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999
REVENUES. Revenues for the quarter ended June 30, 1999 were $3.7 million,
which represented an increase of $3.0 million, or 378%, from $781,000 for the
quarter ended March 31, 1999. The increase was primarily attributable to
revenues generated from our start page agreement with LookSmart, as well as
increased sales of banner advertisements, primarily through our third-party
sales force. In particular, we generated approximately $1.3 million, or 34% of
our total revenues for the quarter ended June 30, 1999, from our agreement with
LookSmart, which we entered into in April 1999. We also generated approximately
$1.0 million, or 28% of our total revenues for the quarter ended June 30, 1999,
from banner advertisements sold through Adsmart. This amount represented an
increase of approximately $856,000 from the $178,000 of revenues generated from
Adsmart for the quarter ended March 31, 1999, which represented approximately
23% of our total revenues for that period.
COST OF REVENUES. Cost of revenues for the quarter ended June 30, 1999 was
$7.4 million, which represented an increase of $3.4 million, or 85%, from $4.0
million for the quarter ended March 31, 1999. The increase was primarily
attributable to increased telecommunications expense related to the growth in
our user base and depreciation related to our network costs.
SALES AND MARKETING. Sales and marketing expenses for the quarter ended
June 30, 1999 were $437,000, which represented an increase of $147,000, or 51%,
from $290,000 for the quarter ended March 31, 1999. The increase was primarily
due to the hiring of additional direct sales force personnel.
PRODUCT DEVELOPMENT. Product development expenses for the quarter ended
June 30, 1999 were $472,000, which represented an increase of $180,000, or 62%,
from $292,000 for the quarter ended March 31, 1999. The increase was primarily
due to the hiring of additional software engineers.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
quarter ended June 30, 1999 were $2.7 million, which represented an increase of
$1.6 million, or 141%, from
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<PAGE>
$1.1 million for the quarter ended March 31, 1999. The increase was primarily
due to the hiring of additional administrative personnel and increased
professional and consulting expense.
STOCK-BASED COMPENSATION. In the year ended June 30, 1999, we recorded
total deferred compensation of $9.0 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 an expense of
$1.2 million for the year ended June 30, 1999. Stock-based compensation for the
year ended June 30, 1999 also includes a charge for $67,000 related to the
issuance of options to purchase shares of Series A and B redeemable convertible
preferred stock.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
quarter ended June 30, 1999 was $150,000, which represented an increase of
$107,000, or 249%, from $43,000 for the quarter ended March 31, 1999. The
increase was primarily attributable 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 June 30, 1999 was $91,000, which represented an increase of
$61,000 from net interest income of $30,000 in the quarter ended March 31, 1999.
The increase was primarily attributable to interest on the $33.2 million in
proceeds from our Series D preferred stock financing in May 1999.
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 fiscal year ended June 30, 1999. We have
provided a full valuation allowance on our deferred tax assets, consisting
primarily of net operating loss carry-forwards of $5.9 million, because of
uncertainty regarding their realizability.
THREE MONTHS ENDED MARCH 31, 1999
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 additional direct sales force personnel.
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 additional software engineers.
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 primarily due to the hiring of additional employees, including Mark
Goldston, our Chief Executive Officer.
STOCK-BASED COMPENSATION. 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-
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<PAGE>
based compensation 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 interest on the $11.4 million
in proceeds from our Series C preferred stock financing in February 1999.
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.
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.
FACTORS AFFECTING OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 some 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. We believe that our
expenses will significantly exceed our revenues for the foreseeable future. As a
result of these and other factors, our operating results may vary substantially
from quarter to quarter. See "Risk Factors" starting on page 5 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. We anticipate that user traffic levels will be impacted
by the summer and year-end vacation and holiday periods. Moreover, the rate at
which new users sign up for our services may be related to gifts or purchases of
personal computers, which typically increase during the fourth quarter as a
result of the holiday season and may decline during other periods. As a result,
new user registration may be subject to seasonality. However, 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.
A small number of customers have accounted for, and may in the future
account for, a significant portion of our revenues. For example, we derived
approximately 27% of our revenues for the year ended June 30, 1999 and
approximately 34% of our revenues for the quarter ended
33
<PAGE>
June 30, 1999 from an agreement with LookSmart. We also derived approximately
26% of our revenues for the year ended June 30, 1999 and approximately 28% of
our revenues for the quarter ended June 30, 1999 from an agreement with Adsmart.
Our agreement with LookSmart will expire in April 2000 and our agreement with
Adsmart will expire in January 2000. 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.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of operating results are not necessarily a good indication of future
performance.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through the
private placement of equity securities, raising $46.9 million through June 1999.
At June 30, 1999 we had $24.0 million in cash and cash equivalents.
Net cash used for our operating activities was $9.4 million for the year
ended June 30, 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 depreciation, stock-based
compensation, accounts payable and deferred revenue.
Net cash used for our investing activities was $13.4 million for the year
ended June 30, 1999. Net cash used for investing activities consisted primarily
of capital expenditures for computer equipment, purchased software, office
equipment and leasehold improvements. 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 $46.8 million for the year
ended June 30, 1999. Net cash provided by financing activities was principally
attributable to the private sale of convertible preferred stock.
As of June 30, 1999, our principal commitments consisted of office and
equipment leases. Future minimum cash payments under these non-cancelable
commitments are $18.1 million through the year 2009.
We expect to continue to incur significant capital expenditures in the
future, including additions and enhancements to our server and network
infrastructure, software licenses and furniture, fixtures and equipment. The
amount of capital expenditures will be primarily affected by the rate of growth
in our user base and technological advances which may require us to develop or
acquire new equipment or technology.
We currently anticipate that our existing cash and cash equivalents, the net
proceeds from 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 capital 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.
34
<PAGE>
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 are currently implementing the following assessment and processes in an
effort to assess and remedy any Year 2000 issues which could impact our existing
operations:
Phase I: Assessment of Operations (completed in August 1999);
Phase II: Prepare Formal Test Plan (completed in September 1999);
Phase III: Implement Test (In process--estimated completion in September
1999); and
Phase IV: Remediation of Year 2000 issues (In process--estimated completion
in October 1999).
We have completed our formal assessment of the impact that the Year 2000
problem may have on our existing operations and believe the following four
distinct areas of our existing 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. We designed and developed these systems and software to be
Year 2000 compliant. Based upon our assessment and testing to date, we believe
that our internally developed systems and software are Year 2000 compliant. We
plan to complete testing of our existing internal systems and software by the
end of September 1999.
THIRD-PARTY HARDWARE AND SOFTWARE SUPPLIERS. We use third-party equipment
and software and 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, data storage equipment from EMC, and JAVA, a
programming language licensed from Sun Microsystems that we use to implement
most of our internally developed software. We have reviewed documentation on
Year 2000 compliance prepared by the third parties from whom we have purchased
hardware and software products. Based upon our review of such documentation and
the fact that we either purchased the most current product versions available
from these third parties or installed the latest patches or upgrades available,
we believe these applications are Year 2000 compliant.
TELECOMMUNICATIONS CARRIERS. We are entirely dependent on our
telecommunications carriers to provide access between their networks and our
network. We have initiated discussions with all of our telecommunications
carriers to determine the extent to which we are vulnerable to those third
parties' Year 2000 issues. We have obtained Year 2000 readiness disclosure
statements from these carriers which confirm that their systems are Year 2000
compliant or that they are in the process of becoming Year 2000 compliant. 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 alternate 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 also be
subject to Year 2000 risks. We have obtained Year 2000 compliance statements
from the manufacturers of our non-IT
35
<PAGE>
systems, all of which were placed in service in 1999. In addition, based on our
assessment to date, we believe that these systems are Year 2000 compliant.
In addition, we plan to continue to assess and test any new systems that we
add to our operations for Year 2000 compliance.
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 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 completed our 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 telecommunications carriers which
provide access between their networks and our internal network. We plan on
completing our contingency plan in the near future.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 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.
36
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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 August 31, 1999,
approximately 1.68 million users registered for our service. During August 1999,
approximately 891,000 of these users accessed our service and were delivered
over 1.15 billion advertising impressions. Our services are offered in over
1,600 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 and
by referring our users to sponsors' Web-sites. We also generate revenues from
performance-based arrangements with 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. Our objective is to redefine the Internet access model and the way
products and services are marketed online by creating a service funded by
advertising, not by Internet access fees.
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 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.
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TRADITIONAL INTERNET ACCESS
There are more than 6,000 Internet service providers 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 a few large
providers, the vast majority of Internet service providers do not offer branded
nationwide coverage. A number of Internet service providers are beginning to
supplement their basic access with services such as e-commerce and
telecommunications.
Internet service providers generally charge users monthly access fees and
fees for additional services, such as hosting users' Web-sites. We believe 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 Internet service providers. 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 Internet service providers. 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. Forrester Research estimates
that the amount spent on Internet advertising in the United States will grow
from $2.8 billion in 1999 to $22 billion in 2004.
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.
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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.
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. The ZeroPort also includes a
customizable ticker which displays sports, headlines, stock quotes and news. Our
users can link directly to various Web-sites by clicking on quotes that appear
on the ticker. We continually evaluate the need to add additional functionality
and features to The ZeroPort. Our user data enables us to deliver information
and advertising intended to be tailored to our users' interests.
The following schematic illustrates The ZeroPort:
[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 40 seconds.
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DYNAMIC TARGETING AND INFORMATION GATHERING. Our users provide demographic
information, such as age, gender, income, geographic location and personal
interests, when they register for our service. In addition, our proprietary
zCast technology allows us to track our users' behavior the entire time they are
online through our service. As a result, we are able to deliver targeted
advertisements based on information provided by users during the registration
process, actual Web-sites visited, Web-site then being viewed, or a combination
of this information, and measure their effectiveness. For example, a local bank
could deliver ads only to users who live near the bank, based on information
provided by the user at the time of registration. Users can also 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. In general, the actual data
we use to target advertisements varies for each targeted advertising
arrangement.
PERFORMANCE-BASED ADVERTISING. While the Internet has emerged as an
important mass advertising medium, advertisers are increasingly seeking
solutions to ensure that they maximize 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 by creating a service funded by advertising,
not by Internet access fees. 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 compact discs 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.
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PURSUE DIVERSE REVENUE SOURCES. Our service enables us to pursue revenues
from diverse sources, including banner advertising, sponsorships and e-commerce.
Advertisers and merchants pay us for placements of ads and sponsorships on The
ZeroPort and for referrals to their Web-sites. We also offer advertisers
enhanced advertising and tracking tools and 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 and other companies 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 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 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 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 purchase standard "banner
advertising" which is advertising displayed through The ZeroPort on a user's
computer screen. Our banner ad rates are comparable to those generally available
for banner advertising. Advertisers typically purchase banner ads on a
cost-per-thousand ads displayed basis, or on a cost-per-click basis which is
measured by the number of times users click on that specific advertisement.
Advertisers can also purchase targeted advertising on The ZeroPort so that their
advertisements are displayed only to users satisfying the 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 those
Web-sites, including those of competitors of the advertisers. They can also
purchase advertising space on The ZeroPort when users are viewing advertisers'
own Web-sites, which allows them to complement the site and preclude 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
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placed banner advertisements on The ZeroPort include Bell South, eBay,
Microsoft, Netscape and theglobe.com.
SPONSORSHIP. The ZeroPort contains a number of buttons and drop-down menus,
a marquee space and a customizable ticker tape and browser window which are
available for sponsorship by advertisers. The buttons and drop-down menus are
organized into categories such as news, sports, finance and shopping. These
buttons and drop-down menus automatically link users to the sponsor's Web-site
when they are clicked on. This allows advertisers to purchase exclusive or
non-exclusive sponsorships for a specific category, and helps direct interested
users to their sites. Our sponsorship arrangements differ from banner
advertisements in that a sponsor's name or logo is displayed on the face of, or
on a drop-down menu on, The ZeroPort for the term of the sponsor's contract,
while banner advertisements generally rotate throughout a user's session. The
ticker tape displays sports, news and stock market quotes.
WEB-REFERRALS.We have the ability to direct users to other parties'
Web-sites when they log on to our service or when they click on buttons or other
placements on The ZeroPort. For example, our agreement with LookSmart provides
that, with some exceptions, each user who logs on to our service or clicks on
the search or start button on The ZeroPort will automatically be directed to a
start page or search page which contains the brands of both LookSmart and
NetZero. In each instance, NetZero is paid a specified sum. LookSmart manages
the start and search pages. The agreement expires April 30, 2000.
E-COMMERCE. We have entered into arrangements with e-commerce merchants who
sell goods and services over the Internet 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 are based 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. An example is our
agreement with Fleet Credit Card Services to develop and market co-branded
credit card accounts as well as Fleet proprietary credit card accounts. Fleet
will purchase a minimum number of advertising impressions, pay additional fees
for each credit card account opened through The ZeroPort, and pay royalties for
open credit card accounts. The agreement also provides that Fleet will market
and distribute the NetZero service. In exchange, NetZero will deliver a minimum
number of credit card accounts and a minimum number of impressions advertising
Fleet products and services. NetZero has also agreed not to advertise or market
co-branded credit cards other than Fleet's during the term of the agreement.
OTHER. We also receive revenues from various other sources, including
distribution arrangements where we receive revenues for allowing others to
include our software with their products and services. For example, we receive
revenues from a distribution agreement with Xerox in which we are paid to allow
Xerox to include our software with its products. We also intend to pursue
similar arrangements in the future as well as 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. During the year ended June 30, 1999, LookSmart
and Adsmart accounted for approximately 27% and 26%, respectively, of NetZero's
revenues. No other customer accounted for more than 10% of NetZero's revenues
during that year.
SALES AND MARKETING
ADVERTISING SALES
We sell traditional banner advertising through third party advertising
firms, including Adsmart. We sell and market banner advertisements and
sponsorship on The ZeroPort through our direct
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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 intend to continue to capitalize on our agreements with third
parties 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, and we granted FiNet the sponsorship for mortgage services, linking
FiNet to a drop-down menu on The ZeroPort. We have also entered into agreements
with priceline.com and Ameritrade to link and refer our users to their Web-sites
from within The ZeroPort, and an agreement with Cisco Systems, which provides
sponsorship advertising within The ZeroPort. We expect our sponsorship
arrangements could involve some level of exclusivity. Sponsorship advertising
involves a greater degree of integration and consultation between NetZero and
the marketer than banner advertising arrangements. 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. Historically, our users have either downloaded
our software from our Web-site or contacted us by phone or e-mail to have a
compact disc containing our software shipped to them. 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
compact discs 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 12-month agreement with Compaq
under which Compaq bundles and distributes our NetZero software with its
Presario products. Compaq pays 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 are directed
to a Web-site determined by NetZero each time they log-on to NetZero's service
for the term of the agreement. The agreement also provides that through February
2000, Compaq is generally restricted from offering any other free Internet
access services on its Presario products and that we are restricted from
bundling our service with the personal computers of any other manufacturer and
entering into any agreements with Compaq's retailers for the distribution of our
services.
XEROX. In June 1999, we entered into a non-exclusive arrangement with Xerox
under which Xerox agreed to bundle and distribute compact discs for installing
our software with its computer peripheral products. Xerox has agreed to pay us a
fee per compact disc and purchase advertising from us through December 1999.
FLEET. Our agreement with Fleet Credit Card Services also provides that
Fleet will market and distribute NetZero's service. See "--Sources of
Revenues--Other" on page 42 for more information on our agreement with Fleet.
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
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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.
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 compact disc 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. PST, Monday through Saturday. We have entered into an agreement with
Taima Corporation to have Taima develop and provide 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. Users will pay Taima for
its services on a per-incident basis.
Our user service organization continually monitors different quantitative
measurements 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 Web-sites visited;
- managing the display of advertising banners;
- targeting advertising based on Web-sites 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;
- providing a mechanism for customer feedback;
- short-cut buttons to content sites;
- an information ticker for stocks, sports and news; and
- a new message indicator.
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We intend to continue to extend the functionality of The ZeroPort to enhance
our users' experience.
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 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 distributes the traffic
loads utilizing various hardware and software products, 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 points of presence. We contract for the use of points of
presence around the country from various wholesale providers, including GTE
Internetworking, Level 3 Communications, NaviNet and Apex Global Information
Systems. These providers also carry our data between their points of presence
and our central computers in Los Angeles, California. Through our network
providers, we are able to offer
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local dial-up phone numbers in over 1,600 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 access to the Internet, and supports the v.90 standard
for 56 kbps connections and Integrated Services Digital Network, or 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 agreements with wholesale telecommunications providers are generally
structured in one of two ways. We have usage agreements under which we are
charged for the aggregate number of hours that our users are connected to a
provider's network. We also have capacity agreements under which we are charged
for a fixed amount of wholesaler's telecommunications capacity in specific
locations whether or not the capacity is actually used. Our contract with GTE is
a usage agreement that expires in December 2000 and includes a minimum purchase
commitment which extends through July 2000. Our contract with Level 3
Communications is a capacity agreement under which we have committed to minimum
telecommunications capacity for up to three years.
Our zCast and e-mail servers reside at a facility provided by Level 3
Communications in Los Angeles, California and at our data center in our offices
in Westlake Village, California. Our data center is equipped with battery and
generator power backup systems to prevent outages from interruption of utility
power to the building.
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, The Microsoft Network,
independent national Internet service providers such as EarthLink, MindSpring
and Prodigy, numerous regional and local commercial Internet service providers,
and portals and search engines such as Yahoo! and Alta Vista. Some of these
providers offer significantly greater customer support and scope of services
than we currently offer, such as instant messaging and online content. We also
compete against other companies that offer free Internet access services or free
products, such as personal computers, bundled with, or as promotions for, access
services, and we 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 Internet service providers and as Internet service providers
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
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utility companies, and wireless communications companies. These companies may
use broadband technologies to include Internet access or business services such
as hosting a user's individual Web-site 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 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 major Internet service providers, 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, sales 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.
These 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
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<PAGE>
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 this data, there can be no
assurance that third parties will not assert claims against us for using this
information. In addition, others may claim rights to the same 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 proprietary rights in Internet-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.
We currently license from Oracle the software we use to run our accounting,
billing, finance and data storage functions. The license agreement requires us
to pay annual support and license fees to Oracle. The agreement terminates in
April 2004. We also license from NetGravity the software we use to deliver
advertisements on The ZeroPort. The agreement requires that we pay NetGravity an
upfront license fee and ongoing consulting and support fees.
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.
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FACILITIES
Our principal executive offices are located in a 49,000 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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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth 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 B.S.B.A. in Marketing and Finance
from Ohio State University and his M.B.A. (M.M.) from the J.L. Kellogg School at
Northwestern 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 Development 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
at 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, 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, 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, Mr. Dowling served
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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, Information Systems and
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 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 University.
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 appointment 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,
and to 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
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<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 a 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" on page 57 for more information on these option grants and
equity incentives.
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" on page 57 for more information on these option
grants and stock issuances.
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 Mark Goldston, who has been our current Chief Executive Officer since March
1999, and Ronald Burr, who acted as our Chief Executive Officer during the
fiscal year ended June 30, 1999 prior to Mr. Goldston. None of our other
executive officers received total compensation in excess of $100,000 during the
fiscal year ended June 30, 1999. Since the close of our June 30, 1999 fiscal
year, we have added several additional officers. For a list of our current
executive officers and certain members of our senior management, see
"--Directors and Executive Officers" above.
SUMMARY COMPENSATION TABLE FOR FISCAL YEAR 1999
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
--------------
ANNUAL COMPENSATION SECURITIES
------------------------ OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) COMPENSATION($)
- --------------------------------- ----------- ----------- ----------------------- -------------- ---------------------
<S> <C> <C> <C> <C> <C>
Mark R. Goldston ................ 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>
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 these individuals during the year.
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The option for Mark Goldston was granted under our 1999 Stock Option/Stock
Issuance Plan. See "--Employment Agreements and Change in Control Arrangements"
below for more information on the vesting of the option shares.
During the fiscal year ended June 30, 1999, we granted options to purchase a
total of 13,595,483 shares of common stock, including 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" below for specific option
information for Messrs. Goldston, Hilliard and Randall.
The following table sets forth information regarding the option grants to
our named executive officers. All the 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. The potential realizable values set forth
in the table are computed by (i) multiplying the number of shares of common
stock subject to the option by the estimated initial public offering price of
$10.00 per share, (ii) assuming that the stock value derived from that
calculation compounds at the annual 0%, 5% or 10% rate shown in the table for
the entire ten-year term of the option and (iii) subtracting that result from
the total option exercise price. The 5% and 10% values assume annual rates of
stock price appreciation as mandated by the rules of the Securities and Exchange
Commission and do not represent our estimate or projection of future common
stock prices.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENTAGE OF RATES OF STOCK
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------------------------
NAME GRANTED(#) 1999(%) SHARE DATE 0% 5% 10%
- --------------------------- ----------- ----------------- ----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mark R. Goldston........... 6,286,383 46.2% $ 0.10 3/19/09 $62,235,192 $ 101,769,917 $ 162,423,947
Ronald T. Burr............. 0 -- -- -- -- -- --
</TABLE>
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 $ 62,235,192
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, under which Mr. Goldston serves as our Chief Executive
Officer and Chairman. Under 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 that
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 his shares.
Our repurchase right lapses pursuant to a 48 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
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for 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 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 24 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, under 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 his 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 12 months of vesting on his option shares. Mr. Hilliard will also be
credited with an additional 12 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 the 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. Under 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 his 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 12 months of vesting on his
option shares. Mr. Randall will also be credited with an additional 12 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 the
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" beginning on
page 58 for more information about these provisions.
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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 of 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. As of
August 31, 1999, options to purchase approximately 4.3 million shares of common
stock remained available for grant under the 1999 Stock Incentive Plan. 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, but in no
event will any such annual increase exceed 6.5 million shares. In addition, no
participant in the 1999 Stock Incentive Plan may be granted stock options or
direct stock issuances for more than 2.0 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
57
<PAGE>
compensation committee will also have the authority to select the executive
officers and other 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 50% 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 may 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, an
employee with such an acceleration provision will, after taking that
acceleration into account, be vested at the time of his or her
involuntary termination in the greater of (i) the number
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<PAGE>
of shares in which he or she would have been vested at that time had
his or her service been twice as long as the actual period of service
rendered prior to such involuntary termination or (ii) the number of
shares in which he or she would have been vested in had he or she
completed one year of service prior to such 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 of the calendar 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.
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- 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.
1999 EMPLOYEE STOCK PURCHASE PLAN.
Our 1999 Employee Stock Purchase 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. 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 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, but in no event will any such annual increase exceed 3,250,000 shares.
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 2,500 shares
on any purchase date, and not more than 500,000 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.
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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.
- 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:
- for any breach of the director's duty of loyalty to the corporation or
its stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- arising under Section 174 of the Delaware law; or
- for any transaction from which the director derived an improper
personal benefit.
The indemnification permitted under Delaware law is not 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. Our
certificate of incorporation will provide 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 some
of our officers. These agreements contain provisions that may require us, among
other things, to indemnify these directors and officers against certain
liabilities that may arise because of their status or service as directors or
officers, except for liabilities arising from willful misconduct of a culpable
nature, advance their expenses incurred as a result of any proceeding against
them as to which they could be indemnified, and obtain directors' and officers'
liability insurance if it is 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.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of August 31, 1999 by:
- 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 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 92,905,217 shares of common stock outstanding
as of August 31, 1999, and 102,905,217 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 August 31, 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% 5.9%
Ronald T. Burr............................................ 3,707,500 4.0% 3.6%
Bill Gross(2)............................................. 28,917,104 31.1% 28.1%
James T. Armstrong(3)..................................... 23,949,278 25.6% 23.3%
Jennifer S. Fonstad(4).................................... 15,050,677 16.2% 14.6%
Paul G. Koontz(5)......................................... 10,899,406 11.7% 10.6%
David C. Bohnett.......................................... 326,260 * *
OTHER 5% STOCKHOLDERS:
Entities affiliated with Bill Gross(6)...................... 28,917,104 31.1% 28.1%
130 West Union Street
Pasadena, CA 91103
Entities affiliated with Draper Fisher Jurvetson Management
Company V, LLC(7)......................................... 15,050,677 16.2% 14.6%
400 Seaport Court, Suite 350
Redwood City, CA 94063
Entities affiliated with Foundation Capital Management II,
LLC(8).................................................... 10,899,406 11.7% 10.6%
70 Willow Road, Suite 200
Menlo Park, CA 94025
</TABLE>
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<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% 7.9%
20555 State Highway 249
Houston, TX 77070
All directors and executive officers as a group (11
people)(10)............................................... 72,055,813 77.4% 70.1%
</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 807,693 shares subject to options, all of which are immediately
exercisable. Also includes 11,693,050 shares subject to our right of
repurchase. Of such shares, 426,696 shall be released from such right of
repurchase within 60 days of August 31, 1999.
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CERTAIN TRANSACTIONS
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 reflect (a)
the number of shares of common stock purchased by the respective party on an
as-converted basis and (b) the 3-2 stock split that occurred 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 a total of 15,000,000 shares of our common stock to
Ronald Burr, Stacy Haitsuka, Marwan Zebian and Harold MacKenzie. The shares were
issued at a price per 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 provide for
accelerated vesting in the event of termination in connection with or following
a change in control.
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ISSUANCE OF SERIES A AND SERIES B PREFERRED STOCK
In September, October and November 1998, and March and June 1999, we sold a
total 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 a total 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 a total 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 a total 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 a total of 4,607,512 shares of Series C
preferred stock for a total purchase price of $1,980,002, (b) two affiliates of
Draper Fisher Jurvetson who purchased a total of 12,798,634 shares of Series C
preferred stock for a total purchase price of $5,500,000, (c) several affiliates
of Foundation Capital who purchased a total of 9,261,557 shares of Series C
preferred stock for a total 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.
EXERCISE 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 a total 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 a total of 5,157,607 shares of Series D preferred stock
for a total purchase price of $9,489,998, (b) two affiliates of Draper Fisher
Jurvetson who purchased a total of 2,252,043 shares of Series D preferred stock
at a total purchase price of $4,143,759, (c) several affiliates of Foundation
Capital Management II, LLC, who purchased a total of 1,637,849 shares of Series
D preferred stock for a total purchase price of $3,013,644, (d) CPQ Holdings,
Inc., which purchased 8,125,000 shares of Series D preferred stock for a
purchase price of $14,950,001, (e) Mark R. Goldston, who purchased 54,348 shares
of Series D preferred stock for a purchase price of $100,000, and (f) Charles S.
Hilliard, who purchased 225,000 shares of Series D preferred stock for a
purchase price of $414,000.
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<PAGE>
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 the 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 the 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
approximately $81,000 of which was allocated to purchase our zCast technology
and approximately $19,000 of which was used to repay existing indebtedness owed
to Impact Software. 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 this agreement was executed.
INVESTORS' RIGHTS AGREEMENT
In May 1999, we entered into an Amended and Restated Investors' Rights
Agreement with some of our stockholders, which provides those 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 12 month
period. Immediately after the offering, Compaq, through its affiliate CPQ
Holdings, Inc., will own approximately 7.9% of our outstanding capital stock.
See "Business--Sales and Marketing--User Acquisition" on page 43 for more
information regarding this agreement.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been otherwise obtained from
unaffiliated third parties.
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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 these 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 certificate that will be adopted by
us immediately prior to the closing of this offering.
COMMON STOCK
As of August 31, 1999, there were 92,905,217 shares of common stock
outstanding and held of record by 173 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 10,000,000
shares of common stock offered by us hereby, there will be 102,905,217 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. Cumulative voting for the
election of directors is not provided for in our certificate of incorporation,
which means that the holders of a majority of the shares voted can elect all of
the directors then standing for election. 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 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
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<PAGE>
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.
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:
- enhance the likelihood of continuity and stability in the composition
of the board and in the policies formulated by the board;
- discourage certain types of transactions which may involve an actual or
threatened change in control of NetZero;
- discourage certain tactics that may be used in proxy fights;
- 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
- 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
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<PAGE>
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.
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 70.1% 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. Section 203 generally 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. Generally, an "interested
stockholder" is a person who, together with his or its affiliates and
associates, owns, or within three years did own, 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 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 85,698,444 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
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<PAGE>
the registration. Of the approximately 85,698,444 shares of Registrable
Securities, approximately 21,286,383 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 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 other conditions
and limitations. The holders' rights with respect to all these registrations are
subject to additional 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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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have 102,905,217 shares of common
stock outstanding (104,405,217 shares if the underwriters' over-allotment option
is exercised in full), assuming no exercise of options after August 31, 1999. Of
this amount, the 10,000,000 shares offered by this prospectus will be available
for immediate sale in the public market as of the date of this prospectus.
Approximately 59,509,273 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. If the underwriters waive the
180-day lock-up agreements within the first 90 days after the date of this
prospectus, an additional 24,007,242 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.
<TABLE>
<CAPTION>
APPROXIMATE SHARES
DAYS AFTER THE DATE OF THIS ELIGIBLE FOR FUTURE
PROSPECTUS SALE COMMENT
- ---------------------------------- -------------------- ----------------------------------
<S> <C> <C>
Upon Effectiveness................ 10,000,000 Freely tradeable shares sold in
offering and shares saleable under
Rule 144(k) that are not subject
to 180-day lock-up
90 days........................... 0 Shares saleable under Rule 144,
144(k) or 701 that are not subject
to 180-day lock-up
180 days.......................... 59,509,273 Lock-up released; shares saleable
under Rule 144, 144(k) or 701
</TABLE>
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, which will be equal to
approximately 1,029,052 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 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 stockholders 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,
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<PAGE>
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 180-day lock-up period without
the consent of Goldman, Sachs & Co., except that we may, without such consent,
grant options and sell shares under 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.
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 the
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. As of August 31, 1999, there were outstanding options to
purchase approximately 4,110,793 shares of common stock under our stock plans.
In addition, some of our stockholders have registration rights with respect
to approximately 85,698,444 shares of common stock and common stock equivalents.
Registration of these registrable securities under the Securities Act would
result in those 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 August 31, 1999,
Brobeck, Phleger & Harrison LLP and certain entities and individuals affiliated
with Brobeck, Phleger & Harrison LLP beneficially owned a total of 46,540 shares
of our Series C preferred stock and 40,761 shares of our Series D preferred
stock, all of which will convert to common stock immediately prior to the
closing of this 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 1999 and
for the period from July 21, 1997 (inception) through June 30, 1998 and the year
ended June 30, 1999 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.
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ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits and schedules, 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 and the exhibits and
schedules attached to the registration statement. Statements contained in this
prospectus as to the contents of any contract, agreement or other document
referred to are materially complete. 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 Room. Our Commission
filings, including the registration statement, are also available to you on the
Commission's Web-site (http://www.sec.gov).
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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
reincorporation into Delaware as described in Note 13 of the notes to the
financial statements.
/s/ PricewaterhouseCoopers LLP
Woodland Hills, California
September 3, 1999
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
NetZero, Inc.
In our opinion, the accompanying balance sheets 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 1999 and the results of its operations and its cash
flows for the period from July 21, 1997 (Inception) through June 30, 1998 and
for the year ended June 30, 1999 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 audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits 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 audits provide a
reasonable basis for the opinion expressed above.
Woodland Hills, California
July 28, 1999, except for Note 13 as
to which the date is , 1999
F-2
<PAGE>
NETZERO, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1999
----------- -------------- PRO FORMA
STOCKHOLDERS'
EQUITY
JUNE 30,
1999
--------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 1,000 $ 24,035,000
Accounts receivable, net of allowance for doubtful accounts of
$160,000 at June 30, 1999....................................... -- 2,253,000
Other current assets.............................................. -- 689,000
----------- --------------
Total current assets.......................................... 1,000 26,977,000
Property and equipment, net......................................... -- 18,116,000
Restricted cash..................................................... -- 1,789,000
Deposits............................................................ -- 619,000
----------- --------------
Total assets.................................................. $ 1,000 $ 47,501,000
----------- --------------
----------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................................. $ 4,000 $ 4,879,000
Due to related party.............................................. 19,000 --
Accrued liabilities............................................... 1,000 1,521,000
Deferred revenue.................................................. -- 2,739,000
Current portion of notes payable.................................. -- 560,000
Current portion of capital leases................................. -- 1,181,000
----------- --------------
Total current liabilities..................................... 24,000 10,880,000
Notes payable less current portion.................................. -- 1,210,000
Capital leases less current portion................................. -- 2,317,000
Commitments and contingencies (Note 12).............................
Redeemable convertible preferred stock, no-par value; 19,231,000
shares authorized; 19,230,000 issued and outstanding at June 30,
1999; liquidation preference and redemption value of $2,140,000... -- 2,140,000
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value; 55,769,000 shares
authorized; 45,182,000 shares issued and outstanding at June 30,
1999; liquidation preference of $44,917,000;
Pro forma--10,000,000 shares authorized; no shares issued and
outstanding..................................................... -- 44,720,000 --
Common stock, $0.001 par value; 30,000,000 and 150,000,000 shares
authorized at June 30, 1998 and June 30, 1999, respectively;
15,000,000 and 28,624,000 shares issued and outstanding at June
30, 1998 and June 30, 1999, respectively; Pro forma--500,000,000
authorized; 93,036,000 shares issued and outstanding............ 2,000 1,352,000 93,000
Additional paid-in capital........................................ -- 9,019,000 57,138,000
Notes receivable from stockholders................................ -- (1,029,000) (1,029,000)
Deferred stock compensation....................................... -- (7,783,000) (7,783,000)
Accumulated deficit............................................... (25,000) (15,325,000) (15,325,000)
----------- -------------- --------------
Total stockholders' equity (deficit).......................... (23,000) 30,954,000 $ 33,094,000
----------- -------------- --------------
--------------
Total liabilities and stockholders' equity.................... $ 1,000 $ 47,501,000
----------- --------------
----------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
NETZERO, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
JULY 21, 1997
(INCEPTION) THROUGH YEAR ENDED
JUNE 30, 1998 JUNE 30, 1999
------------------- ---------------
<S> <C> <C>
Net revenues............................................................... $ -- $ 4,634,000
Cost of revenues (Including $411,000 of depreciation expense).............. -- 12,426,000
------------------- ---------------
Gross loss................................................................. -- (7,792,000)
------------------- ---------------
Operating expenses:
Sales and marketing...................................................... -- 876,000
Product development...................................................... -- 982,000
General and administrative............................................... 19,000 4,307,000
Stock-based compensation................................................. -- 1,236,000
Depreciation and amortization............................................ -- 222,000
------------------- ---------------
Total operating expenses................................................... 19,000 7,623,000
------------------- ---------------
Loss from operations....................................................... (19,000) (15,415,000)
------------------- ---------------
Interest income............................................................ -- 225,000
Interest expense........................................................... -- (110,000)
Other expense.............................................................. (6,000) --
------------------- ---------------
Net loss................................................................... $ (25,000) $ (15,300,000)
------------------- ---------------
------------------- ---------------
Basic and diluted net loss per share....................................... $ -- $ (1.42)
------------------- ---------------
------------------- ---------------
Shares used to calculate basic and diluted net loss per share.............. 15,000,000 10,792,000
------------------- ---------------
------------------- ---------------
Unaudited pro forma basic and diluted net loss per share................... $ (0.44)
---------------
---------------
Unaudited shares used to calculate pro forma basic and diluted net loss per
share.................................................................... 34,800,000
---------------
---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
NETZERO, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE NOTE
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED
------------------------- ------------------------ PAID-IN FROM STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS 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 common
stock............ -- -- 23,000 2,000 -- -- --
Issuance of Series
C convertible
preferred stock,
net.............. 27,077,000 11,512,000 -- -- -- -- --
Exercise of
warrants for
Series C
convertible
preferred
stock............ 23,000 10,000 -- -- -- -- --
Exercise of stock
options.......... -- -- 6,115,000 319,000 -- -- --
Exercise of options
for a note
receivable....... -- -- 7,486,000 1,029,000 -- (1,029,000) --
Deferred stock
compensation..... -- -- -- -- 8,952,000 -- (8,952,000)
Amortization of
deferred stock-
based
compensation..... -- -- -- -- -- -- 1,169,000
Charge for issuance
of Series A and B
options.......... -- -- -- -- 67,000 -- --
Issuance of Series
D convertible
preferred
stock............ 18,082,000 33,198,000 -- -- -- -- --
Net loss........... -- -- -- -- -- -- --
----------- ------------ ----------- ----------- ----------- ------------- --------------
Balance at June 30,
1999............... 45,182,000 44,720,000 28,624,000 1,352,000 9,019,000 (1,029,000) (7,783,000)
Assumed conversion
of convertible
preferred
stock............ (45,182,000) (44,720,000) 45,182,000 44,720,000 -- -- --
Assumed conversion
of redeemable
convertible
preferred
stock............ -- -- 19,230,000 2,140,000 -- -- --
Reincorporation into
Delaware and change
in par value of
common stock....... -- -- -- (48,119,000) 48,119,000 -- --
----------- ------------ ----------- ----------- ----------- ------------- --------------
Balance at June 30,
1999, pro forma
(unaudited)........ -- $ -- 93,036,000 $ 93,000 $57,138,000 $(1,029,000) $ (7,783,000)
----------- ------------ ----------- ----------- ----------- ------------- --------------
----------- ------------ ----------- ----------- ----------- ------------- --------------
<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 common
stock............ -- 2,000
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.......... -- 319,000
Exercise of options
for a note
receivable....... -- --
Deferred stock
compensation..... -- --
Amortization of
deferred stock-
based
compensation..... -- 1,169,000
Charge for issuance
of Series A and B
options.......... -- 67,000
Issuance of Series
D convertible
preferred
stock............ -- 33,198,000
Net loss........... (15,300,000) (15,300,000)
------------- --------------
Balance at June 30,
1999............... (15,325,000) 30,954,000
Assumed conversion
of convertible
preferred
stock............ -- --
Assumed conversion
of redeemable
convertible
preferred
stock............ -- 2,140,000
Reincorporation into
Delaware and change
in par value of
common stock....... -- --
------------- --------------
Balance at June 30,
1999, pro forma
(unaudited)........ $(15,325,000) $ 33,094,000
------------- --------------
------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
NETZERO, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JULY 21, 1997 YEAR
(INCEPTION) THROUGH ENDED
JUNE 30, 1998 JUNE 30, 1999
------------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................ $ (25,000) $(15,300,000)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:
Depreciation and amortization......................................... -- 633,000
Provision for doubtful accounts....................................... -- 160,000
Stock-based compensation.............................................. -- 1,236,000
Loss on disposal of fixed assets...................................... -- 98,000
Changes in operating assets and liabilities:
Accounts receivable................................................. -- (2,413,000)
Deposits............................................................ -- (619,000)
Other current assets................................................ -- (689,000)
Restricted cash..................................................... -- (1,789,000)
Accounts payable.................................................... 4,000 5,085,000
Accrued liabilities................................................. 1,000 1,520,000
Due to related party................................................ 19,000 (19,000)
Deferred revenue.................................................... -- 2,739,000
---------- --------------
Net cash used for operating activities............................ (1,000) (9,358,000)
---------- --------------
Cash flows from investing activities:
Purchases of property and equipment..................................... -- (13,609,000)
Proceeds from the sale of fixed assets.................................. -- 226,000
---------- --------------
Net cash used for investing activities............................ -- (13,383,000)
---------- --------------
Cash flows from financing activities:
Payments on capital leases.............................................. -- (241,000)
Proceeds from bridge loan............................................... -- 100,000
Payments on note payable................................................ -- (165,000)
Proceeds from exercise of stock options................................. -- 319,000
Net proceeds from issuance of common stock.............................. 2,000 2,000
Net proceeds from issuance of redeemable convertible preferred stock.... -- 2,140,000
Net proceeds from issuance of convertible preferred stock............... -- 44,620,000
---------- --------------
Net cash provided by financing activities......................... 2,000 46,775,000
---------- --------------
Change in cash and cash equivalents............................... 1,000 24,034,000
Cash and cash equivalents, beginning of period............................ -- 1,000
---------- --------------
Cash and cash equivalents, end of period.................................. $ 1,000 $ 24,035,000
---------- --------------
---------- --------------
Supplemental disclosure of cash flow activities:
Cash paid during the year for interest.................................... $ -- $ 110,000
---------- --------------
---------- --------------
Notes receivable from stockholders in connection with the exercise of
stock options........................................................... $ -- $ 1,029,000
---------- --------------
---------- --------------
Bridge loan repayment in exchange for issuance of convertible preferred
stock................................................................... $ -- $ 100,000
---------- --------------
---------- --------------
Equipment financed with note payable...................................... $ -- $ 1,725,000
---------- --------------
---------- --------------
Accounts payable financed with note payable............................... $ -- $ 210,000
---------- --------------
---------- --------------
Equipment obtained under capital leases................................... $ -- $ 3,739,000
---------- --------------
---------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS
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:
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.
At June 30, 1999, two customers comprised 43% and 13% of the accounts
receivable balance, respectively. For the year ended June 30, 1999, two
customers comprised 27% and 26% of revenues, respectively.
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
F-7
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
RESTRICTED CASH
Under the terms its facility lease agreement, the Company maintains a letter
of credit as collateral for this lease with a financial institution as a
security deposit.
DEPOSITS
The Company is required to maintain refundable security deposits with its
telecommunications service providers.
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 advertising,
which includes arrangements for the delivery of impressions or click-throughs,
sponsorships, and referrals of users to other web-sites. The foregoing may
include additional performance-based revenues based on arrangements with
individual sponsors or advertisers. To date, most of the Company's revenues have
been generated from banner advertisements and referrals of users to other
web-sites. Banner advertising and sponsorship revenues are recognized in the
periods in which the advertisement or sponsorship placement is displayed, based
upon the lesser of impressions delivered over the total number of guaranteed
impressions or ratably over the period in which the advertisement is displayed,
provided that no significant Company obligations remain and collection of the
related receivable is probable. The Company's obligations typically include the
guarantee of a minimum number of impressions or the satisfaction of other
performance criteria. The guaranteed minimum number of impressions are generally
required to be delivered over the term of the commitment which has generally
averaged one to two months. Revenues from performance-based arrangements,
including click-throughs, are recognized as the related performance criteria are
met. Referral revenues are recognized as referrals are made to other web-sites,
provided that no significant Company obligations remain and collection of the
related receivable is probable.
F-8
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
COST OF REVENUES
Cost of revenues consist of telecommunications costs, depreciation of
network equipment, occupancy costs and personnel and related expenses of the
Company's network infrastructure. These costs are expensed as incurred.
SALES AND MARKETING
Sales and marketing expenses include salaries, sales commissions, employee
benefits, travel and related expenses for the Company's direct sales force, fees
paid to third-party advertising sales agents, marketing, and sales support
functions. These costs are expensed as incurred.
Advertising costs included in sales and marketing expenses totalled $0 and
$102,000 for the period from July 21, 1997 (Inception) through June 30, 1998 and
for the year ended June 30, 1999, respectively.
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.
GENERAL AND ADMINISTRATIVE
General and administrative expenses include salaries, employee benefits and
expenses for our executive, finance, legal and human resources personnel. In
addition, general and administrative expenses include fees for professional
services and occupancy costs. These costs are expensed as incurred.
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.
F-9
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 24,008,000 for the year
ended June 30, 1999.
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 June 30, 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
F-10
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
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.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1999
-------------- --------------
<S> <C> <C>
Computer software and equipment.............................. $ -- $ 14,068,000
Furniture and fixtures....................................... -- 929,000
Assets under capital leases.................................. -- 3,739,000
-------------- --------------
Total........................................................ -- 18,736,000
Less: accumulated depreciation, including accumulated capital
lease amortization of $0 and $246,000 at June 30, 1998 and
1999, respectively......................................... -- (620,000)
-------------- --------------
$ -- $ 18,116,000
-------------- --------------
-------------- --------------
</TABLE>
Depreciation expense for the period from July 21, 1997 (Inception) through
June 30, 1998 and for the year ended June 30, 1999 was $0 and $633,000,
respectively.
4. ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1999
-------------- --------------
<S> <C> <C>
Accrued payroll............................................... $ -- $ 619,000
Accrued expenses.............................................. 1,000 642,000
Accrued offering expenses..................................... -- 260,000
-------------- --------------
$ 1,000 $ 1,521,000
-------------- --------------
-------------- --------------
</TABLE>
F-11
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consisted of the following at June 30, 1999:
<TABLE>
<CAPTION>
Notes Payable to vendor, quarterly payments of $198,000,
including interest at 15.29% through March 2002,
uncollateralized.............................................. $1,770,000
<S> <C>
Less current portion........................................... 560,000
----------
$1,210,000
----------
----------
</TABLE>
Future minimum principal payments required are as follows:
<TABLE>
<CAPTION>
Year Ended June 30:
<S> <C>
2000........................................................... $ 560,000
2001........................................................... 652,000
2002........................................................... 558,000
----------
$1,770,000
----------
----------
</TABLE>
6. RELATED-PARTY TRANSACTIONS:
In September 1998, the Company purchased certain software technology for
$80,000 in cash from a related party.
At June 30, 1999, the Company held notes receivable from two employees for
$1,029,000 for the exercise of stock options. The notes bear interest at 4.83%
and 5.28% per annum, respectively and are due on March 20, 2004 and April 16,
2004, respectively, unless paid earlier. The notes, which are classified as a
component of stockholders' equity, are full recourse to the Company and are
collateralized by the shares of common stock issued upon exercise, as well as
Series D Convertible Preferred Stock of the Company for one of the employees.
7. STOCK OPTIONS AND STOCK ISSUANCE PLANS:
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 19,500,000 shares were reserved
under the Plans, of which 2,379,000 shares were available for future grant at
June 30, 1999 and 3,497,000 options were outstanding at June 30, 1999.
The Plans provide for the grant of nonstatutory and incentive stock options
to employees, officers, directors and consultants of the Company. Options
granted generally vest 25% after one year of service, and ratably over 36 months
thereafter and are 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 10,907,000 unvested shares of common stock issued and outstanding under the
Plans at June 30, 1999 (Note 8), which were subject to repurchase by the Company
at the exercise price.
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. Unvested shares of
common stock remain subject to repurchase by the
F-12
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS AND STOCK ISSUANCE PLANS: (CONTINUED)
Company at the original issuance price. There were 23,000 shares issued under
the Stock Issuance program as of June 30, 1999.
The following table summarizes activity under the Stock Option Plans for the
period from July 21, 1997 (Inception) through June 30, 1998 and for the year
ended June 30, 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............................................................... 4,285,000 .03 .03
--------------
OPTIONS OUTSTANDING AT JUNE 30, 1998.................................... 4,285,000 .03 .03
Granted............................................................... 13,865,000 .03-3.33 .26
Exercised............................................................. (13,601,000) .03-.87 .10
Canceled.............................................................. (1,052,000) .03-.10 .04
--------------
OPTIONS OUTSTANDING AT JUNE 30, 1999.................................... 3,497,000 $ .03-3.33 $ .69
--------------
--------------
</TABLE>
Options granted during the year ended June 30, 1999 resulted in a total
deferred compensation amount of $8,619,000 which was included in deferred stock
compensation in stockholders' equity. Deferred compensation expense is computed
over the service period by using the aggregate percentage of compensation
accrued by the end of each year of service (the vesting period). During the year
ended June 30, 1999, such compensation expense included in stock-based
compensation in the statement of operations amounted to $996,000. Annual
amortization of deferred stock compensation for options granted as of June 30,
1999 is approximately $3.9 million, $2.1 million, $1.2 million and $500,000 for
the years ending June 30, 2000, 2001, 2002 and 2003, respectively.
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
- ------ --------- ----------- -------- --------- -------- --------- -----------
$.03 758,000 9.08 $ .03 758,000 $ .03 2,270,000 $ .03
<S> <C> <C> <C> <C> <C> <C> <C>
.10 674,000 9.70 .10 674,000 .10 7,377,000 .10
.33 -- -- .33 -- .33 1,200,000 .33
.87 1,860,000 9.87 .87 1,860,000 .87 60,000 .87
3.33 205,000 9.95 3.33 205,000 3.33 -- 3.33
--------- --------- ---------
3,497,000 3,497,000 10,907,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-13
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS AND STOCK ISSUANCE PLANS: (CONTINUED)
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)
THROUGH YEAR ENDED
JUNE 30, 1998 JUNE 30, 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>
Year Ended June 30, 1999:
Net loss....................................................................... $ (15,300,000) $ (15,331,000)
Basic and diluted net loss per share........................................... (1.42) (1.42)
Period from July 21, 1997 (Inception) through June 30, 1998:
Net loss....................................................................... $ (25,000) $ (25,000)
Basic and diluted net loss per share........................................... -- --
</TABLE>
The weighted average grant-date fair value of options granted was $0 and
$.07 per share for the period from July 21, 1997 (inception) through June 30,
1998 and for the year ended June 30, 1999, respectively.
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 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.
F-14
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. CAPITALIZATION:
PREFERRED STOCK
Convertible and redeemable convertible preferred stock ("preferred stock")
at June 30, 1999 consist of the following:
<TABLE>
<CAPTION>
SHARES
---------------------------- LIQUIDATION REDEMPTION
AUTHORIZED OUTSTANDING AMOUNT AMOUNT
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Series A redeemable convertible..................... 11,956,000 11,956,000 $ 1,063,000 $ 1,063,000
Series B redeemable convertible..................... 7,275,000 7,274,000 1,077,000 1,077,000
Series C convertible................................ 27,681,000 27,100,000 11,646,000 --
Series D convertible................................ 19,500,000 18,082,000 33,271,000 --
Undesignated........................................ 8,588,000 -- -- --
------------- ------------- -------------- -------------
75,000,000 64,412,000 $ 47,057,000 $ 2,140,000
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
</TABLE>
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 Series A, Series B and Series C
preferred stock and common stock, assuming conversion of each such series of the
preferred shares until the holders of the Series A, Series B and Series C shares
have received an aggregate of five 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
F-15
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. CAPITALIZATION: (CONTINUED)
than $10,000,000, or (ii) the consent of the holders of a majority of the then
outstanding shares of preferred stock. As of June 30, 1999, the Company was
required to keep available, out of its authorized but unissued shares of common
stock, 64,412,000 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 constructively or involuntarily 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 year ended June 30, 1999, such compensation
expense included in stock-based compensation in the statement of operations
amounted to $173,000.
At June 30, 1999, 17,001,000 shares of common stock were subject to
repurchase, of which 6,094,000 shares related to unvested shares under the
restricted stock agreements and 10,907,000 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 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.
F-16
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. 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
(INCEPTION)
THROUGH YEAR ENDED
JUNE 30, 1998 JUNE 30, 1999
-------------- ---------------
<S> <C> <C>
HISTORICAL PRESENTATION
Numerator:
Net loss....................................................................... $ (25,000) $ (15,300,000)
-------------- ---------------
Denominator:
Weighted average common shares................................................. 15,000,000 19,401,000
Adjustment for common shares subject to repurchase............................. -- (8,609,000)
-------------- ---------------
Adjusted weighted average common shares........................................ 15,000,000 10,792,000
-------------- ---------------
-------------- ---------------
Basic and diluted net loss per share............................................. $ -- $ (1.42)
-------------- ---------------
</TABLE>
<TABLE>
<S> <C>
PRO FORMA PRESENTATION
Denominator:
Shares used above............................................................ 10,792,000
Weighted average effect of convertible securities:
Series A redeemable convertible preferred stock............................ 7,825,000
Series B redeemable convertible preferred stock............................ 3,515,000
Series C convertible preferred stock....................................... 10,818,000
Series D convertible preferred stock....................................... 1,850,000
----------
Denominator for pro forma calculation (unaudited).............................. 34,800,000
----------
----------
Unaudited pro forma basic and diluted net loss per share....................... $ (.44)
----------
----------
</TABLE>
The diluted per share computations exclude convertible preferred stock,
unvested common stock and options which were antidilutive. The number of shares
excluded from the diluted net loss per share computation were 4,285,000 and
84,910,000 for the period from July 21, 1997 (Inception) through June 30, 1998
and for the year ended June 30, 1999, respectively. The number of such shares
excluded from the pro forma diluted net loss per share computation was
20,498,000 for the year ended June 30, 1999.
10. 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 June 30, 1999.
F-17
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. 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 JUNE 30, 1999
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................ $ 10,000 $ 5,868,000
Other....................................................... -- 125,000
-------------- --------------
Total deferred tax assets................................... 10,000 5,993,000
Less: valuation allowance................................... (10,000) (5,993,000)
-------------- --------------
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, 1999, the Company had net operating losses for federal and state
income tax purposes of approximately $13,697,000 and $13,696,000, respectively,
which begin to expire in 2019 and 2006, respectively. 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.
12. COMMITMENTS AND CONTINGENCIES:
CAPITAL LEASES
During the year ended June 30, 1999, the Company entered into certain
noncancelable lease obligations for computer equipment. The future minimum lease
payments are discounted using interest rates of 13-29% over the two- to
five-year lease terms.
Future minimum lease payments under noncancelable capital leases for the
following fiscal years at June 30, 1999 are:
<TABLE>
<S> <C>
2000........................................................... $ 1,678,000
2001........................................................... 1,628,000
2002........................................................... 895,000
2003........................................................... 100,000
2004........................................................... 20,000
-----------
Total minimum obligations...................................... 4,321,000
Less amounts representing interest............................. (823,000)
-----------
Present value of minimum obligations........................... 3,498,000
Less current portion........................................... (1,181,000)
-----------
Total.......................................................... $ 2,317,000
-----------
-----------
</TABLE>
F-18
<PAGE>
NETZERO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. 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 June 30, 1999.
Future minimum lease payments under the facility lease for the following
fiscal years at June 30, 1999 are:
<TABLE>
<CAPTION>
<S> <C>
2000.......................................................................... $ 1,444,000
2001.......................................................................... 1,539,000
2002.......................................................................... 1,402,000
2003.......................................................................... 1,247,000
2004.......................................................................... 1,349,000
Thereafter.................................................................... 6,754,000
--------------
Total......................................................................... $ 13,735,000
--------------
--------------
</TABLE>
Total rental expense for operating leases was $0 and $153,000 for the period
from July 21, 1997 (Inception) through June 30, 1998 and for the year ended June
30, 1999, respectively.
13. SUBSEQUENT EVENTS:
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.
The conversion of the Series A and B redeemable convertible preferred stock
and the Series C and D 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 June 30, 1999.
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
1,500,000 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 1,500,000 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 $1.2 million.
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>
THE INSIDE BACK COVER INCLUDES:
THE FOLLOWING TEXT IS CENTERED ON THE TOP 1/3 OF THE PAGE: Consumers can
visit the NetZero Web-site to view The ZeroPort animated demonstration and
download our software
CENTERED IN THE BOTTOM 2/3 OF THE PAGE IS A VIEW OF THE NETZERO HOME PAGE.
AT THE TOP RIGHT HAND CORNER OF THE GRAPHIC IS THE TEXT: Consumers click this
button to download NetZero software
ACROSS THE BOTTOM OF THE PAGE IS THE TEXT: www.netzero.net
<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............................. 37
Management........................... 50
Principal Stockholders............... 62
Certain Transactions................. 64
Description of Capital Stock......... 67
Shares Eligible For Future Sale...... 71
Legal Matters........................ 72
Experts.............................. 72
Additional Information............... 73
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>
10,000,000 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............................................... $ 31,970
NASD filing fee................................................ 12,000
Nasdaq National Market listing fee............................. 95,000
Blue sky fees and expenses..................................... 10,000
Printing and engraving expenses................................ 250,000
Legal fees and expenses........................................ 400,000
Accounting fees and expenses................................... 350,000
Transfer Agent and Registrar fees.............................. 2,500
Miscellaneous.................................................. 80,000
----------
Total.................................................... $1,231,470
----------
----------
</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 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 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 17,098,182 shares of common stock to our directors, executive
officers, employees and consultants at a weighted exercise price of $0.219. As
of June 30, 1999, options to purchase 5,640,699 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
$0.333, options to purchase 1,919,925 shares at an exercise price of $0.867, and
options to purchase 205,350 shares at an exercise price of $3.333 had been
issued. We also issued 23,269 shares to a consultant at a price of $0.10 per
share.
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 Registrant.
3.2* Bylaws of the Registrant.
4.1 See Exhibit 3.1 and 3.2 for provisions of the Registrant's Certificate of
Incorporation and Bylaws defining the rights of holders of the Registrant's
common stock. See Exhibit 10.24 for the rights of certain holders of
registration rights.
4.2* Specimen common stock certificate.
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**+ Quotation for Dialinx Services dated December 9, 1998, between the Registrant and
GTE Internetworking Incorporated, as amended.
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 Addendum to Stock Option Agreements.
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 the
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, as amended.
10.22**+ Distributor, License and Affiliate Agreement dated as of April 30, 1999, between
the Registrant and Compaq Computer Corporation, as amended.
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.
10.30 Form of Indemnification Agreement between the Registrant and its executive
officers.
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.
** Previously filed by the Registrant with the Commission.
II-5
<PAGE>
+ Confidential treatment is 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.
(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
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, 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,
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 Amendment No. 3 to 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 7th day of September, 1999.
NETZERO, INC.
By: /s/ MARK R. GOLDSTON
-----------------------------------------
Mark R. Goldston
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to 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 September 7, 1999
Mark R. Goldston Officer)
Senior Vice President,
/s/ CHARLES S. HILLIARD Finance and Chief
- ------------------------------ Financial Officer September 7, 1999
Charles S. Hilliard (principal financial and
accounting officer)
RONALD T. BURR* President and Director
- ------------------------------ September 7, 1999
Ronald T. Burr
WILLIAM T. GROSS* Director
- ------------------------------ September 7, 1999
William T. Gross
JAMES T. ARMSTRONG* Director
- ------------------------------ September 7, 1999
James T. Armstrong
DAVID C. BOHNETT* Director
- ------------------------------ September 7, 1999
David C. Bohnett
JENNIFER S. FONSTAD* Director
- ------------------------------ September 7, 1999
Jennifer S. Fonstad
PAUL G. KOONTZ* Director
- ------------------------------ September 7, 1999
Paul G. Koontz
* Power of Attorney
<TABLE>
<S> <C> <C> <C>
By: /s/ CHARLES S.
HILLIARD
-------------------------
Charles S. Hilliard
ATTORNEY IN FACT
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
4.1 See Exhibit 3.1 and 3.2 for provisions of the Registrant's Certificate of
Incorporation and Bylaws defining the rights of holders of the Registrant's
common stock. See Exhibit 10.24 for the rights of certain holders of
registration rights.
4.2* Specimen common stock certificate.
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**+ Quotation for Dialinx Services dated December 9, 1998, between the Registrant and
GTE Internetworking Incorporated, as amended.
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 Addendum to Stock Option Agreements.
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.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.17**+ Software License and Service Agreement dated as of April 14, 1999, between the
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, as amended.
10.22**+ Distributor, License and Affiliate Agreement dated as of April 30, 1999, between
the Registrant and Compaq Computer Corporation, as amended.
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.
10.30 Form of Indemnification Agreement between the Registrant and its executive
officers.
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.
** Previously filed by the Registrant with the Commission.
+ Confidential treatment is 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>
EXHIBIT 10.12
ADDENDUM
TO
STOCK OPTION AGREEMENT
The following provisions are hereby incorporated into, and are hereby
made a part of, that certain Stock Option Agreement (the "Option
Agreement") by and between NetZero, Inc. (the "Corporation") and
("Optionee") evidencing the stock option (the "Option") granted to
Optionee under the terms of the Corporation's 1998 or 1999 Stock Option/Stock
Issuance Plan, and such provisions shall be effective immediately. All
capitalized terms in this Addendum, to the extent not otherwise defined
herein, shall have the meanings assigned to them in the Option Agreement.
INVOLUNTARY TERMINATION FOLLOWING
CORPORATE TRANSACTION
1. To the extent the Option is, in connection with a Corporate
Transaction, to be assumed in accordance wit h the Option Agreement, none of
the Option Shares shall vest on an accelerated basis upon the occurrence of
that Corporate Transaction, and Optionee shall accordingly continue, over his
or her period of Service following the Corporate Transaction, to vest in the
Option Shares in one or more installments in accordance with the provisions
of the Option Agreement. However, upon an Involuntary Termination of
Optionee's Service within twelve (12) months following such Corporate
Transaction, Optionee shall automatically vest on an accelerated basis in an
additional number of Option Shares so that the total number of Option Shares
in which Optionee is vested at the time of such Involuntary Termination
shall, after taking such accelerated vesting into account, be equal to the
greater of (i) the number of Option Shares in which Optionee would have been
vested, at the time of such Involuntary Termination, in accordance with the
normal Vesting Schedule had Optionee completed twice the amount of Service
actually completed by him or her immediately prior to such Involuntary
Termination (but in no event shall the number of Option Shares which vest on
such an accelerated basis exceed the number of Option Shares in which
Optionee is not vested immediately prior to such Involuntary Termination) or
(ii) the number of Option Shares in which Optionee would have been vested
under the normal Vesting Schedule had Optionee completed twelve (12) months
of Service prior to his or her Involuntary Termination. The Option shall
remain exercisable for the vested Option Shares until the earlier of the
Expiration Date or the expiration of the ninety (90) day period following the
date of the Involuntary Termination.
2. For purposes of this Addendum, an Involuntary Termination shall mean
the termination of Optionee's Service by reason of:
(i) Optionee's involuntary dismissal or discharge by the Corporation
for reasons other than for Misconduct, or
(ii) Optionee's voluntary resignation following (A) a material
reduction in the scope of his or her day-to-day responsibilities, it being
understood that a change in Optionee's title shall not, in and of itself,
be deemed a material reduction, (B) a reduction in Optionee's base salary
or (C) a relocation of
1
<PAGE>
Optionees' place of employment by more than fifty (50) miles, provided and
only if such change, reduction or relocation is effected by the Corporation
without Optionee's consent.
IN WITNESS WHEREOF, NetZero, Inc. has caused this Addendum to be executed
by its duly authorized officer as of the Effective Date specified below.
NETZERO, INC.
By:
--------------------------------
Title:
-----------------------------
EFFECTIVE DATE: ____________, 199_
2
<PAGE>
EXHIBIT 10.21
START PAGE AGREEMENT
This Agreement, dated as of April 20, 1999 (the "Effective Date"), is made
by and between LookSmart, Ltd., a Delaware corporation with a principal place of
business at487 Bryant Street, San Francisco, CA 94107 ("LOOKSMART"), and
NetZero, Inc., a California corporation with a principal place of business at
31416 Agoura Road #150, Westlake Village, CA 91362 ("NETZERO").
RECITALS
WHEREAS LookSmart is the owner or licensee of certain Web services,
including web guides, search engines, directories, community information
services, and e-mail (collectively, the "LOOKSMART SERVICES"), which are
accessible through the URL "WWW.LOOKSMART.COM" (the "LOOKSMART SITE");
WHEREAS NetZero provides free dial up Internet access services (the
"NETZERO ISP SERVICE") and operates an Internet site with a URL
"WWW.NETZERO.NET" (the "NETZERO SITE");
WHEREAS NetZero ISP subscribers log on to the Internet using NetZero's
proprietary software (the "NETZERO SOFTWARE") which provides dial-up access and
a window (the "ADVANTAGE WINDOW") which remains persistent during the
subscriber's connection; and
WHEREAS the parties would like to offer the LookSmart Services to
subscribers of the NetZero ISP Service through a site designed to appear to
NetZero ISP Service subscribers as an integrated co-branded part of the NetZero
ISP Services and through a co-branded start page.
NOW, THEREFORE, LookSmart and NetZero hereby agree as follows:
1. THE CO-BRANDED SITE AND SERVICES.
a. DEVELOPMENT OF THE CO-BRANDED SITE AND SERVICES. LookSmart and
NetZero shall jointly design and create a co-branded version of the LookSmart
Site (the "Co-branded Site") for NetZero's use in connection with the NetZero
ISP Service. The parties shall take all necessary action to ensure the
Co-branded Site is made available to NetZero's ISP subscribers on May 1, 1999.
The Co-branded Site shall be created pursuant to the following provisions:
i. LookSmart shall, [***], create, design and develop the
appropriate portions of the Co-branded Site so that they include or link
to appropriate branding material of both parties, including co-branded
versions of the LookSmart Services (the "CO-BRANDED SERVICES") and a
co-branded version of
[***] Confidential treatment has been requested for the bracketed portions.
The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
1
<PAGE>
the LookSmart start page (the "CO-BRANDED START PAGE") pursuant to
Section 1(b). NetZero acknowledges that certain pages within the Co-
Branded Site may not contain NetZero branding material. The parties shall
use their commercially reasonable best efforts to complete the Co-branded
Site within ten (10) business days of the execution of this Agreement.
ii. The Co-branded Site will have the look and feel similar to
the NetZero.net Site.
iii. The parties shall cooperate with each other on creating,
designing and developing all aspects of the Co-branded Site, including logo
and link placements and the co-branded navigation bar to be displayed on
the Co-branded Site and the Co-branded Services.
b. The Co-branded Start Page shall be created, designed and
developed pursuant to the following provisions:
i. The Co-branded Start Page may include any of the following:
(A) LookSmart directory of sites and all updates to such directory, (B)
LookSmart key word search capabilities, (C) AltaVista search engine
capabilities, (D) links and graphics to other NetZero products, (E) one or
more of the following features offered by LookSmart: News, Sports, Weather,
Horoscopes, Personals and Specialized searches (newsgroups, businesses,
white pages), and (F) links to other LookSmart services and products.
ii. NetZero shall be entitled to offer content, buttons or other
editorial product of its own choosing on the Co-branded Start Page;
provided, however, that such content, buttons or editorial product (i)
shall not exceed fifteen percent (15%) of the "above the fold" real estate
of the Co-branded Start Page when displayed at full height on an 800x600
pixel resolution screen and (ii) shall not include any direct advertising
for any services that directly compete with the products and services
offered by LookSmart on the LookSmart Site, the BeSeen Site (located at
www.beseen.com) or on the Co-branded Start Page. The foregoing shall not be
construed to limit or restrict advertising for, or promotion of, NetZero
ISP Services, or links to any NetZero hosted site or page.
iii. Subject to the foregoing, LookSmart shall have final
approval of the Co-branded Site design, including the Co-branded Start Page
design, which approval shall not be unreasonably withheld.
c. ADVERTISING. LookSmart will be responsible for all advertising
related activities on all of the pages on the Co-branded Site and for all
advertising related activities on the Co-branded Services. In no event shall
LookSmart display advertising on the Co-branded Site or Co-branded Services for
any internetaccess services (free or
2
<PAGE>
paid) which compete directly with NetZero ISP Service or for any company
whose primary business is to provide internet access services.
d. HOSTING. LookSmart shall maintain, operate, host and serve,
[***], all of the Co-branded Services and those portions of the Co-branded
Site for which LookSmart is responsible for selling advertising. NetZero
shall maintain, operate, host and serve those portions of the Co-branded Site
for which NetZero is responsible for selling advertising. In the event
NetZero and LookSmart are jointly responsible for selling advertising as to a
particular portion or page of the Co-branded Site, the parties shall mutually
agree as to which party shall be responsible for maintaining, hosting,
operating and serving such portion or page. The URL of the Co-branded Start
Page will be substantially similar to "WWW.NETZERO.LOOKSMART.COM".
e. SEARCH PAGE. LookSmart shall, [***], develop a co-branded
search page (the "SEARCH PAGE") which will be linked to the LookSmart Site.
f. OBLIGATIONS OF NETZERO. Except as provided in Section 1(g) below
and elsewhere herein, NetZero shall perform the following obligations during the
Term:
i. NetZero shall configure all browser software (including
compact disks, diskettes, and downloaded software) distributed by or on
behalf of NetZero for the purpose of allowing NetZero's subscribers to
access the NetZero ISP Service so that (a) the Co-branded Start Page will
be the default and only start page for all NetZero ISP Service subscribers,
(b) a bookmark will be set to the Co-branded Start Page and (c) the default
search engine will be set to the Search Page.
ii. The Advantage Window will not contain (a) a search button
which [***] or (b) a start button which [***].
iii. NetZero shall provide a start button and search button on
the AdVantage Window which link to the Co-branded Start Page and Search
Page, respectively. The configuration of such buttons shall be
substantially similar to that set forth in the graphic attached as Exhibit
A hereto.
g. HARDWARE MANUFACTURERS. Notwithstanding anything to the contrary
in this Agreement, NetZero shall not be restricted from entering into agreements
with one or more computer hardware manufacturers and/or distributors or their
affiliates for start pages, search pages, services or sites in connection with
such manufacturers' or distributors' products. As such, the provisions of
Section 1(f) above shall not apply with respect to any such agreements or the
software distributed in connection with such agreements.
[***] Confidential treatment has been requested for the bracketed portions.
The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
3
<PAGE>
h. NetZero acknowledges that LookSmart may modify the Co-branded
Site, including the Co-branded Start Page, from time to time without NetZero's
consent if such modification does not adversely impact NetZero or the rights
conferred on NetZero pursuant to this Agreement. As the Co-branded Start Page is
something which is jointly created by the parties pursuant to Section 1 and
changes to the Co-branded Start Page will impact NetZero's customers and will
therefor impact NetZero, LookSmart agrees to provide NetZero with at least five
(5) days prior written notice of any changes to the Co-branded Start Page which
are to be implemented without NetZero's consent.
i. Promptly following the payment referred to in Section 2(c)
below, NetZero shall create a hyperlink on NetZero's website to the
Co-branded Site and LookSmart shall add NetZero to, and prominently display
NetZero in, its ISP locator and shall take reasonable efforts to ensure that
NetZero is the ISP of choice in results of searches on the LookSmart search
engine in searches for ISPs.
j. As the Co-branded Site will not be operational until May 1, 1999,
the restrictions on NetZero set forth herein shall not apply until such date.
k. This Agreement shall only apply to a version of the Co-branded Site
designed primarily for an English speaking consumer and shall only apply to the
NetZero ISP service in the United States of America. As such, the provisions of
Section 1(f) above shall not apply with respect to agreements for sites, start
pages, search pages, services or sites that are not primarily in the English
language or the software distributed in connection with such agreements.
Non-English language versions of start sites, search pages, services or sites
shall not be covered by this Agreement in any respect. This Agreement shall not
be construed as providing any limitations on either party's activities outside
of the United States.
2. PAYMENTS.
a. Concurrent with the execution of this Agreement, LookSmart shall
pay to [***].
b. Within five (5) business days after the date that the Co-branded
Start Page is developed and accepted by both parties in writing (which
acceptance shall not be unreasonably withheld and which shall be deemed to have
occurred no later than the date Referrals commence), LookSmart shall pay to
NetZero [***].
c. Within two (2) business days after such time that NetZero has
delivered an aggregate of [***] Referrals (as defined below), LookSmart shall
pay to NetZero [***].
d. [***].
[***] Confidential treatment has been requested for the bracketed portions.
The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
4
<PAGE>
e. LookSmart shall pay to NetZero [***]; provided, [***] during
the Term, the [***] for [***]. Within twenty (20) days of the end of each
month, LookSmart shall provide NetZero with information (as described in
Section 3 below) regarding the [***] generated by NetZero during the
preceding month and the payment for such [***]. Delinquent payments shall
accrue interest at an annualized rate of [***]. For the purposes of this
Agreement, a [***] shall mean [***].
f. If NetZero fails [***] during the [***] following the date of
this Agreement for any reason other than a reason primarily attributable to
LookSmart including, without limitation, LookSmart's failure to develop and
operate the Co-branded Site as set forth herein.
g. [***].
h. For the purposes of this Agreement, [***] shall mean [***] for
advertising campaigns displayed on the Start Page and Search Page [***] will
be audited by LookSmart on a monthly basis. [***] will also be audited by
LookSmart for the same period(s). The reference to campaign shall mean the
same creatives for the same products displayed at the same times during the
day or the night with the same frequency to the ad recipient. LookSmart
agrees to deliver to NetZero in writing within fifteen (15) days of the end
of each month a detailed summary of the [***]. In the event that the [***]
falls to a level below [***] of the [***] during [***] based on a
statistically significant sampling, LookSmart and NetZero shall meet during
the five (5) day period following the delivery of such data to develop a
mutually acceptable strategy to [***]. This strategy may include specific
recommendations by NetZero as to how LookSmart [***]. Such strategy shall
include the use by LookSmart of the demographic data provided by NetZero
under this Agreement. During the [***] day period following the acceptance of
such strategy by both parties, LookSmart agrees to use commercially
reasonable efforts to implement the strategy. If the strategy fails to bring
the [***] within [***] of the [***] for [***] period, then [***].
[***].
3. REPORTING; AUDITING. LookSmart shall provide Netzero with
monthly reports regarding the Referrals delivered, along with a statement of
[***] relating to [***], and such periodic reports as may reasonably
requested by NetZero to confirm the [***]. NetZero shall have the right, at
its expense, to audit LookSmart's books and records for the sole purpose of
verifying the number [***] previously reported and the [***]. Such audits
will be made not more than twice per year, on not less than ten (10) days
written notice, during regular business hours, by auditors reasonably
acceptable to LookSmart; provided, the twice per year limitation shall not
apply to audits related to [***]. If the auditor's figures reflect a number
different than those reported by LookSmart, the party benefited by the error
shall immediately pay the other party the difference in [***] arising from
such error. Information revealed to the auditors shall be
5
<PAGE>
kept confidential by such auditors, and such auditors will sign customary
confidentiality agreements if requested by LookSmart.
4. CO-MARKETING EFFORTS. The parties shall meet from time to time to
mutually determine what co-marketing efforts should be made to further the
purpose of this Agreement.
5. DEMOGRAPHIC INFORMATION. Except as provided below and excluding
personal identifying information, NetZero agrees to provide LookSmart with the
demographic and consumer data which NetZero collects during registration and
compiles from its subscribers accessing the Co-branded Start Page for the sole
purpose of enabling LookSmart to better target content, e-commerce and
advertising opportunities to NetZero's subscribers. LookSmart agrees that such
data is proprietary to NetZero and in no event shall LookSmart disclose,
analyze, compile, sell or otherwise use such data for any other purpose.
Furthermore, NetZero's obligation to provide such data and LookSmart'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.
NetZero shall not use its policies and procedures to deny LookSmart access to
the data referred to above unless such policies and procedures are reasonably
designed to ensure NetZero's compliance with current and future applicable laws,
rules, regulations or orders.
6. OWNERSHIP. NetZero acknowledges and agrees that, as between
LookSmart and NetZero, LookSmart owns all title to, and all ownership rights
in, any LookSmart trademarks, the LookSmart Site and all aspects of the
Co-branded Site, the Search Page and the Co-branded Services which are solely
created and/or contributed by LookSmart, including without limitation the
underlying software but excluding any NetZero brand features which are the
sole property of NetZero. LookSmart acknowledges and agrees that, as between
LookSmart and NetZero, NetZero owns all title to, and all ownership rights
in, the NetZero ISP Service, the NetZero Software (including without
limitation the AdVantage Window), any NetZero trademarks and all aspects of
the Co-branded Site which are solely created and/or contributed by NetZero,
including without limitation the underlying software but excluding any
LookSmart brand features which are the sole property of LookSmart. Each of
NetZero and LookSmart acknowledges and agrees that LookSmart and NetZero
shall jointly hold all title to, and ownership rights in, the aspects of the
Co-branded Site and Co-branded Services which are jointly created and/or
contributed to by both parties, but excluding any NetZero brand features
which are the sole property of NetZero and any LookSmart brand features which
are the sole property of LookSmart.
7. TERM [***]. This Agreement shall have a term ("TERM") of one (1)
year from the Effective Date unless terminated earlier in accordance with
Section 14. [***]
[***] Confidential treatment has been requested for the bracketed portions.
The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
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8. MARKS. LookSmart hereby grants to NetZero a non-exclusive,
non-transferable, non-sublicensable license to reproduce and display
LookSmart's trademarks, service marks, logos and the like in the United
States solely for the purposes specified in this Agreement. NetZero hereby
grants LookSmart a non-exclusive, non-transferable, non-sublicensable license
to reproduce and display NetZero's trademarks, service marks, logos and the
like in the United States solely for the purposes specified in this
Agreement. Except as expressly stated herein, neither party shall make any
other use of the other party's marks. Furthermore, each party agrees and
acknowledges that the use of any of the other party's trademarks, service
marks, logos and the like shall not create any right, title or interest in or
to the use of such trademarks, service marks, logos and the like and that all
such use and goodwill associated therewith shall inure to the benefit of the
other party. Upon request of either party, the other party shall provide
appropriate attribution of the use of the requesting party's marks. All
licenses granted hereunder shall terminate automatically upon the effective
date of expiration or termination of this Agreement.
9. REPRESENTATIONS AND WARRANTIES. Each party hereby represents and
warrants as follows:
a. CORPORATE POWER. Such party is duly organized and validly
existing under the laws of the state of its incorporation and has full corporate
power and authority to enter into this Agreement and to carry out the provisions
hereof.
b. DUE AUTHORIZATION. Such party is duly authorized to execute
and deliver this Agreement and to perform its obligations hereunder.
c. BINDING AGREEMENT. This Agreement is a legal and valid
obligation binding upon it and enforceable with its terms. The execution,
delivery and performance of this Agreement by such party does not conflict with
any agreement, instrument or understanding, oral or written, to which it is a
party or by which it may be bound, nor violate any law or regulation of any
court, governmental body or administrative or other agency having jurisdiction
over it.
d. INTELLECTUAL PROPERTY RIGHTS.
i. NetZero (i) has the full and exclusive right to
permit LookSmart to utilize NetZero's intellectual property, including
any trademark, service mark, graphics, logos or other material provided
to LookSmart hereunder, to the extent contemplated by this Agreement,
(ii) is the sole owner or is a valid licensee of the NetZero Software
and the AdVantage Window, and (iii) NetZero is aware of no claims by
any third parties adverse to any of such intellectual property rights,
including the NetZero Software and the AdVantage Window.
ii. LookSmart (i) has the full and exclusive right to
grant or otherwise permit NetZero to access the Co-branded Site
(including the Co-
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branded Start Page) and the Co-branded Services, and to use
LookSmart's intellectual property, including any trademark,
service mark, graphics, logos or other material provided to NetZero
hereunder, to the extent contemplated by this Agreement, (ii) is the
sole owner or is a valid licensee of the software underlying the
Co-branded Site, and (iii) LookSmart is aware of no claims by any third
parties adverse to any of such intellectual property rights, including
any software underlying the Co-branded Site.
iii. If either party's (the "INFRINGING PARTY")
intellectual property rights are alleged or held to infringe the
intellectual property rights of a third party, the Infringing Party
shall, at its own expense, and in its sole discretion, (1) procure for
the non-Infringing Party the right to continue to use the allegedly
infringing intellectual property or (2) replace or modify the
intellectual property to make it non-infringing.
The representations and warranties and covenants in this Section 9 are
continuous in nature and shall be deemed to have been given by each party at
execution of this Agreement and at each stage of performance hereunder. These
representations, warranties and covenants shall survive termination or
expiration of this Agreement.
10. LIMITATION OF WARRANTY. EXCEPT AS EXPRESSLY WARRANTED IN SECTION 9
ABOVE, EACH PARTY EXPRESSLY DISCLAIMS ANY FURTHER WARRANTIES, EXPRESS, IMPLIED,
OR STATUTORY, INCLUDING BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. WITHOUT LIMITING THE
GENERALITY OF THE FOREGOING, NEITHER PARTY MAKES ANY EXPRESS OR IMPLIED
WARRANTIES OR REPRESENTATIONS WITH RESPECT TO ITS WEB-SITE, THE NETZERO
SOFTWARE, THE NETZERO ISP SERVICE, THE CO-BRANDED SITE, THE CO-BRANDED SERVICES,
AND THE CO-BRANDED START PAGE AND NEITHER PARTY SHALL BE LIABLE FOR THE
CONSEQUENCES OF ANY INTERRUPTIONS, DOWNTIME, NON-PERFORMANCE OR ERRORS RELATED
THERETO.
11. INDEMNIFICATION.
a. MUTUAL INDEMNITY. Each party (in such case, the
"INDEMNIFYING PARTY") will at all times defend, indemnify and hold harmless the
other party (in such case, the "INDEMNIFIED PARTY") and the Indemnified Party's
officers, directors, shareholders, employees, accountants, attorneys, agents,
successors and assigns from and against any and all third party claims, damages,
liabilities, costs and expenses, including reasonable legal fees and expenses,
arising out of or related to the Indemnifying Party's breach of any express
representations and warranties set forth in Section 10 of this Agreement. In
addition, (i) NetZero shall indemnify LookSmart, its officers, directors,
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shareholders, employees, accountants, attorneys, agents, successors and assigns
from and against any and all third party claims, damages, liabilities, costs and
expenses, including reasonable legal fees and expenses, arising out of or
related to the operation, provision or maintenance of the NetZero ISP Service,
the ISP Software, the AdVantage Window, or any other services offered by
NetZero, and (ii) LookSmart shall indemnify NetZero, its officers, directors,
shareholders, employees, accountants, attorneys, agents, successors and assigns
from and against any and all thrid party claims, damages, liabilities, costs and
expenses, including reasonable legal fees and expenses, arising out of or
related to the operation, provision or maintenance of services offered by
LookSmart on the Co-branded Site (other than services or products offered by
NetZero). The Indemnified Party shall give the Indemnifying Party prompt written
notice of any claim, action or demand for which indemnity is claimed. The
Indemnifying Party shall have the right, but not the obligation, to control the
defense and/or settlement of any claim in which it is named as a party and which
arises as a result of its breach of any warranty, representation, covenant
or agreement under this Agreement. The Indemnified Party shall have the right to
participate in any defense of a claim by the Indemnifying Party with counsel of
the Indemnified Party's choice at its own expense. The foregoing indemnity is
conditioned upon; prompt written notice by the Indemnified Party to the
Indemnifying Party of any claim, action or demand for which indemnity is
claimed; complete control of the defense and settlement thereof by the
Indemnifying Party; and such reasonable cooperation by the Indemnified Party in
the defense as the Indemnifying Party may request.
b. SETTLEMENT. Neither party shall, without the prior written
consent of the other party, settle, compromise or consent to the entry of any
judgment with respect to any pending or threatened claim unless the settlement,
compromise or consent provides for and includes an express, unconditional
release of all claims, damages, liabilities, costs and expenses, including
reasonable legal fees and expenses, against the indemnified party.
12. CONFIDENTIALITY, PRESS RELEASES.
a. NON-DISCLOSURE AGREEMENT. The parties agree and acknowledge
that, as a result of negotiating, entering into and performing this Agreement,
each party has and will have access to certain of the other party's Confidential
Information (as defined below). Each party also understands and agrees that
misuse and/or disclosure of that information could adversely affect the other
party's business. Accordingly, the parties agree that, during the Term of this
Agreement and thereafter, each party shall use and reproduce the other party's
Confidential Information solely for purposes of this Agreement and only to the
extent necessary for such purpose and shall restrict disclosure of the other
party's Confidential Information to its employees, consultants or independent
contractors with a need to know and shall not disclose the other party's
Confidential Information to any third party without the prior written approval
of the other party. Notwithstanding the foregoing, it shall not be a breach of
this Agreement for either party to disclose Confidential Information of the
other party if required to do so under law (including compliance with any
applicable federal or state securities laws) or in a judicial or other
governmental investigation or proceeding, provided the other party has been
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<PAGE>
given prior written notice and the disclosing party has sought all commercially
reasonable safeguards against any further dissemination prior to such
disclosure.
b. CONFIDENTIAL INFORMATION DEFINED. As used in this
Agreement, the term "Confidential Information" refers to: (i) each party's
trade secrets, business plans, strategies, methods and/or practices; and (ii)
other information relating to either party that is not generally known to the
public, including information about either party's personnel, products,
customers, marketing strategies, services or future business plans.
Notwithstanding the foregoing, the term "Confidential Information"
specifically excludes (A) information that is now in the public domain or
subsequently enters the public domain by publication or otherwise through no
action or fault of the other party; (B) information that is known to either
party without restriction, prior to receipt from the other party under this
Agreement, from its own independent sources as evidenced by such party's
written records, and which was not acquired, directly or indirectly, from the
other party; (C) information that either party receives from any third party
reasonably known by such receiving party to have a legal right to transmit
such information, and not under any obligation to keep such information
confidential; and (D) information independently developed by either party's
employees or agents provided that such party can show that those same
employees or agents had no access to the Confidential Information received
hereunder.
c. PRESS RELEASES. Except to the extent permitted pursuant
to the last sentence of paragraph (a) above and except for disclosure to
investors or potential investors (including disclosures to federal and state
regulatory agencies in connection therewith), in no event shall either party,
its employees, consultants or affiliates disclose to any third parties or
make any press release or any public announcement relating in any way
whatsoever to the financial provisions of this Agreement, including but not
limited to the individual or aggregate payments to be made to NetZero
hereunder and the CPM for Referrals, without the express prior written
consent of the other party; provided, however, following the initial press
release NetZero and LookSmart may reference the financial term as "a multi
million dollar deal", specifically and only. The parties agree to cooperate
with one another to determine the content of the initial press release
relating to this Agreement and to issue such press release on or about the
commercial launch of the Co-branded Start Page.
13. TERMINATION.
a. TERMINATION. Either party may terminate this Agreement if
(i) the other party files a petition for bankruptcy or is adjudicated bankrupt;
(ii) a petition in bankruptcy is filed against the other party and such petition
is not dismissed within sixty (60) days of the filing date; (iii) the other
party becomes insolvent or makes an assignment for the benefit of its creditors
pursuant to any bankruptcy law; (iv) a receiver is appointed for the other party
or its business; (v) upon the occurrence of a material breach of a material
provision by the other party if such breach is not cured within thirty (30) days
after written notice is received by the breaching party identifying the matter
constituting the material breach; or (f) by mutual consent of the parties. In
addition, if
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LookSmart fails to pay any CPM Revenues within ten (10) calendar days
following written notice that payment is delinquent and without any
limitation on NetZero's remedies, NetZero shall have the right, at its
option, to (a) immediately terminate this Agreement on delivery of written
notice to LookSmart or (b) switch its default start page and search page to
any other start or search page of its choice until LookSmart has cured such
delinquency.
b. EFFECT OF TERMINATION. Upon such termination, (i)
LookSmart shall remove the Co-branded Site, (ii) each party shall promptly
deliver to the other party all originals and copies of any of the other
party's content or material provided by the other party hereunder, and (iii)
if at the time of termination, NetZero has failed to deliver at least [***]
Referrals for any reason other than a reason primarily attributable to
LookSmart including, without limitation, LookSmart's failure to develop and
operate the Co-branded Site as set forth herein, [***]. Each party shall
ensure that such materials have been erased from all computer memories and
storage devices within its possession or control.
14. FORCE MAJEURE. In the event that either party is prevented from
performing, or is unable to perform, any of its obligations under this Agreement
due to any cause beyond the reasonable control of the party invoking this
provision, the affected party's performance shall be excused and the time for
performance shall be extended for the period of delay or inability to perform
due to such occurrence.
15. RELATIONSHIP OF PARTIES. NetZero and LookSmart are independent
contractors under this Agreement, and nothing herein shall be construed to
create a partnership, joint venture or agency relationship between NetZero and
LookSmart. Neither party has authority to enter into agreements of any kind on
behalf of the other.
16. ASSIGNMENT. Neither LookSmart nor NetZero may assign this Agreement
or any of its rights or delegate any of its duties under this Agreement without
the prior written consent of the other. Notwithstanding the foregoing, each
party may assign this Agreement to any successor of such party.
17. CHOICE OF LAW AND FORUM. This Agreement, its interpretation,
performance or any breach thereof, shall be construed in accordance with, and
all questions with respect thereto shall be determined by, the laws of State of
California applicable to contracts entered into and wholly to be performed
within said State. Each of NetZero and LookSmart hereby consents to the personal
jurisdiction of the State of California, acknowledges that venue is proper in
any state or Federal court in the State of California, agrees that any action
related to this Agreement must be brought in a state or Federal court in the
State of California, and waives any objection it has or may have in the future
with respect to any of the foregoing.
18. GOOD FAITH. The parties agree to act in good faith with respect to
each provision of this Agreement and any dispute that may arise related hereto.
[***] Confidential treatment has been requested for the bracketed portions.
The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
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<PAGE>
19. COUNTERPARTS AND FACSIMILE SIGNATURES. This Agreement may be
executed in multiple counterparts, each of which shall be deemed to be an
original, but all of which together shall constitute one and the same
instrument. Facsimile signatures will be considered original signatures.
20. NO WAIVER. The waiver by either party of a breach or a default of
any provision of this Agreement by the other party shall not be construed as a
waiver of any succeeding breach of the same or any other provision, nor shall
any delay or omission on the part of either party to exercise or avail itself of
any right, power or privilege that it has, or may have hereunder, operate as a
waiver of any right, power or privilege by such party.
21. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs,
successors and assigns.
22. SEVERABILITY. Each provision of this Agreement shall be severable
from every other provision of this Agreement for the purpose of determining the
legal enforceability of any specific provision.
23. NOTICES. All notice required to be given under this Agreement must
be given in writing and delivered either in hand, by certified mail, return
receipt requested, postage pre-paid, or by Federal Express or other recognized
overnight delivery service, all delivery charges pre-paid, and addressed:
If to LookSmart: LookSmart, Ltd.
487 Bryant Street
San Francisco, CA 94107
Attention: SVP, Sales
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Facsimile: (650) 493-6811
Attention: Hank Barry
If to NetZero: NetZero, Inc.
31416 Agoura Road #150
Westlake Village, CA 91362
Attention: President; General Counsel
with a copy to:
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<PAGE>
Brobeck, Phleger & Harrison LLP
38 Technology Drive
Irvine, California 92618
Facsimile: (949) 790-6301
Attention: Kevin DeBre Esq.
24. ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties hereto with respect to the transactions and
matters contemplated hereby, supersedes all previous agreements between
LookSmart and NetZero concerning the subject matter, and cannot be amended
except by a writing signed by both parties. No party hereto has relied on any
statement, representation or promise of any other party or with any other
officer, agent, employee or attorney for the other party in executing this
Agreement except as expressly stated herein.
25. LIMITATIONS OF LIABILITY. UNDER NO CIRCUMSTANCES SHALL EITHER PARTY
BE LIABLE TO THE OTHER PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR
EXEMPLARY DAMAGES (EVEN IF SUCH DAMAGES ARE FORESEEABLE OR THAT PARTY HAS BEEN
ADVISED OR HAS CONSTRUCTIVE KNOWLEDGE OF THE POSSIBILITY OF SUCH DAMAGES),
ARISING FROM SUCH PARTY'S PERFORMANCE OR NON-PERFORMANCE PURSUANT TO ANY
PROVISION OF THIS AGREEMENT OR THE OPERATION OF SUCH PARTY'S SITE (INCLUDING
SUCH DAMAGES INCURRED BY THIRD PARTIES), SUCH AS, BUT NOT LIMITED TO, LOSS OF
REVENUE OR ANTICIPATED PROFITS OR LOST BUSINESS. NOTWITHSTANDING ANYTHING HEREIN
TO THE CONTRARY, HOWEVER, THIS SECTION SHALL NOT LIMIT EITHER PARTY'S LIABILITY
TO THE OTHER FOR (A) WILLFUL AND MALICIOUS MISCONDUCT; (B) DIRECT DAMAGES TO
REAL OR TANGIBLE PERSONAL PROPERTY; (C) BODILY INJURY OR DEATH CAUSED BY
NEGLIGENCE; OR (D) INDEMNIFICATION AND CONFIDENTIALITY OBLIGATIONS HEREUNDER.
26. SURVIVAL. All terms of this Agreement which by their nature extend
beyond its termination (including any accrued payment or refund obligations)
remain in effect until fulfilled, and apply to respective successors and
assigns.
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Executed as of the date first written above.
NetZero, Inc. LookSmart, Ltd.
By: /s/ RONALD T. BURR By: /s/ BRIAN J. COWLING
-------------------------------- -------------------------------
Name: Ronald T. Burr Name: Brian J. Cowling
------------------------------ -----------------------------
Title: President Title: Senior Vice President
------------------------------ -----------------------------
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AMENDMENT NO. 1 TO START PAGE AGREEMENT
This Amendment No. 1 to Start Page Agreement, effective as of the 1st
day of September 1999 (the "Effective Date"), is made by and between
LookSmart, Ltd., a Delaware corporation with a principal place of business at
487 Bryant Street, San Francisco, CA 94107 ("LOOKSMART"), and NetZero, Inc.,
a California corporation with a principal place of business at 2555 Townsgate
Road, Westlake Village, CA 91361 ("NETZERO"). Capitalized terms not
otherwise defined herein shall have the meaning ascribed to such terms in
that certain Start Page Agreement between the parties dated effective April
30, 1999 (the "Existing Agreement").
RECITALS
WHEREAS NetZero and LookSmart are party to the Existing Agreement and
have agreed to amend the Existing Agreement as set forth below;
NOW, THEREFORE, for good and valuable consideration, the receipt of which
is hereby acknowledged, LookSmart and NetZero hereby agree as follows:
1. Sections 2(e), (f), (g) and (h) of the Existing Agreement are hereby
deleted in their entirety and replaced by the following:
e. Except as set forth in this Section 2, LookSmart shall pay to
NetZero [***]. Within twenty (20) days of the end of each month,
LookSmart shall provide NetZero with information (as described in
Section 3 below) regarding the [***] generated by NetZero during
the preceding month and the payment for such [***] (unless amounts
due are covered by prepayment). Delinquent payments shall accrue
interest at an annualized rate of [***]. For the purposes of this
Agreement, a [***].
f. At such time as the [***] generated during the period commencing
[***] equal [***], the [***] will be [***] from [***] during
such period in excess of [***] (which represents [ ***] of [***])*.
Effective [***], the [***] for all [***] following [***] shall
be [***]; provided, however, at such time as the [***] generated
during the period commencing [***] and ending [ ***] equal [***],
the [***] will be [***] from [***] to [***] for all [***]
during such period in excess of [***] (which represents [***]). At
such time as the [***] generated during the period commencing [***]
and ending [***] equal [***], the [***] will be [***] from
[***] to [***] for all [***] during such period in excess of [***]
(which represents [***] of [***]).
2. Section 3 of the Existing Agreement is hereby deleted in its entirety
and replaced with the following:
- ---------------------
* Confidential treatment is requested for confidential information enclosed
in the brackets and underlined.
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3. REPORTING; AUDITING. LookSmart shall provide Netzero with monthly
reports regarding the [***] delivered, along with a statement of
[***] relating to such [***]. NetZero shall have the right, at its
expense, to audit LookSmart's books and records for the sole
purpose of verifying the number of [***] previously reported. Such
audits will be made not more than twice per year, on not less than
ten (10) days written notice, during regular business hours, by
auditors reasonably acceptable to LookSmart. If the auditor's
figures reflect a number different than those reported by
LookSmart, the party benefited by the error shall immediately pay
the other party the difference in [***] arising from such error.
Information revealed to the auditors shall be kept confidential by
such auditors, and such auditors will sign customary
confidentiality agreements if requested by LookSmart.
3. Section 7 of the Existing Agreement is hereby deleted in its entirety
and replaced by the following:
7. TERM. This Agreement shall have a term ("TERM") through April 30,
2000 unless terminated earlier in accordance with Section 14 or as
provided in this Section 7. NetZero shall have the option, at its
convenience and without cause, to terminate this Agreement prior to
the end of the Term by delivering written notice to LookSmart;
provided, however, NetZero may not exercise such right to deliver
notice prior to the first date that the [***] are [***] below
[***] pursuant to the terms of Section 2 (e.g., at the latest,
[***]* or, if earlier, on such date as the [***]). The effective date
of such termination shall be as specified in the written notice but
shall in no event be less than forty five (45) days following
delivery of such written notice. The delivery of written notice
shall not affect either party's obligation to continue performance
hereunder through the effective date of termination, nor shall it
relieve a party of its obligations (including payment obligations)
incurred prior to the effective date of termination or which
survive the termination of this Agreement.
4. Section 13(b) is hereby deleted in its entirety and replaced with the
following:
b. EFFECT OF TERMINATION. Upon such termination (including termination
pursuant to Section 7), (i) LookSmart shall remove the Co-branded
Site and (ii) each party shall promptly deliver to the other party
all originals and copies of any of the other party's content or
material provided by the other party hereunder. Each party shall
ensure that such materials have been erased from all computer
memories and storage devices within its possession or control.
5. Section 23 of the Existing Agreement is hereby deleted in its entirety
and replaced by the following:
- ---------------------
* Confidential treatment is requested for confidential information enclosed
in the brackets and underlined.
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23. NOTICES. All notice required to be given under this Agreement must be
given in writing and delivered either in hand, by certified mail,
return receipt requested, postage pre-paid, or by Federal Express
or other recognized overnight delivery service, all delivery
charges pre-paid, and addressed:
If to LookSmart: LookSmart, Ltd.
487 Bryant Street
San Francisco, CA 94107
Attention: SVP, Sales
With a copy to: Senior Counsel at the same address
If to NetZero: NetZero, Inc.
2555 Townsgate Road
Westlake Village, CA 91362
Attention: President; General Counsel
With a copy to:
Brobeck, Phleger & Harrison LLP
38 Technology Drive
Irvine, California 92618
Facsimile: (949) 790-6301
Attention: Kevin DeBre, Esq.
6. Each of the parties represents to the other in connection with the
execution and delivery of this Amendment that it is not aware of any
breach by the other party of the Existing Agreement. Each of the
parties agrees that, except for disclosures to, and filings with, the
Securities and Exchange Commission; disclosures to potential investors,
advisors and others who have a reasonable need to know, and disclosures
that may be required under GAAP or relevant laws or regulations, that it
will not make any press release or other similar announcement with
respect to the financial terms of this Amendment.
7. LookSmart agrees to pay NetZero by wire transfer (a) concurrently with
the execution of this Amendment the sum of [***], (b) on January 1,
2000 the sum of [***] and (c) on April 1, 2000 the sum of [***]. Such
amounts shall be a prepayment against payments to be made under the
Existing Agreement, as revised by this Amendment. If, due to NetZero's
termination under Section 7 of the Existing Agreement (as amended by
this Amendment), at the effective date of such termination a portion of
any of the foregoing amounts have been paid to NetZero but are still
unearned because NetZero has not generated the [***] that give rise to
the payment obligations,
- ---------------------
* Confidential treatment is requested for confidential information enclosed
in the brackets and underlined.
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LookSmart shall be entitled to a refund of the unearned amount. If
NetZero gives notice of its intent to terminate this Agreement under
Section 7 of the Existing Agreement (as amended by this Amendment) and
one of the payments referenced above becomes payable after the date of
notice but prior to the effective date of termination, LookSmart's
payment obligation shall be decreased. The amount of the payment shall
be reduced by multiplying the payment by a fraction, the numerator of
which is the number of days remaining from the due date of the payment
to the effective date of termination and the denominator of which is the
number of days in the period for which the prepayment applies.
8. Except as specifically set forth herein, the Existing Agreement shall
remain unaffected by this Amendment and shall remain in full force and
effect.
This Agreement has been executed to be effective as of the date first written
above.
NetZero, Inc. LookSmart, Ltd.
By: /s/ Mark R. Goldston By: /s/ Brian J. Cowling
------------------------------ ------------------------------
Name: Mark R. Goldston Name: Brian J. Cowling
---------------------------- ----------------------------
Title: Chief Executive Officer Title: Senior Vice President
--------------------------- ---------------------------
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NETZERO, INC.
1999 STOCK INCENTIVE PLAN
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1999 Stock Incentive Plan is intended to promote the interests
of NetZero, Inc., a California corporation, by providing eligible persons in
the Corporation's service with the opportunity to acquire a proprietary
interest, or otherwise increase their proprietary interest, in the
Corporation as an incentive for them to remain in such service.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into four separate equity programs:
- the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock,
- the Salary Investment Option Grant Program under which
eligible employees may elect to have a portion of their base salary invested
each year in special option grants,
- 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), and
- the Director Fee Option Grant Program under which
non-employee Board members may elect to have all or any portion of their
annual retainer fee otherwise payable in cash applied to a special stock
option grant.
B. The provisions of Articles One and Six shall apply to all
equity programs under the Plan and shall govern the interests of all persons
under the Plan.
<PAGE>
III. ADMINISTRATION OF THE PLAN
A. The Primary Committee shall have sole and exclusive authority
to administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. Administration of the Discretionary Option
Grant and Stock Issuance Programs with respect to all other persons eligible
to participate in those programs may, at the Board's discretion, be vested in
the Primary Committee or a Secondary Committee, or the Board may retain the
power to administer those programs with respect to all such persons.
However, any discretionary option grants or stock issuances for members of
the Primary Committee must be authorized by a disinterested majority of the
Board.
B. Members of the Primary Committee or any Secondary Committee
shall serve for such period of time as the Board may determine and may be
removed by the Board at any time. The Board may also at any time terminate
the functions of any Secondary Committee and reassume all powers and
authority previously delegated to such committee.
C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, 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
Discretionary Option Grant and Stock Issuance Programs and to make such
determinations under, and issue such interpretations of, the provisions of
those programs and any outstanding options or stock issuances thereunder as
it may deem necessary or advisable. Decisions of the Plan Administrator
within the scope of its administrative functions under the Plan shall be
final and binding on all parties who have an interest in the Discretionary
Option Grant and Stock Issuance Programs under its jurisdiction or any option
or stock issuance thereunder.
D. The Primary Committee shall have the sole and exclusive
authority to determine which Section 16 Insiders and other highly compensated
Employees shall be eligible for participation in the Salary Investment Option
Grant Program for one or more calendar years. However, all option grants
under the Salary Investment Option Grant Program shall be made in accordance
with the express terms of that program, and the Primary Committee shall not
exercise any discretionary functions with respect to the option grants made
under that program.
E. Service on the Primary Committee or the Secondary Committee
shall constitute service as a Board member, and members of each such
committee shall accordingly be entitled to full indemnification and
reimbursement as Board members for their service on such committee. No
member of the Primary Committee or the Secondary Committee shall be liable
for any act or omission made in good faith with respect to the Plan or any
option grants or stock issuances under the Plan.
F. Administration of the Director Fee Option Grant Program shall
be self-executing in accordance with the terms of that program, and no Plan
Administrator shall exercise any discretionary functions with respect to any
option grants or stock issuances made under such program.
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IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or 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. Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.
C. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive such 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 under the Stock Issuance Program, which
eligible persons are to receive such issuances, the time or times when the
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 for such shares.
D. The Plan Administrator shall have the absolute discretion
either to grant options in accordance with the Discretionary Option Grant
Program or to effect stock issuances in accordance with the Stock Issuance
Program.
E. Non-employee Board members shall be eligible to participate in
the Director Fee Option Grant Program. In no event, however, shall a
non-employee Board member be eligible for such participation if that
individual would be required, whether contractually or otherwise, to transfer
the ownership of the option grant received under that program, or any
economic interest in such grant, to any venture fund or other entity with
which he or she is at the time affiliated.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall not exceed
21,900,000 shares. Such reserve shall consist of (i) the number
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of shares estimated to remain available for issuance, as of the Plan
Effective Date, under the Predecessor Plan as last approved by the
Corporation's stockholders, including the shares subject to outstanding
options under that Predecessor Plan, (ii) plus an additional increase of
approximately 2,400,000 shares to be approved by the Corporation's
stockholders prior to the Underwriting Date.
B. The number of shares of Common Stock available for issuance
under the Plan shall automatically increase on the first trading day of
January each calendar year during the term of the Plan, beginning with
calendar year 2000, by an amount equal to three percent (3%) of the total
number of shares of Common Stock outstanding on the last trading day in
December of the immediately preceding calendar year, but in no event shall
any such annual increase exceed 6,500,000 shares.
C. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances
for more than 2,000,000 shares of Common Stock in the aggregate per calendar
year.
D. Shares of Common Stock subject to outstanding options
(including options incorporated into this Plan from the Predecessor Plan)
shall be available for subsequent issuance under the Plan to the extent (i)
those 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 cancelled or repurchased by the Corporation at the original
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. However, should the exercise price of an option
under the Plan be paid with shares of Common Stock or should shares of Common
Stock otherwise issuable under the Plan be withheld by the Corporation in
satisfaction of the withholding taxes incurred in connection with the
exercise of an option or the vesting of a stock issuance under the Plan, then
the number of shares of Common Stock available for issuance under the Plan
shall be reduced by the gross number of shares for which the option is
exercised or which vest under the stock issuance, and not by the net number
of shares of Common Stock issued to the holder of such option or stock
issuance. Shares of Common Stock underlying one or more stock appreciation
rights exercised under Section IV of Article Two, Section III of Article
Three or Section III of Article Five of the Plan shall NOT be available for
subsequent issuance under the Plan.
E. If any change is 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 by the Plan Administrator to (i) the maximum number
and/or class of securities issuable under the Plan, (ii) the maximum number
and/or class of securities for which any one person may be granted stock
options, separately exercisable stock appreciation rights and direct stock
issuances under the Plan per calendar year, (iii) the number and/or class of
securities and the exercise price per share in effect under each
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outstanding option under the Plan, (iv) the number and/or class of securities
and price per share in effect under each outstanding option incorporated into
this Plan from the Predecessor Plan and (v) the maximum number and/or class
of securities by which the share reserve is to increase automatically each
calendar year pursuant to the provisions of Section V.B of this Article One.
Such adjustments to the outstanding options are to be effected in a manner
which shall preclude the enlargement or dilution of rights and benefits under
such options. The adjustments determined by the Plan Administrator shall be
final, binding and conclusive.
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ARTICLE TWO
DISCRETIONARY 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 but shall not be less than one hundred percent (100%) 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 Six and the documents evidencing the option, be payable in one or
more of the forms specified below:
(i) cash or check made payable to the Corporation,
(ii) 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
(iii) 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
to (a) 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) the Corporation to deliver the certificates for the
purchased shares directly to such brokerage firm in order to complete
the sale.
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. However, no option shall have a term in excess of ten
(10) years measured from the option grant date.
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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) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan
Administrator and set forth in the documents evidencing the option, but
no such option shall be exercisable after the expiration of the option
term.
(ii) Any option held by the Optionee at the time of death
and exercisable in whole or in part at that time may be subsequently
exercised by the personal representative of the Optionee's estate or by
the person or persons to whom the option is transferred pursuant to the
Optionee's will or the laws of inheritance or by the Optionee's
designated beneficiary or beneficiaries of that option.
(iii) Should the Optionee's Service be terminated for
Misconduct or should Optionee otherwise engage in Misconduct while one
or more of his or her options under this Article Two are outstanding,
then all those options shall terminate immediately and cease to be
outstanding.
(iv) 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 to the extent the
option is not otherwise at that time exercisable for vested shares.
2. The Plan Administrator shall have complete 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 the Optionee's cessation of Service from
the limited exercise 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 had the Optionee continued in Service.
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<PAGE>
D. STOCKHOLDER RIGHTS. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until
such person shall have exercised the option, paid the exercise price and
become a holder of record of the purchased shares.
E. REPURCHASE RIGHTS. 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.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and
shall not be assignable or transferable other than by will or by the laws of
inheritance following the Optionee's death. However, a Non-Statutory Option
may, in connection with the Optionee's estate plan, be assigned in whole or
in part during the Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust established exclusively for one or
more such family members. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant
to the assignment. The terms applicable to the assigned portion shall be the
same as those in effect for the option immediately prior to such assignment
and shall be set forth in such documents issued to the assignee as the Plan
Administrator may deem appropriate. Notwithstanding the foregoing, the
Optionee may also designate one or more persons as the beneficiary or
beneficiaries of his or her outstanding options under this Article Two, and
those options shall, in accordance with such designation, automatically be
transferred to such beneficiary or beneficiaries upon the Optionee's death
while holding those options. Such beneficiary or beneficiaries shall take
the transferred options subject to all the terms and conditions of the
applicable agreement evidencing each such transferred option, including
(without limitation) the limited time period during which the option may be
exercised following the Optionee's death.
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 Articles One, Two and Six shall be applicable to Incentive
Options. Options which are specifically designated as Nonstatutory Options
when issued under the Plan shall not be subject to the terms of this Section
II.
A. ELIGIBILITY. Incentive Options may only be granted to Employees.
B. 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
calendar year shall not exceed the sum of One Hundred Thousand Dollars
($100,000).
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<PAGE>
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.
C. 10% STOCKHOLDER. If any Employee to whom an Incentive Option
is granted is a 10% Stockholder, 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, and the option term shall not
exceed five (5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
exercisable for all the shares of Common Stock at the time subject to such
option and may be exercised for any or all of those shares as fully vested
shares of Common Stock. However, an outstanding option shall NOT become
exercisable on such an accelerated basis if and to the extent: (i) such
option is, in connection with the Corporate Transaction, to be assumed by the
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 at the time of the Corporate Transaction on any
shares for which the option is not otherwise at that time exercisable and
provides for subsequent payout in accordance with the same exercise/vesting
schedule applicable to those 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 automatically
terminate, 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 to be 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.
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 to reflect such Corporate Transaction
shall also be made to (i) the exercise price payable per share under each
outstanding option, provided the aggregate exercise price payable for such
securities shall remain the same, (ii) the maximum number and/or class of
securities available for issuance over the remaining term of the Plan and
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(iii) the maximum number and/or class of securities for which any one person
may be granted stock options, separately exercisable stock appreciation
rights and direct stock issuances under the Plan per calendar year and (iv)
the maximum number and/or class of securities by which the share reserve is
to increase automatically each calendar year.
E. The Plan Administrator shall have the discretionary authority
to structure one or more outstanding options under the Discretionary Option
Grant Program so that those options shall, immediately prior to the effective
date of such Corporate Transaction, become exercisable for all the shares of
Common Stock at the time subject to those options and may be exercised for
any or all of those shares as fully vested shares of Common Stock, whether or
not those options are to be assumed in the Corporate Transaction. In
addition, the Plan Administrator shall have the discretionary authority to
structure one or more of the Corporation's repurchase rights under the
Discretionary Option Grant Program so that those rights shall not be
assignable in connection with such Corporate Transaction and shall
accordingly terminate upon the consummation of such Corporate Transaction,
and the shares subject to those terminated rights shall thereupon vest in
full.
F. The Plan Administrator shall have full power and authority to
structure one or more outstanding options under the Discretionary Option
Grant Program so that those options shall become exercisable in whole or in
part on an accelerated basis in the event the Optionee's Service is
subsequently terminated 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 options are
assumed and do not otherwise accelerate. The option as so accelerated shall
remain exercisable 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
structure one or more of the Corporation's repurchase rights so that those
rights shall immediately terminate with respect to one or more unvested
shares held by the Optionee at the time of his or her Involuntary
Termination, and those shares shall immediately vest at that time.
G. The Plan Administrator shall have the discretionary authority
to structure one or more outstanding options under the Discretionary Option
Grant Program so that those options shall, immediately prior to the effective
date of a Change in Control, become exercisable in whole or in part on an
accelerated basis and may be exercised for any or all of the accelerated
shares as fully vested shares of Common Stock. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more
of the Corporation's repurchase rights under the Discretionary Option Grant
Program so that those rights shall terminate in whole or in part upon the
consummation of such Change in Control, and the shares subject to those
terminated rights shall thereupon vest. Alternatively, the Plan
Administrator may condition the full or partial acceleration of one or more
outstanding options under the Discretionary Option Grant Program and the
termination of one or more of the Corporation's outstanding repurchase rights
under such program upon the subsequent termination of the Optionee's Service
by reason of an Involuntary Termination within a designated period (not to
exceed eighteen (18) months) following the effective date of such Change in
Control. Each option as so accelerated shall remain exercisable 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 Optionee's
cessation of Service.
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H. The portion of any Incentive Option accelerated in connection
with a Corporate Transaction or Change in Control shall remain exercisable as
an Incentive Option only to the extent the applicable One Hundred Thousand
Dollar ($100,000) limitation is not exceeded. To the extent such dollar
limitation is exceeded, the accelerated portion of such option shall be
exercisable as a Nonstatutory Option under the Federal tax laws.
I. The outstanding options 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.
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 Discretionary
Option Grant Program (including outstanding options incorporated from the
Predecessor Plan) and to grant in substitution 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
grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.
B. The following terms shall govern the grant and exercise of
tandem stock appreciation rights:
(i) One or more Optionees may be granted the right,
exercisable upon such terms as the Plan Administrator may establish, to
elect between the exercise of the underlying option for shares of Common
Stock and the surrender of that option in exchange for a distribution
from the Corporation in an amount equal to the excess of (a) the Fair
Market Value (on the option surrender date) of the number of shares in
which the Optionee is at the time vested under the surrendered option
(or surrendered portion thereof) over (b) the aggregate exercise price
payable for such shares.
(ii) No such option surrender shall be effective unless
it is approved by the Plan Administrator, either at the time of the
actual option surrender or at any earlier time. If the surrender is so
approved, then the distribution to which the Optionee shall be entitled
may be made in shares of Common Stock valued at Fair Market Value on the
option surrender date, in cash, or partly in shares and partly in cash,
as the Plan Administrator shall in its sole discretion deem appropriate.
(iii) If the surrender of an option is not approved by
the Plan Administrator, then the Optionee shall retain whatever rights
the Optionee had under the surrendered option (or surrendered portion
thereof) on the option surrender date and may exercise such rights at
any time prior to the LATER of (a) five (5) business days after the
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receipt of the rejection notice or (b) the last day on which the option is
otherwise exercisable in accordance with the terms of the documents
evidencing such option, but in no event may such rights be exercised
more than ten (10) years after the option grant date.
C. The following terms shall govern the grant and exercise of
limited stock appreciation rights:
(i) One or more Section 16 Insiders may be granted
limited stock appreciation rights with respect to their outstanding
options.
(ii) Upon the occurrence of a Hostile Take-Over, each
individual holding one or more options with such a limited stock
appreciation right shall have the unconditional right (exercisable for a
thirty (30)-day period following such Hostile Take-Over) to surrender
each such option to the Corporation. In return for the surrendered
option, the Optionee shall receive a cash distribution from the
Corporation in an amount equal to the excess of (A) the Take-Over Price
of the shares of Common Stock at the time subject to such option
(whether or not the Optionee is otherwise vested in those shares) over
(B) the aggregate exercise price payable for those shares. Such cash
distribution shall be paid within five (5) days following the option
surrender date.
(iii) At the time such limited stock appreciation right
is granted, the Plan Administrator shall pre-approve any subsequent
exercise of that right in accordance with the terms of this Paragraph C.
Accordingly, no further approval of the Plan Administrator or the Board
shall be required at the time of the actual option surrender and cash
distribution.
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ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority
to determine the calendar year or years (if any) for which the Salary
Investment Option Grant Program is to be in effect and to select the Section
16 Insiders and other highly compensated Employees eligible to participate in
the Salary Investment Option Grant Program for such calendar year or years.
Each selected individual who elects to participate in the Salary Investment
Option Grant Program must, prior to the start of each calendar year of
participation, file with the Plan Administrator (or its designate) an
irrevocable authorization directing the Corporation to reduce his or her base
salary for that calendar year by an amount not less than Ten Thousand Dollars
($10,000.00) nor more than Fifty Thousand Dollars ($50,000.00). Each
individual who files such a timely authorization shall automatically be
granted an option under the Salary Investment Grant Program on the first
trading day in January of the calendar year for which the salary reduction is
to be in effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option 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.
A. EXERCISE PRICE.
1. The exercise price per share shall be thirty-three and
one-third percent (33-1/3%) 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 be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. NUMBER OF OPTION SHARES. The number of shares of Common Stock
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A DIVIDED BY (B x 66-2/3%), where
X is the number of option shares,
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A is the dollar amount of the reduction in the Optionee's base
salary for the calendar year to be in effect pursuant to this program,
and
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. EXERCISE AND TERM OF OPTIONS. The option shall become
exercisable in a series of twelve (12) successive equal monthly installments
upon the Optionee's completion of each calendar month of Service in the
calendar year for which the salary reduction is in effect. Each option shall
have a maximum term of ten (10) years measured from the option grant date.
D. EFFECT OF TERMINATION OF SERVICE. Should the Optionee cease
Service for any reason while holding one or more options under this Article
Three, then each such option shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the ten (10)-year option
term or (ii) the expiration of the three (3)-year period measured from the
date of such cessation of Service. Should the Optionee die while holding one
or more options under this Article Three, then each such option may be
exercised, for any or all of the shares for which the option is exercisable
at the time of the Optionee's cessation of Service (less any shares
subsequently purchased by Optionee prior to death), by the personal
representative of the Optionee's estate or by the person or persons to whom
the option is transferred pursuant to the Optionee's will or the laws of
inheritance or by the designated beneficiary or beneficiaries of such option.
Such right of exercise shall lapse, and the option shall terminate, upon the
EARLIER of (i) the expiration of the ten (10)-year option term or (ii) the
three (3)-year period measured from the date of the Optionee's cessation of
Service. However, the option shall, immediately upon the Optionee's cessation
of Service for any reason, terminate and cease to remain outstanding with
respect to any and all shares of Common Stock for which the option is not
otherwise at that time exercisable.
III. CORPORATE TRANSACTION/ CHANGE IN CONTROL/ HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee
remains in Service, each outstanding option held by such Optionee under this
Salary Investment Option Grant Program shall automatically accelerate so that
each such option shall, immediately prior to the effective date of the
Corporate Transaction, become exercisable for all the shares of Common Stock
at the time subject to such option and may be exercised for any or all of
those shares as fully-vested shares of Common Stock. Each such outstanding
option shall terminate immediately following the Corporate Transaction,
except to the extent assumed by the successor corporation (or parent thereof)
in such Corporate Transaction. Any option so assumed and shall remain
exercisable for the fully-vested shares until the EARLIER of (i) the
expiration of the ten (10)-year option term or (ii) the expiration of the
three (3)-year period measured from the date of the Optionee's cessation of
Service.
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B. In the event of a Change in Control while the Optionee remains
in Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each
such option shall, immediately prior to the effective date of the Change in
Control, become exercisable for all the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock. The option shall remain so exercisable
until the EARLIEST to occur of (i) the expiration of the ten (10)-year option
term, (ii) the expiration of the three (3)-year period measured from the date
of the Optionee's cessation of Service, (iii) the termination of the option
in connection with a Corporate Transaction or (iv) the surrender of the
option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Salary Investment Option
Grant Program. The Optionee shall in return be entitled to a cash
distribution from the Corporation in an amount equal to the excess of (i) the
Take-Over Price of the shares of Common Stock at the time subject to the
surrendered option (whether or not the option is otherwise at the time
exercisable for those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. The Primary
Committee shall, at the time the option with such limited stock appreciation
right is granted under the Salary Investment Option Grant Program,
pre-approve any subsequent exercise of that right in accordance with the
terms of this Paragraph C. Accordingly, no further approval of the Primary
Committee or the Board shall be required at the time of the actual option
surrender and cash distribution.
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 the exercise
price payable per share under each outstanding option, provided the aggregate
exercise price payable for such securities shall remain the same. The grant
of options under the Salary Investment Option Grant Program 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.
IV. REMAINING TERMS
The remaining terms of each option granted under the Salary
Investment Option Grant Program shall be the same as the terms in effect for
option grants made under the Discretionary Option Grant Program.
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ARTICLE FOUR
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. Shares of Common
Stock may also be issued under the Stock Issuance Program pursuant to share
right awards which entitle the recipients to receive those shares upon the
attainment of designated performance goals.
A. PURCHASE PRICE.
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the
Fair Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Seven,
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. The elements of the vesting schedule applicable to
any unvested shares of Common Stock issued under the Stock Issuance Program
shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement. Shares of Common Stock may also be issued under the
Stock Issuance Program pursuant to share right awards which entitle the
recipients to receive those shares upon the attainment of designated
performance goals.
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
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receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to 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 stockholder 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 stockholder 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 the surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock
which would otherwise occur upon the cessation of the Participant's Service
or the non-attainment of the performance objectives applicable to those
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.
6. Outstanding share right awards under the Stock Issuance
Program shall automatically terminate, and no shares of Common Stock shall
actually be issued in satisfaction of those awards, if the performance goals
established for such awards are not attained. The Plan Administrator,
however, shall have the discretionary authority to issue shares of Common
Stock under one or more outstanding share right awards as to which the
designated performance goals have not been attained.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all 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 to be 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 in the Stock
Issuance Agreement.
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B. The Plan Administrator shall have the discretionary authority
to structure one or more of the Corporation's repurchase rights under the
Stock Issuance Program so that those rights shall automatically terminate in
whole or in part, 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).
C. The Plan Administrator shall also have the discretionary
authority to structure one or more of the Corporation's repurchase rights
under the Stock Issuance Program so that those rights shall automatically
terminate in whole or in part, 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 Change in Control.
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 FIVE
DIRECTOR FEE OPTION GRANT PROGRAM
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority
to determine the calendar year or years for which the Director Fee Option
Grant Program is to be in effect. For each such calendar year the program is
in effect, each non-employee Board member may irrevocably elect to apply all
or any portion of the annual retainer fee otherwise payable in cash for his
or her service on the Board for that year to the acquisition of a special
option grant under this Director Fee Option Grant Program. Such election must
be filed with the Corporation's Chief Financial Officer prior to first day of
the calendar year for which the annual retainer fee which is the subject of
that election is otherwise payable. Each non-employee Board member who files
such a timely election shall automatically be granted an option under this
Director Fee Option Grant Program on the first trading day in January in the
calendar year for which the annual retainer fee which is the subject of that
election would otherwise be payable in cash.
In no event, however, shall a non-employee Board member be eligible
to receive an option grant under the Director Fee Option Grant Program if
that individual would be required, whether contractually or otherwise, to
transfer the ownership of the grant, or any economic interest in such grant,
to any venture fund or other entity with which he or she is at the time
affiliated.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms
and conditions specified below.
A. EXERCISE PRICE.
1. The exercise price per share shall be thirty-three and
one-third percent (33-1/3%) 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 be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. NUMBER OF OPTION SHARES. The number of shares of Common Stock
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
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X = A DIVIDED BY (B x 66-2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject to the
non-employee Board member's election, and
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. EXERCISE AND TERM OF OPTIONS. The option shall become
exercisable in a series of twelve (12) successive equal monthly installments
upon the Optionee's completion of each calendar month of Board service during
the calendar year in which the option is granted. Each option shall have a
maximum term of ten (10) years measured from the option grant date.
D. LIMITED TRANSFERABILITY OF OPTIONS. Each option under this
Article Five may, in connection with the Optionee's estate plan, be assigned
in whole or in part during the Optionee's lifetime to one or more members of
the Optionee's immediate family or to a trust established exclusively for one
or more such family members. The assigned portion may only be exercised by
the person or persons who acquire a proprietary interest in the option
pursuant to the assignment. The terms applicable to the assigned portion
shall be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate. The Optionee may also designate
one or more persons as the beneficiary or beneficiaries of his or her
outstanding options under this Article Five, and those options shall, in
accordance with such designation, automatically be transferred to such
beneficiary or beneficiaries upon the Optionee's death while holding those
options. Such beneficiary or beneficiaries shall take the transferred
options subject to all the terms and conditions of the applicable agreement
evidencing each such transferred option, including (without limitation) the
limited time period during which the option may be exercised following the
Optionee's death.
E. TERMINATION OF BOARD SERVICE. Should the Optionee cease Board
service for any reason (other than death or Permanent Disability) while
holding one or more options under this Director Fee Option Grant Program,
then each such option shall remain exercisable, for any or all of the shares
for which the option is exercisable at the time of such cessation of Board
service, until the EARLIER of (i) the expiration of the ten (10)-year option
term or (ii) the expiration of the three (3)-year period measured from the
date of such cessation of Board service. However, each option held by the
Optionee under this Director Fee Option Grant Program at the time of his or
her cessation of Board service shall immediately terminate and cease to
remain outstanding with respect to any and all shares of Common Stock for
which the option is not otherwise at that time exercisable.
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F. DEATH OR PERMANENT DISABILITY. Should the Optionee's service
as a Board member cease by reason of death or Permanent Disability, then each
option held by such Optionee under this Director Fee Option Grant Program
shall immediately become exercisable for all the shares of Common Stock at
the time subject to that option, and the option may be exercised for any or
all of those shares as fully-vested shares until the earlier of (i) the
expiration of the ten (10)-year option term or (ii) the expiration of the
three (3)-year period measured from the date of such cessation of Board
service. In the event of the Optionee's death while holding such option, the
option may be exercised by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred pursuant
to the Optionee's will or the laws of inheritance or by the designated
beneficiary or beneficiaries of such option.
Should the Optionee die after cessation of Board service but while
holding one or more options under this Director Fee Option Grant Program,
then each such option may be exercised, for any or all of the shares for
which the option is exercisable at the time of the Optionee's cessation of
Board service (less any shares subsequently purchased by Optionee prior to
death), by the personal representative of the Optionee's estate or by the
person or persons to whom the option is transferred pursuant to the
Optionee's will or the laws of inheritance or by the designated beneficiary
or beneficiaries of such option. Such right of exercise shall lapse, and the
option shall terminate, upon the earlier of (i) the expiration of the ten
(10)-year option term or (ii) the three (3)-year period measured from the
date of the Optionee's cessation of Board service.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee
remains a Board member, each outstanding option held by such Optionee under
this Director Fee Option Grant Program shall automatically accelerate so that
each such option shall, immediately prior to the effective date of the
Corporate Transaction, become exercisable for all the shares of Common Stock
at the time subject to such option and may be exercised for any or all of
those shares as fully-vested shares of Common Stock. Each such outstanding
option shall terminate immediately following the Corporate Transaction,
except to the extent assumed by the successor corporation (or parent thereof)
in such Corporate Transaction. Any option so assumed and shall remain
exercisable for the fully-vested shares until the EARLIER of (i) the
expiration of the ten (10)-year option term or (ii) the expiration of the
three (3)-year period measured from the date of the Optionee's cessation of
Board service.
B. In the event of a Change in Control while the Optionee remains
in Service, each outstanding option held by such Optionee under this Director
Fee Option Grant Program shall automatically accelerate so that each such
option shall immediately become exercisable for all of the shares of Common
Stock at the time subject to such option and may be exercised for any or all
of those shares as fully-vested shares of Common Stock. The option shall
remain so exercisable until the EARLIEST to occur of (i) the expiration of
the ten (10)-year option term, (ii) the expiration of the three (3)-year
period measured from the date of the Optionee's cessation of Board service,
(iii) the termination of the option in connection with a Corporate
Transaction or (iv) the surrender of the option in connection with a Hostile
Take-Over.
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C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Director Fee Option Grant
Program. The Optionee shall in return be entitled to a cash distribution
from the Corporation in an amount equal to the excess of (i) the Take-Over
Price of the shares of Common Stock at the time subject to each surrendered
option (whether or not the option is otherwise at the time exercisable for
those shares) over (ii) the aggregate exercise price payable for such shares.
Such cash distribution shall be paid within five (5) days following the
surrender of the option to the Corporation. No approval or consent of the
Board or any Plan Administrator shall be required at the time of the actual
option surrender and cash distribution.
D. The grant of options under the Director Fee Option Grant
Program 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.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for option
grants made under the Discretionary Option Grant Program.
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ARTICLE SIX
MISCELLANEOUS
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to
pay the option exercise price under the Discretionary Option Grant Program or
the purchase price of shares issued under the Stock Issuance Program by
delivering a full-recourse, interest bearing promissory note payable in one
or more installments. The terms of any such promissory note (including the
interest rate and the terms of repayment) shall be established by the Plan
Administrator in its sole discretion. In no event may 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
(less the par value of those 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. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under
the Plan shall be subject to the satisfaction of all applicable Federal,
state and local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or
all holders of Non-Statutory Options or unvested shares of Common Stock under
the Plan (other than the options granted under the Director Fee Option Grant
Program) with the right to use shares of Common Stock in satisfaction of all
or part of the Withholding Taxes to which such holders may become subject in
connection with the exercise of their options or the vesting of their shares.
Such right may be provided to any such holder in either or both of the
following formats:
STOCK WITHHOLDING: The election to have the Corporation withhold,
from the shares of Common Stock otherwise issuable upon the exercise of such
Non-Statutory Option or the vesting of such shares, a portion of those shares
with an aggregate Fair Market Value equal to the percentage of the
Withholding Taxes (not to exceed one hundred percent (100%)) designated by
the holder.
STOCK DELIVERY: The election to deliver to the Corporation, at the
time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the
Withholding Taxes) with an aggregate Fair Market Value equal to the
percentage of the Withholding Taxes (not to exceed one hundred percent
(100%)) designated by the holder.
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III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately on the Plan
Effective Date. However, the Salary Investment Option Grant Program and the
Director Fee Option Grant Program shall not be implemented until such time as
the Primary Committee may deem appropriate. Options may be granted under the
Discretionary Option Grant at any time on or after the Plan Effective Date.
However, no options 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 stockholders. If such stockholder approval is not obtained
within twelve (12) months after the Plan Effective Date, then all options
previously granted under this Plan shall terminate and cease to be
outstanding, and no further options shall be granted and no shares shall be
issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plan,
and no further option grants or direct stock issuances shall be made under
that Predecessor Plan after the Plan Effective Date. All options outstanding
under the Predecessor Plan on the Plan Effective Date shall be incorporated
into the Plan at that time and shall be treated as outstanding options under
the Plan. However, each outstanding option so incorporated shall continue to
be governed solely by the terms of the documents evidencing such option, and
no provision of the Plan shall be deemed to affect or otherwise modify the
rights or obligations of the holders of such incorporated options with
respect to their acquisition of shares of Common Stock.
C. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two
relating to Corporate Transactions and Changes in Control, may, in the Plan
Administrator's discretion, be extended to one or more options incorporated
from the Predecessor Plan which do not otherwise contain such provisions.
D. The Plan shall terminate upon the earliest to occur of (i) May
31, 2009, (ii) the date on which all shares available for issuance under the
Plan shall have been issued as fully-vested shares or (iii) the termination
of all outstanding options in connection with a Corporate Transaction.
Should the Plan terminate on May 31, 2009, then all option grants and
unvested stock issuances outstanding at that time shall continue to have
force and effect in accordance with the provisions of the documents
evidencing such grants or issuances.
IV. 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 stock 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
stockholder approval pursuant to applicable laws or regulations.
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B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and Salary Investment Option Grant Programs
and shares of Common Stock may be issued under the Stock Issuance Program
that are in each instance in excess of the number of shares then available
for issuance under the Plan, provided any excess shares actually issued under
those programs shall be held in escrow until there is obtained stockholder
approval of an amendment sufficiently increasing the number of shares of
Common Stock available for issuance under the Plan. If such stockholder
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.
V. 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.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock
option under the Plan and the issuance of any shares of Common Stock (i) upon
the exercise of any granted 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 stock options granted under it and the shares of Common Stock issued
pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance
with all applicable requirements of Federal and state securities laws,
including the filing and effectiveness of the Form S-8 registration statement
for the shares of Common Stock issuable under the Plan, and all applicable
listing requirements of any stock exchange (or the Nasdaq National Market, if
applicable) on which Common Stock is then listed for trading.
VII. NO EMPLOYMENT/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.
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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. CHANGE IN CONTROL shall mean a change in ownership or control
of the Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person
or related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders, or
(ii) a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that a
majority of the Board members ceases, by reason of one or more contested
elections for Board membership, to be comprised of individuals who
either (A) have been Board members continuously since the beginning of
such period or (B) have been elected or nominated for election as Board
members during such period by at least a majority of the Board members
described in clause (A) who were still in office at the time the Board
approved such election or nomination.
C. CODE shall mean the Internal Revenue Code of 1986, as amended.
D. COMMON STOCK shall mean the Corporation's common stock.
E. CORPORATE TRANSACTION shall mean either of the following
stockholder 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.
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F. CORPORATION shall mean NetZero, Inc., a Delaware corporation,
and any corporate successor to all or substantially all of the assets or
voting stock of NetZero, Inc. which shall by appropriate action adopt the
Plan.
G. DIRECTOR FEE OPTION GRANT PROGRAM shall mean the special stock
option grant in effect for non-employee Board members under Article Five of
the Plan.
H. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary
option grant program in effect under Article Two of the Plan.
I. ELIGIBLE DIRECTOR mean a non-employee Board member eligible to
participate in the Director Fee Option Grant Program in accordance with the
eligibility provisions of Articles One and Five of the Plan.
J. 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.
K. EXERCISE DATE shall mean the date on which the Corporation
shall have received written notice of the option exercise.
L. 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 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) For purposes of any option grants made on the
Underwriting Date, the Fair Market Value shall be deemed to be equal to
the price per share at which the Common Stock is to be sold in the
initial public offering pursuant to the Underwriting Agreement.
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M. HOSTILE TAKE-OVER shall mean the acquisition, directly or
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled
by, or is under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange offer
made directly to the Corporation's stockholders which the Board does not
recommend such stockholders to accept.
N. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.
O. 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
bonus 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 by the
Corporation without the individual's consent.
P. 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 Optionee, Participant or other
person in the Service of the Corporation (or any Parent or Subsidiary).
Q. 1934 ACT shall mean the Securities Exchange Act of 1934, as
amended.
R. NON-STATUTORY OPTION shall mean an option not intended to
satisfy the requirements of Code Section 422.
S. OPTIONEE shall mean any person to whom an option is granted
under the Discretionary Option Grant, Salary Investment Option Grant or
Director Fee Option Grant Program.
A-3
<PAGE>
T. 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.
U. PARTICIPANT shall mean any person who is issued shares of
Common Stock under the Stock Issuance Program.
V. PERMANENT DISABILITY OR PERMANENTLY DISABLED 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 expected to result in death or to be of continuous duration of
twelve (12) months or more. However, solely for purposes of the Automatic
Option Grant and Director Fee Option Grant Programs, Permanent Disability or
Permanently Disabled shall mean the inability of the non-employee Board
member to perform his or her usual duties as a Board member by reason of any
medically determinable physical or mental impairment expected to result in
death or to be of continuous duration of twelve (12) months or more.
W. PLAN shall mean the Corporation's 1999 Stock Incentive Plan, as
set forth in this document.
X. PLAN ADMINISTRATOR shall mean the particular entity, whether
the Primary Committee, the Board or the Secondary Committee, which is
authorized to administer the Discretionary Option Grant and Stock Issuance
Programs with respect to one or more classes of eligible persons, to the
extent such entity is carrying out its administrative functions under those
programs with respect to the persons under its jurisdiction.
Y. PLAN EFFECTIVE DATE shall mean the date the Plan shall become
effective and shall be coincident with the Underwriting Date.
Z. PREDECESSOR PLAN shall mean the Corporation's Stock
Option/Stock Issuance Plan, as in effect immediately prior to the Plan
Effective Date hereunder.
AA. PRIMARY COMMITTEE shall mean the committee of two (2) or more
nonemployee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to
Section 16 Insiders and to administer the Salary Investment Option Grant
Program solely with respect to the selection of the eligible individuals who
may participate in such program.
BB. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary
investment option grant program in effect under Article Three of the Plan.
CC. SECONDARY COMMITTEE shall mean a committee of one or more Board
members appointed by the Board to administer the Discretionary Option Grant
and Stock Issuance Programs with respect to eligible persons other than
Section 16 Insiders.
A-4
<PAGE>
DD. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of
the 1934 Act.
EE. SERVICE shall mean the performance of services for 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 or stock issuance.
FF. STOCK EXCHANGE shall mean either the American Stock Exchange or
the New York Stock Exchange.
GG. STOCK ISSUANCE PROGRAM 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.
HH. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in
effect under Article Four of the Plan.
II. 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 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.
JJ. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market
Value per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest
reported price per share of Common Stock paid by the tender offeror in
effecting such Hostile Take-Over. However, if the surrendered option is an
Incentive Option, the Take-Over Price shall not exceed the clause (i) price
per share.
KK. 10% STOCKHOLDER 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).
LL. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
MM. UNDERWRITING DATE shall mean the date on which the Underwriting
Agreement is executed and priced in connection with an initial public
offering of the Common Stock.
NN. WITHHOLDING TAXES shall mean the Federal, state and local
income and employment withholding taxes to which the holder of Non-Statutory
Options or unvested shares of Common Stock may become subject in connection
with the exercise of those options or the vesting of those shares.
A-5
<PAGE>
NETZERO, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the
interests of NetZero, Inc., a Delaware corporation, by providing eligible
employees with the opportunity to acquire a proprietary interest in the
Corporation through participation in a payroll-deduction based employee stock
purchase plan designed to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations
for administering the Plan as it may deem necessary in order to comply with
the requirements of Code Section 423. Decisions of the Plan Administrator
shall be final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares of
Common Stock purchased on the open market. The number of shares of Common
Stock initially reserved for issuance over the term of the Plan shall be
limited to 500,000 shares.
B. The number of shares of Common Stock available for issuance
under the Plan shall automatically increase on the first trading day of
January each calendar year during the term of the Plan, beginning with
calendar year 2000, by an amount equal to one and one-half percent (1.5%) of
the total number of shares of Common Stock outstanding on the last trading
day in December of the immediately preceding calendar year, but in no event
shall any such annual increase exceed the lesser of (a) 3,250,000 shares or
(b) such lower amount as may be determined by the Board of Directors for the
calendar year.
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 class of securities
issuable under the Plan, (ii) the maximum number and class of securities
purchasable per Participant on any one Purchase Date, (iii) the maximum
number and class of securities purchasable in total by all Participants on
any one Purchase Date, (iv) the maximum
<PAGE>
number and/or class of securities by which the share reserve is to increase
automatically each calendar year pursuant to the provisions of Section III.B
of this Article One and (v) the number and class of securities and the price
per share in effect under each outstanding purchase right in order to prevent
the dilution or enlargement of benefits thereunder.
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under the
Plan through a series of successive offering periods until such time as (i)
the maximum number of shares of Common Stock available for issuance under the
Plan shall have been purchased or (ii) the Plan shall have been sooner
terminated.
B. Each offering period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date of such offering period. However, the initial offering period
shall commence at the Effective Time and terminate on the last business day
in October 2001. The next offering period shall commence on the first
business day in November 2001, and subsequent offering periods shall commence
as designated by the Plan Administrator.
C. Each offering period shall be comprised of a series of one or
more successive Purchase Intervals. Purchase Intervals shall run from the
first business day in May to the last business day in October each year and
from the first business day in November each year to the last business day in
April in the following year. However, the first Purchase Interval in effect
under the initial offering period shall commence at the Effective Time and
terminate on April 28, 2000.
D. Should the Fair Market Value per share of Common Stock on any
Purchase Date within an offering period be less than the Fair Market Value
per share of Common Stock on the start date of that offering period, then
that offering period shall automatically terminate immediately after the
purchase of shares of Common Stock on such Purchase Date, and a new offering
period shall commence on the next business day following such Purchase Date.
The new offering period shall have a duration of twenty (24) months, unless a
shorter duration is established by the Plan Administrator within five (5)
business days following the start date of that offering period.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start date
of any offering period under the Plan may enter that offering period on such
start date or on any subsequent Semi-Annual Entry Date within that offering
period, provided he or she remains an Eligible Employee.
B. Each individual who first becomes an Eligible Employee after
the start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or
she is an Eligible Employee.
2.
<PAGE>
C. The date an individual enters an offering period shall be
designated his or her Entry Date for purposes of that offering period.
D. To participate in the Plan for a particular offering period,
the Eligible Employee must complete the enrollment forms prescribed by the
Plan Administrator (including a stock purchase agreement and a payroll
deduction authorization) and file such forms with the Plan Administrator (or
its designate) on or before his or her scheduled Entry Date.
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for
purposes of acquiring shares of Common Stock during an offering period may be
any multiple of one percent (1%) of the Cash Earnings paid to the Participant
during each Purchase Interval within that offering period, up to a maximum of
fifteen percent (15%). The deduction rate so authorized shall continue in
effect throughout the offering period, except to the extent such rate is
changed in accordance with the following guidelines:
(i) The Participant may, at any time during
the offering period, reduce his or her rate of payroll
deduction to become effective as soon as possible after
filing the appropriate form with the Plan Administrator. The
Participant may not, however, effect more than one (1) such
reduction per Purchase Interval.
(ii) The Participant may, prior to the
commencement of any new Purchase Interval within the offering
period, increase the rate of his or her payroll deduction by
filing the appropriate form with the Plan Administrator. The
new rate (which may not exceed the fifteen percent (15%)
maximum) shall become effective on the start date of the
first Purchase Interval following the filing of such form.
B. Payroll deductions shall begin on the first pay day
administratively feasible following the Participant's Entry Date into the
offering period and shall (unless sooner terminated by the Participant)
continue through the pay day ending with or immediately prior to the last day
of that offering period. The amounts so collected shall be credited to the
Participant's book account under the Plan, but no interest shall be paid on
the balance from time to time outstanding in such account. The amounts
collected from the Participant shall not be required to be held in any
segregated account or trust fund and may be commingled with the general
assets of the Corporation and used for general corporate purposes.
C. Payroll deductions shall automatically cease upon the
termination of the Participant's purchase right in accordance with the
provisions of the Plan.
D. The Participant's acquisition of Common Stock under the Plan on
any Purchase Date shall neither limit nor require the Participant's
acquisition of Common Stock on any subsequent Purchase Date, whether within
the same or a different offering period.
3.
<PAGE>
VII. PURCHASE RIGHTS
A. GRANT OF PURCHASE RIGHT. A Participant shall be granted a
separate purchase right for each offering period in which he or she
participates. The purchase right shall be granted on the Participant's Entry
Date into the offering period and shall provide the Participant with the
right to purchase shares of Common Stock, in a series of successive
installments over the remainder of such offering period, upon the terms set
forth below. The Participant shall execute a stock purchase agreement
embodying such terms and such other provisions (not inconsistent with the
Plan) as the Plan Administrator may deem advisable.
Under no circumstances shall purchase rights be granted under the
Plan to any Eligible Employee if such individual would, immediately after the
grant, own (within the meaning of Code Section 424(d)) or hold outstanding
options or other rights to purchase, stock possessing five percent (5%) or
more of the total combined voting power or value of all classes of stock of
the Corporation or any Corporate Affiliate.
B. EXERCISE OF THE PURCHASE RIGHT. Each purchase right shall be
automatically exercised in installments on each successive Purchase Date
within the offering period, and shares of Common Stock shall accordingly be
purchased on behalf of each Participant on each such Purchase Date. The
purchase shall be effected by applying the Participant's payroll deductions
for the Purchase Interval ending on such Purchase Date to the purchase of
whole shares of Common Stock at the purchase price in effect for the
Participant for that Purchase Date.
C. PURCHASE PRICE. The purchase price per share at which Common
Stock will be purchased on the Participant's behalf on each Purchase Date
within the offering period shall be equal to eighty-five percent (85%) of the
LOWER of (i) the Fair Market Value per share of Common Stock on the
Participant's Entry Date into that offering period or (ii) the Fair Market
Value per share of Common Stock on that Purchase Date.
D. NUMBER OF PURCHASABLE SHARES. The number of shares of Common
Stock purchasable by a Participant on each Purchase Date during the offering
period shall be the number of whole shares obtained by dividing the amount
collected from the Participant through payroll deductions during the Purchase
Interval ending with that Purchase Date by the purchase price in effect for
the Participant for that Purchase Date. However, the maximum number of
shares of Common Stock purchasable per Participant on any one Purchase Date
shall not exceed 2,500 shares, subject to periodic adjustments in the event
of certain changes in the Corporation's capitalization. In addition, the
maximum number of shares of Common Stock purchasable in total by all
Participants on any one Purchase Date shall not exceed 500,000 shares,
subject to periodic adjustments in the event of certain changes in the
Corporation's capitalization. However, the Plan Administrator shall have the
discretionary authority, exercisable prior to the start of any offering
period under the Plan, to increase or decrease the limitations to be in
effect for the number of shares purchasable per Participant and in total by
all Participants on each Purchase Date during that offering period.
4.
<PAGE>
E. EXCESS PAYROLL DEDUCTIONS. Any payroll deductions not applied
to the purchase of shares of Common Stock on any Purchase Date because they
are not sufficient to purchase a whole share of Common Stock shall be held
for the purchase of Common Stock on the next Purchase Date. However, any
payroll deductions not applied to the purchase of Common Stock by reason of
the limitations on the maximum number of shares purchasable per Participant
or in total by all Participants on the Purchase Date shall be promptly
refunded.
F. TERMINATION OF PURCHASE RIGHT. The following provisions shall
govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to
the next scheduled Purchase Date in the offering period,
terminate his or her outstanding purchase right by filing
the appropriate form with the Plan Administrator (or its
designate), and no further payroll deductions shall be
collected from the Participant with respect to the
terminated purchase right. Any payroll deductions collected
during the Purchase Interval in which such termination
occurs shall, at the Participant's election, be immediately
refunded or held for the purchase of shares on the next
Purchase Date. If no such election is made at the time such
purchase right is terminated, then the payroll deductions
collected with respect to the terminated right shall be
refunded as soon as possible.
(ii) The termination of such purchase right
shall be irrevocable, and the Participant may not
subsequently rejoin the offering period for which the
terminated purchase right was granted. In order to resume
participation in any subsequent offering period, such
individual must re-enroll in the Plan (by making a timely
filing of the prescribed enrollment forms) on or before his
or her scheduled Entry Date into that offering period.
(iii) Should the Participant cease to remain
an Eligible Employee for any reason (including death,
disability or change in status) while his or her purchase
right remains outstanding, then that purchase right shall
immediately terminate, and all of the Participant's payroll
deductions for the Purchase Interval in which the purchase
right so terminates shall be immediately refunded. However,
should the Participant cease to remain in active service by
reason of an approved unpaid leave of absence, then the
Participant shall have the right, exercisable until the last
business day of the Purchase Interval in which such leave
commences, to (a) withdraw all the payroll deductions
collected to date on his or her behalf for that Purchase
Interval or (b) have such funds held for the purchase of
shares on his or her behalf on the next scheduled Purchase
Date. In no event, however, shall any further payroll
deductions be collected on the Participant's behalf during
such leave. Upon the Participant's return to active service
(x) within ninety (90) days following the commencement of
such leave or (y) prior to the expiration of any longer
period for which such Participant's right to reemployment
with the Corporation is guaranteed by statute or contract,
his or her payroll deductions under the Plan shall
automatically resume at the rate in
5.
<PAGE>
effect at the time the leave began, unless the
Participant withdraws from the Plan prior to his or her
return. An individual who returns to active employment
following a leave of absence which exceeds in duration the
applicable (x) or (y) time period will be treated as a new
Employee for purposes of subsequent participation in the
Plan and must accordingly re-enroll in the Plan (by making a
timely filing of the prescribed enrollment forms) on or
before his or her scheduled Entry Date into the offering
period.
G. CHANGE IN CONTROL. Each outstanding purchase right shall
automatically be exercised, immediately prior to the effective date of any
Change in Control, by applying the payroll deductions of each Participant for
the Purchase Interval in which such Change in Control occurs to the purchase
of whole shares of Common Stock at a purchase price per share equal to
eighty-five percent (85%) of the LOWER of (i) the Fair Market Value per share
of Common Stock on the Participant's Entry Date into the offering period in
which such Change in Control occurs or (ii) the Fair Market Value per share
of Common Stock immediately prior to the effective date of such Change in
Control. However, the applicable limitation on the number of shares of
Common Stock purchasable per Participant shall continue to apply to any such
purchase, but not the limitation applicable to the maximum number of shares
of Common Stock purchasable in total by all Participants.
The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Change in Control,
and Participants shall, following the receipt of such notice, have the right
to terminate their outstanding purchase rights prior to the effective date of
the Change in Control.
H. PRORATION OF PURCHASE RIGHTS. Should the total number of
shares of Common Stock to be purchased pursuant to outstanding purchase
rights on any particular date exceed the number of shares then available for
issuance under the Plan, the Plan Administrator shall make a pro-rata
allocation of the available shares on a uniform and nondiscriminatory basis,
and the payroll deductions of each Participant, to the extent in excess of
the aggregate purchase price payable for the Common Stock pro-rated to such
individual, shall be refunded.
I. ASSIGNABILITY. The purchase right shall be exercisable only by
the Participant and shall not be assignable or transferable by the
Participant.
J. STOCKHOLDER RIGHTS. A Participant shall have no stockholder
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased on the Participant's behalf in
accordance with the provisions of the Plan and the Participant has become a
holder of record of the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any purchase right outstanding under this Plan if
and to the extent such accrual, when aggregated with (i) rights to purchase
Common Stock accrued under any other purchase right granted under this Plan
and (ii) similar rights accrued under other employee stock purchase plans
6.
<PAGE>
(within the meaning of Code Section 423) of the Corporation or any Corporate
Affiliate, would otherwise permit such Participant to purchase more than
Twenty-Five Thousand Dollars ($25,000.00) worth of stock of the Corporation
or any Corporate Affiliate (determined on the basis of the Fair Market Value
per share on the date or dates such rights are granted) for each calendar
year such rights are at any time outstanding.
B. For purposes of applying such accrual limitations to the
purchase rights granted under the Plan, the following provisions shall be in
effect:
(i) The right to acquire Common Stock under
each outstanding purchase right shall accrue in a series of
installments on each successive Purchase Date during the
offering period on which such right remains outstanding.
(ii) No right to acquire Common Stock under
any outstanding purchase right shall accrue to the extent
the Participant has already accrued in the same calendar
year the right to acquire Common Stock under one or more
other purchase rights at a rate equal to Twenty-Five
Thousand Dollars ($25,000.00) worth of Common Stock
(determined on the basis of the Fair Market Value per share
on the date or dates of grant) for each calendar year such
rights were at any time outstanding.
C. If by reason of such accrual limitations, any purchase right of
a Participant does not accrue for a particular Purchase Interval, then the
payroll deductions which the Participant made during that Purchase Interval
with respect to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions of
this Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on July 8, 1999 and shall
become effective at the Effective Time, PROVIDED no purchase rights granted
under the Plan shall be exercised, and no shares of Common Stock shall be
issued hereunder, until (i) the Plan shall have been approved by the
stockholders of the Corporation and (ii) the Corporation shall have complied
with all applicable requirements of the 1933 Act (including the registration
of the shares of Common Stock issuable under the Plan on a Form S-8
registration statement filed with the Securities and Exchange Commission),
all applicable listing requirements of any stock exchange (or the Nasdaq
National Market, if applicable) on which the Common Stock is listed for
trading and all other applicable requirements established by law or
regulation. In the event such stockholder approval is not obtained, or such
compliance is not effected, within twelve (12) months after the date on which
the Plan is adopted by the Board, the Plan shall terminate and have no
further force or effect, and all sums collected from Participants during the
initial offering period hereunder shall be refunded.
7.
<PAGE>
B. Unless sooner terminated by the Board, the Plan shall terminate
upon the EARLIEST of (i) the last business day in October 2009, (ii) the
date on which all shares available for issuance under the Plan shall have
been sold pursuant to purchase rights exercised under the Plan or (iii) the
date on which all purchase rights are exercised in connection with a
Corporate Transaction. No further purchase rights shall be granted or
exercised, and no further payroll deductions shall be collected, under the
Plan following such termination.
X. AMENDMENT OF THE PLAN
A. The Board may alter, amend, suspend or terminate the Plan at any
time to become effective immediately following the close of any Purchase
Interval. However, the Plan may be amended or terminated immediately upon
Board action, if and to the extent necessary to assure that the Corporation
will not recognize, for financial reporting purposes, any compensation
expense in connection with the shares of Common Stock offered for purchase
under the Plan, should the financial accounting rules applicable to the Plan
at the Effective Time be subsequently revised so as to require the
Corporation to recognize compensation expense in the absence of such
amendment or termination.
B. In no event may the Board effect any of the following
amendments or revisions to the Plan without the approval of the Corporation's
stockholders: (i) increase the number of shares of Common Stock issuable
under the Plan, except for permissible adjustments in the event of certain
changes in the Corporation's capitalization, (ii) alter the purchase price
formula so as to reduce the purchase price payable for the shares of Common
Stock purchasable under the Plan or (iii) modify the eligibility requirements
for participation in the Plan.
XI. GENERAL PROVISIONS
A. All costs and expenses incurred in the administration of the
Plan shall be paid by the Corporation; however, each Plan Participant shall
bear all costs and expenses incurred by such individual in the sale or other
disposition of any shares purchased under the Plan.
B. Nothing in the Plan shall confer upon the Participant any right
to continue in the employ of the Corporation or any Corporate Affiliate for
any period of specific duration or interfere with or otherwise restrict in
any way the rights of the Corporation (or any Corporate Affiliate employing
such person) or of the Participant, which rights are hereby expressly
reserved by each, to terminate such person's employment at any time for any
reason, with or without cause.
C. The provisions of the Plan shall be governed by the laws of the
State of California without resort to that State's conflict-of-laws rules.
8.
<PAGE>
SCHEDULE A
CORPORATIONS PARTICIPATING IN
EMPLOYEE STOCK PURCHASE PLAN
AS OF THE EFFECTIVE TIME
NetZero, Inc.
<PAGE>
APPENDIX
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
B. CASH EARNINGS shall mean the (i) regular base salary paid to a
Participant by one or more Participating Companies during such individual's
period of participation in one or more offering periods under the Plan plus
(ii) all overtime payments, bonuses, commissions, profit-sharing
distributions and other incentive-type payments received during such period.
Such Cash Earnings shall be calculated before deduction of (A) any income or
employment tax withholdings or (B) any and all contributions made by the
Participant to any Code Section 401(k) salary deferral plan or Code Section
125 cafeteria benefit program now or hereafter established by the Corporation
or any Corporate Affiliate. However, Cash Earnings shall NOT include any
contributions made on the Participant's behalf by the Corporation or any
Corporate Affiliate to any employee benefit or welfare plan now or hereafter
established (other than Code Section 401(k) or Code Section 125 contributions
deducted from such Cash Earnings).
C. CHANGE IN CONTROL shall mean a change in ownership of the
Corporation pursuant to any of the following transactions:
(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 assets of the Corporation in complete
liquidation or dissolution of the Corporation, or
(iii) the acquisition, directly or indirectly by a person
or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by or
is under common control with the Corporation) of beneficial
ownership (within the meaning of Rule 13d-3 of the 1934 Act) of
securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities
pursuant to a tender or exchange offer made directly to the
Corporation's stockholders.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
E. COMMON STOCK shall mean the Corporation's common stock.
A-1.
<PAGE>
F. CORPORATE AFFILIATE shall mean any parent or subsidiary
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
G. CORPORATION shall mean NetZero, Inc., a Delaware corporation,
and any corporate successor to all or substantially all of the assets or
voting stock of NetZero, Inc., which shall by appropriate action adopt the
Plan.
H. EFFECTIVE TIME shall mean the time at which the Underwriting
Agreement is executed and the Common Stock priced for the initial public
offering of the Common Stock. Any Corporate Affiliate which becomes a
Participating Corporation after such Effective Time shall designate a
subsequent Effective Time with respect to its employee-Participants.
I. ELIGIBLE EMPLOYEE shall mean any person who is employed by a
Participating Corporation on a basis under which he or she is regularly
expected to render more than twenty (20) hours of service per week for more
than five (5) months per calendar year for earnings considered wages under
Code Section 3401(a).
J. ENTRY DATE shall mean the date an Eligible Employee first
commences participation in the offering period in effect under the Plan. The
earliest Entry Date under the Plan shall be the Effective Time.
K. 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 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) For purposes of the initial offering period which
begins at the Effective Time, the Fair Market Value shall be
deemed to be equal to the price per share at which the Common
Stock is sold in the initial public offering pursuant to the
Underwriting Agreement.
A-2.
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L. 1933 ACT shall mean the Securities Act of 1933, as amended.
M. PARTICIPANT shall mean any Eligible Employee of a Participating
Corporation who is actively participating in the Plan.
N. PARTICIPATING CORPORATION shall mean the Corporation and such
Corporate Affiliate or Affiliates as may be authorized from time to time by
the Board to extend the benefits of the Plan to their Eligible Employees.
The Participating Corporations in the Plan are listed in attached Schedule A.
O. PLAN shall mean the Corporation's 1999 Employee Stock Purchase
Plan, as set forth in this document.
P. PLAN ADMINISTRATOR shall mean the committee of two (2) or more
Board members appointed by the Board to administer the Plan.
Q. PURCHASE DATE shall mean the last busine ss day of each
Purchase Interval. The initial Purchase Date shall be April 28, 2000.
R. PURCHASE INTERVAL shall mean each successive six (6)-month
period within the offering period at the end of which there shall be
purchased shares of Common Stock on behalf of each Participant.
S. SEMI-ANNUAL ENTRY DATE shall mean the first business day in May
and November each year on which an Eligible Employee may first enter an
offering period.
T. STOCK EXCHANGE shall mean either the American Stock Exchange or
the New York Stock Exchange.
U. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
A-3.
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EXHIBIT 10.30
OFFICER'S INDEMNIFICATION AGREEMENT
THIS OFFICER'S INDEMNIFICATION AGREEMENT ("Agreement") is made and
entered into as of __________ by and between NetZero, Inc., a Delaware
corporation (the "Company"), and __________________ ("Officer").
R E C I T A L S
A. Officer, as the _____________ 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; and
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 Officer to continue to serve as an executive
officer of the Company, the Company has determined and agreed to enter into
this contract with Officer.
NOW, THEREFORE, in consideration of Officer's continued service to the
Company after the date hereof, the parties hereto agree as follows:
1. INDEMNITY OF OFFICER. The Company hereby agrees to hold harmless and
indemnify Officer 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 Officer:
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(a) against any and all expenses (including reasonable attorneys'
fees), witness fees, judgments, fines and amounts paid in settlement actually
and reasonably incurred by Officer 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 Officer is, was or at any time becomes a party, or is
threatened to be made a party, by reason of the fact that Officer is or was
an officer 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 Officer by
the Company under the non-exclusivity provisions of Section 7.08 of Article
VII 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 Officer 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 Officer 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
Officer for an accounting of profits, made from the purchase or sale by
Officer 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 Officer's conduct which is finally adjudged to have
been knowingly fraudulent or deliberately dishonest, or to constitute willful
misconduct;
(e) on account of Officer'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 Officer
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 Officer 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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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 Officer (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 Officer in
such proportion as is appropriate to reflect (i) the relative benefits
received by the Company on the one hand and Officer 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 Officer 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
Officer 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 Officer is an
executive officer 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 Officer 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 Officer was an executive officer 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 Officer of notice of the commencement of any action, suit or
proceeding, Officer 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 Officer otherwise than under
this Agreement. With respect to any such action, suit or proceeding as to
which Officer 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 Officer. After notice from the Company to Officer
of its election so as to assume the defense thereof, the Company will not be
liable to Officer under this Agreement for any legal or other expenses
subsequently incurred by Officer in connection with the defense thereof other
than reasonable costs of investigation or as otherwise provided below.
Officer shall have the right to employ its counsel in such action,
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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 Officer unless (i) the employment of counsel by Officer has
been authorized by the Company, (ii) Officer shall have reasonably concluded,
based on the advice of counsel, that there may be a conflict of interest
between the Company and Officer 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
Officer'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 Officer
shall have made the conclusion provided for in (ii) above; and
(c) the Company shall not be liable to indemnify Officer 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 Officer without Officer's written
consent. Neither the Company nor Officer will unreasonably withhold its
consent to any proposed settlement.
7. ADVANCEMENT AND REPAYMENT OF EXPENSES.
(a) In the event that Officer employs his own counsel pursuant to
Section 6(b)(i) through (iii) above, the Company shall advance to Officer,
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 Officer for such
expenses.
(b) Officer agrees that Officer will reimburse the Company for all
reasonable expenses paid by the Company in defending any civil or criminal
action, suit or proceeding against Officer 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 Officer 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 Officer if Officer (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 Officer,
wilfull disclosure of confidential information in bad faith and in violation
of Officer's fiduciary or contractual obligations to the Company, or any
other willful and deliberate breach in bad faith of Officer's duty to the
Company or its stockholders.
8. ENFORCEMENT.
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(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 Officer to continue as an officer of the Company, and
acknowledges that Officer is relying upon this Agreement in continuing in
such capacity.
(b) In the event Officer 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 Officer for all Officer'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 Officer, 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 Officer by this
Agreement shall not be exclusive of any other right which Officer 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 Officer by this
Agreement shall continue after Officer has ceased to be an officer, employee
or other agent of the Company and shall inure to the benefit of Officer'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 Officer 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 Officer 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.
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14. BINDING EFFECT. This Agreement shall be binding upon Officer and
upon the Company, its successors and assigns, and shall inure to the benefit
of Officer, 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.
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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
OFFICER
-----------------------------------
Name:
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