<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 27, 1999
REGISTRATION NO. 333-82827
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2 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, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE
SECURITIES TO BE REGISTERED OFFERING PRICE (1)
<S> <C>
Common Stock, $0.001 par value.................................................. $115,000,000
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT OF
SECURITIES TO BE REGISTERED REGISTRATION FEE (2)
<S> <C>
Common Stock, $0.001 par value.................................................. $31,970
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(o).
(2) Previously paid by the Registrant in connection with the filing of the
Registration Statement on July 14, 1999.
------------------------------
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 AUGUST 27, 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 6 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-
Making the Internet FREE AND EASY for Consumers
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: Over 1.6 million users have registered for
NetZero's FREE Internet access and FREE e-mail since October 1998
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 for basic demographic and household information
along with interests and activities. 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 continual desktop portal that sits on the
user's screen, separate from the browser and remains `on' throughout the
user's entire Internet experience.
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 key 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 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
ONE-TO-ONE MARKETING FEATURES
NetZero's patent pending zCast technology provides the ability to
identify and track surfing patterns 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 the NetZero 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 June 30, 1999,
approximately 1.17 million users registered for our service. During June 1999,
approximately 613,000 of these users accessed our service and were delivered
over 830 million advertising impressions. Our services are offered in over 1,100
cities nationwide.
An important feature of our service is The ZeroPort, a small window
displayed on our users' computer screens while they are online that is always
visible regardless of where they navigate. Users can move The ZeroPort to any
location on their screen but cannot close it or reduce its size. The ZeroPort
displays advertisements and advertiser-sponsored buttons and icons, all of which
can link directly to sites and services such as news, financial information,
sports and shopping. 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 $15.2 million and
our net loss for the year ended June 30, 1999 was approximately $15.2 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
consumer 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........................................ 102,860,217 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
8,275,649 shares of common stock available for issuance pursuant to our stock
plans, of which 3,497,100 shares are subject to outstanding options as of June
30, 1999, at a weighted average exercise price of $0.69 per share.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth certain of our summary financial data. This
information should be read in conjunction with the financial statements and
notes thereto appearing elsewhere in the prospectus.
<TABLE>
<CAPTION>
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) (8,204)
Net loss.................................... (25) (217) (1,795) (5,095) (8,113)
Net loss per share:
Basic and diluted(1)...................... $ -- $ (0.02) $ (0.22) $ (0.50) $ (0.71)
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........................ (15,335)
Net loss.................................... (15,220)
Net loss per share:
Basic and diluted(1)...................... $ (1.41)
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 $
Working capital..................................................................... 16,097 16,097
Total assets........................................................................ 47,501 47,501
Capital leases and notes payable, less current portion.............................. 3,527 3,527 3,527
Redeemable convertible preferred stock.............................................. 2,140 -- --
Deferred stock compensation......................................................... (6,732) (6,732) (6,732)
Total stockholders' equity.......................................................... 30,954 33,094
</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 shares of common stock offered
hereby at an assumed initial public offering price of $ per
share after deducting the underwriting discount and estimated offering
expenses payable by NetZero. See "Use of Proceeds" and "Capitalization".
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 we do not
have a measurable and predictable revenue stream from user access fees unlike
traditional Internet service providers. 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 30 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.
6
<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 1.17 million users had registered for our service as of June 30,
1999, approximately 613,000 had used our service in the previous 30 days. 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 we expect that these rates may 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
7
<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. 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 "Communications Network" on page 47 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 increase. For
example, some of our telecommunications providers impose minimum connection
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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 2 years. 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 2
years thereafter, 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 $15.2
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 offer up to $400.00 of rebates on computer equipment
with the purchase of three years of 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
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
would decrease significantly.
WE WILL 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.
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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.
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 this 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 telecommunication service providers fail to provide quality
service, our users' ability to access the Internet may be interrupted, which may
adversely affect the NetZero brand. If our users and advertisers do not perceive
our existing products and services as high quality, or if we introduce
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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.
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 will 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,
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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 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
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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 not be circumvented in
the future. We also cannot assure you that the security measures of our
third-party network providers will be adequate. In addition, to alleviate
problems caused by computer viruses or other inappropriate uses or security
breaches, we may have to interrupt, delay, or cease service to our users, which
could have a material adverse effect on our 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
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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.
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" for further information with
respect to our state of readiness on Year-2000 related issues as well as our
"worst case" scenario assessment.
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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 key 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,
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 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 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.
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IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE FUTURE ACQUISITIONS INTO OUR
OPERATIONS, THEN OUR RESULTS AND FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED.
We evaluate acquisition opportunities on an ongoing basis and at any given
time may be engaged in discussions with respect to possible acquisitions or
other business combinations. We may seek strategic acquisitions that can
complement our current or planned business activities. Such acquisitions may not
be available at the times or on terms acceptable to us, or at all. In addition,
acquiring a business involves many risks, including:
- potential disruption of our ongoing business and diversion of resources
and management time;
- unforeseen obligations or liabilities;
- possible inability of management to maintain uniform standards,
controls, procedures and policies;
- difficulty assimilating the acquired operations and personnel;
- risks of entering markets in which we have little or no direct prior
experience;
- potential impairment of relationships with employees or users as a
result of changes in management; and
- potential dilutive issuances of equity, large and immediate write-offs,
the incurrence of debt, and amortization of goodwill or other
intangible assets, any of which could materially or adversely affect
our results of operations and financial condition.
We cannot assure you that we will make any acquisitions or that we will be
able to obtain additional financing for such acquisitions, if necessary. If any
acquisitions are made, we cannot assure that we will be able to successfully
integrate the acquired business into our operations or that the acquired
business will perform as expected.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS AND WE MAY 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 29 for a more
detailed discussion regarding our operating results.
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
19
<PAGE>
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 telecommunication 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 Child Online Protection
Act of 1998 prohibits and imposes criminal penalties and civil liability on
anyone engaged in the business of selling or transferring, by means of the World
Wide Web, material that is harmful to minors without restricting access to this
material by persons under seventeen years of age. In addition, the Federal
Telecommunications Act of 1996 imposes fines on any entity that knowingly
permits any telecommunications facility under such entity's control to be used
to make obscene or indecent material available to minors via an interactive
computer service. Numerous states have adopted or are currently considering
similar types of legislation. We cannot predict whether any claim under federal
statutes, similar state statutes or common law will be asserted against us, or
if asserted, whether it will be successful. In addition, laws have been proposed
which would require Internet service providers to supply, at cost, filtering
technologies to limit or block the access of minors to unsuitable materials on
the Internet. The imposition of content restrictions and potential liability for
materials carried on or disseminated through our systems could require us to
implement measures to reduce our exposure to 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 these claims and potential adverse outcomes of
these claims could have a material adverse effect on our business, results of
operations and financial condition.
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 with respect to the offering
of third-party content that may be accessible through our services, including
links to Web-sites maintained by our users or other third parties, or posted
directly to our Web-site, and subsequently 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
20
<PAGE>
these types of claims have been successfully brought against online service
providers. In particular, copyright and trademark laws are evolving both
domestically and internationally, and it is uncertain how broadly the rights
provided under these laws will be applied to online environments. It is
impossible for us to determine who the potential rights holders may be with
respect to all materials available through our services.
PRIVACY CONCERNS MAY LIMIT OUR ABILITY TO SELL TARGETED ADVERTISING. We
provide users with free Internet access and other free services in exchange for
demographic information when they register with us. We have developed and adhere
to a privacy policy whereby we 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 promulgate 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
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
21
<PAGE>
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 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.
IF INTERNET USAGE DOES NOT CONTINUE TO GROW, WE MAY NOT BE ABLE TO EXECUTE OUR
BUSINESS PLAN.
If the use of the Internet does not continue to grow or evolves in a way
that we cannot address, our business, financial condition and operating results
could be materially and adversely affected. Substantially all of our revenues
are dependent on the continued use and expansion of the Internet. Use of the
Internet has grown dramatically, but 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
22
<PAGE>
be incorrect, our projections may be materially different than actual results or
circumstances, 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.
PURCHASERS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
If you purchase common stock in this offering, you will incur immediate and
substantial dilution in the net tangible book value of the shares purchased. We
estimate this dilution to be approximately $ per share, or
approximately % based on an assumed initial public offering price of
$ . Additional dilution will occur upon the exercise of outstanding
stock options and will also cause your percentage ownership of the Company to
decrease.
23
<PAGE>
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
for a more detailed discussion of when and how many additional shares of our
stock may be sold after this offering.
OUR MANAGEMENT HAS BROAD DISCRETION OVER THE USE OF THE PROCEEDS FROM THIS
OFFERING.
The net proceeds of this offering are estimated to be approximately
$ million, or approximately $ 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 in 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" 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.
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<PAGE>
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are based on our
current expectations, assumptions, estimates and projections about us and our
industry. When used in this prospectus, the words "expects", "anticipates",
"estimates", "intends", "believes" and similar expressions are intended to
identify forward-looking statements. These statements include, but are not
limited to, statements under the captions "Risk Factors", "Use of Proceeds",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Business" and elsewhere in this prospectus.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those projected. The
cautionary statements made in this prospectus should be read as being applicable
to all related forward-looking statements wherever they appear in this
prospectus. We assume no obligation to update such forward-looking statements
publicly for any reason, or to update the reasons actual results could differ
materially from those anticipated in such forward-looking statements, even if
new information becomes available in the future.
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.
25
<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 $ , or $ 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;
- 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 expenditure
plans with respect to 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 with respect to
such acquisitions or investments.
DIVIDEND POLICY
We have never declared nor paid cash dividends on our capital stock. We
currently intend to retain all available funds for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Any future determination to pay dividends will be at the
discretion of our Board of Directors and will depend on our results of
operations, financial conditions, contractual and legal restrictions and other
factors it deems relevant. We expect that any lease financing or credit
agreements we enter into will prohibit the payment of dividends without the
lender's consent.
26
<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
- the pro forma information on an as adjusted basis to give effect to 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 $
--------- ----------- ------------
--------- ----------- ------------
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, shares issued and
outstanding.............................................................. 1,352 93
Additional paid-in capital................................................. 7,888 56,007
Notes receivable from stockholders......................................... (1,029) (1,029) (1,029)
Deferred stock compensation................................................ (6,732) (6,732) (6,732)
Accumulated deficit........................................................ (15,245) (15,245) (15,245)
--------- ----------- ------------
Total stockholders' equity................................................. 30,954 33,094
--------- ----------- ------------
Total capitalization....................................................... $ 36,621 $ 36,621 $
--------- ----------- ------------
--------- ----------- ------------
</TABLE>
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<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 of as of June 30, 1999 would have been $ million, or $ per
share. This represents an immediate increase in pro forma net tangible book
value of $ per share to existing stockholders and an immediate dilution
in pro forma net tangible book value of $ per share to investors
purchasing common stock in this offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................... $
Pro forma net tangible book value per share as of June 30, 1999..... $ 0.36
Increase per share attributable to new investors....................
---------
Pro forma net tangible book value per share after this offering.......
---------
Dilution per share to new investors................................... $
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of 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
$ 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 % $ 48,212,000 % $ 0.52
New investors....................................
------------- --- -------------- ---
Total............................................ 100% $ 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"
and note 6 of the notes to our financial statements.
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<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 46 188 812 1,156
Depreciation and
amortization.............. -- 5 24 43 150 222
------------- -------------- -------------- ----------- --------- -----------
Total operating
expenses.............. 19 211 847 1,927 4,558 7,543
Loss from operations.......... (19) (217) (1,789) (5,125) (8,204) (15,335)
Interest and other income
(expense), net.............. (6) -- (6) 30 91 115
------------- -------------- -------------- ----------- --------- -----------
Net loss...................... $ (25) $ (217) $ (1,795) $ (5,095) $ (8,113) $ (15,220)
------------- -------------- -------------- ----------- --------- -----------
------------- -------------- -------------- ----------- --------- -----------
Basic and diluted net loss per
share....................... $ -- $ (0.02) $ (0.22) $ (0.50) $ (0.71) $ (1.41)
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.................................................................. -- (6,732)
Total stockholders' equity (deficit)......................................................... (23) 30,954
</TABLE>
29
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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 FORWARD-LOOKING 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, referrals of our users to other Web-sites, performance-based
agreements 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
30
<PAGE>
Communications, and FiNet for sponsorship of services offered through drop-down
menus on The ZeroPort. We have also entered into an agreement with Cisco Systems
for sponsored advertising on The ZeroPort and agreements with priceline.com and
Ameritrade to link and refer our users to their Web-sites from within 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.
Advertising revenues, which include banner advertising and sponsorships, 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 advertisers' or
sponsors' Web-sites, provided that no significant Company obligations 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.
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<PAGE>
We do not currently anticipate that inflation will have a material impact on
our results of operations.
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. Telecommunication 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 $7.8 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. Deferred compensation is presented as a reduction of
stockholders' equity and amortized over the vesting period of applicable
options, generally four years.
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<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 22 25
Depreciation and amortization................................ 20 6 4 5
------- ----- ----- -----
Total operating expenses................................. 694 247 122 163
Loss from operations......................................... (1,466) (656) (220) (331)
Interest and other income (expense), net..................... (5) 4 3 3
------- ----- ----- -----
Net loss..................................................... (1,471)% (652)% (217)% (328)%
------- ----- ----- -----
------- ----- ----- -----
</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 $1.1
33
<PAGE>
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 $7.8 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
$1.1 million for the year ended June 30, 1999. Stock-based compensation for the
year ended June 30, 1999 also include 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
34
<PAGE>
or shares, resulting in expense of $277,000 for the nine months ended March 31,
1999. Stock-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" 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.
35
<PAGE>
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 funds in order to fund more rapid
expansion, to expand our marketing activities, to develop new or enhance
existing services or products, to respond to competitive pressures or to acquire
complementary services, businesses or technologies. If we are not successful in
generating sufficient cash flow from operations, we may need to raise additional
capital through public or private financings, strategic relationships or other
arrangements. This additional funding, if needed, might not be available on
terms acceptable to us, or at all. Our failure to raise sufficient capital when
needed could have a material adverse effect on our business, results of
operations and financial condition. If additional funds were raised through the
issuance of equity securities, the percentage of stock owned by our then-current
stockholders would be reduced. Furthermore, such equity securities might have
rights, preferences or privileges senior to those of our common stock.
YEAR 2000
Many existing computer systems and software are coded to accept only two
digit entries in the date code field and cannot distinguish 21st century dates
from 20th century dates. If not corrected, there could be system failures or
miscalculations causing disruptions of operations, including, among other
things, an inability to process transactions or engage in normal business
activities. As a result, many companies' software and computer systems may need
to be upgraded or replaced to comply with these "Year 2000" requirements.
36
<PAGE>
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
operations:
Phase I: Assessment of Operations (completed in August 1999);
Phase II: Prepare Formal Test Plan (In process--estimated completion in
August 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).
While we have not completed our formal assessment of the impact that the
Year 2000 problem may have on our operations, we believe the following four
distinct areas of our operations may be affected by the Year 2000 problem:
INTERNALLY DEVELOPED SOFTWARE. We have internally developed a substantial
portion of the systems and software that we use to operate and monitor our
online operations. 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 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 most of the third parties from whom we have
purchased any hardware and software products. We intend to complete our
assessment of these parties' products by the end of August 1999. 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 some of these carriers which confirm that their systems are Year
2000 compliant. We are following up with our remaining telecommunications
suppliers and plan to receive similar Year 2000 disclosure statements from them
by the end of August 1999. In addition, we believe that several of our
telecommunications carriers have conducted Year 2000 compliance checks as a part
of their standard disaster recovery simulations. We expect to resolve any
significant Year 2000 issues with our telecommunications carriers; however, in
the event they do not achieve Year 2000 compliance, we may have to seek
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 be subject
to Year 2000 risks. We have obtained Year 2000 compliance statements from most
of the manufacturers of our non-IT 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. We plan to complete our assessment and testing
of these systems by the end of September 1999.
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<PAGE>
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.
38
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BUSINESS
NETZERO
NetZero is pioneering a new Internet service model that provides consumers
with free and easy access to the Internet while offering online advertisers a
highly effective way to reach those users through our proprietary targeting
technology. We offer users a simple and compelling proposition--free and
unlimited Internet access, as well as free e-mail and navigational tools to
enhance their online experience. The value of NetZero's proposition is evidenced
by our growth; between our October 1998 launch and June 30, 1999, approximately
1.17 million users registered for our service. During June 1999, approximately
613,000 of these users accessed our service and were delivered over 830 million
advertising impressions. Our services are offered in over 1,100 cities
nationwide.
When users access the Internet through our service, we display a small
window on their computer screen called The ZeroPort which is always visible
while they are online, regardless of where they navigate. Users can move The
ZeroPort to different locations on their screens but cannot close it or reduce
its size. The ZeroPort displays advertisements, advertiser-sponsored buttons,
icons and drop-down menus. By clicking on The ZeroPort, users can navigate
directly to sites and services such as news, sports, finance and shopping. We
generate revenues by selling advertisements and sponsorships on The ZeroPort. We
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 consumer 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 ISPs 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 user's 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, current Web-site 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 which 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 consumer 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 CDs to install our service, bundling and retail
distribution relationships, and television, radio and print advertising.
IMPROVE USER EXPERIENCE. We will continue efforts to improve the experience
of users and maximize their retention by enhancing the technical capabilities
and ease of use of our service, making our users' online experience more
relevant and personal, providing additional user support options and adding new
services.
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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 to
ensure reliable service through multiple wholesale providers.
We also believe that our strategy of using wholesale providers will enable
us to remain network-independent and to switch providers or technologies as cost
or performance improvements become available. As a result, we believe we can be
flexible in responding to user demand for higher-speed access and other types of
improved service such as DSL, cable modems, high-speed wireless access and other
broadband technologies.
SOURCES OF REVENUE
We generate 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 TheZeroPort 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
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have placed banner advertisements on The ZeroPort include Bell South, eBay,
Microsoft, Netscape and theglobe.com.
SPONSORSHIP. The ZeroPort contains a number of buttons and 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,
whereas banner advertisements generally rotate throughout a user's session. The
ticker tape displays sports, news and stock market quotes.
WEB-REFERRALS AND 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 our ability to direct
users to specific Web-sites, on advertisements and sponsorships on The ZeroPort,
as well as on targeted e-mail messages sent directly by advertisers to users who
elect to receive such messages via their free e-mail accounts. For example, our
agreement with Looksmart provides that, with certain 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 runs
through April 30, 2000.
OTHER.We also receive revenues from a distribution arrangement 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 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
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within The ZeroPort. We expect our sponsorship arrangements could involve some
level of exclusivity and will command higher prices than traditional online
advertising. Sponsorship advertising involves a greater degree of integration
and consultation between NetZero and the marketer. We intend to focus our sales
and marketing organization on building and sustaining these relationships,
including working to select the appropriate media strategy based on the
sponsor's requirements for timing, number of impressions and desired response
rate.
USER ACQUISITION
To date, we have relied extensively on word-of-mouth marketing to attract
the vast majority of our users. 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
CDs to install our software, and bundling, co-branding, and retail distribution
arrangements. For instance, we have entered into the following distribution
arrangements to build our brand, acquire users and generate revenues:
COMPAQ. In April 1999, we entered into a twelve-month agreement with Compaq
under which Compaq will bundle and distribute our NetZero software with its
Presario products. Compaq will pay for substantially all of the marketing,
distribution and advertising costs of the bundled product in exchange for up to
10% of The ZeroPort's banner advertising inventory on NetZero sessions initiated
from the bundled Presario products. In addition, all users who sign up for
NetZero's service through software installed on the bundled product will be
directed to 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.
USER SUPPORT
Our user service strategy is to build programs designed to increase user
satisfaction and retention, while controlling costs and accommodating our rapid
growth. To date, our user service has been handled in-house, but we plan to
engage in selective outsourcing of certain aspects of our user service to
vendors to provide us with greater efficiency and scalability for future growth.
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 develop and outsource a "pay for what you need" program
which will provide our users with toll-free telephone access, 24 hours per day,
7 days per week, to a support representative. Users will pay Taima for its
services on a per-incident basis.
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Our user service organization continually monitors different quantitative
measurement 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, weather, sports and news; and
- a new message indicator.
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:
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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 local dial-up phone numbers in over 1,100 cities
across the United States. Thus, our users typically bear no expenses for
communication beyond the cost, if any, of an ordinary local or regional phone
call. Our service provides full Point-to-Point Protocol 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 includes a minimum purchase commitment which extends
through July 2000. Our contract with GTE, including GTE's service, has a term
that ends in December 2000. Our contract
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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. We are in the process of building our
own data center at our offices in Westlake Village, California, which will be
equipped with battery and generator power backup systems to prevent outages from
interruption of utility power to the building. When the data center is complete,
we will also install zCast and e-mail servers at that facility.
COMPETITION
We compete for users and advertising customers.
COMPETITION FOR USERS
We believe that the primary competitive factors determining success in the
market for Internet users include a reputation for reliability of service,
effective customer support, pricing, easy-to-use software, geographic coverage
and scope of services. Other important factors include the timing and
introduction of new products and services and industry as well as general
economic trends. While we believe that we compete favorably with respect to
these factors, numerous of our competitors may have an advantage over us with
respect to specific factors. We currently compete with established online
service and content providers, such as America Online, 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 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.
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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 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 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.
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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 provides for
a five year term and annual support and license fees. 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.
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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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 M.B.A. (M.M.) from the J.L. Kellogg
School at Northwestern University and his B.S.B.A. in Marketing and Finance from
Ohio State University.
RONALD T. BURR is a co-founder of NetZero and has been our President and a
director since July 1997, and our Chief Technology Officer since March 1999. Mr.
Burr was also our Chief Executive Officer from July 1997 to March 1999. From
1991 to 1998, Mr. Burr was President of Impact Software, a software consulting
firm which he co-founded. From 1989 to 1991, Mr. Burr held a senior position as
a consulting technical team leader on a development project jointly produced by
IBM and Security Pacific Automation Company. From 1983 to 1989, Mr. Burr held
various management positions, including vice president of software development
with Vault Corporation, an Allen & Co. venture-funded software startup.
CHARLES S. HILLIARD has been our Senior Vice President, Finance and Chief
Financial Officer since April 1999. Prior to joining NetZero, Mr. Hilliard
served as an investment banker with Morgan Stanley Dean Witter & Co. from May
1994 to April 1999, most recently as a Principal in the
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<PAGE>
Corporate Finance Department. From August 1990 to May 1994, he served in the
Mergers & Acquisitions and Corporate Finance departments of Merrill Lynch & Co.
Mr. Hilliard served as a tax accountant with Arthur Andersen & Co. from
September 1985 to July 1988 and was licensed as a Certified Public Accountant in
January 1988. Mr. Hilliard received his B.S. in Business Administration from the
University of Southern California and his M.B.A. with distinction from the
University of Michigan.
FREDERIC A. RANDALL, JR. has been our Senior Vice President and General
Counsel since March 1999. Mr. Randall was appointed Secretary in May 1999. Prior
to joining NetZero, Mr. Randall was a partner at Brobeck, Phleger & Harrison LLP
from January 1991, and an associate from 1984 to December 1990. Mr. Randall
received his B.A. in English Literature with distinction from the University of
Michigan and his J.D., CUM LAUDE, from the University of San Francisco School of
Law.
PERRI S. PROCIDA has been our Senior Vice President, Sales since May 1999.
From October 1998 to April 1999, Ms. Procida acted as an independent consultant
for various Internet companies. From September 1996 to September 1998, Ms.
Procida was the Senior Vice President, Network Sales of the UPN Television
Network. From October 1979 to September 1996, she held various positions at NBC
Television Network, including Vice President of News Sales. Ms. Procida received
her B.S. from Syracuse University, majoring in Radio/Television and English.
STACY A. HAITSUKA is a co-founder of NetZero and has been our Senior Vice
President, Technology since March 1999. From July 1997 to March 1999, Mr.
Haitsuka was our Chief Technology Officer and a member of our board of
directors. Mr. Haitsuka also served as our Secretary from July 1997 to May 1999.
From May 1991 to September 1998, Mr. Haitsuka was the vice-president of Impact
Software, a software consulting company which he co-founded. Prior to May 1991,
Mr. Haitsuka held various positions at Security Pacific Automation Company. Mr.
Haitsuka received his B.S. in Computer Science from California State University
at Dominguez Hills.
HAROLD R. MACKENZIE is a co-founder of NetZero and has been our Vice
President, Software since July 1997. Prior to joining NetZero, he was a manager
with Impact Software from September 1996 to August 1998. From December 1995 to
September 1996, Mr. MacKenzie was an independent consultant focusing on custom
computer applications. From February 1992 to December 1995, Mr. MacKenzie was a
senior consultant for Andersen Consulting. From 1989 to 1992, he worked for the
Robotics Division of Seiko Instruments, Inc. Mr. MacKenzie received his B.S. in
Computer Science from California State University, Northridge.
MARWAN A. ZEBIAN is a co-founder of NetZero and has been our Vice President,
Networking and Communications since July 1997. Prior to joining NetZero, Mr.
Zebian was a technical expert with Impact Software from 1994 to 1998. From 1990
to 1994, Mr. Zebian founded and operated Megasoftware Engineering. From 1989 to
1991, Mr. Zebian held various technical positions at Security Pacific Automation
Company.
JANET C. DALY has been our Vice President of Marketing since December 1998.
Prior to joining NetZero, Ms. Daly was the Vice President of Marketing of
Quarterdeck from November 1997 to August 1998. From March 1996 to November 1997,
she was the Director of Marketing of CyberMedia. From September 1994 through
March 1996, Ms. Daly was the Senior Brand Manager and the Product Marketing
Manager, Consumer Division at Davidson and Associates. From November 1991 to
August 1994, Ms. Daly was the Senior Marketing Manager at Symantec-Peter Norton
Group. Ms. Daly received her B.A. from the University of California at Santa
Barbara.
DAVID J. DOWLING has been our Vice President of Business Development since
April 1999. From March 1997 to March 1999, he was President of media.com, the
interactive media and marketing communications affiliate of Grey Advertising.
From January 1996 to March 1997,
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Mr. Dowling served as the Director of Media for Grey Interactive. From September
1994 through January 1996, Mr. Dowling served as the Director of Media
Connections, another affiliate of Grey Advertising. Mr. Dowling received his
B.S., CUM LAUDE, in Marketing from the University of Connecticut.
DENNIS L. GORDON has been our Vice President, Customer Care since April 1998
and also our Vice President of Information Systems since March 1999. Prior to
joining NetZero, Mr. Gordon held various information technology management and
technical positions with the Southern California Gas Company, a subsidiary of
Pacific Enterprises, from 1977 to 1998.
JAMES T. ARMSTRONG has been a director since September 1998. Mr. Armstrong
has been a principal with idealab! Capital Partners since August 1998. From May
1995 to August 1998, Mr. Armstrong was a senior associate with Austin Ventures.
From September 1989 to March 1992, Mr. Armstrong was a senior auditor with Ernst
& Young. Mr. Armstrong serves on the board of directors of several private
companies including CarsDirect.com, Aveo, OpenSales.com, and Jobs.com. Mr.
Armstrong received his B.A. in Economics from the University of California at
Los Angeles and his M.B.A. with honors from the University of Texas.
DAVID C. BOHNETT has been a director since December 1998. Mr. Bohnett served
as Chairman of the Board and Secretary of GeoCities, which he founded, from
November 1994 until May 1999, when GeoCities merged with Yahoo!. From November
1994 to April 1998, Mr. Bohnett also served as GeoCities' Chief Executive
Officer and President. From November 1994 to November 1997, Mr. Bohnett also
served as GeoCities' Chief Financial Officer. Mr. Bohnett also serves on the
Board of Directors of Stamps.com, Inc. and several private companies. Mr.
Bohnett received his B.S. degree in Business Administration from the University
of Southern California and his M.B.A. degree in Finance from the University of
Michigan.
JENNIFER S. FONSTAD has been a director since January 1999. Ms. Fonstad is a
partner with Draper Fisher Jurvetson. Ms. Fonstad also serves on the board of
directors of several private companies including iShip.com, Conduit,
Saltare.com, Global Sight and Troika Networks. From January 1997 to May 1997,
she worked with SensAble Technologies. She held management positions with the
Planning Technologies Group, now part of the Nextera Group, from January 1995 to
May 1996 and a start-up based in Central Europe from September 1991 to May 1993.
Ms. Fonstad began her career as an Associate Consultant with Bain & Company. Ms.
Fonstad received her B.S. CUM LAUDE in Economics from Georgetown University and
her M.B.A. with distinction from Harvard.
BILL GROSS has been a director since September 1998. Since March 1996, Mr.
Gross has served as Chairman of the Board, Chief Executive Officer and President
of Bill Gross' idealab!, an incubator and venture capital firm which he founded
that specializes in Internet companies. He also has served as a Managing
Director of idealab! Capital Management I, LLC, a venture capital firm, since
March 1998. From June 1991 to January 1997, he served as Chairman of Knowledge
Adventure, Inc., an educational software developer of multimedia CD-ROMs for
children, which was founded by Mr. Gross. From February 1986 to March 1991, he
was a developer at Lotus Development Corporation. Mr. Gross serves on the board
of directors of Ticketmaster Online-CitySearch, Inc. (formerly CitySearch, Inc.)
and GoTo.com, Inc. He also serves on the board of directors of several private
companies. Mr. Gross received his B.S. in Mechanical Engineering from the
California Institute of Technology.
PAUL G. KOONTZ has been a director since January 1999. Since 1996, Mr.
Koontz has been a member of Foundation Capital Management II L.L.C., the general
partner of Foundation Capital II, L.P. From 1995 to 1996, he was with Sutter
Hill Ventures and in 1994 he was the initial Vice President of Marketing of
Netscape Communications Corporation. From 1987 to 1994, Mr. Koontz was with
Silicon Graphics, Inc., where he held a number of positions, including Director
of
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Marketing. Mr. Koontz serves on the boards of directors of Onyx Software
Corporation and several privately held companies. Mr. Koontz received his B.S.
in mechanical engineering from Princeton University and his Masters in
engineering management from Stanford University.
BOARD OF DIRECTORS
Our board of directors currently comprises seven directors. Directors are
elected by the stockholders at each annual meeting of stockholders and serve for
one year or until their successors are duly elected and qualified. However, our
certificate of incorporation provides that, following the offering, our board of
directors will be divided into three classes as nearly equal in size as possible
with staggered, three-year terms. The term of office of our Class I directors
will expire at the annual meeting of stockholders to be held in 2000; the term
of office of our Class II directors will expire at the annual meeting of
stockholders to be held in 2001; and the term of office of our Class III
directors will expire at the annual meeting of the stockholders to be held in
2002. At each annual meeting of the stockholders, beginning with the 2000 annual
meeting, the successors to the directors whose terms will then expire will be
elected to serve from the time of their election and qualification until the
third annual meeting following their election or until their successors have
been duly elected and qualified, or until their earlier resignation or removal,
if any. Messrs. Bohnett and Koontz have been designated as Class I directors;
Mr. Burr and Ms. Fonstad have been designated as Class II directors; and Messrs.
Armstrong, Goldston and Gross have been designated as Class III directors. The
classification of our board of directors could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of NetZero.
BOARD COMMITTEES
The board has established an audit committee to meet with and consider
suggestions from members of management and our internal accounting personnel, as
well as our independent accountants, concerning our financial operations. The
audit committee also has the responsibility to review our audited financial
statements and consider and recommend the employment of, and approve the fee
arrangements with, independent accountants for both audit functions and for
advisory and other consulting services. The audit committee is currently
comprised of Messrs. Armstrong and Bohnett and Ms. Fonstad. The board has also
established a compensation committee to review and make recommendations to the
board regarding the compensation and benefits for our key executive officers,
administer our stock purchase, equity incentive and stock option plans. The
compensation committee is currently comprised of Messrs. Armstrong, Gross and
Koontz.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee is or has been an employee
of ours at any time since our formation. None of our executive officers serves
as a member of the board of directors or compensation committee of any entity
that has one or more executive officers serving as a member of our board of
directors or compensation committee.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
Our directors receive no cash remuneration for serving on the board of
directors or any board committee; however, directors are reimbursed for all
reasonable expenses incurred by them in attending board and committee meetings.
In December 1998, David C. Bohnett was granted an option to purchase 225,000
shares of Series C preferred stock at an exercise price of $0.4297. The
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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" below.
Employee directors are also eligible to receive stock option grants and
direct issuances of common stock under our 1999 Stock Incentive Plan. See
"--1999 Stock Incentive Plan" below.
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 such individuals during such 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"
for more information on the vesting of the option shares.
During the fiscal year ended June 30, 1999, we granted options to purchase
an aggregate of 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" for specific option information
for Mr. Goldston, Mr. Hilliard and Mr. Randall.
The following table sets forth information regarding our 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 the Company's 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, pursuant to which Mr. Goldston serves as our Chief Executive
Officer and Chairman. Pursuant to this agreement, Mr. Goldston receives a base
salary of $200,000 per year and during the first two years of the agreement, Mr.
Goldston receives a guaranteed bonus of $200,000 per year, payable in four
quarterly installments. Mr. Goldston is also entitled to receive a signing bonus
of $300,000 payable on January 1, 2000 so long as he is employed by us on 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 forty-eight equal monthly vesting
schedule. If Mr. Goldston's employment is terminated by us without cause, or if
following a change in control of NetZero, Mr. Goldston resigns
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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 twenty-four
months of vesting on his option shares in the event his employment is terminated
by reason of death or permanent disability. Further, Mr. Goldston's option
shares automatically vest upon a change in control of NetZero.
Charles S. Hilliard entered into a four-year employment agreement, effective
as of April 17, 1999, pursuant to which Mr. Hilliard serves as Senior Vice
President, Finance and Chief Financial Officer. Pursuant to this agreement, Mr.
Hilliard receives a base salary of $140,000 plus a performance-based bonus of up
to 50% of his base salary. In addition, we gave Mr. Hilliard benefits that we
make available to our employees in comparable positions, and we granted Mr.
Hilliard an immediately exercisable option to purchase 1,200,000 shares of our
common stock at a price per share of $0.33. Mr. Hilliard exercised his option to
purchase common stock in full, however, such option shares are subject to
repurchase by us at the price paid for 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 twelve months of vesting on his option shares. Mr. Hilliard will also
be credited with an additional twelve months of vesting on his option shares in
the event his employment is terminated by reason of death or permanent
disability. If, following a change in control, Mr. Hilliard's employment is
terminated without cause or is constructively terminated, all of the option
shares shall vest immediately; provided, if 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. Pursuant to this Agreement, Mr. Randall
receives a base salary of $135,000 plus a performance-based bonus of up to 50%
of his base salary. In addition, we gave Mr. Randall benefits that we make
available to our employees in comparable positions, and we granted Mr. Randall
an immediately exercisable option to purchase 1,050,000 shares of our common
stock at a price per share of $0.10. Mr. Randall exercised his option to
purchase common stock in full, however, the option shares are subject to
repurchase by us at the price paid for 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 twelve months of vesting on
his option shares. Mr. Randall will also be credited with an additional twelve
months of vesting on his option shares in the event his employment is terminated
by reason of death or permanent disability. If, following a change in control,
Mr. Randall's employment is terminated without cause or is constructively
terminated, all of the option shares shall vest immediately; provided, if 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 57.
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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. 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 million shares of common stock in total
in any calendar year.
PROGRAMS. Our 1999 Stock Incentive Plan has four separate programs:
- the discretionary option grant program, under which eligible
individuals in our employ may be granted options to purchase shares of
our common stock at an exercise price not less than the fair market
value of those shares on the grant date;
- the stock issuance program, under which eligible individuals may be
issued shares of common stock directly, upon the attainment of
performance milestones or the completion of a specified service period
or as a bonus for past services;
- the salary investment option grant program, under which our executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary each year to the
acquisition of special below market stock option grants; and
- the director fee option grant program, under which our non-employee
board members may be given the opportunity to apply a portion of any
retainer fee otherwise payable to them in cash for the year to the
acquisition of special below-market option grants.
ELIGIBILITY. The individuals eligible to participate in our 1999 Stock
Incentive Plan include our officers and other employees, our board members and
any consultants we hire.
ADMINISTRATION. The discretionary option grant and stock issuance programs
will be administered by our compensation committee. This committee will
determine which eligible individuals are to receive option grants or stock
issuances under those programs, the time or times when the grants or issuances
are to be made, the number of shares subject to each grant or issuance, the
status of any granted option as either an incentive stock option or a
nonstatutory stock option under the federal tax laws, the vesting schedule to be
in effect for the option grant or stock issuance and the maximum term for which
any granted option is to remain outstanding. The compensation committee will
also have the authority to select the executive officers and other
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<PAGE>
highly compensated employees who may participate in the salary investment option
grant program in the event that program is put into effect for one or more
calendar years.
PLAN FEATURES. Our 1999 Stock Incentive Plan will include the following
features:
- The exercise price for any options granted pursuant to the plan may be
paid in cash or in shares of our common stock valued at fair market
value on the exercise date. The option may also be exercised through a
same-day sale program without any cash outlay by the optionee.
- The compensation committee will have the authority to cancel
outstanding options under the discretionary option grant program,
including any transferred options from our existing stock option/stock
issuance plan, in return for the grant of new options for the same or
different number of option shares with an exercise price per share
based upon the fair market value of our common stock on the new grant
date.
- Stock appreciation rights may be issued under the discretionary option
grant program. These rights will provide the holders with the election
to surrender their outstanding options for a payment from us equal to
the fair market value of the shares subject to the surrendered options
less the exercise price payable for those shares. We may make the
payment in cash or in shares of our common stock. None of the
outstanding options under our existing stock option/stock issuance plan
have any stock appreciation rights.
CHANGE IN CONTROL. The 1999 Stock Incentive Plan will include the following
change in control provisions which may result in the accelerated vesting of
outstanding option grants and stock issuances:
- In the event that we are acquired by merger or asset sale, each
outstanding option under the discretionary option grant program which
is not to be assumed by the successor corporation will immediately
become exercisable for all the option shares, and all outstanding
unvested shares will immediately vest, except to the extent our
repurchase rights with respect to those shares are to be assigned to
the successor corporation.
- The compensation committee will have complete discretion to grant one
or more options which will become exercisable for all the option shares
in the event those options are assumed in the acquisition but the
optionee's service with us or the acquiring entity is subsequently
terminated. The vesting of any outstanding shares under our 1999 Stock
Incentive Plan may be accelerated upon similar terms and conditions.
- The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than fifty percent of our outstanding voting stock or a change in
the majority of our board through one or more contested elections. Such
accelerated vesting may occur either at the time of such transaction or
upon the subsequent termination of the individual's service.
- The options outstanding under our existing stock option/stock issuance
plan will immediately vest in the event we are acquired and the
acquiring company does not assume those options. In addition, any
options which are so assumed 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 of shares in
which he or she would have been vested at that time had his or her
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<PAGE>
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.
- 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.
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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 Delaware law provides further that the indemnification permitted
thereunder shall not be deemed exclusive of any other rights to which the
directors and officers may be entitled under the corporation's bylaws, any
agreement, a vote of stockholders or otherwise. The certificate of incorporation
provides that we shall, to the fullest extent permitted by the Delaware law,
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (whether
civil, criminal, administrative or investigative) by reason of the fact that
such person is or was a director or officer, or is or was serving at our request
as a director or officer of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses including
attorneys' fees, judgements, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding.
We have entered into indemnification agreements with our directors and some
of our officers containing provisions that may require us, among other things,
to indemnify these directors and officers against certain liabilities that may
arise by reason of their status or service as directors or officers, other than
liabilities arising from willful misconduct of a culpable nature, to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' liability
insurance if maintained for other directors or officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for such indemnification.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of June 30, 1999:
- each stockholder whom we know to beneficially own 5% or more of the
outstanding shares of common stock;
- each of our directors and named executive officers; and
- all of our directors and executive officers as a group.
The information set forth in the table below gives effect to the conversion of
all issued and outstanding convertible preferred stock. Unless otherwise
indicated, the address of each beneficial owner listed below is c/o NetZero,
Inc., 2555 Townsgate Road, Westlake Village, California.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by the footnotes below, we
believe, based on information furnished to us, that the persons and entities
named in the table below have sole voting and investment power with respect to
all shares of common stock shown as beneficially owned by them. Percentage of
beneficial ownership is based on 93,036,410 shares of common stock outstanding
as of June 30, 1999, and 102,860,217 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 June 30, 1999, these shares are deemed outstanding for the purpose of
determining the percentage ownership of the optionee. These shares, however, are
not deemed outstanding for the purpose of computing the percentage ownership of
any other stockholder.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
------------------------------
NUMBER OF SHARES AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING OFFERING
- ------------------------------------------------------------ ------------------- --------------- -------------
<S> <C> <C> <C>
Named Executive Officers and Directors:
Mark R. Goldston(1)....................................... 6,040,731 6.5% 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 900,000 shares subject to options, all of which are immediately
exercisable. Also includes 12,064,111 shares subject to our right of
repurchase. Of such shares, 424,431 shall be released from such right of
repurchase within 60 days of June 30, 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 (a) reflect
the number of shares of common stock purchased by the respective party on an
as-converted basis and (b) reflect the 3-2 stock split that 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 T. 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 were
amended to 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.
ISSUANCE OF OPTION TO PURCHASE SERIES C PREFERRED STOCK
In March 1999, David C. Bohnett purchased 225,000 shares of our Series C
preferred stock for a purchase price of $96,690, in connection with the exercise
of the option to purchase such shares which was granted to Mr. Bohnett in
December 1998 in connection with his joining our board of directors. The option
shares are subject to NetZero's right of repurchase at the price paid per share.
The repurchase right lapses in a series of 48 equal monthly installments which
began December 1, 1998.
ISSUANCE OF SERIES D PREFERRED STOCK
In May 1999, we sold 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.
66
<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 twelve 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 45 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.
67
<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 certificates that will be adopted
by us immediately prior to the closing of this offering.
COMMON STOCK
As of June 30, 1999, there were 93,036,410 shares of common stock
outstanding and held of record by 163 stockholders, assuming conversion of all
shares of preferred stock into common stock. Based on the number of shares
outstanding as of that date and giving effect to the issuance of the 10,000,000
shares of common stock offered by us hereby, there will be 102,860,217 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. 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 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.
68
<PAGE>
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF
INCORPORATION AND BYLAWS
Certain provisions of our certificate of incorporation and bylaws, which
will become effective upon the closing of this offering, may make it more
difficult to acquire control of NetZero by various means. These provisions could
deprive the stockholders of opportunities to realize a premium on the shares of
common stock owned by them. In addition, these provisions may adversely affect
the prevailing market price of the stock. These provisions are intended to:
- 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 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
69
<PAGE>
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. Subject to certain exceptions, Section 203 prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years from the date of
the transaction in which the person became an interested stockholder, unless the
interested stockholder attained such status with the approval of the board of
directors or unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, fifteen percent
(15%) or more of the corporation's voting stock. This statute could prohibit or
delay the accomplishment of mergers or other takeover or change in control in
attempts with respect to us and, accordingly, may discourage attempts to acquire
us.
REGISTRATION RIGHTS
Under the Amended and Restated Investor Rights Agreement dated as of May 10,
1999, among NetZero and certain holders of its securities, the holders of
approximately 85,698,000 shares of common stock, or Registrable Securities,
after this offering will be entitled to certain rights with respect to the
registration of the Registrable Securities under the Securities Act. Under the
Investors Rights Agreement, if NetZero proposes to register any of its
securities under the Securities Act, either for its own account or the account
of other stockholders, the holders of Registrable Securities are entitled to
notice of such registration and are entitled to include their Registrable
Securities in the registration. Of the approximately 85,698,000 shares of
Registrable Securities, approximately 21,286,000 shares are only entitled to
these "piggy back" registration rights.
70
<PAGE>
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 certain other
conditions and limitations. The holders' rights with respect to all these
registrations are subject to certain conditions, including the right of the
underwriters of any of these offerings to limit the number of shares included in
any of these registrations. NetZero has agreed to pay all expenses related to
certain of these registrations, except for underwriting discounts and
commissions, to effect the registration and sale of the Registrable Securities.
Upon registration, such shares are freely tradeable in the public market without
restriction.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock will be U.S. Stock
Transfer Corporation.
LISTING
Application has been made for listing the common stock on The Nasdaq
National Market under the trading symbol "NZRO".
71
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have 102,860,217 shares of common
stock outstanding (104,360,217 shares if the underwriters' over-allotment option
is exercised in full), assuming no exercise of options after ,
1999. Of this amount, the shares offered by this prospectus will be
available for immediate sale in the public market as of the date of this
prospectus. An additional shares are not subject to a 180-day
lock-up and will be available for sale in the public market 90 days following
the date of this prospectus pursuant to Rule 701. Approximately
additional shares will be available for sale in the public market
following the expiration of 180-day lock-up agreements with the representatives
of our underwriters, subject in some cases to compliance with the volume and
other limitations of Rule 144.
<TABLE>
<CAPTION>
APPROXIMATE SHARES
DAYS AFTER THE DATE OF THIS ELIGIBLE FOR FUTURE
PROSPECTUS SALE(1) COMMENT
- ---------------------------------- -------------------- ----------------------------------
<S> <C> <C>
Upon Effectiveness................ 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.......................... Lock-up released; shares saleable
under Rule 144, 144(k) or 701
Over 180 days..................... Restricted securities held for one
year or less
</TABLE>
- ------------------------
(1) If the underwriters waive the 180-day lock-up agreements within the first 90
days after the date of this prospectus, an additional shares
will be available for sale in the public market 90 days following the date
of this prospectus, subject in some cases to compliance with the volume and
other limitations of Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year is entitled to sell within any three-month period commencing 90 days after
the date of this prospectus a number of shares that does not exceed the greater
of (a) 1% of the then outstanding shares of common stock (approximately
shares immediately after the offering) or (b) the average weekly trading volume
during the four calendar weeks preceding such sale, subject to the filing of a
Form 144 with respect to such sale. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of NetZero at any time
during the 90 days immediately preceding the sale and who has beneficially owned
his or her shares for at least two years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.
Persons deemed to be affiliates must always sell pursuant to Rule 144, even
after the applicable holding periods have been satisfied.
We are unable to estimate the number of shares that will be sold under Rule
144, since this will depend on the market price for our common stock, the
personal circumstances of the sellers and other factors. Prior to the offering,
there has been no public market for the common stock, and there can be no
assurance that a significant public market for the common stock will develop or
be
72
<PAGE>
sustained after the offering. Any future sale of substantial amounts of the
common stock in the open market may adversely affect the market price of the
common stock offered hereby.
Our directors, executive officers, stockholders with registration rights and
certain other stockholder and optionholders have agreed pursuant to the
underwriting agreement and other agreements that they will not sell any common
stock without the prior written consent of Goldman, Sachs & Co. for a period of
180 days from the date of this prospectus. We have also agreed not to issue any
shares during the lock-up period without the consent of Goldman, Sachs & Co.,
except that we may, without such consent, grant options and sell shares pursuant
to our stock incentive and purchase plans.
Any of our employees or consultants who purchased his or her shares pursuant
to a written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701, which permits nonaffiliates to sell their Rule 701
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
prospectus. As of , the holders of options to purchase
approximately shares of common stock will be eligible to sell their
shares upon the expiration of the lock-up period, subject in certain cases to
vesting of such options.
We intend to file a registration statement on Form S-8 under the Securities
Act within days after the completion of the offering to register
shares of common stock subject to outstanding stock options reserved for
issuance under our 1999 Stock Incentive Plan, thus permitting the resale of such
shares by nonaffiliates in the public market without restriction under the
Securities Act.
In addition, certain stockholders have registration rights with respect to
85,698,444 shares of common stock and common stock equivalents. Registration of
the registrable securities under the Securities Act would result in such shares
becoming freely tradeable without restriction under the Securities Act.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Brobeck, Phleger & Harrison LLP, Irvine, California. As of June 30, 1999,
Brobeck, Phleger & Harrison LLP and certain entities and individuals affiliated
with Brobeck, Phleger & Harrison LLP beneficially owned a total of 46,540 shares
of our Series C preferred stock and a total of 40,761 shares of our Series D
preferred stock, all of which will convert to common stock in the offering.
Certain legal matters relating to the sale of common stock in this offering will
be passed upon for the underwriters by Wilson, Sonsini, Goodrich & Rosati,
Professional Corporation, Palo Alto, California.
EXPERTS
The financial statements of NetZero, Inc. as of June 30, 1998 and 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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<PAGE>
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 rooms. Our Commission
filings, including the registration statement, are also available to you on the
Commission's Web-site (http://www.sec.gov).
74
<PAGE>
NETZERO, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants.................................................... F-2
Balance Sheets....................................................................... F-3
Statements of Operations............................................................. F-4
Statements of Stockholders' Equity (Deficit)......................................... F-5
Statements of Cash Flows............................................................. F-6
Notes to Financial Statements........................................................ F-7
</TABLE>
F-1
<PAGE>
The following report is in the form that will be signed upon the
reincorporation into Delaware as described in Note 13 of the notes to the
financial statements.
/s/ PricewaterhouseCoopers LLP
Woodland Hills, California
August 25 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.......................................... -- 7,888,000 56,007,000
Notes receivable from stockholders.................................. -- (1,029,000) (1,029,000)
Deferred stock compensation......................................... -- (6,732,000) (6,732,000)
Accumulated deficit................................................. (25,000) (15,245,000) (15,245,000)
----------- -------------- --------------
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................................................. -- 1,156,000
Depreciation and amortization............................................ -- 222,000
------------------- ---------------
Total operating expenses................................................... 19,000 7,543,000
------------------- ---------------
Loss from operations....................................................... (19,000) (15,335,000)
------------------- ---------------
Interest income............................................................ -- 225,000
Interest expense........................................................... -- (110,000)
Other expense.............................................................. (6,000) --
------------------- ---------------
Net loss................................................................... $ (25,000) $ (15,220,000)
------------------- ---------------
------------------- ---------------
Basic and diluted net loss per share....................................... $ -- $ (1.41)
------------------- ---------------
------------------- ---------------
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..... -- -- -- -- 7,821,000 -- (7,821,000)
Amortization of
deferred stock-
based
compensation..... -- -- -- -- -- -- 1,089,000
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 7,888,000 (1,029,000) (6,732,000)
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 $56,007,000 $(1,029,000) $ (6,732,000)
----------- ------------ ----------- ----------- ----------- ------------- --------------
----------- ------------ ----------- ----------- ----------- ------------- --------------
<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..... -- 1,089,000
Charge for issuance
of Series A and B
options.......... -- 67,000
Issuance of Series
D convertible
preferred
stock............ -- 33,198,000
Net loss........... (15,220,000) (15,220,000)
------------- --------------
Balance at June 30,
1999............... (15,245,000) 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)........ $(15,245,000) $ 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) $(15,220,000)
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.............................................. -- 1,156,000
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 banner
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. Advertising revenues, which include banner
advertising and sponsorships, 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 $7,488,000 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 $916,000. Annual
amortization of deferred stock compensation for options granted as of June 30,
1999 is approximately $3.4 million, $1.8 million, $1.0 million and $400,000 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....................................................................... $ (15,220,000) $ (15,251,000)
Basic and diluted net loss per share........................................... (1.41) (1.41)
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) $ (15,220,000)
-------------- ---------------
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............................................. $ -- $ (1.41)
-------------- ---------------
</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.......................................... 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
shares from NetZero to cover such sales. They may exercise that option for
30 days. If any shares are purchased pursuant to this option, the underwriters
will severally purchase shares in approximately the same proportion as set forth
in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by NetZero. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by NetZero
---------------------------
No Exercise Full Exercise
------------ -------------
<S> <C> <C>
Per Share...................................... $ $
Total.......................................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from
the initial public offering price. If all the shares are not sold at the initial
offering price, the representatives may change the offering price and the other
selling terms.
NetZero has agreed with the underwriters not to dispose of or hedge any of
its common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this Prospectus continuing
through the date 180 days after the date of this prospectus, except with the
prior written consent of Goldman, Sachs & Co. This agreement does not apply to
any existing employee benefit plans. See "Shares Eligible for Future Sale" for a
discussion of certain transfer restrictions.
At the request of NetZero, the underwriters have reserved for sale, at the
initial public offering price, up to % of the common stock offered hereby
for sale to certain directors, employees and associates of NetZero. There can be
no assurance that any of the reserved shares will be purchased. The number of
shares available for sale to the general public in this offering will be
U-1
<PAGE>
reduced by the number of reserved shares sold. Any reserved shares not so
purchased will be offered to the general public on the same basis as the other
shares offered hereby.
Prior to the offering, there has been no public market for the shares. The
initial public offering price will be negotiated among NetZero and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be NetZero's historical performance, estimates of the business
potential and earnings prospects of NetZero, an assessment of NetZero's
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.
Application has been made for quotation of the Common Stock on The Nasdaq
National Market under the symbol "NZRO".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offerings are in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on The Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
NetZero estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $ . NetZero
will pay all such expenses.
NetZero has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
U-2
<PAGE>
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......................... 6
Information Regarding Forward-Looking
Statements......................... 25
Trademarks........................... 25
Use of Proceeds...................... 26
Dividend Policy...................... 26
Capitalization....................... 27
Dilution............................. 28
Selected Financial Data.............. 29
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 30
Business............................. 39
Management........................... 51
Principal Stockholders............... 63
Certain Transactions................. 65
Description of Capital Stock......... 68
Shares Eligible For Future Sale...... 72
Legal Matters........................ 73
Experts.............................. 73
Additional Information............... 74
Index to Financial Statements........ F-1
Underwriting......................... U-1
</TABLE>
------------------
Through and including , 1999 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriter and with respect to an unsold allotment or
subscription.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Shares
NETZERO, INC.
Common Stock
-------------
[LOGO]
-------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
HAMBRECHT & QUIST
WIT CAPITAL CORPORATION
Representatives of the Underwriters
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimated
except the Securities and Exchange Commission, NASD and Nasdaq National Market
fees. All of the expenses below will be paid by NetZero.
<TABLE>
<CAPTION>
ITEM
- -----------------------------------------------------------------
<S> <C>
Registration fee................................................. $
NASD filing fee..................................................
Nasdaq National Market listing fee...............................
Blue sky fees and expenses.......................................
Printing and engraving expenses..................................
Legal fees and expenses..........................................
Accounting fees and expenses.....................................
Transfer Agent and Registrar fees................................
Miscellaneous....................................................
---------
Total......................................................
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation (the "Certificate") provides
that, except to the extent prohibited by the Delaware General Corporation Law
(the "DGCL"), the Company's directors shall not be personally liable to the
Company or its stockholders for monetary damages for any breach of fiduciary
duty as directors of the Company. Under the DGCL, the directors have a fiduciary
duty to the Company which is not eliminated by this provision of the Certificate
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of nonmonetary relief will remain available. In addition, each
director will continue to be subject to liability under the DGCL for breach of
the director's duty of loyalty to the Company, for acts or omissions which are
found by a court of competent jurisdiction to be not in good faith or involving
intentional misconduct, for knowing violations of law, for actions leading to
improper personal benefit to the director, and for payment of dividends or
approval of stock repurchases or redemptions that are prohibited by DGCL. This
provision also does not affect the directors' responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws. The Company has obtained or will obtain liability insurance for its
officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL, or (iv)
for any transaction from which the director derived an improper personal
benefit. The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's bylaws, any agreement, a vote
of stockholders or otherwise. The Certificate eliminates the personal liability
of directors to the fullest extent permitted by Section 102(b)(7) of the DGCL
and provides that the Company shall fully indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed
II-1
<PAGE>
action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that such person is or was a director or
officer of the Company, or is or was serving at the request of the Company as a
director or officer of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding.
The Company, with the approval of the Board of Directors, intends to obtain
directors' and officers' liability insurance prior to the effectiveness of this
offering. In addition, the Company intends to enter into indemnification
agreements with each of its directors, a form of which is filed as Exhibit 10.27
hereto.
There is no pending litigation or proceeding involving any director,
officer, employee or agent of the Company in which indemnification will be
required or permitted. Moreover, the Company is not aware of any threatened
litigation or proceeding that might result in a claim for such indemnification.
The Company believes that the foregoing indemnification provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.
The Underwriting Agreement (the form of which is filed as Exhibit 1.1
hereto) provides for indemnification by the underwriters of NetZero and its
officers and directors, and by NetZero of the underwriters, for certain
liabilities arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following is a summary of transactions by the Company since the
Company's inception in July 1997 involving sales of the Company's securities
that were not registered under the Securities Act. All of the numbers reflect a
post-split basis.
(a) In July 1997, we issued an aggregate of 15,000,000 shares of common
stock for an aggregate purchase price of $2,000 to the founders of the Company.
(b) In September 1998, we issued an aggregate of 3,516,507 shares of Series
A preferred stock for an aggregate purchase price of $312,500 to two investors
in connection with our initial Series A closing.
(c) In October 1998, we issued an aggregate of 3,516,507 shares of Series A
preferred stock for an aggregate purchase price of $312,500 to two investors in
connection with our second Series A closing.
(d) In November 1998, we issued an aggregate of 3,516,507 shares of Series A
preferred stock for an aggregate purchase price of $312,500 to two investors in
connection with our third Series A closing.
(e) In December 1998, we issued an aggregate of 4,219,173 shares of Series B
preferred stock for an aggregate purchase price of $625,000 to two investors in
connection with our initial Series B closing and our second Series B closing.
(f) In January 1999, we issued an aggregate of 2,109,586 shares of Series B
preferred stock for an aggregate purchase price of $312,500 to two investors in
connection with our third Series B closing.
(g) In January 1999, we issued 101,260 shares of Series B Preferred for a
purchase price of $15,000 to David C. Bohnett.
(h) In January 1999, in connection with a $100,000 bridge loan, we issued
warrants to two investors to purchase up to 23,271 shares of Series C preferred
stock at $0.4297 per share. The investors exercised these warrants in full in
February 1999.
II-2
<PAGE>
(i) In February 1999, we issued an aggregate of 26,851,533 shares of Series
C preferred stock to several investors for an aggregate purchase price of
$11,539,001.
(j) In March 1999, we issued 703,300 shares of Series A preferred stock for
a purchase price of $62,500 to one investor in connection with the exercise of
an option issued in connection with our initial Series A closing in September
1998.
(k) In March 1999, we issued 421,917 shares of Series B preferred stock for
a purchase price of $62,500 to one investor in connection with the exercise of
an option granted in connection with our initial Series B closing.
(l) In March 1999, we issued 225,000 shares of Series C preferred stock for
an aggregate purchase price of $96,690 to David C. Bohnett in connection with
the exercise of an option granted to him after joining our Board of Directors.
(m) In May 1999, we issued an aggregate of 18,082,283 shares of Series D
preferred stock to several investors for an aggregate purchase price of
$33,271,405.
(n) In June 1999, we issued an aggregate of 703,300 shares of Series A
preferred stock for an aggregate consideration of $62,500 in cash 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 Company.
3.2* Bylaws of the Company.
4.1 See Exhibit 3.1 and 3.2 for provisions of the Company's Certificate of
Incorporation and Bylaws defining the rights of holders of the Company's common
stock. See Exhibit 10.24 for the rights of certain holders of registration
rights.
4.2* Specimen common stock certificates.
5.1* Opinion of Brobeck, Phleger and Harrison LLP.
10.1+ Adserver License Agreement dated as of August 28, 1998, between the Registrant
and NetGravity, as amended.
10.2** Technology Assignment Agreement dated as of September 11, 1998, by and between
the Registrant and Impact Software, Inc.
10.3** Form of Stock Restriction Agreement between the Registrant and the founders.
10.4** Preferred Stock Purchase Agreement dated as of September 11, 1998, among the
Registrant and certain investors thereto.
10.5+ 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.
10.13** 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.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------
<C> <S>
10.15** Stock Pledge Agreement dated as of March 20, 1999, between the Registrant and
Mark R. Goldston, as amended.
10.16** Note Secured by Stock Pledge Agreement dated March 20, 1999, made by Mark R.
Goldston in favor of the Registrant, as amended.
10.17+ Software License and Service Agreement dated as of April 14, 1999, between
Registrant and Oracle Corporation.
10.18** Employment Agreement dated as of April 17, 1999, by and between the Registrant
and Charles S. Hilliard.
10.19** Stock Pledge Agreement dated April 17, 1999, between the Registrant and Charles
S. Hilliard.
10.20** Note Secured by Stock Pledge Agreement dated April 17, 1999, made by Charles S.
Hilliard in favor of the Registrant.
10.21+ Start Page Agreement dated as of April 20, 1999, between the Registrant and
LookSmart, Ltd.
10.22+ Distributor, License and Affiliate Agreement dated as of April 30, 1999, between
the Registrant and Compaq Computer Corporation, 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
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.
II-5
<PAGE>
(b) Financial Statement Schedules
All such Schedules have been omitted because the information required to be
set forth therein is not applicable or is shown in the financial statements or
notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Company hereby undertakes to provide to the underwriters at
the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit, or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus as filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, we have duly
caused this Amendment No. 2 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 27th day of August, 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. 2 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 August 27, 1999
Mark R. Goldston Officer)
Senior Vice President,
/s/ CHARLES S. HILLIARD Finance and Chief
- ------------------------------ Financial Officer August 27, 1999
Charles S. Hilliard (principal financial and
accounting officer)
RONALD T. BURR* President and Director
- ------------------------------ August 27, 1999
Ronald T. Burr
WILLIAM T. GROSS* Director
- ------------------------------ August 27, 1999
William T. Gross
JAMES T. ARMSTRONG* Director
- ------------------------------ August 27, 1999
James T. Armstrong
DAVID C. BOHNETT* Director
- ------------------------------ August 27, 1999
David C. Bohnett
JENNIFER S. FONSTAD* Director
- ------------------------------ August 27, 1999
Jennifer S. Fonstad
PAUL G. KOONTZ* Director
- ------------------------------ August 27, 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 Company.
3.2* Bylaws of the Company.
4.1 See Exhibit 3.1 and 3.2 for provisions of the Company's Certificate of
Incorporation and Bylaws defining the rights of holders of the Company's common
stock. See Exhibit 10.24 for the rights of certain holders of registration
rights.
4.2* Specimen common stock certificates.
5.1* Opinion of Brobeck, Phleger and Harrison LLP.
10.1+ Adserver License Agreement dated as of August 28, 1998, between the Registrant
and NetGravity, as amended.
10.2** Technology Assignment Agreement dated as of September 11, 1998, by and between
the Registrant and Impact Software, Inc.
10.3** Form of Stock Restriction Agreement between the Registrant and the founders.
10.4** Preferred Stock Purchase Agreement dated as of September 11, 1998, among the
Registrant and certain investors thereto.
10.5+ 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.
10.13** 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
Registrant and Oracle Corporation.
10.18** Employment Agreement dated as of April 17, 1999, by and between the Registrant
and Charles S. Hilliard.
10.19** Stock Pledge Agreement dated April 17, 1999, between the Registrant and Charles
S. Hilliard.
10.20** Note Secured by Stock Pledge Agreement dated April 17, 1999, made by Charles S.
Hilliard in favor of the Registrant.
10.21+ Start Page Agreement dated as of April 20, 1999, between the Registrant and
LookSmart, Ltd.
10.22+ Distributor, License and Affiliate Agreement dated as of April 30, 1999, between
the Registrant and Compaq Computer Corporation, 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
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 10.1
NETGRAVITY ADSERVER LICENSE AGREEMENT
This Agreement is made and entered into as of this 28th day of August,
1998 ("Effective Date") by and between NetGravity, Inc., a Delaware
corporation, having its principal place of business at 1700 S. Amphlett
Blvd., Suite 350, San Mateo, CA 94402 ("NetGravity") and the entity at the
location listed on Exhibit A hereto ("Licensee").
RECITALS
A. NetGravity is the owner of proprietary Internet web site advertising
sales and management software products.
B. Licensee wishes to obtain a license to use such software on the terms
and conditions of this Agreement.
NOW, THEREFORE, for good and valuable consideration, the parties hereby
agree as follows:
1. DEFINITIONS
The following terms shall have the following meanings:
1.1 "SOFTWARE" means the proprietary Internet web site advertising sales and
management software program developed by NetGravity known as AdServer which
is comprised of the Program Components, in object code form only, and any
updates and upgrades as may be issued to Licensee by NetGravity after the
Effective Date.
1.2 "PROGRAM COMPONENT(S)" means the AdManager component, AdServer
component, the AdClient component, the AdConsole component, and the AdInsight
Server as further described on Exhibit A.
1.3 "SITE(S)" means Licensee's site or sites on the World Wide Web.
2. GRANT OF RIGHTS
2.1 GRANT OF LICENSE. Subject to the terms and conditions of this
Agreement, NetGravity hereby grants to Licensee a perpetual, worldwide,
nonexclusive, nontransferable (except in accordance with Section 12.1)
license, to install and use the number of copies of each Program Component of
the Software licensed as indicated on Exhibit A internally to manage
advertising on the Site(s). Licensee may make backup copies of the Software
for archival or disaster recovery purposes.
2.2 RESTRICTIONS. The license granted herein is granted solely to the
person or entity set forth on Exhibit A, and not, by implication or
otherwise, to any parent, subsidiary or affiliate of such person or entity.
No right is granted hereunder to use the Software to perform advertising
management services for third parties (so-called "service bureau" uses). All
rights not expressly granted hereunder are reserved to NetGravity. Licensee
may not copy, distribute, reproduce, use or allow access to the Software
except as explicitly permitted under this Agreement, and Licensee will not
modify, adapt, translate, prepare derivative works from, decompile, reverse
engineer, disassemble or otherwise attempt to derive source code from the
Software or any internal data files generated by the Software. Licensee shall
not remove, obscure, or alter NetGravity's copyright notice, trademarks, or
other proprietary rights notices affixed to or contained within the Software.
2.3 OWNERSHIP. NetGravity owns and shall retain all right, title, and
interest in and to the Software, including all copyrights, patents, trade
secret rights, trademarks and other intellectual property rights therein.
Licensee shall provide NetGravity with access to Licensee's facilities, at
reasonable times and upon reasonable notice, to verify Licensee's compliance
with the terms of this Agreement.
3. DELIVERY OF THE SOFTWARE
3.1 DELIVERY. As soon as practicable following the Effective Date,
NetGravity shall deliver the Software electronically or by other means
mutually agreed upon to Licensee at the location(s) set forth on Exhibit A.
3.2 INSTALLATION AND TRAINING. As soon as practicable following the
delivery of the Software, NetGravity will provide reasonable assistance to
Licensee by telephone and e-mail in installing the Software. At Licensee's
request, on-site installation assistance and training may be provided at
NetGravity's standard rates, plus reasonable travel expenses.
4. FEES
4.1 LICENSE FEE. In consideration for the rights granted hereunder,
Licensee shall pay NetGravity license fees in the amounts and on the payment
terms set forth on Exhibit A.
4.2 TAXES. Licensee shall be responsible for all sales taxes, use taxes and
any other similar taxes im posed by any federal, state or local governmental
entity on the transactions contemplated by this Agreement, excluding U.S.
taxes based upon NetGravity's income. When NetGravity has the legal
obligation to pay or collect such taxes, the appropriate amount shall be
invoiced to and paid by Licensee unless Licensee provides NetGravity with a
valid tax exemption certificate authorized by the appropriate taxing
authority.
4.3 U.S. DOLLARS. All fees quoted and payments made hereunder shall be in
U.S. Dollars.
1
<PAGE>
NETGRAVITY ADSERVER LICENSE AGREEMENT
5. NETGRAVITY SUPPORT
At Licensee's request, NetGravity will offer maintenance and technical
support with respect to the Software under its then current standard Software
Maintenance Subscription and Support Agreement, a copy of which is attached
as Exhibit B.
6. WARRANTY AND DISCLAIMER
NetGravity warrants that for a period of forty-five (45) days following the
delivery of the Software: (i) the Software shall operate substantially in
accordance with the then current documentation for such Software and (ii) the
media on which the Software is furnished shall be free from defects in
materials and faulty workmanship under normal use. NetGravity does not
warrant that the Software will meet all of Licensee's requirements or that
the use of the Software will be uninterrupted or error-free. NetGravity's
sole obligation under this warranty is to use reasonable efforts to correct
any non-conforming Software. Except as expressly provided herein, NETGRAVITY
LICENSES THE SOFTWARE TO LICENSEE ON AN "AS IS" BASIS. NETGRAVITY MAKES NO
OTHER WARRANTY OR CONDITION OF ANY KIND, WHETHER EXPRESS, IMPLIED, STATUTORY,
OR OTHERWISE INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OR
CONDITIONS OF SATISFACTORY QUALITY, MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, AND NONINFRINGEMENT.
7. INDEMNIFICATION
7.1 BY NETGRAVITY. NetGravity shall indemnify, defend and hold harmless
Licensee from any and all damages, liabilities, costs and expenses (including
reasonable attorneys' fees) incurred by Licensee as a result of any claim
that the Software, when used within the scope of this Agreement, infringes
any copyright, trademark, or trade secret of any third party; provided that
Licensee promptly notifies NetGravity in writing of any such claim and
promptly tenders the control of the defense and settlement of any such claim
to NetGravity at NetGravity's expense and with NetGravity's choice of
counsel. Licensee shall cooperate with NetGravity, at NetGravity's expense,
in defending or settling such claim and Licensee may join in defense with
counsel of its choice at its own expense. If the Software is, or in the
opinion of NetGravity may become, the subject of any claim for infringement
or if it is adjudicatively determined that the Software infringes then
NetGravity may, at its option and expense, either (i) procure for Licensee
the right from such third party to use the Software or (ii) replace or modify
the Software with other suitable and reasonably equivalent products so that
the Software become noninfringing or (iii) if (i) and (ii) are not
practicable, terminate this Agreement.
7.2 EXCLUSIONS. NetGravity shall have no liability for any infringement
arising from (i) the use of other than the then-current, commercially
available version of the Software; (ii) the use of the Software other than as
set forth in its accompanying documentation; (iii) the modification of the
Software unless such modification was made or authorized by NetGravity, when
such infringement would not have occurred but for such modification; or (iv)
the combination or use of the Software with other software, hardware or other
products not approved by NetGravity in advance if such infringement would
have been avoided by the use of the Software not in such combination. THIS
SECTION 7 STATES NETGRAVITY'S ENTIRE OBLIGATION WITH RESPECT TO ANY CLAIM
REGARDING THE INTELLECTUAL PROPERTY RIGHTS OF ANY THIRD PARTY.
7.3 BY LICENSEE. Licensee shall indemnify, hold harmless and defend
NetGravity from and against any and all claims, liabilities, damages and
expenses (including reasonable attorneys' fees) incurred by NetGravity as a
result of any breach by Licensee of this Agreement; provided that NetGravity
promptly notifies Licensee in writing of any such claim and promptly tenders
to Licensee the control and defense and settlement of such claim at
Licensee's expense and with Licensee's choice of counsel. NetGravity shall
cooperate with Licensee, at Licensee's expense, in defending or settling such
claim and NetGravity may join in defense with counsel of its choice at its
own expense.
8. LIMITATION OF LIABILITY
IN NO EVENT WILL NETGRAVITY'S LIABILITY ARISING OUT OF THIS AGREEMENT OR THE
USE OR PERFORMANCE OF THE SOFTWARE EXCEED THE SUM OF THE LICENSE FEES
ACTUALLY PAID BY LICENSEE HEREUNDER. IN NO EVENT SHALL EITHER PARTY HAVE ANY
LIABILITY TO THE OTHER PARTY FOR ANY LOST PROFITS OR COSTS OF PROCUREMENT OF
SUBSTITUTE GOODS OR SERVICES, OR FOR ANY INDIRECT, SPECIAL OR CONSEQUENTIAL
DAMAGES, HOWEVER CAUSED AND UNDER ANY THEORY OF LIABILITY AND WHETHER OR NOT
SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE; PROVIDED,
HOWEVER, THAT THIS LIMITATION SHALL NOT APPLY TO ANY BREACH BY LICENSEE OF
THE LICENSE RESTRICTIONS OR ITS CONFIDENTIALITY OBLIGATIONS. THE PARTIES
AGREE THAT THIS SECTION 8 REPRESENTS A REASONABLE ALLOCATION OF RISK.
2
<PAGE>
NETGRAVITY ADSERVER LICENSE AGREEMENT
9. CONFIDENTIALITY
9.1 DEFINITION. The term "Confidential Information" shall mean any
information disclosed by one party to the other party in connection with
this Agreement which is disclosed in writing, orally or by inspection and is
identified as "Confidential" or "Proprietary" or which a party has reason to
believe is treated as confidential by the other party. Any information, in
whatever form, disclosed by NetGravity that relates to the Software and that
is not publicly known is "Confidential Information."
9.2 OBLIGATION. Each party shall treat as confidential all Confidential
Information received from the other party, shall not use such Confidential
Information except as expressly permitted under this Agreement, and shall not
disclose such Confidential Information to any third party without the other
party's prior written consent. Each party shall take reasonable measure to
prevent the disclosure and unauthorized use of Confidential Information of
the other party.
9.3 EXCEPTIONS. Notwithstanding the above, the restrictions of this Section
shall not apply to information that:
a) was independently developed by the receiving party without any use
of the Confidential Information of the other party and by employees or other
agents of (or independent contractors hired by) the receiving party who have
not been exposed to the Confidential Information;
b) becomes known to the receiving party, without restriction, from a
third party without breach of this Agreement and who had a right to disclose
it;
c) was in the public domain at the time it was disclosed or becomes in
the public domain through no act or omission of the receiving party;
d) was rightfully known to the receiving party, without restriction,
at the time of disclosure; or
e) is disclosed pursuant to the order or requirement of a court,
administrative agency, or other governmental body; provided, however, that
the receiving party shall provide prompt notice thereof to the other party
and shall use its reasonable best efforts to obtain a protective order or
otherwise prevent public disclosure of such information.
10. TERM AND TERMINATION
10.1 TERM. The term of this Agreement shall commence on the Effective Date
and shall continue in force until terminated as follows:
a) If Licensee fails to make any payment due within thirty (30) days
after receiving written notice from NetGravity that such payment is
delinquent, NetGravity may terminate this Agreement on written notice to
Licensee at any time following the end of such thirty (30) day period.
b) If either party materially breaches any term or condition of this
Agreement and fails to cure that breach within thirty (30) days after
receiving written notice of the breach, the nonbreaching party may terminate
this Agreement on written notice at any time following the end of such thirty
(30) day period.
c) This Agreement shall terminate immediately upon notice in the event
Licensee becomes insolvent (i.e., becomes unable to pay its debts in the
ordinary course of business as they come due) or makes an assignment of this
Agreement for the benefit of creditors.
10.2 SURVIVAL. The following sections shall survive the termination, for any
reason, of this Agreement: 4, 6, 7, 8, 9, 10, and 12.
10.3 REMEDIES. Licensee acknowledges that its breach of Section 2.2 or 9
would cause irreparable harm to NetGravity, the extent of which would be
difficult to ascertain. Accordingly, Licensee agrees that, in addition to
any other remedies to which NetGravity may be legally entitled, NetGravity
shall have the right to obtain immediate injunctive relief in the event of a
breach of such sections by Licensee or any of its officers, employees,
consultants or other agents.
11. EXPORT REGULATIONS
Without affecting the scope of the license granted herein, in the event
Licensee is permitted to transfer the Software to any location outside the
United States under this Agreement, Licensee hereby agrees it will comply
with all applicable United States export laws and regulations.
12. MISCELLANEOUS.
12.1 ASSIGNMENT. Licensee may not assign any of its rights or delegate any of
its obligations under this Agreement, whether by operation of law or
otherwise, without the prior express written consent of NetGravity. Subject
to the foregoing, this Agreement will bind and inure to the benefit of the
parties, their respective successors and permitted assigns.
12.2 WAIVER AND AMENDMENT. No modification, amendment or waiver of any
provision of this Agreement shall be effective unless in writing and signed
by the party to be charged. No failure or delay by either party in
exercising any right, power, or remedy under this Agreement, except as
3
<PAGE>
NETGRAVITY ADSERVER LICENSE AGREEMENT
specifically provided herein, shall operate as a waiver of any such right,
power or remedy.
12.3 GOVERNING LAW; ARBITRATION. This Agreement shall be governed by the laws
of the State of California, USA, excluding conflict of laws provisions and
excluding the 1980 United Nations Convention on Contracts for the
International Sale of Goods. Any disputes arising out of this Agreement
shall be resolved by binding arbitration in Santa Clara County California in
accordance with the rules of the American Arbitration Association. The
arbitrator shall have the power to grant injunctive relief.
12.4 NOTICES. All notices, demands or consents required or permitted under
this Agreement shall be in writing. Notice shall be considered effective on
the earlier of actual receipt or (a) the day following transmission if sent
by facsimile followed by written confirmation by registered overnight carrier
or certified United States mail; or (b) one (1) day after posting when sent
by registered private overnight carrier (e.g., DHL, Federal Express, etc.);
or (c) five (5) days after posting when sent by certified United States mail.
Notice shall be sent to the NetGravity at the addresses set forth on the
first page of this Agreement and to Licensee at the address set forth on
Exhibit A, or at such other address as shall be given by either party to the
other in writing. Notices to NetGravity shall be addressed to the attention
of Contracts Administrator.
12.5 INDEPENDENT CONTRACTORS. The parties are independent contractors.
Neither party shall be deemed to be an employee, agent, partner or legal
representative of the other for any purpose and neither shall have any right,
power or authority to create any obligation or responsibility on behalf of
the other.
12.6 SEVERABILITY. If any provision of this Agreement is held by a court of
competent jurisdiction to be contrary to law, such provision shall be changed
and interpreted so as to best accomplish the objectives of the original
provision to the fullest extent allowed by law and the remaining provisions
of this Agreement shall remain in full force and effect.
12.7 COMPLETE UNDERSTANDING. This Agreement, including all Exhibits
attached hereto, constitutes the final, complete and exclusive agreement
between the parties with respect to the subject matter hereof, and supersedes
any prior or contemporaneous agreement.
12.8 FORCE MAJEURE. Except for Licensee's obligations to pay NetGravity
hereunder, neither party shall be liable to the other party for any failure
or delay in performance caused by reasons beyond its reasonable control.
12.9 PURCHASE ORDERS. This Agreement shall control Licensee's use of the
Software. All different or additional terms or conditions in any Licensee
purchase order or similar document shall be null and void.
12.10 EXECUTION. The parties have shown their acceptance of this Agreement
by causing it to be executed below by their duly authorized representatives.
This agreement may be executed in counterparts which together shall
constitute one agreement, and each party agrees that a copy of a counterpart
executed by it and sent to the other by any method including without
limitation facsimile shall constitute acceptance of this Agreement.
NETGRAVITY
By: /s/ Chris J. Krook
------------------------------------
Name: /s/ Chris J. Krook
----------------------------------
Title: Corporate Controller
---------------------------------
"LICENSEE"
By: /s/ Ronald T. Burr
------------------------------------
Name: Ronald T. Burr
----------------------------------
Title: CEO
---------------------------------
4
<PAGE>
EXHIBIT A
LICENSEE: NetZero
P.O Box 5365
Glendale, CA 91221
Attention: [License Administrator]: Ronald Burr 818-673-4900
ADSERVER SOFTWARE LICENSED COMPONENTS:
PROGRAM COMPONENTS DESCRIPTION:
The Admanager component contains the user interface and management
database. The Adserver is a server application responsible for delivering
advertisements. The AdClient component is the technology that integrates with
web server software to receive ads from the ad server. The AdConsole
component serves as a report publishing platform to advertisers and agencies.
<TABLE>
<CAPTION>
PROGRAM COMPONENT LICENSED NUMBER OF COPIES
----------------- -------------------------
<S> <C>
AdManager [***]
AdServer [***]
AdClient [***]
AdConsole [***]
AdInsight Server [***]
</TABLE>
* Licensee shall have the right to copy the right to copy the AdServer for
AdInsight (reporting) purposes. This additional copy of AdServer shall not
be used for additional adserving capability.
SureStart Deployment Package:
[***]
TOTAL PACKAGE PRICE: [***]
CONSULTING: [***]
FEES DUE: [***]
PAYMENT TERMS:
Payment is due [***] from the [***]
- --------------
[***] 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>
EXHIBIT B
DATE OF THIS AGREEMENT: AUGUST 28, 1998
SOFTWARE SUBSCRIPTION AND SUPPORT AGREEMENT
BETWEEN
NETGRAVITY, INC.
AND
NETZERO
NetGravity, Inc. ("NetGravity") has granted Licensee a license to certain
software in accordance with a license agreement dated August 28, 1998 (the
"License Agreement"). Licensee wishes to obtain maintenance and support of
such software pursuant to this Agreement.
SECTION 1
DEFINITIONS
1.1 "Product(s)" means the software programs licensed to Licensee pursuant
to the License Agreement together with any Updates furnished by NetGravity to
Licensee under this Agreement.
1.2 "Updates" means a software Product release containing error corrections
and minor enhancements, in object code form, which is made commercially
available by NetGravity and generally indicated by a change in the revision
number in the tenths or hundredths digit to the right of the decimal point
(e.g., a change from version x.xx to x.xy or x.yx) and any corrections and
updates to the associated documentation.
1.3 "Upgrades" means a software Product release containing significant
functional enhancements and feature additions of the Software, in object code
form, which is made commercially available by NetGravity and generally
indicated by a change in the revision number to the left of the decimal point
(i.e., 4.00).
SECTION 2
TECHNICAL SUPPORT
2.1 SUPPORT. NetGravity will provide Licensee with technical support
("Support") during the hours indicated on the attached Schedule 1. Support
will be provided by at least one of the following methods: telephone, email,
World Wide Web, or fax. NetGravity, at its sole discretion, will choose which
method(s) it uses to provide support to Licensee. Support will include:
a) assistance related to questions on the installation and
operational use of the Product(s);
b) assistance in identifying and verifying the causes of suspected
errors in the Products(s); and
1
<PAGE>
c) providing workarounds for identified Product errors or
malfunctions, where reasonably available to NetGravity.
Licensee will designate the number of persons set forth in Schedule 1 to act
as support liaisons to utilize the support and will ensure that such person
will be properly trained in the operation and usage of the Products. Upon
request, Licensee will allow the use of on-line diagnostics of the Products
during error diagnosis.
2.2 ERROR CORRECTIONS. During the term of this Agreement, NetGravity
shall use its reasonable efforts to correct any reproducible error in the
Product with a level of effort commensurate with the severity of the error.
NetGravity shall have no obligation to correct all errors in the Product.
Upon identification of any error, Licensee shall notify NetGravity of such
error and shall provide NetGravity with enough information to reproduce the
error.
2.3 ERROR CORRECTIONS. NetGravity shall not be responsible for correcting
any errors not reproducible by NetGravity on the unmodified Product or errors
caused by: (i) Licensee's failure to implement all Updates issued under this
Agreement; (ii) changes to the operating system or environment which
adversely affect the Product;(iii) any alterations of or additions to the
Product made by parties other than NetGravity; (iv) use of the Product in a
manner for which it was not designed; (v) interconnection of the Product with
other software products not supplied by NetGravity; or (vi) use of the
Product on an unsupported platform. NetGravity shall only be obligated to
support the then current production version of the Product and the
immediately prior release for a period of three (3) months after such
release. Support for any earlier versions or for errors not covered under
this Agreement may be obtained at NetGravity's then current rates.
2.4 ON-SITE TRAINING AND SUPPORT. Upon request, and provided that
Licensee is current with fees due under this Agreement, NetGravity will
provide training for Licensee's administrators and trainers and/or direct
support at Licensee's site at NetGravity's then applicable standard training
rates and charges.
SECTION 3
MAINTENANCE SUBSCRIPTION
NetGravity will provide each Update and Upgrade to Licensee within a
reasonable time after publication ("Subscription"). Licensee may acquire
additional copies of the documentation at NetGravity's then current standard
rates.
SECTION 4
FEES
4.1 SUPPORT AND SUBSCRIPTION FEES. For NetGravity technical Support
services covered by Section 2 of this Agreement, Licensee agrees to pay
NetGravity the annual technical Support fee in the amount set forth in
Schedule 1 for the first year following the Date of this Agreement. Licensee
shall pay the annual fees each year at the beginning of each renewal term of
this Agreement. For NetGravity Subscription Service provided under Section 3
of this Agreement, Licensee shall pay the annual Subscription fee set forth
in Schedule 1 beginning one year from the Date of this Agreement. Licensee
shall pay the annual fees at the beginning of each renewal term of this
Agreement. NetGravity reserves the right to change the annual fees from time
to time effective at the commencement of the next annual period by giving
Licensee at least sixty (60) days' prior written notice of such change.
NetGravity reserves the right to charge Licensee a reinstatement fee to
resume services if Licensee has not continuously maintained this Agreement in
effect. Annual fees on any additional units licensed beyond the initial
purchase will be prorated and billed at the time of the applicable license
grant.
4.2 PAYMENT. Any amount payable to NetGravity under this Agreement will
be due and payable within [***] after Licensee's receipt of NetGravity's
invoice. All monetary amounts are specified and shall be paid in the lawful
currency of the United States of America. Licensee shall pay all amounts due
under this Agreement to NetGravity at the address indicated at the beginning
of this Agreement or such other location as NetGravity designated in writing.
Any amount not paid when due will bear interest at the rate of [***] or the
maximum rate permitted by applicable usury law, which is less, determined and
compounded on a daily basis from the date due until the date paid.
4.3 TAXES. Unless otherwise specified, the fees, charges and other
amounts specified in this Agreement
- --------------
[***] 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.
2
<PAGE>
do not include any sales, use, excise or other applicable taxes. Licensee
will pay or reimburse NetGravity for any and all such taxes (excluding any
applicable federal and state taxes based on NetGravity's income).
SECTION 5
TERMINATION
5.1 TERM. The term of this Agreement shall be one year and shall
automatically renew unless Licensee notifies NetGravity of its intention
not to renew at least 60 days prior to the renewal date or unless terminated
pursuant to paragraph 5.2.
5.2 TERMINATION FOR DEFAULT. If either party defaults in the performance
of or compliance with any of its material obligations under this Agreement,
and such default has not been remedied or cured within thirty (30) days after
written notice specifying the default or, if the nature of the default is
such that more than (30) days are required for the cure thereof, the
defaulting party fails to commence its efforts to cure such breach or default
within such thirty (30) days and to diligently prosecute the same to
completion thereafter, the non-defaulting party may terminate this Agreement
in addition to its other rights and remedies under law.
5.3 SURVIVAL. Sections 4.2, 4.3, 5, 6 and 7 shall survive the
termination of this Agreement.
SECTION 6
LIMITATIONS OF LIABILITY
LIMITATION. NETGRAVITY'S LIABILITY (WHETHER IN CONTRACT, WARRANTY,
TORT OR OTHERWISE; AND NOTWITHSTANDING ANY FAULT, NEGLIGENCE,
REPRESENTATION, STRICT LIABILITY OR PRODUCT LIABILITY OF NETGRAVITY) UNDER
THIS AGREEMENT WITH REGARD TO ANY PRODUCT, DOCUMENTATION, SERVICES OR OTHER
ITEMS SUBJECT TO THIS AGREEMENT SHALL IN NO EVENT EXCEED THE TOTAL
COMPENSATION PAID BY LICENSEE TO NETGRAVITY UNDER THIS AGREEMENT. IN NO
EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY OR ANY OTHER PARTY FOR
ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT OR SPECIAL DAMAGES, HOWEVER CAUSED
AND ON ANY THEORY OF LIABILITY, ARISING OUT OF OR RELATING TO THIS AGREEMENT,
EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
SECTION 7
MISCELLANEOUS
7.1 ASSIGNMENT. Licensee may not assign any of its rights or delegate any
of its obligations under this Agreement, whether by operation of law or
otherwise, without the prior express written consent of NetGravity. Subject
to the foregoing, this Agreement will bind and inure to the benefit of the
parties, their respective successors and permitted assigns.
7.2 WAIVER AND AMENDMENT. No modification, amendment or waiver of any
provision of this Agreement shall be effective unless in writing and signed
by the party to be charged. No failure or delay by either party in
exercising any right, power, or remedy under this Agreement, except as
specifically provided herein, shall operate as a waiver of any such right,
power or remedy.
7.3 GOVERNING LAW; ARBITRATION. This Agreement shall be governed by the
laws of the State of California, USA, excluding conflict of laws provisions
and excluding the 1980 United Nations Convention on Contracts for the
International Sale of Goods. Any disputes arising out of this Agreement
shall be resolved by binding arbitration in Santa Clara County California in
accordance with the rules of the American Arbitration Association. The
arbitrator shall have the power to grant injunctive relief.
7.4 NOTICES. All notices, demands or consents required or permitted under
this Agreement shall be in writing. Notice shall be considered effective on
the earlier of actual receipt or (a) the day following transmission if sent
by facsimile followed by written confirmation by registered overnight carrier
or certified United States mail; or (b) one (1) day after posting when sent
by registered private overnight carrier (e.g., DHL, Federal Express, etc.);
or (c) five (5) days after posting when sent by certified United States mail.
Notice shall be sent to the parties at the addresses set forth on the first
page of this Agreement or at such other address as shall be given by either
party to the other in writing. Notices to NetGravity shall be addressed to
the attention of Contracts Administrator.
7.5 INDEPENDENT CONTRACTORS. The parties are independent contractors.
Neither party shall be deemed to be an employee, agent, partner or legal
representative of the other for any purpose and neither shall have any right,
power or authority to create any obligation or responsibility on behalf of
the other.
3
<PAGE>
7.6 SEVERABILITY. If any provision of this Agreement is held by a court
of competent jurisdiction to be contrary to law, such provision shall be
changed and interpreted so as to best accomplish the objectives of the
original provision to the fullest extent allowed by law and the remaining
provisions of this Agreement shall remain in full force and effect.
7.7 COMPLETE UNDERSTANDING. This Agreement, including all Exhibits
attached hereto, constitutes the final, complete and exclusive agreement
between the parties with respect to the subject matter hereof, and supersedes
any prior or contemporaneous agreement.
7.8 EXCUSED PERFORMANCE. Neither party will be liable for, or be
considered to be in breach of or default under this Agreement on account of,
any delay or failure to perform as required by this Agreement (other than
monetary obligations) as a result of an event of force majeure or any cause
or condition beyond such party's reasonable control.
NETGRAVITY
Signature: /s/ Chris J. Krook
-------------------------------
Printed Name: /s/ Chris J. Krook
----------------------------
Title: Corporate Controller
-----------------------------------
Date Signed: 8/28/98
-----------------------------
Licensee:
Signature: /s/ Ronald T. Burr
-------------------------------
Printed Name: Ronald T. Burr
----------------------------
Title: CEO
-----------------------------------
Date Signed: 8/28/98
-----------------------------
4
<PAGE>
SCHEDULE 1
SUPPORT HOURS: AdService 24 (24 hours a day -- 7 days a week)
SUPPORT CONTACTS: Please List 3:
FEES:
<TABLE>
<CAPTION>
PRODUCTS LICENSE DATE ANNUAL SUPPORT FEE ANNUAL SUBSCRIPTION FEE
- -------- ------------ ------------------ -----------------------
<S> <C> <C> <C>
AdManager
AdServer August ___, 1998 [***] [***]
AdClient
AdConsole
AdInsight
Fees are payable [***].
</TABLE>
- --------------
[***] 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.
5
<PAGE>
Date: June-29-1999
[LOGO] Customer: NetZero
ORDER FORM
- -------------------------------------------------------------------------------
ADVERTISING VOLUME*: NETZERO'S NEEDS
- -------------------------------------------------------------------------------
According to [***], NetZero is currently getting [***] per AdServer at peak
According to [***] number of [***], NetZero will require a total of [***] to
manage peak loads.
This number does not include any failover servers-
NetGravity recommends another [***] serving capacity or [***]
NetZero is currently licensed for [***], thus would require an additional
[***]
*All AdServer volume figures discussed in this document are for reference only.
They are based upon NetZero's own experience, warranty, express or implied.
- -------------------------------------------------------------------------------
EXISTING LICENSES: RENEWALS
- -------------------------------------------------------------------------------
Current Licensing with upcoming renewal August 31, 1999
<TABLE>
<CAPTION>
Item QTY List Each Total List License Support Subscription
[***] [***]
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
[***] [***] [***] [***] [***] [***]
[***] [***] [***] [***] [***] [***]
[***] [***] [***] [***] [***] [***]
- -------------------------------------------------------------------------------
[***] [***] [***]
</TABLE>
Renewal Due (8/31/99) [***]
[***] [***]
- ----------------------- -------
Total Renewal of Exisiting Licenses [***]
*The [***] represents support fees already paid by NetZero thru 8/31
- -------------------------------------------------------------------------------
NEW PURCHASES: ADDITIONAL ADSERVERS & CONSULTING
- -------------------------------------------------------------------------------
To buy the needed additional [***]
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
List Total List NetZero Net
QTY Each License Discount License $ Support Subscription
<S> <C> <C> <C> <C> <C> <C>
[***] [***]
[***] [***] [***] [***] [***] [***] [***]
- -------------------------------------------------------------------------------
New Licenses Current Year [***]
Year 2 Total [***]
-----
[***]
</TABLE>
* 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.
Page 1 of 2
<PAGE>
<TABLE>
<S> <C> <C>
--------------------------
Plus, ------- --Renewals from above rolled
Renewal of Existing Renewal Due 8/31/99 [***] into purchase of new
(see above) Year 2 Total [***] licenses, synching up the
- renewal dates of all
NewZero licenses.
------------------------------------------ --------------------------
TOTALS Year 1 Total [***]
Year 2 Total [***]
-------
[***]
--------------------------------
80
- -------------------------------------------------------------------------------
[***]
- -------------------------------------------------------------------------------
[***] [***] [***] [***] [***]
[***] [***] [***] [***] [***]
- -------------------------------------------------------------------------------
[***]
- -------------------------------------------------------------------------------
Grand Total Licenses, Renewals & Support 2 years [***]
[***] [***]
---------
Grand Total [***] [***]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CONDITIONS
- -------------------------------------------------------------------------------
see attached word document
Authorized Licensee Signature: Title: Date:
Senior V.P.
/s/ Frederic A. Randall, Jr. & General Counsel 6/29/99
- -------------------------------- ----------------- -------
Authorized NetGravity Signature: Title: Date:
/s/ Stephen E. Recht CFO
- -------------------------------- ----------------- -------
</TABLE>
* 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.
Page 2 of 2
<PAGE>
1. Software purchased under this Order Form shall be governed by the
terms and conditions of the NetGravity AdServer License Agreement dated
August 28, 1998 (the "License Agreement") and NetGravity Software
Subscription and Support Agreements (the "Support Agreement") entered into by
NetGravity and NetZero, dated August 31, 1998 (collectively, the "Existing
Agreements"). The Existing Agreements are hereby amended to incorporate the
terms of this Order Form. [***]. So long as Licensee is not in breach
hereunder, Licensee shall have an option by delivery of written notice to
extend the License Agreement, as amended hereunder, for an additional two
year term on the terms set forth herein, provided that [***]
2. Notwithstanding anything to the contrary in Section 5.1 of the Support
Agreement referenced herein, the term of this purchase shall be two years.
3. Because this quotation represents a two year obligation on the part of
Licensee and Licensee is paying for both years under [***], in the event that
Licensee purchases additional copies of the AdManager AdServer, and AdClient
component(s) during the two years from the date of this quotation, Licensee
shall receive [***] when the software is ordered. In addition, [***]
4. During the two year term of this Order Form, Licensee shall have the
right to purchase an additional 100 days of consulting at [***].
Additionally, NetGravity shall use its commercially reasonable efforts to
develop custom software programs requested by Licensee. In the event
NetGravity is not able to develop a custom software program requested by
Licensee using commercially efforts, NetGravity agrees to provide Licensee
with such technical information as Licensee may reasonably request to enable
Licensee to develop such custom programs on its own, it being understood that
Licensee shall be required to keep such information confidential and shall
only be entitled to use such information in conjunction with the products
purchased hereunder.
5. The Support Subscription Agreement entered into by the parties on
August 31, 1998 is hereby amended to include the attached Exhibit's C and D.
6. The parties agree that in the event that NetGravity provides
consulting services pursuant to this Order Form, the parties shall, on a case
by case basis, decide upon intellectual property ownership produced by said
consulting services. In particular, if specific programs are proposed,
designed and paid for by Licensee, then appropriate restrictions shall be
placed on NetGravity;s ability to use the same to benefit Licensee's
competitors.
7. The parties agree to amend the Assignment sections of the above
mentioned AdServer License Agreement and the Support Subscription Agreement
by replacing the existing language with the following:
This Agreement is not assignable by Customer without the prior written
consent of NetGravity; provided however, this entire Agreement may be
assigned without NetGravity's consent to an affiliate controlled by or
under common control with Licensee or to any successor by merger or
acquisition of all or substantially all of Licensee's assets, provided
that such assignee is bound by law or written agreements to all of the
obligations of the assigning party under this Agreement. Subject to
the 1foregoing, this Agreement will bind and inure to the benefit of
the parties, their respective successors and permitted assigns. If
such aquiror is [***], then Licensee shall have no further rights to
any custom development and the support obligations under the Existing
Agreements shall terminate six months after the effective date of such
acquisition and such competitor shall not be entitled to source code
under the escrow provisions herein.
[***] 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.
<PAGE>
8. NetGravity agrees to enter into within 15 days of the date hereof a
Source Code Escrow Agreement in the form of the Preferred Escrow Agreement
attached hereto as Exhibit E and will place into escrow the source code,
design, documentation, information and instructions on the building/compiling
of the source code, and such other materials as may reasonably necessary for
Licensee to utilize such escrow materials for support of the Software. The
conditions for release of the source code shall be, in addition to those set
forth therein, limited to (i) NetGravity's material breach of its warranty
obligations and support obligations under the Existing Agreement which
remains uncured for 30 days (or 10 days with respect to Priority 1 or
Priority 2 errors as defined in the attached Exhibit C) from notice to cure
or if not capable of being cured within such time NetGravity fails to use its
best efforts to effect such cure.
9. In the event of release of source code from the escrow, Licensee shall
have the right to use the escrowed materials to perform support services and
to make modifications to the Licensed Software for internal use consistent
with the license granted in the License Agreement. The escrow license shall
be perpetual or until such time as NetGravity has cured the breach which gave
rise to the release from escrow. Licensee shall be responsible for a
associated escrow fees after the first year, the first year of which shall be
borne by NetGravity.
10. The parties agree to amend the Indemnity section of the above
referenced NetGravity AdServer License Agreement by adding the following to
the end of Section 7.1:
If NetGravity terminates under subsection (iii) within the first four
(4) years from the Effective Date, NetGravity will refund a pro-rata
portion of the license fees (the refundable amount being determined by
the total license fees reduced reduced each month by 1/48th of the
total). If NetGravity terminates under subsection (iii) at any time
after the Effective Date, NetGravity will refund any prepaid
subscription and support fees applicable to the remaining period for
which the services will be terminated.
<PAGE>
EXHIBIT 10.5
QUOTATION FOR DIALINX SERVICE-NETZERO
TO: NetZero Quote Date: [***]
Attn: Ron Burr Quote Valid To: [***]
Quote Number: [***]
QUOTATION FOR DIALINX SERVICE
This Quotation is for DiaLinx Service Version 2.0, and sets forth the pricing
and volume commitments agreed to under the Service Schedule for DiaLinx
Services. This Quote shall supercede Quote Number [***].
1. RECITAL: For ease of understanding, this section highlights the general
elements of pricing and commitments:
1.1 Network Access. You will be charged for Network Access which shall be
the roaming Hourly Rate for each hour that a user may access the GTE
Internetworking DiaLinx network ("Network").
1.2 Minimum Customer Commitment: In return for volume discounts (inherent
in the prices stated below), you have agreed to use a minimum dollar
volume of network access in each month of the agreement set forth
below ("Minimum Customer Commitment").
1.3 800/888 Charge: You will be billed additional charges for user's use
of the 800 or 888 dial access.
2. COMMENCEMENT DATE: The Commencement Date shall be the date of execution
of this Quote.
3. SERVICE PERIOD: The Service Period shall be from the Commencement Date
until [***].
4. MINIMUM CUSTOMER COMMITMENT: During the Service Period, [***], you have
agreed to use the following Minimum Customer Commitment*:
<TABLE>
<CAPTION>
MONTHS FROM COMMENCEMENT DATE MINIMUM CUSTOMER COMMITMENT
- ----------------------------- ---------------------------
<S> <C>
[***] [***]
[***] [***]
[***] [***]
</TABLE>
5. INSTALLATION CHARGE: GTE shall credit to Customer the Installation
charge of $25,000 billed under Quote NZ10698. Such credit may be applied
toward the first month of usage
[***] 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.
<PAGE>
under this revised Quote. In addition, GTE shall re-price all previously
billed monthly usage charges for October and November, such that the pricing
in this Quote applies. If such charges have already been invoiced GTE will
affect such re-pricing via a credit.
6. RATES AND CHARGES: You have the following pricing options available.
<TABLE>
<S> <C>
[***]: [***]
[***]: [***]
[***]: [***]
</TABLE>
[***]
ADJUSTMENTS TO ROAMING ANALOG HOURLY RATE: In any month where the number
of Roaming Analog Hours used exceeds the thresholds in the table below, the
roaming Analog Hourly Rate for that month will be reduced to the
corresponding Adjusted Hourly Rate.
<TABLE>
<S> <C>
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
</TABLE>
[***]
[***] All pricing is listed as U.S. dollars.
GTE Internetworking expects the DiaLinx network to change over time in
order to meet the changing needs of our customers. GTE Internetworking
reserve the right to add or delete the dial-in access numbers associated
with a specified zone from time to time.
We also reserve the right to add additional services and zones to the
foregoing rate schedule as the DiaLinx network develops (e.g. Canadian
800 Service). These additional services and respective prices will be
made available to you on an on-going basis, and will be deemed added to
the foregoing rate schedule upon notice by us to you that they are
available. For an updated list of services, prices, and dial-up access
number associated with each zone, please consult our Web page or contact
your GTE Internetworking representative.
[***] 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.
2
<PAGE>
7. BASIC SERVICES -- RECURRING FEES:
7.1 NETWORK ACCESS: You will be charged for Network Access, which, for
each calendar month, shall be [***.]
7.2 800/888 CHARGE: In addition to any other applicable charges under
section 6.0, you will be charged the 800/888 charge for each hour that
an End User accesses the Network via the 800/888 access number. Network
access connect time is measured [***].
7.3 DIALER/PHONE BOOK SOFTWARE. Based on Microsoft's CONNECTION
MANAGER, GTE will provide a software client that provides a PPP
dialer, and Local Number Phone Book.
7.4 LEVEL I (END-USER) SUPPORT: Level 1 will be the responsibility of
Net Zero.
7.5 LEVEL II AND III (NETWORK) SUPPORT. Every GTE Internet working
customer is provided with second-level help desk support designed to
work with either your own or out-sourced help desk, your project
administrator, or your IS department. This help desk is integrated
with our Cambridge NOC and is the first point of contact for opening
new trouble tickets, getting updates on existing ones, or simply
asking information questions.
8. CREDIT AND PAYMENT TERMS. Customer shall be invoiced [***] Payment is
due [***]. Notwithstanding the preceding, in no event shall the
aggregate amount due to GTE for DiaLinx Services (including invoiced and
un-invoiced amounts ("Customer Balance")) exceed [***]. In the event the
actual Customer Balance [***], GTE shall notify Customer in writing
("Payment Notice"). Customer shall be obligated to immediately pay i)
all invoiced amounts, or ii) an amount sufficient to reduce the Customer
Balance to [***], whichever is greater. For example, if Customer Balance
is [***] and Customer has an unpaid invoice in the amount of [***],
Customer must pay to GTE [***]. In the event that GTE does not receive
such payment within [***] of the Payment Notice, GTE shall have the right
to terminate or suspend all services provided hereunder without further
notice.
After the [***] of the Service Period and contingent upon (a) Customer
completing additional investment round(s) valued at [***], (b) no adverse
change to Customer's business and (c) consistent timely payments
hereunder, GTE shall invoice Customer on a
[***] 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>
monthly basis and increase Customer Balance threshold to [***]. Payment
shall be due [***]. In the event the actual Customer Balance exceeds
[***], GTE shall send Customer Payment Notice. Customer shall be
obligated to immediately pay i) all invoiced amounts, or ii) an amount
sufficient to reduce the Customer Balance to [***], whichever is greater.
In the event GTE does not receive the required payment within [***] of
the Payment Notice, GTE shall have the right to terminate or suspend all
services provided hereunder without further notice.
9. ADDITIONAL CUSTOMER RESPONSIBILITIES. You shall provide expected usage
forecasts on a city by city basis to us ninety (90) days in advance. In
addition, you shall use commercially reasonable efforts to provide us
with advance information as to marketing programs that may materially
impact future usage.
10. USER "KILL" SERVER. On or before March 31, 1999, GTE shall deliver to
customer functionality within the GTE network to, upon Customer's
request, disconnect one of Customer's users. Customer shall provide GTE
with suggestions regarding such functionality no later than December 20,
1998. GTE does not warrant that the final design or functionality shall
include any of the Customer's suggestions. In the event that GTE does
not release such functionality on or before March 31, 1999, GTE shall
reduce the Hourly Rate for services by [***] until such time as the
service is released.
11. Upon your written request and your demonstration to GTE through
acceptable (i) usage levels; (ii) past payment performance; (iii)
demonstrated creditworthiness and (iii) performance and adherence to the
terms and conditions of this Agreement; GTE shall commence negotiations,
in good faith, of a new Agreement to provide services for Customer on a
dedicated per port basis.
PLEASE SIGN BELOW TO INDICATE YOUR UNDERSTAND AND ACCEPTANCE OF THE TERMS OF
THIS QUOTATION.
Company (Type or Print Full Customer name): NetZero, Inc.
-------------------------------
Signature: /s/ Andrea L. Roschke Date: 12/16/98
------------------------------ -------------------------
Print name: Andrea L. Roschke Title: CFO
------------------------------ ------------------------
[***] 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>
AMENDMENT TO QUOTATION FOR DIALINX SERVICES
JULY 1999
This Amendment ("Amendment") amends the terms and conditions of the
Quotation - DiaLinx Services #[***] dated December 9, 1998 (the
"Quotation") under the Master Agreement for Internetworking Services and
the DiaLinx Service Schedule dated October 13, 1998 (individually, the
"Master Agreement" and the "Service Schedule" and, collectively with the
Quotation, the "Agreement") between NetZero, Inc. ("you" or "NetZero")
and GTE Internetworking Incorporated ("we" or "GTE Internetworking") as
set forth herein.
In consideration of the mutual covenants and agreements contained herein and
in the Agreement, and in satisfaction of the obligations set forth in section
11 of the Quotation, the parties agree as follows:
I. The parties agree to delete section 3 of the Quotation in its entirety
and to replace it with the following:
"3. SERVICE PERIOD. The Service Period shall be from the Commencement
Date until [***]."
II. [***]
III. The parties agree to modify section 6 of the Quotation by adding the
following as though set forth therein in its entirety:
[***]
GTE Internetworking expects the DiaLinx Network to change over time
in order to meet the changing needs of our customers. We reserve
the right to add to, delete or change the dial-in access numbers.
[***].
[***]. All pricing is listed as U.S. dollars."
IV. The parties agree to delete sections 9, 10 & 11 of the Quotation in
their entirety and to replace them with the following:
"9. CAPACITY PLANNING:
9.1 We use commercially reasonable efforts to reduce Network
costs through numerous means such as volume purchase
agreements, more efficient network designs, and the receipt of
off-setting compensation. Once per quarter, the parties will
review network usage, costs, customer commitment and pricing
to evaluate in good faith whether to reduce the Roaming Analog
Hourly Rate.
9.2 For purposes of capacity planning, you agree to provide
best estimate monthly rolling ninety (90) day usage forecasts
on a city by city basis. In addition, you agree to use
commercially reasonable efforts to provide us with advance
information as to your marketing programs that will materially
affect future usage.
9.3 You agree to provide GTEI with at least [***] prior
written notification of any intent to significantly reduce
usage on a single or group of local access numbers. [***],
should a [***] reduction of usage occur for a given access
number from [***], to the extent directly due to the actions
of NetZero and not as a result of decreased usage by NetZero
subscribers or any other factor, without such prior
notification, GTEI shall charge NetZero [***]. The parties
- ----------------------------
[***] 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.
PAGE 1 OF 4
<PAGE>
acknowledge that this payment is an approximation of the
losses suffered by GTEI for unplanned capacity under-
utilization, and is not intended as a penalty.
10. User "Kill" Server. By September 15, 1999, GTE shall furnish
to customer functionality within the network to, through an
automated call to an API, disconnect one of Customer's users.
Customer agrees to provide GTE with any information on design or
functionality they would like to see for such a service by September
1, 1999. GTE does not warrant that the final design shall meet all
of their design suggestions. Should GTE not meet the September 15,
1999, and failure to meet such date is not due on part to Customer,
GTE shall reduce the Hourly Rate for services by [***] until such
time as the service is delivered."
11. Year 2000 Compliance. The "Year 2000 Problem" refers to the
potential inability of some computer software to appropriately treat
date-related information or functions involving dates of December
31, 1999 and thereafter. GTEI represents that is has made and will
continue to make commercially reasonable efforts to ensure that the
services it provides under this Agreement will not be materially
impaired by the Year 2000 Problem, provided, however, that Client
acknowledges that GTEI is an integrator of systems and services
provided by other entities, and GTEI cannot guarantee that third
party products will function without adverse effect from the Year
2000 Problem. GTEI will periodically inform Client of the steps
GTEI is taking to ensure against adverse effects on the GTEI
services caused by the Year 2000 Problem through either direct
communications or updates on GTE's web-site, and agrees to inform
Client promptly in writing of any material risk of which it becomes
aware that GTES's services will be materially affected by the Year
2000 Problem."
V. Section 6 of the Master Agreement is hereby deleted in its entirety
and replaced with the following: "We will indemnify you for damages,
costs and attorneys fees you incur from any third party claim that
our design of the Services infringes any U.S. patent, copyright,
trademark, trade secret or other intellectual property right, except
to the extent that such claim arises from your combination of the
Services with other products or services not provided by us, or your
modification of the Services. You will indemnify us for damages,
costs and attorneys fees we incur from any third party claims (i)
arising out of the content of the transmissions which you or your end
users send via the Services; (ii) that you in using Services have
failed to comply with applicable laws and/or regulations (including,
without limitation export control laws); (iii) arising out of your
breach of the terms of any applicable license for GTE provided
software; or (iv) arising out of business activities conducted by you
via the Services. In the event of a claim, the party requesting
indemnity shall deliver prompt written notice to the other and provide
the other party with the right to defend such action. The indemnifying
party shall pay all judgements, fees, expenses (including attorneys
fees) and amounts paid in settlement of a claim. No settlement of a
claim by the indemnifying party will be made without the consent of
the indemnified party, which consent shall not be unreasonably
withheld. Failure to provide written notice shall release a party
from its obligations under this paragraph only to the extent that the
indemnifying party is prejudiced by such failure. In no event shall
either party be entitled to indemnity hereunder if the claim that gave
rise to the indemnity is as a result of such party's willful misconduct
or breach of its obligations under this Agreement. THE PARTIES DISCLAIM
THE IMPLIED WARRANTY OF NON-INFRINGEMENT, RELYING INSTEAD ON THE TERMS
OF THIS SECTION."
VI. Section 9 of the Master Agreement is hereby deleted in its entirety and
replaced with the following: "You shall not use the Services in ways
that violate laws. You shall maintain and enforce an acceptable use
policy that is consistent with applicable laws, regulations, and
Internet community standards. (For example, you shall have a policy
against distribution of unsolicited bulk electronic mail ("spamming")
and shall take reasonable actions to enforce such policy.) You agree
to work with us in good faith to address any abuse complaints and to
terminate services to end users that we reasonably designate as
violators of acceptable use guidelines. In the event of unforeseen
forms of abuse, or unacceptable abuse complaints, we reserve the right
to negotiate good faith changes to your acceptable use policy."
VII. The last sentence of Section 10 of the Master Agreement is hereby
deleted in its entirety and replaced with the following: "We reserve
the right, but assume no obligation, to suspend the Services (or any
portion thereof) in the event that: (i) you are overdue in payments
and have not cured such delinquency within three business days
following written notice of such; or (ii) in our reasonable judgment
you have violated Section 9 of the Master Agreement which
[***] 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.
PAGE 2 OF 4
<PAGE>
violation is having a material adverse effect on us and is not
corrected such condition to our reasonable satisfaction within 48
hours following written notification."
VIII. Item (b) of Section 12 of the Master Agreement shall be deleted
and replaced with the following: "(b) [***], whichever is less."
IX. The second sentence of Section 13 of the Master Agreement regarding
restrictions on assignments is hereby deleted in its entirety and
replaced by the following: "Except for assignments by one party to
affiliates of such party, neither party may assign the Agreement
without the prior written consent of the other party; provided,
however, either party may assign this agreement in connection with
the transfer of all or substantially all of the assets or the stock
of such party without the consent of the other party."
X. The last sentence of Section 13 of the Master Agreement is hereby
amended to add the following to the end of such sentence "and you."
XI. Section 9 of the Service Schedule is hereby amended to add the
following: "Any such price changes will not be effective without
at least thirty (30) days prior written notice. [***]."
XII. Sections 10 and 11 of the Schedule are hereby deleted. In Section
12 of the Schedule the subparagraph entitled "Content
Responsibility" is hereby deleted.
XIII. Notices under this Agreement shall be in writing and shall be deemed
effective (1) upon personal delivery to the persons to be notified
or (2) at 11:00 a.m. on the business day following the deposit with a
reputable overnight courier (with such package designated for priority
next day delivery and delivered to such courier at a time when such
courier can effect such next day delivery) and addressed to the
persons to receive such notice as designated below; provided, however,
in each case an email to the persons to receive such notice shall
also be sent prior to the time such notice is to be deemed effective.
The persons and/or addresses to receive notices shall be as follows,
but shall be subject to change consistent with the foregoing notice
provisions: To NetZero: 2555 Townsgate Road, Westlake Village, CA
91361, Attn: Chief Financial Officer at email
[email protected] and to General Counsel at email
[email protected]. To GTE Intenetworking: 150 CambridgePark
Drive, Cambridge, MA 02114, Attn: Director of Contracts at email
[email protected] and to Director of Remote Access Services at email
[email protected].
Except as expressly modified by this Amendment, all terms and conditions of
the Agreement shall remain in full force and effect. The terms and
conditions of the Agreement (including, but not limited to, any disclaimers
and limitations on liability) will continue to apply to the services
described herein. Any terms defined in the Agreement and not defined in the
Amendment shall have the meaning given in the Agreement. In the event of
any conflict between the terms of the Agreement and the terms of this
Amendment, the terms of this Amendment shall control.
- ----------------------------
[***] 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.
PAGE 3 OF 4
<PAGE>
- -------------------------------------------------------------------------------
NetZero, Inc.
Signature: /s/ Charles S. Hilliard Date: 8/5/99
-------------------------- --------------------------
Print Name: /s/ Charles S. Hilliard Title: SVP & CFO
-------------------------- --------------------------
GTE Internetworking Incorporated
Signature: /s/ Cathleen Butt Date: 8/6/99
-------------------------- --------------------------
Print Name: /s/ Cathleen Butt Date: Senior Contracts Representative
-------------------------- -------------------------------
- -------------------------------------------------------------------------------
PAGE 4 OF 4
<PAGE>
EXHIBIT 10.17
ORACLE
ENABLING THE INFORMATION AGE
SOFTWARE LICENSE AND SERVICES AGREEMENT
This Software License and Services Agreement ("Agreement") is between Oracle
Corporation ("Oracle") and the Customer identified below. The terms of this
Agreement shall apply to each Program license granted and to all services
provided by Oracle under this Agreement, which will be identified on one or
more Order Forms.
<TABLE>
<CAPTION>
<S> <C>
I. DEFINITIONS
1.1 "Program" means the software in object code form distributed by Oracle
for which Customer is granted a license pursuant to this Agreement,
and the media, Documentation and Updates therefor.
1.2 "Documentation" means the user guides and manuals for installation and
use of the Program software. Documentation is provided in CD-ROM or
bound form, whichever is generally available.
1.3 "Update" means a subsequent release of the Program which Oracle
generally makes available for Program licenses at no additional
license fee other than media and handling charges, provided Customer
has ordered Technical Support for such licenses for the relevant time
period. Update shall not include any release, option or future
product which Oracle licenses separately.
1.4 "Order Form" means the document in hard copy or electronic form by
which Customer orders Program licenses and services, and which is
agreed to by the parties. The Order Form shall reference the
Effective Date of this Agreement.
1.5 "Designated System" means the computer hardware and operating system
designated on the relevant Order Form.
1.6 "Technical Support" means Program support provided under Oracle's
policies in effect on the date Technical Support is ordered.
1.7 "Commencement Date" means the date on which the Programs are delivered
by Oracle to Customer, or if no delivery is necessary, the Effective
Date set forth on the relevant Order Form.
II. PROGRAM LICENSE
2.1 Rights Granted
</TABLE>
A. Oracle grants to Customer a nonexclusive license to use the
Programs specified on an Order Form under this
Agreement, as follows:
i. to use the Programs solely for Customer's operations on the
Designated System or on a backup system if the Designated
System is inoperative, consistent with the use limitations
specified or referenced in this Agreement, an Order Form, or
the Documentation. Customer may not relicense, rent or lease
the Programs for third-party training, commercial time-sharing
or service bureau use;
ii. to use the Documentation provided with the Programs in support
of Customer's authorized use of the Programs;
iii. to copy the Programs for archival or backup purposes, and to
make a sufficient number of copies for the use specified in the
Order Form. All titles, trademarks, and copyright and
restricted rights notices shall be reproduced in such copies;
iv. to modify the Programs and combine them with other software
products; and
v. to allow third parties to use the Programs for Customer's
operations so long as Customer ensures that use of the Programs
is in accordance with the terms of this Agreement.
<PAGE>
Customer shall not copy or use the Programs (including the
Documentation) except as specified in this Agreement or an
Order Form. Customer shall have no right to use any other
software program that may be delivered with ordered Programs.
B. Customer agrees not to cause or permit the reverse engineering,
disassembly or decompilation of the Programs, except to the extent
required to obtain interoperability with other independently
created software or as specified by law.
C. Oracle shall retain all title, copyright and other proprietary
rights in the Programs. Customer does not acquire any rights,
express or implied, in the Programs, other than those specified in
this Agreement.
2.2 Transfer and Assignment
A. Customer may transfer a Program license within its organization
upon notice to Oracle; transfers are subject to the terms and fees
specified in Oracle's transfer policy in effect at the time of the
transfer.
B. Customer may not assign this Agreement or transfer a Program
License to a legal entity separate from Customer without the prior
written consent of Oracle. Oracle shall not unreasonably withhold
or delay such consent.
2.3 Verification
At Oracle's written request, not more frequently than annually,
Customer shall furnish Oracle with a signed certification verifying
that the Programs are being used pursuant to the provisions of this
Agreement and applicable Order Forms.
Oracle may audit Customer's use of the Programs. Any such audit shall
be conducted during regular business hours at Customer's facilities and
shall not unreasonably interfere with Customer's business activities.
If an audit reveals that Customer has underpaid fees to Oracle,
Customer shall be invoiced for such underpaid fees. Audits shall be
conducted no more than once annually.
III. TECHNICAL SUPPORT SERVICES
3.1 Technical Support Services
Technical Support Services ordered by Customer will be
provided under Oracle's Technical Support policies in effect on the
date Technical Support is ordered.
3.2 Consulting and Training Services
Oracle will provide consulting and training services
agreed to by the parties under the terms of this
Agreement. All consulting services shall be billed on a
time and materials basis unless the parties expressly
agree otherwise in writing.
3.3 Incidental Expenses
For any on-site services requested by Customer, Customer
shall reimburse Oracle for actual, reasonable travel and
out-of-pocket expenses incurred.
IV. TERM AND TERMINATION
4.1 Term
If not otherwise specified on the Order Form, this
Agreement and each Program license granted under this
Agreement shall continue perpetually unless terminated
under this Article IV.
4.2 Termination by Customer
Customer may terminate any Program license at any time;
however, termination shall not relieve Customer's
obligations specified in Section 4.4.
4.3 Termination by Oracle
Oracle may terminate this Agreement or any license upon
written notice if Customer materially breaches this
Agreement and fails to correct the breach within 30 days
following written notice specifying the breach.
4.4 Effect of Termination
Termination of this Agreement or any license shall not
limit either party from pursuing other remedies available
to it, including injunctive relief, nor shall such
termination relieve Customer's obligation to pay all fees
that have accrued or are otherwise owed by Customer under
any Order Form. The parties' rights and obligations under
Sections 2.1.B, 2.1.C, and 2.2.B, and Articles
IV, V, VI and VII shall survive termination of this
Agreement. Upon termination, Customer shall cease using,
and shall return or destroy, all copies of the applicable
Programs.
<PAGE>
V, INDEMNITY, WARRANTIES, REMEDIES
5.1 Infringement Indemnity
Oracle will defend and indemnify Customer against
a claim that the Programs infringe a copyright or patent or other
intellectual property right, provided that: (a) Customer notifies Oracle
in writing within 30 days of the claim' (b) Oracle has sole control of the
defense and all related settlement negotiations; and (c) customer provides
Oracle with the assistance, information and authority necessary to perform
Oracle's obligations under this Section. Oracle will reimburse Customer's
reasonable out-of-pocket expenses incurred in providing such assistance.
Oracle shall have no liability for any claim or infringement based on use
of a superseded or altered release of Programs if the infringement would
have been avoided by the use of a current unaltered release of the Programs
which Oracle provides to Customer.
If the Programs are held or are believed by Oracle to infringe, Oracle
shall have the option, at its expense, to (a) modify the Programs to
be noninfringing; or (b) obtain for Customer a license to continue
using the Programs. If it is not commercially reasonable to
perform either of the above options, then Oracle may terminate the
license for the infringing Programs and refund the license fees paid
for those Programs. This Section 5.1 states Oracle's entire liability
and Customer's exclusive remedy for infringement.
5.2 Warranties and Disclaimers
A. Program Warranty
Oracle warrants for a period of one year from the Commencement
Date that each unmodified Program license will perform the
functions described in the Documentation.
B. Media Warranty
Oracle warrants the tapes, diskettes or other media to be
free of defects in materials and workmanship under normal
use for 90 days from the Commencement Date.
C. Services Warranty
Oracle warrants that its Technical Support, training and
consulting services will be performed consistent with
generally accepted industry standards. This warranty shall
be valid for 90 days from performance of service.
D. Disclaimers
THE WARRANTIES ABOVE ARE EXCLUSIVE AND IN LIEU OF ALL OTHER
WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING THE
IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.
Oracle does not warrant that the Programs will operate
in combinations other than as specified in the
Documentation or that the operation of the Programs
will be uninterrupted or error-free. Pre-production
releases of Programs and computer-based training products
are distributed "AS IS."
5.3 Exclusive Remedies
For any breach of the warranties contained in Section 5.2,
Customer's exclusive remedy, and Oracle's entire liability,
shall be:
A. For Programs
The correction of Program errors that cause breach of
the warranty, or if Oracle is unable to make the Program
operate as warranted, Customer shall be entitled to
terminate the Program license and recover the fees paid
to Oracle for the Program license.
B. For Media
The replacement of defective media returned within 90
days of the Commencement Date.
C. For Services
The reperformance of the services, or if Oracle is
unable to perform the services as warranted, Customer
shall be entitled to recover the fees paid to Oracle
for the unsatisfactory services.
VI. PAYMENT PROVISIONS
6.1 Invoicing and Payment
All fees shall be due and payable [***] from the invoice
date. Any amounts payable by
Confidential treatment has been requested for the bracketed
portions. The confidential redacted portion has been omitted and filed
separate;ly with the Securities and Exchange Commission.
<PAGE>
Customer hereunder which remain unpaid after the due date
shall be subject to a late charge equal to [***] per month
from the due date until such amount is paid. Customer
agrees to pay applicable media and shipping charges.
Customer shall issue a purchase order, or alternative
document acceptable to Oracle, on or before the Effective
Date of the applicable Order Form.
6.2 Taxes
The fees listed in this Agreement do not include taxes;
if Oracle is required to pay sales, use , property,
value-added or other taxes based on the licenses or
services granted in this Agreement or on Customer's use
of Programs or services, then such taxes shall be billed
to and paid by Customer. This Section shall not apply to
taxes based on Oracle's income.
VII. GENERAL TERMS
7.1 Nondisclosure
By virtue of this Agreement, the parties may have access to
information that is confidential to one another ("Confidential
Information"). Confidential Information shall be limited to the
programs, the terms and pricing under this Agreement, and all
information clearly identified as confidential.
A party's Confidential Information shall not include information
that: (a) is or becomes a part of the public domain through no
act or omission of the other party; (b) was in the other party's
lawful possession prior to the disclosure and had not been
obtained by the other party either directly or indirectly from
the disclosing party; (c) is lawfully disclosed to the other
party by a third party without restriction on disclosure; or
(d) is independently developed by the other party. Customer
shall not disclose the results of any benchmark tests of the
Programs to any third party without Oracle's prior written
approval.
The parties agree to hold each other's Confidential Information
in confidence during the term of this Agreement and for a period
of two years after termination of this Agreement. The parties
agree, unless required by law, not to make each other's
Confidential Information available in any form to any third
party for any purpose other than the implementation of this
Agreement. Each party agrees to take all reasonable steps to
ensure that Confidential Information is not disclosed or
distributed by its employees or agents in violation of the
terms of this Agreement.
7.2 Governing Law
This Agreement, and all matters arising out of or relating
to this Agreement, shall be go verned by the laws of the State
of California.
7.3 Jurisdiction
Any legal action or proceeding relating to this Agreement shall
be instituted in a state or federal court in San Francisco or
San Mateo County, California. Oracle and Customer agree to
submit to the jurisdiction of, and agree that venue is proper
in, these courts in any such legal action or proceeding.
7.4 Notice
All notices, including notices of address change, required to be sent
hereunder shall be in writing and shall be deemed to have been given when
mailed by first class mail to the first address listed in the relevant
Order Form (if to Customer) or to the Oracle address on the Order Form
(if to Oracle).
To expedite order processing, Customer agrees that Oracle may treat
documents faxed by Customer to Oracle as original documents;
nevertheless, either party may require the other to exchange original
signed documents.
7.5 Limitation of Liability
In no event shall either party be liable for any indirect, incidental,
special or consequential damages, or damages for loss of profits,
revenue, data or use, incurred by either party or any third party,
whether in an action in contract or tort, even if the other party has
been advised of the possibility of such damages. Oracle's liability
for damages hereunder shall in no event exceed the amount of fees paid
by Customer under this Agreement, and if such damages result from
Customer's use of the Program or services, such liability shall be
limited to fees paid for the relevant Program or services giving rise
to the liability.
The provisions of this Agreement allocate the risks between Oracle and
Customer. Oracle's pricing reflects this allocation of risk and the
limitation of liability specified herein.
[***] Confidential treatment has been requested for the bracketed
portions. The confidential redacted portion has been omitted and filed
separate;ly with the Securities and Exchange Commission.
<PAGE>
7.6 Severability
If any provision of this Agreement is held to be invalid or
unenforceable, the remaining provisions of this Agreement will
remain in full force.
7.7 Waiver
The waiver by either party of any default or breach of this
Agreement shall not constitute a waiver of any other or subsequent
default or breach. Except for actions for nonpayment or breach of
Oracle's proprietary rights in the Programs, no action, regardless
of form, arising out of this Agreement may be brought by either party
more than two years after the cause of action has accrued.
7.8 Export Administration
Customer agrees to comply fully with all relevant export laws and
regulations of the United States ("Export Laws") to assure that
neither the Programs nor any direct product thereof are (1) exported,
directly or indirectly, in violation of Export Laws; or (2) are
intended to be used for any purposes prohibited by the Export Laws,
including, without limitation, nuclear, chemical, or biological
weapons proliferation.
7.9 Entire Agreement
This Agreement constitutes the complete agreement between the
parties and supersedes all prior or contemporaneous agreements or
representations, written or oral, concerning the subject matter of
this Agreement. This Agreement may not be modified or amended
except in a writing signed by a duly authorized representative of
each party; no other act, document, usage or custom shall be deemed
to amend or modify this Agreement.
It is expressly agreed that the terms of this Agreement and any Order
Form shall supersede the terms in any Customer purchase order or other
ordering document. This Agreement shall also supersede all terms of
any unsigned or "shrinkwrap" license included in any package, media,
or electronic version of Oracle-furnished software and any such
software shall be licensed under the terms of this Agreement, provided
that the use limitations contained in an unsigned ordering document
shall be effective for the specified licenses.
The Effective Date of this Agreement shall be April 14, 1999.
<TABLE>
<S> <C>
Executed by Customer:___________________ Executed by Oracle Corporation:
Authorized Signature: /s/ Ronald T. Burr Authorized Signature: ____________________
Name: Ronald T. Burr Name: ____________________________________
Title: President Title: ___________________________________
Address:_________________________________ Address: 500 Oracle Parkway, Redwood City, CA
</TABLE>
Oracle is a registered trademark of Oracle Corporation
13006-103196
<PAGE>
AMENDMENT ONE
TO THE
SOFTWARE LICENSE AND SERVICES AGREEMENT
BETWEEN
NETZERO
AND
ORACLE CORPORATION
This document ("Amendment One") amends the Software License and Services
Agreement, dated April 14, 1999, and all amendments and addenda thereto (the
"Agreement") between NetZero ("Customer") and Oracle Corporation ("Oracle").
The parties hereby agree to amend the Agreement as follows:
1. In the last paragraph of Section 2.1.A, add the following to the end of
the last sentence "unless otherwise authorized."
2. In Section 2.1.B, add the words "knowingly or negligently" before the
word "permit" in the first sentence of such section.
3. In Section 2.1.C, add the words "or in the Order Form" at the end of such
section.
4. In the second paragraph of Section 2.3, add "Upon 30 days prior notice"
at the beginning of the first sentence.
5. In Section 3.2, add "or in the Order Form" to the end of the first
sentence of such section.
6. In Section 3.3, add the words "Unless otherwise agreed to by the parties"
at the beginning of the first sentence of such section.
7. The following Sections shall be added after 5.2.C of the Agreement:
D. Viruses and Remedy
Oracle warrants that it will use reasonable efforts using best of
breed commercially available software to test the Programs for viruses
such as works, Trojan horses, etc. ("Viruses"). Oracle will also
maintain a master copy of the appropriate versionsof the Programs, free
of Viruses. If Customer believes a Virus may be present in the delivered
Programs, then upon Customer" request, Oracle will provide a master copy
to Customer for comparison with and correction of Customer's copy of the
Programs. Any breach of this warranty is subject to the exclusive
remedies as set forth in Section 5.3 of the Agreement.
E. Millennium Warranty and Remedy
Except as otherwise agreed by the parties, Oracle warrants that the
production version of the Programs which are current on the Effective Date
of an Order Form will fully comply with the following millennium compliance
statement when configured and used according to the Documentation. The
definition of compliance is the ability to:
1. Currently handle date information before, during and after 1 January
2000, including accepting date input, providing date output and
performing calculation on dates or portions of dates or ranges of
dates;
2. Function according to the Documentation, before, during and after
1 January 2000 without changes in operation resulting from the
advent of the we century assuming correct configuration;
3. Where appropriate, respond to two digit date input in a way that
resolves the ambiguity as to century in a disclosed, defined and
predetermined manner in accordance with the Documentation;
4. Store and provide output of date information in ways that are
unambiguous as to century;
5. Manage leap years, including that leap year occurring in the year
2000, following the quad-centennial rule.
Any breach of this warranty is subject to the exclusive remedies as set forth
in Section 5.3 of the Agreement.
<PAGE>
8. Section 5.2.D shall become Section 5.2.F.
9. In Section 5.3.A, add the word "all" after the word "recover" in the second
to last line of such section.
10. In Section 5.3.C, add the word "all" after the word "recover" in the second
to last line of such section.
11. In Section 7.1, add the words "on a confidential basis" at the end of
clause (b).
12. Insert the following at the beginning of the second sentence of Section
7.5: "Except with respect to the exclusive remedies of Section 5.1,".
13. Delete the last sentence of Section 7.9 and replace it with the following:
"This Agreement shall also supersede all terms of any unsigned or
"shrinkwrap" license included in any package, media, or electronic
version of Oracle-furnished software and any such software shall be
licensed under the terms of this Agreement, provided that the use
limitations contained in any such unsigned ordering document shall be
effective for the specified licenses."
Subject to the modifications herein, the Agreement shall remain in full force
and effect.
The Effective Date of this Amendment One is April 14, 1999.
<TABLE>
<CAPTION>
NETZERO ORACLE CORPORATION
<S> <C>
Authorized Signature: /s/ Ronald T. Burr Authorized Signature:
------------------ ------------------
Name: Ronald T. Burr Name:
------------------ ----------------------------------
Title: President Title:
------------------ ----------------------------------
</TABLE>
<PAGE>
AMENDMENT TWO
TO THE
SOFTWARE LICENSE AND SERVICES AGREEMENT
BETWEEN
NETZERO
AND
ORACLE CORPORATION
This document ("Amendment Two") amends the Software License and Services
Agreement, dated April 19, 1999, and all amendments and addenda
thereto (the "Agreement") between NetZero ("Customer") and Oracle Corporation
("Oracle"). The parties hereby agree to amend the Agreement as follows:
Notwithstanding Section 7.1, Customer may disclose confidential information
relating to the Agreement and April 20, 1999 Order Form Agreement
to third party significant investors or potential investors, provided that
they are bound by a nondisclosure agreement which prohibits them from
disclosing such information to third parties. Customer must keep an
auditable list of confidential information recipients, and the nature of the
confidential information disclosed. Recipients of confidential information
may not be direct competitors of Oracle in the software manufacturing
business.
Subject to modifications herein, the Agreement shall remain in full force and
effect.
The effective date of this Agreement is April 20, 1999.
<TABLE>
<CAPTION>
NETZERO ORACLE CORPORATION
<S> <C>
By: /s/ Mark R. Goldston By: /s/ Michael Poplack
--------------------- --------------------
Name: Mark R. Goldston Name: Michael Poplack
----------------- -----------------
Title: Chairman, CEO Title: Assistant General Counsel
---------------- --------------------------
</TABLE>
<PAGE>
ORACLE
LIFECYCLE SUPPORT SERVICES ENGAGEMENT CONTRACT
CUSTOMER NAME: NETZERO, INC.
CUSTOMER CONTACT: STACY HAITSUKA
CUSTOMER ADDRESS: 31416 AGOURA ROAD, SUITE 150
WESTLAKE VILLAGE, CA 91361
- ------------------------------------------------------------------------------
This Engagement Contract ("EC") shall be governed by the terms of the
Software License and Services Agreement dated April 20, 1999, (the
"Agreement") between NetZero, Inc. ("Customer") and Oracle Corporation
("Oracle"). Oracle shall provide Services acquired under this EC in the
United States only. For purposes of this EC, "Territory" shall be defined as
Customer facilities in the United States.
A. SERVICES
1. DESCRIPTION OF SERVICES
Oracle shall provide the Lifecycle Technical Support Services to
Customer as specified below pursuant to the terms of this EC.
i. INTERNET BUSINESS SOLUTION SUPPORT
Oracle Technical Support related calls shall be directed by
Customer to the Internet Business Solution Support Center staffed
by a named team of senior support analysts. The Customer shall
designate two (2) primary and two (2) backup employee(s) to serve
as the Customer technical contacts. The technical contacts shall
be the sole liaisons eligible for access to the Internet Business
Solution Support Center for technical assistance.
Oracle shall provide a private, toll-free number, for the
Customer to access the Internet Solution Support Center. The
access shall be available 24 hours a day, 7 days a week. All
calls placed during the normal business day, excluding holidays,
shall be answered by the Solutions Support team. The normal
business day shall be defined as 8:00 A.M. TO 5:00 P.M. PST. All
calls outside of this time frame shall be routed to the
After-Hours Product Support group for diagnosis and resolution;
if the call is determined to be a Severity 1 high business impact
issue, the Solution Support team shall be engaged to participate
in the diagnosis and resolution of the issue.
ii. SINGLE POINT OF SITUATION MANAGEMENT AND ESCALATION
The Internet Business Solution Support team shall act as a single
point of contact for the Customer and shall be responsible for
engaging the Oracle Bug Diagnostic & Escalation group to
facilitate the programming and resolution of the TARs through
Oracle Development if the TAR is determined to be the result of a
product defect.
iii. ORACLE SUPPORT ASSESSMENT AND REVIEW
Customer shall receive and initial assessment and review of their
operational environment for recommendations of best practices.
Oracle shall assess Customer's support infrastructure, operating
environment and internal processes in order to provide and
recommend a comprehensive support model for the Customer
inclusive of patch configuration management.
iv. PRODUCT MAINTENANCE RELEASES
The Customer shall be entitled to maintenance releases for the
Supported Program Licenses specific to the Customer's Designated
Systems.
v. PRODUCT UPDATES
The Customer shall be entitled to Updates for the Supported
Program Licenses specific to the Customer's Designated Systems.
<PAGE>
vi. ELECTRONIC SERVICES
All electronic services including Oracle Metalink and Virtual
Support Analyst "VSA" shall be made available to the Customer.
The Solution Support team shall assist the Customer with the
initial registration of the electronic services including usage
training.
TRANSFER RIGHTS
vii. Customer shall be entitled to the right to transfer programs
pursuant to then current technical support policies.
B. FEES AND PAYMENTS
1. LIFECYCLE SUPPORT FEE SCHEDULE
For five (5) years from the Effective Date, provided Customer continuously
maintains Lifecycle Technical Support services during such period, Customer
may receive annual Lifecycle Technical Support services for all Programs
licensed in the Territory as specified in Section C.1 below. Lifecycle
Support Fees specified herein shall become due and payable annually [***]
from the date of invoice.
[***]
C. SUPPORTED PROGRAMS
1. PROGRAM SET
The Services provided in this EC shall be applicable to Customer's
current Program Licenses as listed below which have been licensed
pursuant to Order Forms and are currently under Oracle technical
Support. Except as may be otherwise provided in this EC, this EC shall
not affect the license rights granted pursuant to Customer's existing
executed Order Forms as of the Effective Date.
<TABLE>
<CAPTION>
PROGRAMS QUANTITY LICENSE LEVEL USER TYPE
<S> <C> <C> <C>
[***] [***] [***] [***]
[***] [***] [***] [***]
[***] [***] [***] [***]
[***] [***] [***] [***]
[***] [***] [***] [***]
[***] [***] [***] [***]
[***] [***] [***] [***]
[***] [***] [***] [***]
[***] [***] [***] [***]
[***] [***] [***] [***]
</TABLE>
D. ADDITIONAL TERMS
1. RIGHTS TO DEVELOPMENTS
Oracle grants Customer or successor as defined in the SLSA agreement
dated April 20th, 1999 a perpetual, non-exclusive, non-transferable,
royalty-free, license to use anything developed by Oracle for Customer
under this EC ("Contract Property"). Oracle shall retain all
copyrights, patent rights, and other intellectual property rights to the
Contract Property.
2. SEGMENTATION
Customer acknowledges that the Services acquired hereunder were bid by
Oracle separately from any Oracle program licenses. Customer
understands that it has the right to acquire Services without acquiring
any Oracle program licenses, and that Customer has the right to acquire
the Services and any Oracle program licenses separately.
- ---------------------------
[***] 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.
2
<PAGE>
3. CUSTOMER'S OBLIGATIONS
Customer acknowledges that its timely provision of and access to
Customer operations documentation, equipment, assistance, complete and
accurate information and data from its officers, agents, and employees
(collectively, "Cooperation") are essential to performance of any
Services as set forth in this EC and that Oracle shall not be liable for
any deficiency in performing Services if such deficiency results from
Customer's failure to provide full Cooperation.
4. ORACLE ASSUMPTIONS
The Description of Services and Fee(s) set forth in this Order Form are
based upon information the Customer has presented to Oracle and the
following assumptions:
- Customer shall provide a first and second line help desk to handle
all calls from the user community
- Oracle shall support the second line help desk and have named
contacts from the customer
- Customer shall provide desks and facilities for the onsite
resources
- Customer shall keep the Solution Support manager and the Solution
Support Center engineers apprised of proposed, planned and implemented
system configuration changes
- Provide regular feedback on all issues via agreed channels to
facilitate overall coordination.
Customer acknowledges that changes in the assumption set forth above may
affect Oracle's ability to provide Services as set forth in this EC. If
delivery of a Service is delayed, or Oracle's cost of providing Services
is increased, as a result of Customer's failure to complete a task,
Customer agrees to pay time and materials rates for Oracle's increased
costs in providing Services under this EC.
5. CHANGE ORDER
In order to make a change to the Description of Services in this EC,
Customer will submit a written request to Oracle specifying the proposed
changes in detail. Oracle will submit to Customer an estimate of the
charges and the anticipated changes in the delivery schedule that will
result from the proposed change in Services (Change Order). Oracle will
continue performing the Services in accordance with the EC until the
parties agree in writing on the change in scope of work, scheduling, and
fees therefor. Any Change Order shall be agreed to by the parties in
writing prior to implementation.
6. NON-SOLICITATION
Oracle and Customer agree that for the term of 4 years from the
Effective Date of this EC, neither Customer nor the U.S. Division of
Oracle Lifecycle Support Services (a division of Oracle Corporation)
shall solicit for employment or retention as an independent contractor
any employee or former employee of the other who was directly involved
in the performance of Services hereunder, without the other's prior
written consent. "Solicit" shall not be deemed to include advertising
in newspapers or trade publications available to the public. In the
event that one of the aforementioned entities solicits an employee of
the other in violation of this paragraph, the entire liability of the
soliciting entity and the exclusive remedy shall be payment of ten
thousand dollars ($10,000) to the nonsoliciting entity by the soliciting
entity.
3
<PAGE>
7. CONFIDENTIALITY
Customer and Oracle agree that the terms and pricing of this EC are
confidential and shall not be disclosed without prior consent of the
other party except as required by law and as required in connection with
filing the applicable federal and state securities agencies.
NETZERO, INC. ORACLE CORPORATION
Signature: /s/ Mark R. Goldston Signature: /s/ Michael Poplack
---------------------------- ---------------------------
Name: Mark R. Goldston Name: /s/ Michael Poplack
-------------------------------- -------------------------------
Title: Chairman, CEO Title: Assistant General Counsel
-------------------------------- -------------------------------
Effective Date: 4/20/99
------------------------
4
<PAGE>
LIFECYCLE SUPPORT IDENTIFICATION ATTACHMENT
Oracle Support Administrator:
Name:
Address:
Telephone:
Fax:
Oracle Solution Service Manager:
Name:
Address:
Telephone:
Fax:
Customer Billing Accounts Payable Contact:
Name:
Address:
Telephone:
Fax:
Customer Project Manager:
Name:
Address:
Telephone:
Fax:
Purchase Order No.
or
Purchase Order Exception Acknowledgment:
Customer agrees to pay for Services performed under this EC, as specified in
the EC and/or Agreement without a purchase order.
Tax Information
___(1) Exempt (Attach Tax Exemption Form)
___(2) Non-exempt
- --------------------------------------- ---------------------------------
Customer Authorized Signature Date
- --------------------------------------- ---------------------------------
Customer Name (please print or type) Title
5
<PAGE>
==============================================================================
ORACLE-C-
NETWORK LICENSE ORDER FORM
<TABLE>
<S> <C>
Customer Name: NetZero Incorporated Contract Administrator: Stacy Haitsuka
Customer Location: 31416 Agoura Road Phone: 818-879-7250
Suite #150 Fax: 818-879-7257
Westlake Village, CA 91361
</TABLE>
- ------------------------------------------------------------------------------
ORACLE CONTRACT INFORMATION
Agreement: Software License and Service Agreement
Agreement Name: SLSA-
This Network License Order Form and attachment(s) ('Order
Form') are placed in accordance with the agreement specified
above ('Agreement'). Customers hereby orders the Program
licenses described herein for use in the Territory, unless
otherwise specified.
The Network is defined as any number of Components of the
Designated Systems listed in their Order Form, accept for
Computer-based or Processor-based licenses or other similar
licenses as specified herein
- ------------------------------------------------------------------------------
A. DESIGNATED SYSTEMS/PROGRAMS
Make/Model: [***]
Operating System: [***]
Media: [***]
CSI:________
<TABLE>
<CAPTION>
DESCRIPTION QUANTITY LICENSE LEVEL LICENSE TYPE
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
INTERNAL LICENSED PROGRAMS
FINANCIAL APPLICATIONS LICENSED PROGRAMS
Per User Licenses:
[***] [***] [***] [***]
[***] [***] [***] [***]
[***] [***] [***] [***]
Oracle Applications Licenses:
[***] [***] [***] [***]
[***] [***] [***] [***]
</TABLE>
**For purposes of this Order Form, Named and Casual Users of the Applications
Program above shall be counted based on Primary Usage.
[***] 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>
<TABLE>
<CAPTION>
Description Quantity License Level License Type
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
EXTERNAL LICENSED PROGRAMS
Per User Licenses:
[***] [***] Web Application Specific [***]
External User Web Application Specific Net License Fees: [***]
Internal User Net License Fees: [***]
External Users Initial Year Annual Technical Support Fee: [***]
Technical Support Type: Solutions
Internal Users Initial Year Annual Technical Support Fee: [***]
Technical Support Type: Solutions
Electronic Distribution Fees: [***]
Number of Education Units: [***]
Education Units Fee: [***]
Consulting Fee: [***]
*Programs included in External User Bundle: -------------------------
[***] TOTAL FEES:[***]
-------------------------
[***]
[***]
[***]
</TABLE>
B. GENERAL TERMS
1. TERRITORY. The "Territory" shall be defined as Customer facilities in the
U.S. Customer may elect to expand the Territory subject to U.S. Export Laws
and regulations provided that prior to any use of the Programs outside the
U.S. Customer shall provide notice to Oracle and payment of an additional
[***] uplift charge for the license and Technical Support fees for the
applicable Program licenses.
2. CUSTOMER DEFINITION. For purposes of this Order Form, Customer shall be
defined as the company listed at the head of this Order Form and its majority
owned subsidiaries located in the U.S. as of the Effective Date. Before
accessing the Programs, each subsidiary must agree in writing to be bound by
the terms of the Agreement and this Order Form.
3. WEB APPLICATION SPECIFIC. A Web Application Specific Program shall mean a
Program license which may only be accessed by Customer Client via internet
networking protocols and which is limited to use solely for deployment of
Customer's public web site including Extranet services provided by Customer
to third party customers, provided that in connection with the use of a Web
Application Specific Program to corporate use or internal data processing by
Customer or its clients shall be permitted. Prohibited internal uses shall
include, but shall not be limited to, the following types of uses:
[***] 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.
2
<PAGE>
human resource, finance and administration, internal messaging and
communications, accounting, sales force management, etc. Notwithstanding any
use restrictions in the Agreement, Customer's application may allow internal
or third party web access to a licensed Web Application Specific Program
solely for viewing, querying, or adding data, and provided such use is in
accordance with the other terms of the Agreement.
4. TERM LICENSE. The External License Programs acquired under this Order Form
as of the Effective Date shall be a Term License under the conditions set
forth in this Section. The phrase "Term License" shall mean a Program
license which shall be valid from the Effective Date until April 30, 2004
(the "Term License Period"). Customer's right to use such External License
Programs shall expire and terminate on April 30, 2004. Upon termination of
the Term License, Customer shall destroy any copies of such External License
Programs, unless Customer and Oracle have entered into a renewal of such
license or separate agreement allowing otherwise. This requirement applies
to all copies in all forms, partial and complete, and whether or not modified
and merged into other materials.
5. EXPIRATION. At Customer request and twelve (12) months prior to expiration
of the Term License Period set forth in this Order Form, the parties agree to
negotiate in good faith to renew or obtain new licenses and support based
upon then current Oracle policies, fees and discounting practices.
6. TECHNICAL SUPPORT. Annual Technical Support Services ordered by Customer
will be provided under Oracle's Technical Support and Oracle's Solutions
Support policies in effect on the date Technical Support is ordered and shall
be effective upon shipment (or upon Order Form Effective Date for products
not requiring shipment); first year Technical Support is quoted above, if
ordered. Fees for Technical Support are due and payable annually [***]. A
copy of Oracle's current Technical Support policies and Oracle's Internet
Business Solution Support policies and Oracle's Internet Business Solution
Support policies are attached hereto.
Customer estimates it will deploy External and Internal Program licenses
ordered hereunder over a period of 4 years. In light of this, for the fees
below Customer may receive annual Solutions Technical Support for External
Use Program licenses ordered hereunder (except for license grants modified or
added hereto after the Effective Date, or for which Technical Support is not
available). Technical Support consists of Updates for such licenses as well
as support services, pursuant to the Technical Support Policies in effect, as
such licenses are deployed. Technical Support fees shall be paid annually
[***].
<TABLE>
<CAPTION>
Support Year Technical Support Fee
------------ ---------------------
<S> <C>
First Year [***]
Second Year [***]
Third Year [***]
Fourth Year [***]
Fifth Year [***]
</TABLE>
Annual Technical support services ordered by customer will include access to
the Oracle business solution center via a dedicated 800 phone number. The
solution center will include a named team of analysts, named Solution Support
manager. Customer is entitled to product upgrades, maintenance and transfer
rights.
7. MISCELLANEOUS. Oracle will electronically deliver the initial shipment of
Programs to Customer for use in the Territory, 1 copy of the software media
("Master Copy") and 1 set of Documentation for each Program currently
available in product release as of the Effective Date below for use on the
Network. The cost for electronic distribution shall be [***]. Customer
shall have the right to make up to 1 copy of the Program(s), including
Documentation, for each license of the Program(s) and the Customer shall be
responsible for installation of the software. All fees under this Order Form
shall be due and payable [***] from date of invoice, and shall be
non-cancellable and the sums paid nonrefundable. Customer agrees to pay
applicable sales and media charges. If Customer loses or damages the media
containing a Program licensed hereunder, upon Customer's written notice
[***] 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>
Oracle will provide a replacement copy thereof, under Oracle's then-current
Technical Support policies, for a media and shipping charge. The following
shipping terms shall apply: POB Destination, Prepaid, and Add. These terms
shall also apply to any options exercised by Customer. Oracle may refer to
Customer as a customer in sales presentations, marketing vehicles and
activities.
C. OTHER
1. ADDITIONAL DESIGNATED SYSTEMS. Until 5 years from the Effective Date,
Customer shall have the option to add 4 additional Designated System(s) types
("Additional Designated System(s)") to this Order Form [***], if: (i) the
Programs licensed herein are available in production release status on the
Additional Designated System at the time Customer elects to add the
Additional Designated System; and (ii) Customer has continuously maintained
Technical Support for such Programs.
Oracle shall ship to the Customer Location a single Master Copy of the
Programs licensed herein for the Additional Designated System added. These
Programs may only be copied and installed in accordance with the terms of
this Order Form; Oracle has no further shipment obligation other than as
specified above. Programs licensed herein for use on Additional Designated
System(s) may not be currently available. Customer has not relied on
potential availability in entering into the payment obligations in this Order
Form. Oracle is under no obligation to change current availability.
2. ADDITIONAL LICENSE INCREMENTS. For 2 years from the Effective Date,
provided Customer has continuously maintained Technical Support, Customer may
increase the quantity of each applicable License Type accessing the Programs
on this Order Form ("Additional License Increment") by paying Oracle [***]:
<TABLE>
<CAPTION>
First Year Support
License Fee per Fee per each
External License License each Additional Additional License
Program Level License Type Increment License Increment Increment Term
- -------- -------- ------------ --------- ----------------- ------------------- ----
<S> <C> <C> <C> <C> <C> <C>
[***] [***] [***] [***] 12/01/95
</TABLE>
Each order placed for Additional License of External Programs must be at
least 2 Processors: applicable sales tax will be added to the fee. All
applicable fees shall be due and payable on the date that Customer notifies
Oracle in writing of its exercise of this option; Oracle has no shipment
obligation. Upon election, this payment obligation is non-cancellable, and
the sum paid is nonrefundable.
3. ADDITIONAL WEB APPLICATION SPECIFIC PROGRAMS. For a period of 2 years from
the Effective Date, Customer may acquire the Programs in the Categories
specified below provided such Programs are available in production release
and are listed on Oracle's U.S. Price List for installation on the Designated
Systems types as of the Effective Date. The license fee for such Programs
shall be [***], specified below, [***] in effect as of the Effective Date.
Upon Customer's exercise of this option, Oracle shall ship the Programs to
Customer pursuant to the Miscellaneous section above. At the time of
election Customer may obtain Technical Support services from Oracle for
Additional License Programs at Oracle's applicable Technical Support fees and
policies in effect when such services are ordered.
<TABLE>
<CAPTION>
Categories (see attached Exhibit) License Level License Type [***]License Fees Term
- --------------------------------- ------------- ------------ ----------------- ----
<S> <C> <C> <C> <C>
[***] [***] [***] [***] Coterminous
with End User
Bundle
</TABLE>
4. ADDITIONAL PROGRAMS For a period of 2 years from the Effective Date,
Customer may acquire the Programs in the Categories specified below if such
Programs are available in production release and are listed on Oracle's U.S.
[***] 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>
Price List for installation on the Designated Systems types as of the
Effective Date. The license fee for such Programs shall be [***], specified
below, [***] in effect as of the Effective Date. Upon Customer's exercise of
this option, Oracle shall ship the Programs to Customer pursuant to the
Miscellaneous section above. At the time of election, Customer may obtain
Technical Support services from Oracle for Additional License Programs at
Oracle's applicable Technical Support fees and policies in effect when such
services are ordered.
<TABLE>
<CAPTION>
Categories (see attached Exhibit) License Level License Type [***]License Fees
- --------------------------------- ------------- ------------ -----------------
<S> <C> <C> <C>
[***] [***] [***] [***]
[***] [***] [***] [***]
[***] [***] [***] [***]
</TABLE>
5. CONSULTING SERVICES In consideration of the Order Form, Customer is
entitled to receive [***] worth of standard time and materials Oracle
Consulting Services performed in the U.S. by an Oracle consultant or an
Oracle Support consultant for a period of (4) four months from the Effective
Date of this Order Form. Any consulting services acquired pursuant to this
Order Form will be bid by Oracle separately from the Program licenses
acquired pursuant to this Order Form. Customer understands that it has the
right to acquire the Program licenses without acquiring the consulting
services, and that Customer has the right to acquire the Program licenses and
the consulting services separately at the fees stated in the Agreement.
6. EDUCATION In consideration for the License payment to Oracle specified in
Section A above within 30 days of the Effective Date, Customer shall receive
(20) twenty Oracle standard Education Units which are valid for one year from
the Effective Date of this Order Form. The value of these Education Units is
[***].
- -------------------------------------------------------------------------------
Customer and Oracle agree that the terms and pricing of this Order Form shall
not be disclosed without the prior written consent of the other party. This
quote is valid through April 30, 1999 and shall become binding upon execution
by Customer and acceptance by Oracle.
NETZERO INCORPORATED ORACLE CORPORATION
Signature: /s/ Mark R. Goldston Signature: /s/ Michael Poplack
Name: Mark R. Goldston Name: Michael Poplack
Title: Chairman, CEO Title: Assistant General Counsel
Effective Date: 4/20/99
- -------------------------------------------------------------------------------
[***] 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.
5
<PAGE>
<TABLE>
<CAPTION>
SHIPMENT SUMMARY:
PROGRAMS DESIGNATED SYSTEMS MEDIA TYPES
- -------- ------------------ -----------
<S> <C> <C>
[***] [***] [***]
[***]
[***]
[***]
[***]
[***]
[***]
</TABLE>
[***] 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.
6
<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.
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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.
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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
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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,
8
<PAGE>
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
9
<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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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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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. CONLIN
-------------------------------- -------------------------------
Name: Ronald T. Burr Name: Brian J. Conlin
------------------------------ -----------------------------
Title: President Title: Senior Vice President
------------------------------ -----------------------------
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DISTRIBUTION, LICENSE AND ALLIANCE AGREEMENT
This Distribution, License and Alliance Agreement (the "Agreement") between
Compaq Computer Corporation, with its principal business office at 20555 S.H.
240, Houston, Texas 77070, a Delaware corporation ("Compaq"), and NetZero,
Inc., with its principal business office at 3835 R. East Thousand Oaks
Blvd, Suite 338, Westlake Vilage, California 91362, a California corporation
("NETZERO"), is made effective as of this 30th day of April, 1999. Compaq
and NetZero are sometimes referred to individually as a "Party," and
collectively as the "Parties."
RECITALS
WHEREAS, Compaq and NetZero wish to enter into a business alliance to,
among other things, market, promote and offer NetZero branded Internet access
service (the "NetZero ISP Service") which shall be free to the Compaq enduser
at the time the Licensed Product associated with such service is distributed
with the Presario Product Line.
WHEREAS, Compaq and NetZero each acknowledge that the keys to developing
the desired program are a good faith commitment to solve business and
operational issues through open communication and a willingness to employ
flexible procedures to address any such issues which may arise during the
performance of this Agreement.
NOW, THEREFORE, AND IN CONSIDERATION of the foregoing premises and for
other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the Parties agree as follows:
1.0 PURPOSE
The intent of the Parties is to work together to allow Compaq to market,
offer and distribute the Licensed Product on the Presario Product Line
commencing with the 2C Product Run (the "Products") during the term of this
Agreement with the goal and purpose of consumer adoption of the NetZero ISP
Service by purchasers of the Products. Compaq and NetZero agree to work
together to understand the demands on an ISP service that could be made by
Compaq customers and identify what may be required by both parties to
anticipate and handle such demands.
2.0 WORK EFFORT
This Agreement shall describe:
a) the terms and conditions under which Compaq shall have the right and
obligation to distribute the Licensed Product and Compaq's marketing
obligations in connection with the distribution of the Licensed
Products,
b) the license terms by which such distribution rights are granted,
c) the parties' obligations as they relate to the development, testing
and integration of the Licensed Product to allow the Licensed Product
to be
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bundled or shipped with the Products shipped during the term of
this Agreement (the Products which are shipped with or which
incorporate the Licensed Product pursuant to this Agreement are
referred to herein as the "Combined Products"), and
d) Compaq's ability to designate an initial start page from Alta Vista
solely for the Compaq enduser who uses the Licensed Product on the
Combined Products.
2.1 DISTRIBUTION; EXCLUSIVITY; PROMINENCE
a) Commencing with the 2C Run and during the term of this Agreement,
Compaq shall distribute the Licensed Product with all the Products to
enable purchasers of the Products to choose and sign-up to NetZero as
their free ISP. The parties agree that, as soon as technically
feasible and subject to NetZero's Licensed Product passing quality
assurance testing and integration issues as discussed more fully
below, the Licensed Product shall be incorporated into the Products in
the same manner as Compaq incorporates the AOL and Compaq branded ISP
offerings.
b) NetZero agrees that it shall not enter into an agreement with any
other personal computer manufacturer to permit such manufacturer to
distribute or combine in any manner the Licensed Product in
conjunction with the personal computers of such manufacturer where
such distribution takes place during the period commencing June 1,
1999 and ending February 28, 2000 (the "Exclusivity Period"). In
addition, NetZero agrees not to enter into an agreement with any of
Compaq's authorized dealers for the Products to permit such retailers
to distribute copies of the Licensed Product where such distribution
takes place in North America during the Exclusivity Period.
c) Compaq agrees that it shall not distribute during the Exclusivity
Period, or enter into any agreement permitting a third party to
distribute during the Exclusivity Period, Products bundled or combined
in any manner with any Free ISP Service (including any service offered
by Compaq) other than the Licensed Product, excluding (i) Compaq may
offer America Online as a Free ISP Service if required to by AOL and
(ii) Compaq may sell Products to or in support of Affinity Partners.
The phrase "Free ISP Service" for the purpose of this Agreement shall
mean any internet access service, including a service offered or
provided by Compaq, which requires the purchaser of such service to
pay less than five dollars ($5.00) per month, excluding any free
limited trial period of three (3) months or less. The intention of
the foregoing is to make NetZero the exclusive Free ISP on the
Products.
d) If America Online commences offering a Free ISP Service on or in
connection with the Products, then neither party shall be bound by the
restrictions set forth in Sections 2.1(b) and 2.1(c) above. In
addition, NetZero will have the option to terminate the restrictions
on both Parties set forth in Sections 2.1(b) and 2.1(c) above if the
conversion rate for the Licensed Product on the Combined Products is
less than twenty percent (20%) during the Measurement Period
determined as follows. The
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conversion rate shall mean the percentage of purchasers of Combined
Products who subscribe to the NetZero ISP Service as determined
during a particular period. Compaq shall prepare weekly summaries
of Combined Product sales to end-users which shall contain such
information as shall be mutually acceptable to the Parties but
which must, at a minimum, provide NetZero with enough information
to determine how many Combined Products were sold to end-users in a
particular week and what percentage of the purchasers of such
Combined Products subscribed to the NetZero ISP Service. The
Parties shall review the conversion rate on a weekly basis and, if
the conversion rate for the Combined Products in the 3C run during
August 1999 is less than 20%, the Parties shall meet to mutually
determine what additional methods should be implemented to increase
the conversion rate and shall use commercially reasonable efforts
to implement such methods during the month of September. If the
conversion rate during the first two weeks of the month of October,
1999 (the "Measurement Period") is not at least 20%, then NetZero
shall thereafter have the option to terminate the restrictions on
both Parties (but not just on one Party) in Sections 2.1(b) and
2.1(c) above effective upon the delivery of written notice to
Compaq.
e) To the extent the Licensed Product is required to be distributed with
Products pursuant to this Agreement, the NetZero ISP Service offering
shall be prominently displayed on screen as well as in marketing
materials in a manner which shall be mutually agreed to between the
Parties but which shall, subject to (i) Compaq's contractual
restrictions set forth below with respect to AOL and (ii) Compaq's
right to be displayed more prominently than AOL, result in the
NetZero ISP Service being the most prominently displayed ISP service.
NetZero acknowledges that America Online is a business partner with
Compaq in providing Internet access and that Compaq is subject to
certain pre-existing contractual relationships with America Online
which may result in AOL being displayed more prominently in accordance
with such preexisting contractual obligations. However, at a minimum,
NetZero shall have at least equal space with the most prominently
displayed ISP offering (and in no event less than 1/3 of the page) on
the first page that displays either the Compaq or the AOL Internet
access offers on the Products, an example of which is graphically
shown on Schedule 2.1(e)(1) attached hereto. The content in such
space shall be provided by NetZero, and shall be subject to Compaq's
approval and such approval shall not be unreasonably withheld. With
respect to the button (or any replacement button) on such page that
prompts the user to "Next" in the experience, such button may either
take the user to the NetZero sign up, will complete the registration
process (which shall not include any ISP sign-up offers), or to
another page that will have NetZero and Compaq as the only brands from
which to choose. Such page will provide equal prominence to the Net
Zero and Compaq offerings. The desktop shall also include an icon
for the NetZero ISP service which will launch to the Licensed Product.
Until web-based registration is available
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from NetZero enabling the end-user to launch NetZero from the page
referenced above, acceptance of the NetZero service on such page
shall guide the end-user to the site or icon through mutually
acceptable instructions.
2.2 DEVELOPMENT, TESTING AND TECHNICAL REQUIREMENTS
a) Compaq and NetZero agree to work together in the development, testing,
and integration of the current and future versions of the Licensed
Product, as may be made available during the Term of this Agreement.
The intent of the development effort will be to make the Licensed
Product available in a manner to optimize distribution with the retail
marketing cycles of the Product.
b) The work effort shall consist of two phases. The first phase shall be
to test, validate, and reproduce the NetZero 1.6.x version of the
Licensed Product so it can be distributed with the Products in the
form of a CD in the box. The second phase will be the integration of
the Licensed Product into the Compaq Out of Box Experience ("OoBE")
for the 3C Run and the other distributions during the Term of this
Agreement. This integration is intended to be implemented by
incorporating the Licensed Product into the Products in the same
manner other ISP Services are incorporated into the Products
(including web-based registration when available), subject to the
Licensed Product meeting reasonable technical specifications in
accordance with reasonable timelines related to the 3C Run required to
meet the retail marketing cycles.
PHASE 1
Compaq and NetZero shall work together to test and qualify the NetZero
version 1.6.x of the Licensed Product. In order for
Compaq to be obligated to include the Licensed Product in the Products, the
Licensed Product when included with a Product must meet the following basic
quality standards: (i) it must allow a customer who has purchased a
Product to load the Licensed Product from a CD, (ii) the CD shall install
the program either through an auto load or by providing writing
instructions on how to install the program, (i.e. insert disk, click on
the Windows Start key, click on Run, etc), and (iii) shall not cause any
of the Compaq standard features or functions of the Product to fail or
cease to function.
The parties shall work together to ensure that the Licensed Product or any
of its Updates, Enhancements, Modifications or Versions shall not cause any
of the features or functions of the Product to fail or cease to function.
To the extent that NetZero is not having to respond to a security or other
critical customer care issue relating to the NetZero ISP Service, NetZero
shall be required to provide Compaq with advance notice of any changes to
the Licensed Product by email to specified individuals within Compaq and
Compaq shall have the opportunity to test all such Updates, Enhancements,
Modifications and Versions to ensure they function properly with the
Products. The Parties understand that NetZero will effect changes to the
Licensed Product on a regular basis and that it is important
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for Compaq to test promptly. Compaq agrees to perform testing within 48
hours of delivery of the changes. If at any point in the testing of a
Licensed Product or any Update, Modification, Enhancement or Version,
Compaq determines that there is a material problem attributable to the
Licensed Product that would prevent the Licensed Product from achieving
basic quality standards, Compaq shall not have an obligation to ship the
Licensed Product, until such time as the material problems are cured.
NetZero shall be immediately notified in writing and the Parties shall
use their commercially reasonable efforts to resolve the issue as
expeditiously as possible. NetZero acknowledges that if there is a
functionality problem in the Licensed Product (other than a problem
attributable to the Product, any change to the Products or any other
third party software included in the Product) which causes it to fail to
achieve basic quality standards, and if the parties use commercially
reasonable efforts to resolve the same after written notice and a thirty
(30) day period to cure, either party may terminate this Agreement by
delivering written notice to the other. The Parties agree that
termination is a last resort and agree to work together to make the
project a success
PHASE 2
Compaq and NetZero will complete and mutually agree to the Deliverables,
test plans, development process, defect reporting and correction process
and other technical delivery and acceptance requirements to complete Phase
2, which shall be more fully described in a Schedule 2.2 to be attached to
this Agreement. Compaq and NetZero agree that within ten (10) working
days of execution of this Agreement, they shall engage to complete this
Schedule. The failure of the parties to engage and complete the
Schedule shall not be a breach of this Agreement. One of the purposes of
this Schedule is to ensure the Parties do not miss the deliverable dates.
Compaq and NetZero shall consider the following as guidelines when
developing the requirements:
a. process to develop, test and certify the Licensed Product, and to
integrate the Licensed Product with the Product.
b. required resources for both parties to certify that the NetZero
product shall meet Compaq quality and technical requirements
c. establish a process for on-going updating and incorporation of the
Licensed Product into the Product.
d. a sign-up process, so that the enduser may only have to enter their
information a single time.
e. the process for receipt of Gold Master and error correction.
2.3 DEFAULT START PAGE & ADVANTAGE WINDOW; DISPLAY OF COMPETITOR ADS
a) Compaq and NetZero agree that during the Term of this Agreement that
the designated default start page for the Licensed Products on the
Combined Products (the "Default Start Page") shall be the AltaVista
start page, and Compaq shall be responsible for procuring all rights
required to
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enable and permit NetZero to implement the same. Compaq shall have
the right to determine at Compaq's sole discretion that the Default
Start Page shall no longer be an AltaVista start page. To ensure a
smooth transition for the consumer, Compaq shall provide reasonable
notice of its intent that the Default Start Page shall no longer be
an AltaVista start page. In the event that Compaq chooses not to
use an AltaVista start page as the Default Start Page NetZero shall
be entitled to replace the Default Start Page with such other start
page as it selects, it being understood that NetZero may be
contractually limited in its choices
b) NetZero agrees that within the Advantage Window that Compaq shall be
provided an area in which a "Q" button or link designed with a Q
symbol shall be displayed. The prominence shall, at a minimum, be as
set forth in Schedule 2.3. This link shall be directed to a Compaq
site currently designated as "My Presario." Compaq shall within five
(5) working days of execution of this Agreement provide NetZero with
the appropriate URL for the Default Start Page, as well as for the
graphic for the "Q."
c) NetZero agrees that during the Term of this Agreement it shall not
display ads of other personal computer manufacturers in the Advantage
Window on the Combined Product as a result of the user accessing a
Compaq URL.
The Advantage Window is a persistent window, which is controlled and
maintained by NetZero and which, among other features, is used to display
advertisements. Compaq acknowledges that NetZero shall determine the
function, look, and feel of such window. NetZero and Compaq agree to
coordinate to minimize material inconsistencies between the icons and the
functionality of the buttons on the keyboard and in the Advantage Window,
although the parties understand that there will be some inconsistencies.
The Advantage Window is displayed only when the Compaq enduser is logging
on or actively logged onto the Internet.
2.4 SERVICE AND SUPPORT
Within five (5) days of the execution of this Agreement, the Parties shall
mutually agree to a service and support schedule, which will be attached
hereto as Schedule 2.4. The failure of the parties to prepare and attach a
Schedule shall not be deemed to be a breach of this Agreement. In the
event a Schedule is not attached NetZero agrees that the level of service
and support provided to a purchaser of Combined Products using NetZero's
ISP Service shall be at least the same level as provided to other users of
the NetZero ISP Service.
2.5 EQUITY INVESTMENT
The Parties acknowledge that they are currently in negotiations for Compaq
to participate in an equity investment in NetZero. Compaq agrees to
promptly perform its necessary due diligence and to sign a definitive
agreement within ten (10) days of the date hereof. Failure to execute such
agreement shall give NetZero the option to cancel this Agreement.
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2.6 MARKETING
Compaq agrees to advertise and promote the NetZero ISP Service through its
retail channels. Compaq and NetZero agree to the Schedule attached hereto
as Schedule 2.6 and agree to create additional Marketing Schedules for each
product cycle to describe the marketing plans and marketing materials to
implement the same which shall then be attached hereto as Schedule 2.6.
The failure of the parties to attach and prepare a Schedule shall not be
deemed a breach of this Agreement.
The parties shall consider the following as guidelines for the Marketing
Schedule
1. Reference to this Agreement,
2. Product cycle that the market Addendum is in support of,
3. Description of the promotion,
4. Technical development or modifications if any required,
5. Reliance on NetZero for implementation if required,
6. Perceived impact or change on current level of service or
obligations being provided by either party,
7. Required Deliverables if any;
8. Schedule for implementation;
9. Party's Executive that will be approving the Marketing
Addendum.
Each party shall be provided with reasonable advance written notice to
approve, which approval shall not be unreasonably withheld, any marketing
materials which such party intends to use that references the other party's
trademarks or services or products.
2.7 FORECASTING
The parties acknowledge that analysis of the timing of Product sales by
geographic region and the accurate forecasting of consumer acceptance of
the NetZero ISP Service will be critical in ensuring the quality of the
consumer experience. The parties agree to work together in good faith to
develop procedures and processes to anticipate and ameliorate issues caused
by periodic increases in customer demand.
2.8 TECHNOLOGY REVIEW BOARD
It is NetZero's current intention to establish a Technology Review Board
("TRB") for the purpose of implementing this Agreement. Upon establishment
of the TRB, NetZero shall invite Compaq to sit on and participate as a
non-voting member of the TRB.
2.9 PAYMENT OF EXPENSES
Compaq agrees to source and to pay the cost and expenses of a CD to be
placed in the Products during the 2C Run. The expenses Compaq shall pay
are a CD (four color), a feature guide,/brochure (8.5"x10", four colors/2
sides), bar code label, packaging material and kitting process.
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Compaq may invoice NetZero fifty thousand dollars ($50,000) for expenses
incurred by Compaq for providing CDs in the Products.
NetZero agrees to provide Compaq with all artwork for the CD, packaging
material and feature guide/brochure in a format which can be used by a
commercial replicator. The packaging material and feature guide/brochure
shall be subject to Compaq approval, which approval shall not be
unreasonably withheld.
The parties acknowledge that any additional cost for mutually agreed to
marketing collateral or promotional activities shall be described in a
Marketing Schedule and approved in writing by an authorized executive of
the parties.
3.0 DEFINITIONS.
Unless the context clearly requires otherwise or unless otherwise defined
herein, the capitalized terms used within CONTRACT DOCUMENTS shall have the
same meaning as ascribed to the terms below.
a. 2C Run shall mean the Product distribution by Compaq commencing in May
1999 and ending in September 1999.
b. 3C Run shall mean the Product distribution by Compaq commencing in
August 1999 and ending in December 1999.
c. Affinity Partner shall mean a group or company which provides unique
products or services on or in conjunction with the Products, and which
unique products or services are not made generally available on all of
the models of the Products so as to materially impair the purposes of
this Agreement. To be able to receive such product or services the
enduser must be a customer of the group or company sponsoring the
program. Affinity Partners shall not include any group or company
that is a retailer, a dealer or provider of Internet access services.
The Licensed Products shall be included on the Products when such
inclusion is not inconsistent with the objectives of the Affinity
Partner. An example of an Affinity Partner is FreePC.
d. Advantage Window - as defined in Section 2.3.
e. Presario Product Line - shall mean the Compaq Presario branded
personal computers which include a Microsoft Windows 98 or successor
operating system, or any successor, additional line or replacement
line of personal computers which are designated for the consumer
market and which include a Microsoft 98 or successor operating system.
f. Licensed Product(s) shall mean the Executable Code and Object Code
which comprise the Advantage Window and the underlying client
component programs that form the basis of that portion of the NetZero
ISP Service to be installed on the Products pursuant to this
Agreement, and which incorporate the NetZero trademarks (including
name and logo).
g. CODE- shall mean computer-programming instructions. Unless
specifically stated otherwise, Code shall include Executable Code,
Object Code, and
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any Maintenance Modifications or Enhancements in existence from
time to time during a relevant Work Effort.
(1) EXECUTABLE CODE - shall mean Code that loads and executes
without further processing by a software compiler or linker.
(2) OBJECT CODE - shall mean the Code that results when Source
Code is processed by a software compiler, but is not
Executable Code.
(3) SOURCE CODE - shall mean the human-readable form of the
Code and related system documentation, including all
comments and any procedural language.
(4) COMPAQ CODE, NETZERO CODE, OR THIRD-PARTY CODE - shall
mean Code in which Compaq, NetZero, or another,
respectively owns the copyrights and other intellectual
property rights or otherwise has sufficient
authorization to grant or assert rights in such Code.
h. CONTRACT DOCUMENTS - shall mean this Agreement, and its attachments,
any schedules, attachments or addenda referred to in Work Effort, and
any amendments to the foregoing in effect from time to time during the
term or terms of the applicable Contract Documents.
i. DELIVERABLES - shall mean any Materials which result from performance
under the Work Effort and which are required to be delivered by virtue
of their description or specification in the Work Effort.
j. DOCUMENTATION - shall mean user manuals and other written materials
that relate to Documentation shall include any Maintenance
Modifications or Enhancements to such Documentation in existence from
time to time during the term of the Work Effort, and shall include new
Versions of such Documentation.
k. ENHANCEMENTS - shall mean changes or additions, other than Maintenance
Modifications, to Code and related Documentation, including all new
releases, that improve functions, add new functions, or improve
performance by changes in system design or coding.
l. MODIFICATIONS - shall mean any modifications or revisions, other than
Enhancements, to Licensed Product or Documentation that correct errors
or provide other incidental corrections.
m. MATERIALS- shall mean Code, Documentation, other written materials or
tangible media, including machine-readable media with Code or
Documentation recorded thereon, hardware, or any combination of the
foregoing.
n. SUBSIDIARY- shall mean a corporation, company or other entity (1) more
than fifty percent (50%) of whose outstanding shares or securities
(representing the right to vote for the election of directors or other
managing authority) are, or (2) which does not have outstanding shares
or securities, as may be the case in a partnership, joint venture or
unincorporated association, but more than fifty percent (50%) of whose
ownership interest representing the right to make the decisions for
such
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corporation, company or other entity is, now or hereafter, owned
or controlled, directly or indirectly, by a party hereto. However,
such corporation, company or other entity shall be deemed to be a
SUBSIDIARY only so long as such ownership or control exists.
o. VERSION - shall mean Derivative Works that result from changes or
additions to Code and related Documentation that (1) provide
additional value and utility and, as a practical matter, may be priced
and offered separately as optional additions to the Code and
Documentation, or (2) are not made available without separate charge.
p. COMPAQ - shall mean Compaq Computer Corporation. operating by and
through its Consumer Products Group
q. NETZERO - shall mean NetZero and any of its Subsidiaries.
4.0 LICENSE GRANTS
4.1 NetZero grants to Compaq, for the term of this Agreement, a
non-exclusive, non-transferable, worldwide (except as set forth
herein) license to use the Licensed Products with or in the Products
(but only in conjunction with NetZero logo and trademarks) and to
market, sublicense and distribute, electronically or otherwise, the
Licensed Products and Upgrades of Licensed Products with or in the
Products, all in accordance with the intent of, and pursuant to the
terms of, this Agreement. As used herein, the term "use" includes the
right to make, have made, use, have used, copy, reproduce, perform,
display, and distribute the Licensed Products.
NetZero further grants to Compaq a non-exclusive, non-transferable
worldwide (except as set forth herein) license to publicly perform and
publicly display the Licensed Products at trade shows, exhibitions,
and to prospective Customers.
4.2 Compaq may distribute and sublicense the Licensed Products only in
conjunction with the Products, and to third party contractors used by
Compaq to install, configure and otherwise adapt and prepare the
Licensed Products for distribution with the Products. Compaq will not
alter, reverse-engineer, decompile, or disassemble the Licensed
Products without the written consent of NetZero.
4.3 NetZero and Compaq hereby grant to each other a non-exclusive,
non-transferable, worldwide right to use the other's trademarks, trade
names and logos in connection with marketing and distributing the
Licensed Products in conjunction with the Products. Each party's
usual trademark guidelines, including any third party licensed
programs shall apply to the use of the marks. Each party will use
commercially reasonable efforts to avoid any action that diminishes
the value of such marks.
4.4 NetZero has and shall retain all rights of ownership, or rights to
license in and to the Licensed Product and all copies thereof provided
to or created
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by Compaq under this Agreement, any and all Modifications, and
derivative works thereof and the Intellectual Property Rights
embodied therein and related thereto. No right or license to
Compaq, except as specifically set forth herein, shall be implied.
4.5 NetZero hereby grants to Compaq a non-exclusive, non-transferable,
royalty-free worldwide right and license to modify only in respect to
visual and formatting changes, without any change in substantive
content and in the following manner: (1) use, copy, modify,
nationalize, translate and reproduce the Documentation; (2) have the
Documentation copied, modified, nationalized, translated and
reproduced; (3) merge the Documentation with other materials, as
necessary, to meet Compaq's form factor and /or packaging
requirements; and (4) distribute the Documentation in any manner in
connection with Licensed Products, including, without limitation,
eye-readable and/or machine readable form. It is understood that
NetZero is the sole owner of the Documentation.
5.0 COMPENSATION
NetZero will compensate Compaq by providing Compaq with the right to
utilize up to 10% of the advertising inventory of the banner portion of the
Advantage Window displayed on the Combined Products ("Ad Inventory") during
the term of this Agreement. The allocation of such inventory shall be
determined on a weekly basis and the failure to utilize such inventory
shall result in the loss of the same. Compaq may utilize the banner
portion of the Advantage window for its own internal ads, ads for a Compaq
retailer, Compaq partners, direct sells by Compaq, placement of the Ad
Inventory with a third party or other manner which is consistent with the
process by which NetZero sells or monetizes the remaining NetZero ninety
percent (90%) of the banner portion of the Advantage Window displayed on
the Combined Products. In the event that Compaq desires to utilize URL
targeting, it shall inform NetZero of the same. While NetZero shall use
commercially reasonable efforts to permit Compaq to utilize URL targeting,
Compaq's ability to utilize the same shall be in all respects limited to
any existing or future arrangements, contracts or programs of NetZero
relating to the utilization of URL targeted marketing or the protection
therefrom, and the technical limitations associated with the provisioning
of URL targeted marketing.
If Compaq desires to sell its allocation through demographic or other
targeting to specific groups, NetZero agrees to assist Compaq and to
provide Compaq with up to 10% of the Ad inventory associated with a
particular group that Compaq wishes to target. NetZero agrees to use
commercially reasonable efforts to accommodate Compaq's request to help
place any unsold or unused portions of Compaq's allocation. Compaq and
NetZero agree to discuss a process by which NetZero would assist Compaq in
being able to maximize the ability to use the targeting advertising ability
within the Advantage Window to obtain a high ad rate.
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6.0 REPORTS; DEMOGRAPHIC DATA
Unless otherwise provided and to the extent agreed to by the Parties, the
Project Manager of one party shall provide to the Project Manager of the
other party monthly written progress reports for such Work Effort
specifying the current work progress level and identifying any problems
that have been resolved and any problems that are unresolved, along with a
projected date of resolution. The Project Managers shall also notify the
appropriate executives in writing at the earliest possible time of any
factor, event or anticipated event that may affect the ability to meet the
requirements of the Work Effort, including changes in the assignment of its
key employees, strikes and labor unrest, or unavailability of critical
resources. The issuance of such a notice shall not excuse the Party from
any default or performance obligation, unless the other Party consents.
Except as provided below and excluding personal identifying information,
NetZero agrees to provide Compaq on a weekly basis with the demographic
and consumer data which NetZero collects during registration and compiles
from its subscribers who utilize the Combined Products for the sole purpose
of enabling Compaq to better target advertising opportunities to NetZero's
subscribers. Compaq agrees that such data is proprietary to NetZero and
in no event shall Compaq disclose, analyze, compile, sell or otherwise use
such data for any other purpose; provided, however, the foregoing shall not
be interpreted to limit Compaq's rights to the information it derives from
Compaq's registration and support process. Furthermore, NetZero's
obligation to provide such data and Compaq's use of such data shall be
subject in all respects to, and shall comply with, all current and future
applicable laws, rules, regulations and orders regarding the collection,
retention, use, dissemination and confidentiality of such data, and to
all current and future policies and procedures of NetZero regarding the
same.
7.0 CONFIDENTIALITY AND INFORMATION EXCHANGE
a. EXCHANGE It is the intention of Compaq and NetZero to transfer and/or
exchange information as may be essential for completing the Work
Effort under this Agreement and to explore other business
relationships between the parties. Such information may be disclosed
in oral, visual, or written form (including magnetic media). The
obligations of the parties regarding confidentiality under this
Agreement and the Work Effort entered into by the parties pursuant to
the Agreement shall be governed by the Confidentiality and
Nondisclosure Agreement between the parties with an effective date of
February 2, 1999 or any renewals thereof.
b. DISCLOSURE TO OTHERS Neither party shall, without the prior written
authorization of the other party, disclose to any third-party the
terms and conditions of these CONTRACT DOCUMENTS, except as may be
necessary to establish or assert rights hereunder, or as may be
required by law or governmental regulations. The parties agree that
this Agreement may be disclosed to potential investors in NetZero and
their agents (including underwriters, brokers, attorneys and
accountants), and may be disclosed in filings with the Securities
Exchange Commission. As
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one purpose of this Agreement is to publicize the relationship
created by this Agreement, it is the Parties intention to effect
press releases and to create marketing materials regarding the
distribution of the Licensed Product by Compaq. The Parties agree
to coordinate their efforts in this regard, and all press releases
shall be upon mutual agreement of the Parties and such approval
shall not be unreasonably withheld...
8.0 INTERNATIONAL ISSUES
The NetZero ISP Service is not available outside of the United States and
is not available in Hawaii or Alaska. Compaq, however, may be distributing
Combined Products in such states as well as in Puerto Rico and Canada.
Compaq agrees that the rights hereunder extend only to distribution of the
Licensed Product in the United States, Canada and Puerto Rico. To the
extent the Combined Product are distributed in jurisdictions where NetZero
does not provide the NetZero ISP Service, the Parties agree to indicate so
in a manner as to not confuse the consumer.
9.0 WARRANTIES, DISCLAIMERS, AND LIMITS ON LIABILITY
9.1 NetZero warrants that:
1. It has the right to grant the licenses granted to Compaq in this
Agreement.
2. It has not made and will not make any commitments to any third
party inconsistent with or in derogation of the rights and
licenses granted to Compaq and that it is free of any
obligation that would prevent it from entering into this
Agreement or performing its obligations hereunder.
3. To NetZero's knowledge, the Licensed Products and/or their use
and distribution alone and/or in combination with Products
will not infringe any patent, copyright, trade secret,
trademark or any other legal or equitable rights of any third
party.
9.2 Compaq warrants that:
1. It has the right to grant the rights granted to NetZero in
this Agreement.
2. Except as specifically set forth herein, It has not made and
will not make any commitments to any third party inconsistent
with or in derogation of the rights and licenses granted to
NetZero and that it is free of any obligation that would
prevent it from entering into this Agreement or performing its
obligations hereunder.
3. To Compaq's knowledge, the Products and/or their use and
distribution alone and/or in combination with the Products
will not infringe any patent, copyright, trade secret,
trademark or any other legal or equitable rights of any third
party.
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9.3 THE WARRANTIES STATED HEREIN ARE EXPRESSLY IN LIEU OF ALL OTHER
WARRANTIES, AND UNLESS OTHERWISE EXPRESSLY STATED HEREIN, NEITHER
PARTY MAKES ANY OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT
NOT LIMITED TO, ANY EXPRESS OR IMPLIED WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE.
9.4 Each party shall indemnify, defend and hold the other (and its
officers and employees) harmless against all suits, actions, costs,
expenses, damages, settlements, judgments, and all other liabilities
resulting from claims by third parties that, with respect to Compaq,
the Products and with respect to NetZero the Licensed Products (or
their marketing, distribution, combination or use as allowed by this
Agreement) infringe any United States patent, copyright, trade secret,
trademark, or any other proprietary rights., The foregoing indemnity
shall not apply to the extent the claim is based on the manner in
which the parties have incorporated their products together. NetZero
shall indemnify, defend and hold Compaq (and its officers and
employees) harmless against all suits, actions, costs, expenses,
damages, settlements, judgments, and all other liabilities resulting
from claims by third parties that the collection or use of information
about NetZero's subscribers by NetZero violates any privacy or other
right of such subscriber. Compaq shall indemnify, defend and hold
NetZero (and its officers and employees) harmless against all suits,
actions, costs, expenses, damages, settlements, judgments, and all
other liabilities resulting from claims by third parties that the use
of information about NetZero's subscribers by Compaq violates any
privacy or other right of such subscriber. Each party shall promptly
notify the other in writing when it becomes aware of any claim upon
which a request for indemnity may be made hereunder, provided that the
failure to give such notice shall only constitute a waiver of an
indemnified party's rights hereunder to the extent the indemnifying
party is materially prejudiced by the failure to promptly provide such
notice. The indemnifying party shall assume and thereafter have
control of any suit involving such claim and any settlement
negotiations. The indemnifying party shall promptly pay any such
settlement or final judgment entered against the indemnified party.
If a court determines that a Licensed Product or a Product, as the
case may be, or any part thereof, infringes any United States patent,
copyright, trade secret, trademark or other right covered by this
indemnity, and the sale or use of the Licensed Product or the Product,
as the case may be, or any part thereof, is, as a result, enjoined,
then the indemnifying party may, at its option and expense (but in
addition to its obligations above): (i) procure for the other the
right under such patent, copyright, trade secret, trademark or other
right to sell or use as appropriate, the Licensed Product or Product
or such parts thereof; (ii) replace the Licensed Product or Product,
or parts thereof, with other suitable, functionally equivalent and
non-infringing product or parts; or (iii) suitably modify the Licensed
Product or Product or parts thereof.
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9.5 EXCEPT FOR THE UNAUTHORIZED USE OF A PARTY'S PROPRIETARY RIGHTS
HEREUNDER, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY
INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES,
INCLUDING LOST PROFITS, ARISING OUT OR RESULTING FROM THIS AGREEMENT
EVEN IF THE OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. THE FOREGOING SHALL APPLY REGARDLESS OF THE NEGLIGENCE OR
OTHER FAULT OF EITHER PARTY AND REGARDLESS OF WHETHER SUCH LIABILITY
SOUNDS IN CONTRACT, NEGLIGENCE, TORT, OR ANY OTHER THEORY OF LEGAL
LIABILITY.
10.0 TERM AND TERMINATION OF AGREEMENT
10.1 Unless earlier terminated as provided below, the term of this
Agreement shall be for one (1) year from the date of execution of this
Agreement. At either Party's request, the Parties shall commence
meeting prior to the end of the term to determine whether to extend
the term of this Agreement.
10.2 If either party hereto materially breaches any of the terms and
conditions of this Agreement, the other party may give written notice
to the defaulting party specifying the actions or omissions which
constitute a breach of this Agreement, and in the event that any
breach so indicated shall not be remedied by the defaulting party
within thirty (30) days after such notice, the party not in default
may by further written notice to the defaulting party terminate this
Agreement, and, except as expressly provided otherwise in this
Agreement, this Agreement and all the rights herein granted shall
terminate five (5) days after date of mailing of such notice of
termination. Failure of either party to so terminate this Agreement
due to a breach on the part of the other party shall not prejudice its
rights to terminate for a subsequent breach by the other.
10.3 All sublicenses granted to Customers under this Agreement, and all
obligations with respect thereto set forth in Sections, 4 and 9 shall
survive the expiration or termination of this Agreement. Thereafter,
Compaq agrees to return or destroy all additional copies of the
Licensed Software in its possession and to make no further use of
NetZero's trademarks or trade names.
10.4 Upon termination or otherwise, neither party shall have an obligation
to reimburse the other for any expenses or costs incurred by such
party in performing hereunder. Any costs or expenses incurred by
either party in connection with performing under this Agreement shall,
unless otherwise expressly provided herein, be at that party's sole
risk and based upon its own independent business judgment.
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11.0 MISCELLANEOUS
11.1 The licenses granted herein by NetZero to Compaq shall automatically
extend to include Compaq Subsidiaries and affiliates (other than
AltaVista) owned or controlled by Compaq, and Compaq's contractors and
consultants, but only to the extent necessary to fulfill the specific
intent of this Agreement.. This Agreement may be assigned or
transferred to and shall be binding upon and inure to the benefit of
any corporation or other legal entity with which NetZero or Compaq may
be merged or consolidated, or to the assignee of the entire assets of
either party to which this Agreement relates. Except as allowed by
the foregoing, this Agreement shall not be assignable without the
prior written consent of the other party.
11.2 Neither party is the legal representative or agent of the other, nor
shall either party have the right or authority to assume, create, or
incur any liability or any obligation of any kind, expressed or
implied, against, or in the name of or on behalf of the other party.
11.3 The parties understand and acknowledge that they may be subject to
regulation by agencies of the U.S. government, including the U.S.
Department of Commerce, which prohibit export or diversion of certain
products and technology to certain countries. Any and all obligations
of the parties shall be subject in all respects to such United States
laws and regulations as may apply to the Licensed Products, their use,
distribution, and the like, which may include the Export
Administration Act of 1979, as amended, any successor legislation, and
the Export Administration Regulations issued by the Department of
Commerce. Upon Compaq's request, NetZero shall immediately and fully
cooperate with Compaq in properly identifying and classifying the
Licensed Products according to U.S. Department of Commerce coding
conventions.
11.4 Any and all written notices, communications and deliveries between
NetZero and Compaq with reference to this Agreement shall be deemed
made two days following deposit with the US Postal Service if sent by
registered or certified mail, or one day following deposit with a
reputable overnight courier for overnight delivery to the respective
address of the other party (or such other address as a party may
designate by written notice) as follows:
In the case of Compaq Compaq Computer Corporation
20555 SH 249
Houston, Texas 77070
Attn: Software Commodity Manager
Corporate Procurement MS060217
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In the case of NetZero: 3835 R. East Thousand Oaks Blvd, Suite 338
Westlake Village, California 91362
Attn: Chief Executive Officer;
General Counsel
11.5 THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK, EXCLUDING ITS CONFLICTS OF LAW
RULES WHICH MIGHT REFER TO THE LAWS OF ANOTHER JURISDICTION.
11.6 The section headings appearing in this Agreement are inserted only as
a matter of convenience and in no way define, limit, construe or
describe the scope or intent of a section, nor in any way affect this
Agreement.
11.7 This Agreement sets forth the entire agreement and understanding of
the parties relating to the subject matter contained herein, and
merges all prior discussions and agreements between them. Neither
party shall be bound by any definition, condition, warranty or
representation other than as expressly set forth in this Agreement or
its Schedules, or as subsequently set forth in writing signed by an
authorized representative of the party to be bound thereby. Nothing
in any invoice, order acknowledgment, or other document of NetZero or
Compaq shall affect, alter or modify the terms and conditions in this
Agreement unless signed as provided in the preceding sentence. The
provisions in any Schedule subsequently attached to this Agreement
shall have no legal effect and shall not be deemed to be incorporated
herein unless signed by authorized representatives of both Parties to
this Agreement. Authorized representatives of NetZero for the
purposes of the foregoing are the Chief Executive Officer, President
and Chief Financial Officer.
11.8 In the event that any terms or conditions within this Agreement
conflict with any Schedule, this Agreement shall take precedence.
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12.0 SIGNATURES
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement by
their authorized representatives.
COMPAQ COMPUTER CORPORATION NETZERO, INC.
Signature /s/ Michael J. Larson Signature /s/ Mark R. Goldston
-------------------------- --------------------------
Name: Michael J. Larson Name: Mark R. Goldston
Title: GM & V.P. Consumer Title: Chairman & CEO
Products Group
Date Date
------------------------------- -------------------------------
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Amendment No. 1 to Distribution, License and Alliance Agreement
This Amendment No. 1 (the "Amendment") to that certain Distribution, License
and Alliance Agreement dated April 30, 1999 (the "Agreement") between Compaq
Computer Corporation, with its principal business office at 20555 S.H. 240,
Houston, Texas 77070, a Delaware corporation ("Compaq"), and NetZero, Inc.,
with its principal business office at 2555 Townsgate Road, Westlake Village,
CA 91361, a California corporation ("NetZero"), is made effective as of the
26th day of August, 1999. Compaq and NetZero are sometimes referred to
individually as a "Party," and collectively as the "Parties." Defined terms
not otherwise defined herein shall have the meaning ascribed to such terms in
the Agreement.
RECITALS
WHEREAS, Compaq and NetZero are parties to the Agreement and desire to
amend the Agreement to provide NetZero with the ability to designate the
start page on the Products and to enter into a revenue sharing agreement with
respect to proceeds received by NetZero from such start page;
NOW, THEREFORE, AND IN CONSIDERATION of the foregoing premises and for
other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the Parties agree as follows:
1. Section 2.3(a) of the Agreement is hereby deleted in its entirety and
replaced with the following:
a) Compaq and NetZero agree, commencing as soon as practicable following
the date of this Amendment and during the remainder of the Term of this
Agreement, that the designated default start page for the Licensed
Product on the Combined Products (the "Default Start Page") shall no
longer be AltaVista but shall be a start page or the start pages
determined by NetZero. NetZero shall be responsible for procuring all
rights required to enable and permit NetZero to implement the Default
Start Page. [***] during the Term of this Agreement. Within thirty
(30) days following the end of each month during which this Agreement
is in effect [***] shall deliver to [***] a summary of [***] and shall
concurrently therewith deliver [***] for such month. [***] shall
maintain records regarding all [***] and shall provide [***] with
reasonable audit rights with respect to the same. Audit rights may be
exercised on no more than three (3) occasions and on at least five (5)
days written notice. Any audit will be performed, at [***] option, by a
[***] representative or by a nationally recognized accounting firm
acceptable to both parties. The individuals performing the audit shall
be bound by a customary form of confidentiality agreement with [***].
The terms and conditions of any transactions regarding the Default Start
Page shall be considered confidential information of NetZero. [***] shall
be responsible for the costs of the audit
- ------------------
[***] 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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unless the audit reveals underpayments by [***] in excess of [***], in
which event [***] shall be responsible for such audit costs.
2. The parties acknowledge that the Agreement and this Amendment shall only
apply to the United States, Canada and Puerto Rico.
3. Except as specifically set forth in this Amendment, the Agreement shall
be unaffected and shall remain in full force and effect. This Amendment is
incorporated into the Agreement as if set forth therein.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
by their authorized representatives.
COMPAQ COMPUTER CORPORATION NETZERO, INC.
Signature /s/ Michael J. Larson Signature /s/ Charles S. Hilliard
------------------------------ -----------------------
Name: Michael J. Larson Name: Charles S. Hilliard
--------------------------------- ---------------------------
Title: GM & V.P. Consumer Products Group Title: SVP and CFO
--------------------------------- ---------------------------
Date: 8/27/99 Date: 8/29/99
--------------------------------- ---------------------------
- ------------------
[***] 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.
2
