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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 000-27405
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NETZERO, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-4644384
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2555 TOWNSGATE ROAD, 91361
WESTLAKE VILLAGE, CALIFORNIA (Zip Code)
(Address of principal executive office)
</TABLE>
(805) 418-2000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
------------------------
Indicate by check mark whether the registrant (1) has filed all documents
and reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares of Common Stock outstanding as of March 31, 2000:
104,840,241 shares.
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<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets at March 31, 2000 and June 30,
1999...................................................... 3
Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999 and the nine months ended
March 31, 2000 and 1999................................... 4
Consolidated Statements of Cash Flow for the nine months
ended March 31, 2000
and 1999.................................................. 5
Notes to Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 9
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 32
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 33
Item 2. Changes in Securities and Use of Proceeds................... 33
Item 3. Defaults Upon Senior Securities............................. 33
Item 4. Submission of Matters to a Vote of Security Holders......... 33
Item 5. Other Information........................................... 33
Item 6. Exhibits and Reports on Form 8-K............................ 33
A. Exhibits
B. Reports on Form 8-K
Signatures........................................................... 34
</TABLE>
In this Report, "NetZero," the "Company," "we," "us" and "our" collectively
refers to NetZero, Inc. and its wholly-owned subsidiaries.
2
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PART I. FINANCIAL INFORMATION
NETZERO, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $118,552,000 $ 24,035,000
Short-term investments.................................... 7,500,000 --
Restricted cash........................................... 10,199,000 --
Accounts receivable, net of allowance for doubtful
accounts of $625,000 at March 31, 2000 and $160,000 at
June 30, 1999........................................... 10,287,000 2,253,000
Other current assets...................................... 2,668,000 689,000
------------ ------------
Total current assets.................................... 149,206,000 26,977,000
Property and equipment, net................................. 25,439,000 18,116,000
Restricted cash............................................. 2,687,000 1,789,000
Intangible assets........................................... 20,541,000 --
Other assets................................................ 1,658,000 619,000
------------ ------------
Total assets............................................ $199,531,000 $ 47,501,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... 16,218,000 4,879,000
Accrued liabilities....................................... 2,311,000 1,521,000
Deferred revenue.......................................... 2,426,000 2,739,000
Current portion of notes payable.......................... 1,529,000 560,000
Current portion of capital leases......................... 3,018,000 1,181,000
------------ ------------
Total current liabilities:.................................. 25,502,000 10,880,000
Notes payable less current portion.......................... 2,809,000 1,210,000
Capital leases less current portion......................... 5,033,000 2,317,000
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; no shares issued or
outstanding at March 31, 2000............................. -- 2,140,000
Stockholders' equity
Convertible preferred stock, $0.001 par value; 55,769,000
shares authorized; 45,182,000 shares isued and outstanding
at June 30, 1999; liquidation preference of $44,917,000;
10,000,000 shares authorized and no shares issued and
outstanding at March 31, 2000............................. -- 44,720,000
Common stock, $0.001 par value; 500,000,000 and 150,000,000
shares authorized at March 31, 2000 and June 30, 1999,
respectively; 104,840,000 and 28,624,000 shares issued and
outstanding at March 31, 2000 and June 30, 1999,
respectively.............................................. 115,000 1,352,000
Additional paid-in capital.................................. 261,228,000 9,019,000
Notes receivable from stockholders.......................... (1,061,000) (1,029,000)
Deferred stock-based charges................................ (14,407,000) (7,783,000)
Accumulated deficit......................................... (79,688,000) (15,325,000)
------------ ------------
Total stockholders' equity.............................. 166,187,000 30,954,000
------------ ------------
Total liabilities and stockholders' equity.............. $199,531,000 $ 47,501,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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NETZERO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net revenues............................. $ 16,858,000 $ 781,000 $ 36,820,000 $ 903,000
Cost of revenues (excluding stock-based
charges of $96,000 and $285,000) for
the quarter and nine months ended March
31, 2000, respectively)................ 18,459,000 3,979,000 45,701,000 5,049,000
------------ ----------- ------------ -----------
GROSS LOSS............................... (1,601,000) (3,198,000) (8,881,000) (4,146,000)
------------ ----------- ------------ -----------
OPERATING EXPENSES
Sales and marketing (excluding
stock-based charges of $804,000 and
$1,328,000 for the quarter and nine
months ended March 31, 2000,
respectively)........................ 12,923,000 522,000 33,470,000 834,000
Product development (excluding stock-
based charges of $81,000 and $240,000
for the quarter and nine months ended
March 31, 2000, respectively)........ 1,566,000 288,000 3,796,000 483,000
General and administrative (excluding
stock-based charges of $980,000 and
$188,000 for the quarters ended March
31, 2000 and 1999 and $2,907,000 and
$344,000 for the nine months ended
March 31, 2000 and 1999,
respectively) 6,073,000 929,000 14,064,000 1,324,000
Stock-based charges.................... 1,961,000 188,000 4,759,000 344,000
Amortization of intangible assets...... 2,500,000 -- 3,158,000 --
------------ ----------- ------------ -----------
Total operating expenses............. 25,023,000 1,927,000 59,247,000 2,985,000
------------ ----------- ------------ -----------
LOSS FROM OPERATIONS............... (26,624,000) (5,125,000) (68,128,000) (7,131,000)
------------ ----------- ------------ -----------
Interest income.......................... 2,128,000 50,000 4,809,000 50,000
Interest expense......................... (364,000) (20,000) (1,044,000) (26,000)
------------ ----------- ------------ -----------
NET LOSS........................... $(24,860,000) $(5,095,000) $(64,363,000) $(7,107,000)
============ =========== ============ ===========
Basic and diluted net loss per share..... $ (0.27) $ (0.50) $ (0.99) $ (0.67)
============ =========== ============ ===========
Shares used to calculate basic and
diluted net loss per share............. 91,123,000 10,277,000 64,837,000 10,587,000
============ =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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NETZERO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(64,363,000) $(7,107,000)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization............................. 9,188,000 148,000
Allowance for doubtful accounts........................... 465,000 50,000
Stock-based charges....................................... 4,759,000 344,000
Accrued interest--notes receivable from stockholders...... (53,000) --
Changes in operating assets and liabilities (excluding the
effects of the acquisition of AimTV):
Short-term investments.................................. (7,500,000)
Restricted cash......................................... (11,021,000) (794,000)
Accounts receivable..................................... (8,499,000) (547,000)
Other assets............................................ (2,993,000) (329,000)
Accounts payable and accrued expenses................... 11,430,000 2,305,000
Deferred revenue........................................ (313,000) --
------------ -----------
Net cash used for operating activities................ (68,900,000) (5,930,000)
------------ -----------
Cash flows from investing activities:
Purchases of property and equipment....................... (12,569,000) (985,000)
------------ -----------
Cash flows from financing activities:
Payments on capital leases................................ (1,763,000) (32,000)
Payments on notes payable................................. (930,000) --
Proceeds from equipment refinancing....................... 5,680,000 --
Proceeds from notes payable............................... 3,498,000 --
Repayment of note due from stockholders................... 21,000 --
Proceeds from exercise of stock options................... 180,000 122,000
Net proceeds from issuance of common stock................ 169,300,000 2,000
Net proceeds from issuance of redeemable convertible
preferred stock......................................... -- 2,015,000
Net proceeds from issuance of convertible preferred
stock................................................... -- 11,522,000
------------ -----------
Net cash provided by financing activities............. 175,986,000 13,629,000
------------ -----------
Change in cash and cash equivalents................... 94,517,000 6,714,000
Cash and cash equivalents, beginning of period.............. 24,035,000 1,000
------------ -----------
Cash and cash equivalents, end of period.................... $118,552,000 $ 6,715,000
============ ===========
Supplemental disclosure of cash flow activities:
Note receivable from stockholders in connection with the
exercise of stock options............................... $ -- $ 629,000
============ ===========
Equipment obtained under capital leases................... $ 636,000 $ 916,000
============ ===========
Stock issued for acquisition of AimTV..................... $ 23,249,000 $ --
============ ===========
Issuance of warrant for marketing services................ $ 8,600,000 $ --
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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NETZERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BUSINESS.
NetZero 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 an effective way to reach those consumers.
2. BASIS OF PRESENTATION.
The financial statements are unaudited, other than the balance sheet
information for the Company as of June 30, 1999 and, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) that are necessary for a fair presentation of the results for the
periods shown. The results of operations for such periods are not necessarily
indicative of the results expected for the full fiscal year or for any future
period. Certain amounts in the prior year's financial statements have been
reclassified to conform with the presentation of the current period. These
financial statements should be read in conjunction with the financial statements
as of June 30, 1999 and related notes included in the Company's final prospectus
dated September 23, 1999 related to its initial public offering as filed with
the Securities and Exchange Commission (the "SEC").
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results may differ from those estimates.
3. NEW PRONOUNCEMENTS.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" (SAB 101), which provides additional
guidance in applying generally accepted accounting principles to revenue
recognition in the financial statements. The Company has evaluated the
provisions of SAB 101 and believes it has no effect on the Company's
consolidated financial position, consolidated results of operations or
liquidity.
4. ACQUISITION.
On December 1, 1999, the Company acquired AimTV, Inc. ("AimTV") in a
stock-for-stock transaction. AimTV has developed a patent-pending technology
designed to enable advertisers to run broadcast-quality commercials over
narrowband Internet connections. Pursuant to the terms of the agreement, the
outstanding capital stock and options of AimTV were exchanged for approximately
970,000 shares of Common Stock and options to purchase Common Stock of NetZero.
The transaction has been accounted for under the purchase method.
The following summarized unaudited pro forma financial information for the
nine months ended March 31, 2000 assumes that the acquisition of AimTV had
occurred at the beginning of the period:
<TABLE>
<S> <C>
Revenues............................................... $ 36,820,000
Net loss............................................... $(69,718,000)
Net loss per share..................................... $ (1.08)
</TABLE>
6
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NETZERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. CONCENTRATION OF CREDIT RISK.
At March 31, 2000, one customer comprised 11% of the accounts receivable
balance. For the quarter ended March 31, 2000, one customer accounted for 26% of
revenues and for the nine months ended March 31, 2000, two customers accounted
for 31% and 15% of revenues.
6. EQUITY.
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.
INITIAL PUBLIC OFFERING
In September 1999, the Company completed an initial public offering in which
the Company sold 11,500,000 shares of its Common Stock, including 1,500,000
shares in connection with the exercise of the underwriters' over-allotment
option, at $16 per share. The proceeds to the Company from the offering, after
deducting offering expenses, including underwriting discounts and commissions,
were $169.3 million. Upon the closing of the offering, all of the Company's then
outstanding Preferred Stock automatically converted into Common Stock on a
one-for-one basis. After the offering, the Company's authorized capital consists
of 510,000,000 shares of capital stock (500,000,000 shares of Common Stock and
10,000,000 shares of Preferred Stock) of which approximately 104,840,000 shares
of Common Stock were outstanding at March 31, 2000. Refer to "Part II--Other
Information--Item 2(d)" for a discussion of use of proceeds from the Company's
initial public offering.
7. NET LOSS PER SHARE.
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings per Share" ("EPS"). SFAS No. 128 requires dual presentation
of basic and diluted EPS. Basic EPS represents the weighted average number of
shares outstanding divided into net income attributable to common stockholders
during a reported period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock. However, the Company has not included potential
common stock in the calculation of EPS as such inclusion would have an
anti-dilutive effect.
The following table sets forth the computation of basic and diluted net loss
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Numerator:
Net Loss............................... $(24,860,000) $(5,095,000) $(64,363,000) $(7,107,000)
------------ ----------- ------------ -----------
Denominator:
Weighted average common shares......... 104,811,000 19,454,000 80,092,000 16,646,000
Adjustment for common shares subject to
repurchase........................... (13,688,000) (9,177,000) (15,255,000) (6,059,000)
------------ ----------- ------------ -----------
Adjusted weighted average common
shares............................... 91,123,000 10,277,000 64,837,000 10,587,000
------------ ----------- ------------ -----------
Basic and diluted net loss per share..... $ (0.27) $ (0.50) $ (0.99) $ (0.67)
============ =========== ============ ===========
</TABLE>
7
<PAGE>
NETZERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. RELATED PARTY TRANSACTIONS.
In the three and nine months ended March 31, 2000, idealab! purchased
$1.3 million and $1.7 million, respectively in banner advertisements. idealab!,
including its affiliates, is a major stockholder in the Company and Bill Gross,
a director of NetZero, is also a director and major stockholder of idealab!
9. COMMITMENTS AND CONTINGENCIES.
The Company is not currently party to any material legal proceedings.
10. SUBSEQUENT EVENT.
In April 2000, QUALCOMM Incorporated invested approximately $144 million in
NetZero for a 9.9% stake in the Company.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report on Form 10-Q contains forward-looking statements based on our
current expectations, estimates and projections about our operations, industry,
financial condition and liquidity. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "may," "will" or similar expressions are
intended to identify forward-looking statements. In addition, any statements
that refer to expectations, projections or other characterizations of future
events or circumstances, including any underlying assumptions, are
forward-looking statements. Such statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict. Therefore, our actual results could differ materially
and adversely from those expressed in any forward-looking statements as a result
of various factors. The section entitled "Risk Factors" set forth in this
Form 10-Q and similar discussions in our registration statement declared
effective by the Securities and Exchange Commission ("SEC") on September 23,
1999, discuss some of the important risk factors that may affect our business,
results of operations and financial condition. We undertake no obligation to
revise or update publicly any forward-looking statements for any reason.
OVERVIEW
NetZero is a leading provider of advertising and commerce-sponsored Internet
access offering a broad range of interactive marketing, research and measurement
solutions. We offer consumers free access to the Internet, free e-mail and
custom navigation tools that provide "speed dial" to key sites on the Internet.
Through proprietary technologies, we offer advertisers targeting capabilities
through numerous online advertising and sponsorship channels. Our CyberTarget
division offers marketers and advertisers mass-scale, online market research and
measurement services.
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
operating activities related primarily to the development of our proprietary
zCast software. Since launching our service, we have focused on:
- developing our service to enhance its features and functionality;
- implementing the zCast Server network cell infrastructure;
- hiring personnel;
- contracting with third-party communications providers;
- developing the NetZero brand;
- selling advertising;
- marketing our service to potential sponsors of placements on The ZeroPort
and Start Page;
- marketing our service to consumers;
- developing long-term strategic alliances to strengthen our financial
position; and,
- pursuing distribution arrangements.
We have spent, and will continue to spend, significant resources on these
activities.
On December 1, 1999, we acquired AimTV, Inc. ("AimTV") in a stock-for-stock
transaction. AimTV has developed a patent-pending technology designed to enable
advertisers to run broadcast-quality commercials over narrowband Internet
connections. Pursuant to the terms of the agreement, the outstanding capital
stock and options of AimTV were exchanged for approximately 970,000 shares of
Common Stock and options to purchase Common Stock of NetZero. The transaction
has been accounted for under the purchase method.
9
<PAGE>
REVENUES.
We generate revenues generally through banner advertisements, sponsorships
on The ZeroPort, referrals of our users to other Web sites, performance-based
agreements including e-commerce arrangements, advertising messages delivered to
our users via e-mail, 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 defined 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. We may receive fees for these rights
alone, although many sponsorships also involve a commitment by us to deliver
banner advertisements or fulfill defined performance criteria. 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 or drop down menus on The ZeroPort. Referral
payments are, in general, based upon the number of times users are directed to
advertisers' Web sites. 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. Revenues are also generated when users elect to receive messages from
advertisers in their NetZero e-mail accounts and such messages are delivered. In
distribution arrangements, we may be paid by third parties for the right to
distribute the software containing our service together with products of those
third parties.
We also intend to generate revenues through our CyberTarget division by
offering marketers, advertisers and market research companies mass-scale, online
market research and measurement services using our unique Zcast technology. We
are in the early stages of this business and there is no assurance as to when,
or if, this division will make a significant contribution to our revenue.
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. To date, we have
sold targeted advertising based upon Web sites visited, key word searches, and
users' demographic and geographic information. In addition, the growth in the
user base has resulted, and may result in the future, in situations where
advertising inventory capacity has increased faster than the 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, the failure
to renew such agreements or the failure of the combination of such agreements
and the efforts of the in-house sales force to sell increased inventory at
reasonable rates may materially and adversely affect operating results. In
addition, success with performance-based fee arrangements may depend on our
ability to effectively target users. We are still 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 in the user base will
enhance the value of our services to our advertising customers, there can be no
assurance that we will adequately perform under these arrangements or that we
will be able to replace such arrangements on comparable terms, if at all. The
failure to generate significant sponsorships on The ZeroPort or the failure to
replace significant contracts when they expire could adversely affect our
revenues and results of operations.
Banner advertising and sponsorship revenues are recognized in the periods in
which the advertisement or sponsorship placement is displayed, based upon the
lesser of impressions delivered over the total number of guaranteed impressions
or ratably over the period in which the advertisement is displayed, provided
that no significant obligations on our part remain and collection of the related
receivable is probable. Our obligations typically include the guarantee of a
minimum number of
10
<PAGE>
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. Revenues from performance-based arrangements, including
click-throughs, are recognized as the related performance criteria are met.
Referral revenues are recognized as referrals are made to advertisers' or
sponsors' Web sites, provided that no significant obligations on our part remain
and collection of the related receivable is probable.
Our advertising revenues are subject to the effects of seasonality.
Advertisers typically purchase impressions on a forward basis. If purchasing
patterns or timing of purchasing by advertisers were to change, operations could
be materially affected.
Our revenues will be significantly affected by our ability to grow our user
base which is also subject to the effects of seasonality. 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
agreements with our advertisers relating to performance criteria.
We do not currently anticipate that inflation will have a material impact on
our results of operations.
COST OF REVENUES.
Cost of revenues consists of telecommunications costs, depreciation of
network equipment, occupancy costs and personnel and related expenses of the
network department. We intend to expend significant funds, 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 an increasing subscriber base and anticipated usage patterns.
Telecommunications costs for network access are expensed as incurred. Our
failure to accurately forecast users' needs could result in significant
overcapacity, which would adversely impact our results of operations.
Conversely, under-forecasting usage could adversely impact the ability of users
to receive adequate service and adversely impact our reputation and our ability
to maintain or increase our subscriber base. We have limited history in
forecasting our user 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 advertising and promotion expenses,
salaries, sales commissions, employee benefits, travel and related expenses for
our direct sales force, fees paid to third-party advertising sales agents and
sales support functions. We have expended, and intend to continue to expend,
significant amounts on sales and marketing including a national branding
campaign comprised of television and radio advertising, sponsorships and a
variety of other promotions. Due to the timing of these promotions, amounts
expended may vary significantly from quarter to quarter. Marketing costs
associated with increasing brand awareness and user base 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 salaries and related expenses for the software engineering department,
as well as costs for contracted services, facilities and equipment. We believe
that a significant level of product development is necessary for the business
and intend to increase, as necessary, the amount of spending to fund this
activity.
11
<PAGE>
GENERAL AND ADMINISTRATIVE.
General and administrative expenses include salaries, employee benefits and
expenses for executive, finance, legal, human resources and customer support
personnel. In addition, general and administrative expenses include fees for
professional services, third-party customer support and occupancy costs. We
expect general and administrative expenses to increase as we continue to expand
our administrative infrastructure.
STOCK-BASED CHARGES.
In connection with the grant of stock options to employees and the
imposition of restrictions on shares of stock held by certain founders, we have
recorded deferred stock-based charges of approximately $11.7 million. This
deferred compensation represents the difference between the deemed fair value of
common stock for accounting purposes and the exercise price of these options or
shares at the date of grant. We are amortizing this amount over the vesting
periods of the applicable options or shares, generally four years.
In January 2000, we entered into a four-year strategic alliance with General
Motors Corporation ("GM"). As part of the agreement to enter into a strategic
marketing relationship we issued to GM warrants to purchase 575,000 shares of
NetZero's common stock. The warrants were valued at $8.6 million and are being
amortized ratably over the four-year period.
Deferred stock-based charges are presented as a reduction of stockholders'
equity.
CONSOLIDATED RESULTS OF OPERATIONS.
The following tables set forth selected consolidated statements of
operations data in dollars and as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, 2000 DECEMBER 31, 1999 MARCH 31, 1999
-------------- ----------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues......................................... $ 16,858 $ 12,242 $ 781
Cost of Revenues................................. 18,459 15,148 3,979
-------- -------- -------
Gross Loss....................................... (1,601) (2,906) (3,198)
Operating Expenses:
Sales and marketing............................ 12,923 15,582 522
Product development............................ 1,566 1,414 288
General and administrative..................... 6,073 4,458 929
Stock-based charges............................ 1,961 1,495 188
Amortization of intangible assets.............. 2,500 658 --
-------- -------- -------
Total operating expenses......................... 25,023 23,607 1,927
-------- -------- -------
Loss from operations............................. (26,624) (26,513) (5,125)
Interest and other income (expense), net......... 1,764 1,937 30
-------- -------- -------
Net loss......................................... $(24,860) $(24,576) $(5,095)
======== ======== =======
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, 2000 DECEMBER 31, 1999 MARCH 31, 1999
-------------- ----------------- --------------
<S> <C> <C> <C>
As a percentage of revenues:
Revenues......................................... 100 % 100 % 100 %
Cost of Revenues................................. (109) (124) (509)
-------- -------- -------
Gross Loss....................................... (9) (24) (409)
Operating Expenses:
Sales and marketing............................ (77) (127) (67)
Product development............................ (9) (12) (37)
General and administrative..................... (36) (37) (119)
Stock-based charges............................ (12) (12) (24)
Amortization of intangible assets.............. (15) (5) 0
-------- -------- -------
Total operating expenses......................... (148) (193) (247)
-------- -------- -------
Loss from operations............................. (158) (217) (656)
Interest and other income (expense), net......... 11 16 4
-------- -------- -------
Net loss......................................... (147)% (201)% (652)%
======== ======== =======
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE
THREE MONTHS ENDED DECEMBER 31, 1999
REVENUES.
Revenues for the three months ended March 31, 2000 were $16.9 million, which
represented an increase of $4.7 million, or 38%, from $12.2 million for the
three months ended December 31, 1999. The increase was primarily attributable to
increased revenue from sponsorships on The ZeroPort, advertising associated with
co-branded distribution arrangements and sales of banner advertisements,
primarily through our in-house sales force. Approximately $4.4 million, or 26%,
of our total revenues for the three months ended March 31, 2000, was generated
from our agreement with LookSmart, compared to $4.1 million, or 34%, in the
three months ended December 31, 1999.
COST OF REVENUES.
Cost of revenues for the three months ended March 31, 2000 was
$18.5 million, which represented an increase of $3.3 million, or 22%, from
$15.1 million for the three months ended December 31, 1999. The increase was
primarily attributable to increased telecommunications expense related to the
growth in our user base from approximately 3 million registered users at
December 31, 1999 to approximately 4 million registered users at March 31, 2000.
In the three months ended March 31, 2000 and December 31, 1999
telecommunications services purchased averaged less than $0.30 per user hour.
SALES AND MARKETING.
Sales and marketing expenses for the three months ended March 31, 2000 were
$12.9 million, which represented a decrease of $2.7 million, or 17%, from
$15.6 million for the three months ended December 31, 1999. In the quarter ended
December 31, 1999 we continued our first national consumer branding campaign
which began in August 1999 with advertisements running on television, radio and
in print. The cost of the initial campaign and other promotional expenses in the
December quarter exceeded the March quarter advertising and promotion expense
(which included for the first time sponsorship of the half time show of
televised National Basketball Association games on NBC) by approximately
$3.3 million. The decrease in advertising and promotion expense of $3.3 million
was partially offset by increased staffing costs and sales commissions.
13
<PAGE>
PRODUCT DEVELOPMENT.
Product development expenses for the three months ended March 31, 2000, were
$1.6 million, which represented an increase of $0.2 million, or 11%, from
$1.4 million for the three months ended December 31, 1999. The increase was
primarily due to the hiring of additional software engineers.
GENERAL AND ADMINISTRATIVE.
General and administrative expenses for the three months ended March 31,
2000 were $6.1 million, which represented an increase of $1.6 million, or 36%,
from $4.5 million for the three months ended December 31, 1999. The increase was
primarily due to increased taxes (not related to income) and licenses, the
hiring of additional administrative personnel and an increase in bad debt
reserve.
STOCK-BASED CHARGES.
For the three months ended March 31, 2000 and December 31, 1999 amortization
of deferred stock-based charges was $2.0 million and $1.5 million, respectively.
The increase was due to the amortization of the warrant issued to GM.
AMORTIZATION OF INTANGIBLE ASSETS.
Amortization of intangible assets amounted to $2.5 million for the three
months ended March 31, 2000 compared to $0.7 million for the three months ended
December 31, 1999. We acquired AimTV in December 1999 in a stock-for-stock
transaction and recorded one month of amortization in the December quarter.
INTEREST AND OTHER INCOME (EXPENSE), NET.
Interest income consists of earnings on our cash and cash equivalents,
short-term investments and restricted cash. Interest expense consists primarily
of interest expense on capital leases and notes payable. Net interest income,
for the three months ended March 31, 2000 was $1.8 million, which represented a
decrease of $0.1 million from net interest income of $1.9 million in the three
months ended December 31, 1999. The decrease was primarily due to reduced
average cash balances in the March quarter.
INCOME TAXES.
As a result of operating losses and our inability to recognize a benefit
from deferred tax assets, we have not recorded a benefit for income tax for the
three months ended March 31, 2000 or December 31, 1999.
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 1999
REVENUES.
Revenues for the three months ended December 31, 1999 were $12.2 million,
which represented an increase of $4.5 million, or 59%, from $7.7 million for the
three months ended September 30, 1999. The increase was primarily attributable
to revenues generated from our start page agreement with LookSmart, sponsorships
on The ZeroPort and increased sales of banner advertisements, primarily through
our in-house sales force. Specifically, we generated approximately
$4.1 million, or 34% of our total revenues for the three months ended
December 31, 1999, from our agreement with LookSmart, which we entered into in
April 1999. This amount represented an increase of approximately $1.1 million
from the $3.0 million of revenues generated from LookSmart for the three months
ended
14
<PAGE>
September 30, 1999, which represented approximately 39% of our total revenues
for that period. We also generated approximately $2.4 million, or 19% of our
total revenues for the three months ended December 31, 1999, from banner
advertisements sold through Adsmart. This amount represented an increase of
approximately $0.1 million from the $2.3 million of revenues generated from
Adsmart for the three months ended September 30, 1999, which represented
approximately 29% of our total revenues for that period.
COST OF REVENUES.
Cost of revenues for the three months ended December 31, 1999 was
$15.1 million, which represented an increase of $3.0 million, or 25%, from
$12.1 million for the three months ended September 30, 1999. The increase was
primarily attributable to increased telecommunications expense related to the
growth in our user base and increased depreciation related to our internal
network costs. During the December quarter, the Company's cost of
telecommunications services purchased averaged less than $0.30 per user hour.
SALES AND MARKETING.
Sales and marketing expenses for the three months ended December 31, 1999
were $15.6 million, which represented an increase of $10.6 million, or 213%,
from $5.0 million for the three months ended September 30, 1999. The increase
was primarily due to increased levels of advertising and other marketing
expenses associated with the Company's initial major nationwide consumer
branding campaign, distribution of CDs containing our software, the start of our
exclusive sponsorship of the half time show of televised National Basketball
Association games on NBC, and the hiring of additional direct sales force
personnel.
PRODUCT DEVELOPMENT.
Product development expenses for the three months ended December 31, 1999
were $1.4 million, which represented an increase of $0.6 million, or 73%, from
$0.8 million for the three months ended September 30, 1999. The increase was
primarily due to the hiring of additional software engineers and professional
expenses.
GENERAL AND ADMINISTRATIVE.
General and administrative expenses for the three months ended December 31,
1999 were $4.5 million, which represented an increase of $1.0 million, or 27%,
from $3.5 million for the three months ended September 30, 1999. The increase
was primarily due to the hiring of additional administrative personnel and
increased professional and consulting expenses.
STOCK-BASED CHARGES.
For the three months ended December 31, 1999 and September 30, 1999,
amortization of deferred stock-based charges was $1.5 million and $1.3 million,
respectively in connection with stock option grants and restricted founders'
shares.
AMORTIZATION OF INTANGIBLE ASSETS.
Amortization of intangible assets for the three months ended December 31,
1999 was $0.7 million as a result of our acquisition of AimTV in December 1999.
15
<PAGE>
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 leases and
notes payable. Interest income, net, for the three months ended December 31,
1999 was $1.9 million, which represented an increase of $1.8 million from net
interest income of $0.1 million in the three months ended September 30, 1999.
The increase was primarily due to income earned on cash balances from the
proceeds of our initial public offering.
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 benefit for income tax for
the three months ended December 31, 1999 or September 30, 1999.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1999
REVENUES.
Revenues for the three months ended September 30, 1999 were $7.7 million,
which represented an increase of $4.0 million, or 107%, from $3.7 million for
the three months ended June 30, 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 $3.0 million, or 39% of
our total revenues for the three months ended September 30, 1999, from our
agreement with LookSmart, which we entered into in April 1999. This amount
represented an increase of approximately $1.7 million from the $1.3 million of
revenues generated from LookSmart for the three months ended June 30, 1999,
which represented approximately 34% of our total revenues for that period. We
also generated approximately $2.3 million, or 29% of our total revenues for the
three months ended September 30, 1999, from banner advertisements sold through
Adsmart. This amount represented an increase of approximately $1.3 million from
the $1.0 million of revenues generated from Adsmart for the three months ended
June 30, 1999, which represented approximately 28% of our total revenues for
that period.
COST OF REVENUES.
Cost of revenues for the three months ended September 30, 1999 was
$12.1 million, which represented an increase of $4.7 million, or 64%, from
$7.4 million for the three months ended June 30, 1999. The increase was
primarily attributable to increased telecommunications expense related to the
growth in our user base and increased depreciation related to our internal
network costs. During the September quarter, the Company's cost of
telecommunications services purchased averaged less than $0.30 per hour.
SALES AND MARKETING.
Sales and marketing expenses for the three months ended September 30, 1999
were $5.0 million, which represented an increase of $4.1 million, or 485%, from
$0.9 million for the three months ended June 30, 1999. The increase was
primarily due to increased levels of advertising and other marketing expenses
associated with the Company's nationwide consumer and advertiser branding
campaign. The increase was also attributable to the hiring of additional direct
sales force personnel.
PRODUCT DEVELOPMENT.
Product development expenses for the three months ended September 30, 1999
were $0.8 million, which represented an increase of $0.3 million, or 64%, from
$0.5 million for the three months ended
16
<PAGE>
June 30, 1999. The increase was primarily due to the hiring of additional
software engineers and professional expenses.
GENERAL AND ADMINISTRATIVE.
General and administrative expenses for the three months ended
September 30, 1999 were $3.5 million, which represented an increase of
$1.1 million, or 47%, from $2.4 million for the three months ended June 30,
1999. The increase was primarily due to the hiring of additional administrative
personnel and increased professional and consulting expenses.
STOCK-BASED CHARGES.
For the three months ended September 30, 1999 and June 30, 1999,
amortization of deferred stock-based charges was $1.3 million and $0.9 million,
respectively, in connection with stock option grants and restricted founders'
shares.
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 three months ended September 30, 1999 was
$64,000, which represented a decrease of $27,000 from net interest income of
$91,000 in the three months ended June 30, 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 benefit for income tax for
the three months ended September 30, 1999.
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1999
We began business operations in October 1998, and, as a result, our
operating results for the period from July 1, 1998 through March 31, 1999
included only $0.9 million in revenues, $5.0 million in cost of revenues, and
$3.0 million in operating expenses. Accordingly, our results for the first three
quarters of fiscal 1999 are not meaningful or material in comparison to the
operating results for the first three quarters of fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
From inception of the business to September 1999 our operations were
financed primarily through the private placement of approximately $47 million in
equity securities. In September 1999, we completed an initial public offering of
11.5 million shares (including 1.5 million shares pursuant to the underwriters'
over-allotment option) of common stock at a price of $16 per share, resulting in
net proceeds of $169.3 million after deducting offering expenses, including
underwriting discounts and commissions. At March 31, 2000 we had $126.1 million
in cash, cash equivalents and short-term investments.
17
<PAGE>
Net cash used for operating activities was $68.9 million for the nine months
ended March 31, 2000 and was due primarily to operating losses, deposits to
guarantee future obligations and increases in accounts receivable, short-term
investments and other assets, partially offset by increases in accounts payable
and accrued expenses, depreciation and stock-based charges.
Net cash used for investing activities was $12.6 million for the nine months
ended March 31, 2000 and involved primarily investments in server network
equipment, purchased software, office equipment and leasehold improvements.
Net cash provided by financing activities was $176.0 million for the nine
months ended March 31, 2000 and was principally attributable to the proceeds
from the initial public offering.
In April 2000, QUALCOMM Incorporated invested approximately $144 million in
NetZero for a 9.9% interest in the Company.
We expect to continue to incur significant capital expenditures in the
future, including additions and enhancements to our servers and network
infrastructure, software licenses and furniture, fixtures and equipment. The
actual amount of capital expenditures will depend on the rate of growth in our
user base, which is difficult to predict and which could change dramatically
over time. Technological advances may also require us to make capital
expenditures to develop or acquire new equipment or technology. We intend to use
a combination of cash and capital lease financing to fund capital expenditures
in a manner, which minimizes our cost of capital. However, there is no assurance
that lease financing will be available on favorable terms, if at all in which
case we would be required to use a greater portion of cash to fund capital
expenditures.
We currently anticipate that our existing cash, cash equivalents and
short-term investments will be sufficient to fund our operating activities,
capital expenditures and other obligations for at least the next 12 months.
However, we may need additional capital in order to fund more rapid growth,
expand our marketing activities, 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 to us
on acceptable terms, 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 the then-current
stockholders would be reduced. Furthermore, such equity securities might have
rights, preferences or privileges senior to holders of our common stock.
NEW PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101), which provides additional guidance in applying generally accepted
accounting principles to revenue recognition in the financial statements. The
Company has evaluated the provisions of SAB 101 and believes it has no effect on
the Company's consolidated financial position, consolidated results of
operations or liquidity.
FUTURE RESULTS OF OPERATIONS MAY VARY DUE TO CERTAIN FACTORS
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 Form 10-Q. We may significantly increase our
operating expenses and capital expenditures for a variety of reasons including,
without limitation, the expansion of our sales and marketing efforts, our
promotion of the NetZero brand, enhancement of the features and functionality of
The ZeroPort, upgrading of our
18
<PAGE>
internal network infrastructure, pursuit of new distribution channels and the
hiring of new personnel across all levels of the organization. Expenditures in
each of these categories may vary significantly from quarter-to-quarter. While
some expenses are fixed in the short-term, our total operating expenses are
principally determined on the basis of anticipated growth in revenues. 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 expenses will significantly exceed
revenues for the foreseeable future. As a result of these and other factors, our
operating results may vary substantially from quarter-to-quarter.
In addition, seasonal trends could affect our revenues generated. 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 the summer and year-end vacation and
holiday periods will impact user traffic levels. Moreover, the rate at which new
users sign up for our service may be related to gifts or purchases of personal
computers, which typically increase during the fourth calendar quarter because
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 limited, it is difficult for us to accurately predict these trends
and plan accordingly. Since our operating expenses are based on expectations of
future revenues, it is possible that seasonal fluctuations could materially and
adversely affect our business, results of operations and financial condition.
A small number of customers have accounted for, and may in the future
account for, a significant portion of our revenues. For example, approximately
26% of revenues for the three months ended March 31, 2000 were derived from our
agreement with LookSmart. Our agreement with LookSmart was renewed in
February 2000 and will extend through February 15, 2001. In February 2000, we
entered into a strategic alliance with 24/7 Media. Pursuant to this alliance,
24/7 Media will sell e-mail and banner advertising on behalf of NetZero but
there can be no assurance that such agreement will result in material revenues.
In February 2000, we also entered into an agreement with idealab! pursuant to
which idealab! will purchase $3.0 million of banner advertisements and data from
us over an approximately five-month period. idealab!, including its affiliates,
is a major stockholder of NetZero and Bill Gross, a director of NetZero, is also
a director and major stockholder of idealab! The termination of material
agreements, as well as the timing of orders under material agreements, may cause
significant fluctuations in our quarterly results. Our business, results of
operations and financial condition will be materially and adversely affected if
we are unable either to renew material agreements or to replace such agreements
with similar agreements with new customers.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of operating results may not necessarily be a good indication of future
performance.
YEAR 2000 COMPLIANCE.
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, various problems may arise from the
improper processing of dates and date-sensitive calculations by computers and
other machinery in Year 2000. 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. As a result, many companies' software and
computer systems may need to be upgraded or replaced to comply with these "Year
2000" requirements.
To date the Company has not experienced any material issues associated with
the Year 2000 problem. Formal assessment of the impact that the Year 2000
problem may have on existing operations has been completed.
19
<PAGE>
There have been no significant expenses either prior to, or subsequent to,
December 31, 1999 relating to this matter and to date there has been no impact
on results of operations or third party relationships.
RISK FACTORS
Before deciding to invest in our Company or to maintain or increase your
investment, you should carefully consider the risks described below, in addition
to the other information in this report and our other filings with the SEC. The
risks and uncertainties described below are not the only ones facing our
Company. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also affect our business operations. If any of
these risks actually occur, our business, financial condition or results of
operations could be seriously harmed. In that event, the market price of our
common 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 makes it difficult
to evaluate our performance. Our business model, unlike traditional Internet
service providers, does not have a measurable and predictable revenue stream
from user access fees. If we are not able to successfully address these risks,
we will not be able to grow our business, compete effectively or achieve
profitability.
OUR MARKET SHARE AND REVENUES WOULD SUFFER IF WE ARE NOT ABLE TO COMPETE
EFFECTIVELY FOR USERS WITH ESTABLISHED, AND NEW PROVIDERS OF, INTERNET ACCESS
SERVICES.
Competitors
Competitors for users is increasing. We currently compete or expect to
compete for users with the following types of companies that provide access
services:
- companies that provide free Internet access under their own brands, such
as Freei Networks, Inc. and Juno Online Services, Inc., as well as
companies such as 1stUp.com that provide free Internet access co-branded
with, or under the brands of, third parties.
- established online service and content providers, such as America Online
and The Microsoft Network;
- independent national Internet service providers, such as EarthLink, which
has recently merged with 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! and Alta Vista;
- retail companies such as K-Mart; and
- nonprofit or educational Internet service providers.
20
<PAGE>
We expect that competition for users will continue to intensify for the
foreseeable future. We believe that additional competitors for Internet users,
including major computer manufacturers, retail companies, and software, media
and telecommunications companies, will continue to enter the Internet access
market. 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. For example, Alta Vista and Excite, leading
portals and search engines now offer free Internet access solutions in
conjunction with 1stUp.com; K-Mart, SOFTBANK, Spinway and Yahoo, have invested
in, or entered into relationships with Bluelight.com to form a new free Internet
access provider; and both Microsoft and CompuServe have partnered with personal
computer makers and consumer electronics retailers to offer consumers rebates on
computer equipment when the consumer signs up for their Internet access
services. New entrants have announced Internet access models similar to ours,
and the implementation of similar models by new entrants or existing competitors
could limit the value of our consumer proposition. As awareness of the Internet
grows, existing competitors are likely to further increase their emphasis on
their Internet access services, resulting in even greater competition for us.
Increased competition could limit our growth, resulting in additional sales
and marketing expenses that add user acquisition cost, and result in increased
user turnover. Increased competition could also result in decreased advertising
revenue. Since we do not charge our users membership fees, we may not be able to
offset the effect of these increased costs, and we may not have the resources to
continue to compete successfully. The ability of our competitors to acquire
other Internet providers or to enter into strategic alliances or joint ventures
could also put us at a significant competitive disadvantage.
Telecommunications services.
In addition, telecommunications companies with far greater resources,
distribution channels and brand awareness offer, or have announced that they
will 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. 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.
Broadband providers.
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 generally 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. 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 offering broadband Internet access through the wire and cable
networks that they own. 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 their 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, state
or federal regulatory agencies will take any initiatives to
21
<PAGE>
implement this type of regulation, and whether they will be successful in
establishing their authority to do so.
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.
IF WE FAIL TO GROW OUR USER BASE, WE MAY NOT BE ABLE TO GENERATE REVENUES,
DECREASE PER-USER TELECOMMUNICATIONS COSTS OR IMPLEMENT OUR STRATEGY.
If we are unable to grow our user base, we may not be able to generate
revenues, decrease per-user telecommunications costs or implement our strategy.
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. However, we have
limited 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. 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.
There is no assurance that we will be able to successfully address these
issues and retain our existing user base.
OUR ADVERTISING REVENUES WILL SUFFER IF WE ARE UNABLE TO DEMONSTRATE THAT OUR
REGISTERED USERS ARE ACTIVELY USING OUR SERVICE.
If we are not able to demonstrate to our advertisers that our registered
users are actively using our service, advertisers may choose not to advertise
with us and our advertising revenues could be materially and adversely affected.
While approximately 4 million users had registered for our service as of
March 31, 2000, approximately 1.8 million had used our service during the month
of March. 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 FAIL TO GENERATE SUFFICIENT ADVERTISING REVENUES, WE MAY NOT BE ABLE TO
SUPPORT OUR OPERATIONS.
Since we do not charge our users any fees for our Internet access and e-mail
services, we depend primarily on our ability to generate advertising revenues.
Accordingly, if we fail to generate sufficient advertising revenues, we may not
be able to support our operations. We 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
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pricing, marketing or structuring these arrangements, or whether we will perform
under these arrangements to the satisfaction of the other parties. Our failure
to appropriately price, market or structure these arrangements could impact our
ability to enter into and perform under these arrangements, or to renew these
arrangements on similar or acceptable terms. In addition, the success of some of
these arrangements will depend on our ability to effectively target users based
on demographic and other 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. In light of
these factors, there can be no assurance that we will be able to attract
sufficient advertising revenues to support our operations.
In addition, competition for Internet-based advertising revenues is intense
and the amount of available standard banner advertising space on the Internet is
increasing at a significant rate. These factors are causing Internet advertising
rates to decline, and it is possible that rates will continue to decline in the
future. Also, our growth in users has resulted in, and in the future may result
in, our advertising inventory growing faster than our ability to sell the
inventory at reasonable rates.
Many of our advertising competitors have longer operating histories, greater
name recognition, larger user bases, significantly greater financial, technical,
sales and marketing resources and more established relationships with
advertisers than we do. These advantages may allow such competitors to respond
more quickly than we can to new or emerging technologies and changes in
advertiser requirements. They may also be able to devote greater resources than
we can to develop, promote and sell their products and services. Such
competitors may also engage in more extensive research and development,
undertake more far-reaching marketing campaigns, adopt more aggressive pricing
policies and make more attractive offers to existing and potential employees,
strategic partners, advertisers and Web publishers. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with 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 MAY NOT BE ABLE TO PROVIDE INTERNET ACCESS FOR OUR USERS IF OUR
TELECOMMUNICATIONS CARRIERS RAISE THEIR RATES 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 providers offer 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. Certain 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, in which event, we may not be able to provide
Internet access to our users.
WE MAY LOSE OUR USERS IF OUR TELECOMMUNICATIONS PROVIDERS DELIVER UNACCEPTABLE
SERVICE QUALITY.
If our third-party telecommunications service providers deliver unacceptable
service, the quality of our Internet access service would suffer. In this 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, there can be no assurance that we
will be able to provide consistently reliable Internet access for our users.
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IF TELECOMMUNICATIONS PRICES INCREASE, OUR MARGINS WOULD BE ADVERSELY IMPACTED.
Our margins are highly sensitive to variations in prices for the
telecommunications services we purchase. 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 on commercially reasonable terms, if at all. There
can be no assurance that our telecommunications providers will continue to
provide their services on commercially acceptable price terms, or that
alternative services will be available on similar terms.
OUR ABILITY TO SERVE ADVERTISEMENTS ON 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 to switch to another provider. As such, we are reliant on
NetGravity and its software. Our agreement with NetGravity expires in
June 2001; however we have an option to renew the agreement for an additional
two-year term upon initial expiration. If NetGravity's software fails to perform
as expected, or if we are not able to renew such agreement or license or
internally develop similar software in the future, we may not be able to
effectively display advertisements to our users. In this event, our ability to
generate advertising revenues would be severely limited. In October 1999,
NetGravity was acquired by Double Click, an Internet advertising provider. Since
our agreement with NetGravity does not expire until June 2001 and we have an
option to renew for an additional two-year term upon initial expiration, we do
not believe the acquisition 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.
We have a significant accumulated deficit. We expect that our losses and
negative cash flow will increase for the foreseeable future as we continue to
expand our operations. 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 the most recent
three months, we cannot be certain that we will be able to sustain these growth
rates or that we will obtain sufficient revenues to achieve profitability or
positive cash flow. If we do achieve profitability, we cannot be certain that we
can sustain or increase profitability on a quarterly or annual basis in the
future. If we fail to do so, the market price for our common stock could suffer.
OUR REVENUES WOULD SIGNIFICANTLY DECREASE IF WE LOSE KEY CUSTOMERS.
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 26% of our revenues for the three months ended March 31, 2000 from
an agreement with LookSmart. Our agreement with LookSmart was renewed in
February 2000 and will expire on February 15, 2001. In February 2000, we entered
into a strategic alliance with 24/7 Media. Pursuant to this alliance, 24/7 Media
will sell e-mail and banner advertising on behalf of NetZero. There can be no
assurance that such agreement will result in material revenues to us. The
termination of material agreements, as well as the timing of orders under
material agreements, may cause significant fluctuations in our quarterly
results. 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. Inaccessibility, 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 WILL NOT BE ABLE TO SUPPORT INCREASED NUMBERS OF USERS IF WE ARE UNABLE TO
ENHANCE OUR INTERNAL NETWORK INFRASTRUCTURE.
Our internal network infrastructure is composed of a complex system of
application, database, advertisement 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.
IF WE FAIL TO MANAGE OUR TELECOMMUNICATIONS CAPACITY, OUR SERVICE LEVELS MAY
SUFFER OR WE MAY EXPERIENCE INCREASED PER-USER COSTS.
We will have to accurately anticipate our future telecommunications capacity
needs within lead-time requirements. If we fail to procure sufficient quantities
of telecommunications products and services, we may be unable to provide our
current and future users with acceptable service levels. We also run the risk of
purchasing excessive amounts of telecommunications products and services based
on incorrect projections regarding increased usage. In that event, we would be
required to bear the costs of excess telecommunications capacity without
commensurate increases in revenues. There can be no assurance 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.
WE MAY NOT BE ABLE TO GROW OUR USER BASE IF WE ARE UNSUCCESSFUL IN ESTABLISHING
AND MAINTAINING THE NETZERO BRAND.
If we are unsuccessful in establishing or maintaining the NetZero brand, we
may not be able to grow our user base. We believe that establishing and
maintaining the NetZero brand is critical to retain and expand our user base.
Promotion of the NetZero brand will depend on our success in providing
high-quality Internet products and services. However, such success will depend,
in part, on the services, products and efforts of third parties, over which we
have little or no control. For instance, if our third party telecommunications
service providers fail to provide quality service, our users' ability to access
the Internet may be interrupted, which may adversely affect the NetZero brand.
If our users and advertisers do not perceive our existing products and services
as high quality, or if we introduce new products or services or enter into new
business ventures that are not favorably received by our users and advertisers,
then we may be unsuccessful in building brand recognition and brand loyalty in
the marketplace. In addition, 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 incur
excessive expenses in promoting and maintaining our brand, our financial results
could be seriously harmed.
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WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IF WE ARE NOT ABLE TO RESPOND TO
CHANGING INDUSTRY STANDARDS.
We may not be able to compete effectively 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. 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. There can be no
assurance 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.
WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCT OR SERVICE OFFERINGS IF WE ARE UNABLE
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 these 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.
CONSUMERS MAY DECIDE NOT TO USE OUR SERVICE IF OUR TECHNOLOGY AND SERVICES
BECOME OBSOLETE.
Others may develop services or technologies that render our services or
technology noncompetitive or obsolete. For instance, a number of companies are
offering broadband and other high speed Internet access services, which allow
users to access the Internet at much faster speeds than the access services we
currently provide. Our ability to remain technologically competitive may require
substantial expenditures and lead time.
WE MAY NOT SUCCESSFULLY DEVELOP AND MARKET NEW PRODUCTS IN A TIMELY MANNER.
We may expend significant resources developing and implementing new
products. Product development involves a number of uncertainties, including
unanticipated delays and expenses. New products may have technological problems
or may not be accepted by our users or advertisers. There is no assurance that
new products will be introduced in a timely manner or result in user
satisfaction or increased revenues. If we are unable to respond in a timely
manner to technological advances, we may not be able to compete effectively for
users, which could cause our revenues to decrease.
IF OUR SOFTWARE OR HARDWARE CONTAIN ERRORS, OUR BUSINESS COULD BE SERIOUSLY
HARMED.
The software and hardware used to operate and provide our services is
complex and, accordingly, may contain undetected errors or failures. We have in
the past, and may in the future, encounter errors in the software 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.
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We have experienced some technical and customer support issues associated
with our products and software releases and we cannot assure you that we will
not experience additional problems in the future.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IF WE ARE NOT ABLE TO PROTECT OUR
PROPRIETARY RIGHTS.
If we are not able to protect our proprietary rights, we may not be able to
compete effectively. 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. 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 our brand name.
WE MAY INCUR SUBSTANTIAL COSTS AND DIVERSION OF MANAGEMENT RESOURCES IF WE
INFRINGE UPON THE PROPRIETARY RIGHTS OF OTHERS.
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.
OUR SERVICE COULD BE DISRUPTED BY A SECURITY BREACH, VIRUS OR INAPPROPRIATE USE
BY INTERNET USERS.
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. There can be no assurance that we would
prevail in such claims and our failure to do so could result in large judgments
against us. 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
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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 temporarily cease service
to our users, which could have a material adverse effect on our revenues and
could also result in increased user turnover.
OUR REVENUES COULD BE ADVERSELY AFFECTED IF PROGRAMS TO DISABLE THE ZEROPORT
BECOME PREVALENT.
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, there can be no assurance 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.
WE MAY NOT BE ABLE TO EXPAND OUR OPERATIONS IF WE ARE NOT ABLE TO OBTAIN
ADDITIONAL EQUIPMENT FROM THIRD-PARTY HARDWARE SUPPLIERS.
The expansion of our network infrastructure and Internet services in general
is placing, and will continue to place, a significant demand on our suppliers.
From time to time, we have experienced delayed delivery from suppliers of
modems, servers, and other equipment. 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 equipment in a timely manner and on commercially
acceptable terms. In particular, our servers are a critical part of our
infrastructure and we will need additional servers to expand our operations. We
currently purchase, and expect to continue to purchase, all of our servers from
Sun Microsystems. Since we do not have an agreement with Sun Microsystems
regarding future server purchases, we have no assurance that Sun Microsystems
will continue to supply servers to us on commercially acceptable terms, if at
all.
WE MAY EXPERIENCE LOSS OF DATA, DISRUPTION OF OPERATIONS, OR ERRONEOUS
OVERCHARGES OR UNDERCHARGES TO ADVERTISING CUSTOMERS IF THE ORACLE SOFTWARE WE
USE TO RUN OUR OPERATIONS FAILS TO OPERATE CORRECTLY.
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.
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OUR ABILITY TO OPERATE OUR BUSINESS COULD BE SERIOUSLY HARMED IF WE LOSE, OR
FAIL TO ASSIMILATE, MEMBERS OF OUR SENIOR MANAGEMENT TEAM AND OTHER KEY
EMPLOYEES.
Most of our senior management team has only recently joined us. For example,
Mark Goldston, our Chief Executive Officer, joined us in March 1999, Charles
Hilliard, our Chief Financial Officer, joined us in April 1999, and Perri
Procida, our Senior Vice President, Sales, joined us in May 1999. There can be
no assurance that we will successfully assimilate our recently hired officers or
that we can successfully locate, hire, assimilate and retain qualified key
management personnel. Our business is largely dependent on the personal efforts
and abilities of our senior management and other key personnel. Any of our
officers or employees can terminate his or her employment relationship at any
time. The loss of these key employees or our inability to attract or retain
other qualified employees could seriously harm our business and prospects. We do
not carry key man life insurance on any of our employees.
WE WILL NOT BE ABLE TO GROW OUR BUSINESS IF WE ARE NOT ABLE TO HIRE ADDITIONAL
PERSONNEL.
Our future success also depends on our ability to attract, retain and
motivate highly skilled technical, managerial, editorial, merchandising, sales,
marketing and user service personnel. We plan to 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. If we fail to retain and attract the necessary
personnel, we may not be able to operate and grow our business.
OUR BUSINESS COULD BE SHUT DOWN OR SEVERELY IMPACTED IF A NATURAL DISASTER
OCCURS.
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 facilities in Los Angeles
and San Jose, California. Despite precautions taken by us and our third-party
network providers, over which we have no control, a natural disaster or other
unanticipated problems at our headquarters or at a network hub, or within a
third-party network provider's network, could cause interruptions in the
services that we provide. For example, if an earthquake damages equipment at our
network operations center, we may have no means of replacing this equipment on a
timely basis or at all and our service would be shut down. We do not currently
maintain fully redundant or back-up Internet services, backbone facilities or
other fully redundant computing and telecommunications facilities. Furthermore,
we do not currently have any business disruption insurance. Any prolonged
disruption of our services due to system failure could result in user turnover
and decreased revenues.
IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE FUTURE ACQUISITIONS INTO OUR
OPERATIONS, THEN OUR RESULTS AND FINANCIAL CONDITION MAY BE ADVERSELY
AFFECTED.
We have made, and may continue to make acquisitions or undertake other
business combinations 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:
- disruption of our ongoing business and diversion of resources and
management time;
- unforeseen obligations or liabilities;
- difficulty assimilating the acquired operations and personnel;
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- 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.
There can be no assurance that we will make any further acquisitions or that
we will be able to obtain additional financing for such acquisitions, if
necessary. If any acquisitions are made, there can be no assurance that we will
be able to successfully integrate the acquired business into our operations or
that the acquired business will perform as expected.
WE FACE RISKS RELATED TO THE INTERNET INDUSTRY
WE COULD BE EXPOSED TO SIGNIFICANT LEGAL LIABILITY IF NEW CASE LAW IS DECIDED,
OR NEW GOVERNMENT REGULATION IS ENACTED, REGARDING THE INTERNET AND INTERNET
SERVICE PROVIDERS.
The law relating to our business and operations is evolving and no clear
legal precedents have been established. The adoption of new laws or the
application of existing laws may decrease the growth in the use of the Internet,
affect telecommunications costs or increase the likelihood or scope of
competition from regional telephone companies. These results could decrease the
demand for our services or increase our cost of doing business, each of which
would cause our gross margins and revenues to fall. In particular, the following
risks could occur:
REGULATION OF CONTENT AND ACCESS COULD LIMIT OUR ABILITY TO GENERATE REVENUES
AND EXPOSE US TO LIABILITY.
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. A variety of
restrictions on content and access, primarily as they relate to children, have
been enacted or proposed, including laws which would require Internet service
providers to supply, at cost, filtering technologies to limit or block the
ability of minors to access unsuitable materials on the Internet. Because of
these content restrictions and potential liability to us for materials carried
on or disseminated through our systems, we may be required to implement measures
to reduce our exposure to liability. These measures may require the expenditure
of substantial resources or the discontinuation of our product or service
offerings that subject us to this liability. Further, we could incur substantial
costs in defending against any of these claims and we may be required to pay
large judgments or settlements or alter our business practices. In addition, our
liability insurance may not cover potential claims relating to the Internet
services we provide or may not be adequate to indemnify us for all liabilities
that may be imposed on us.
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 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 Millennium Copyright Act of 1998, there can be no
guarantee that we will prevail in any such claims. We also could be exposed to
liability because of third-party content that may be accessible through our
services, including links to Web sites maintained by our users or other third
parties, or posted directly to our Web site, and subsequently retrieved by a
third party through our services. It is also possible that if any third-party
content provided through our services contains errors, third parties who access
such material could make claims against us for losses incurred in reliance on
such information. These types of claims have been successfully brought against
other online
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service providers. In particular, copyright and trademark laws are evolving 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.
OUR ABILITY TO SELL TARGETED ADVERTISING MAY BE LIMITED IF NEW LAWS RELATING TO
USER PRIVACY ARE ENACTED.
Our ability to sell targeted advertising partly depends on our ability to
use personal information collected from our users. 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. 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 including the sale of targeted advertising.
OUR MARGINS AND COSTS WOULD BE ADVERSELY AFFECTED IF OUR BUSINESS BECOMES
SUBJECT TO TAXATION.
The tax treatment of activities on or relating to the Internet 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
Freedom 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 Internet commerce and, as a result,
negatively impact our margins or make it cost-prohibitive to operate our
business.
TELECOMMUNICATIONS REGULATION COULD MAKE IT MORE EXPENSIVE FOR US TO 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. Nevertheless, Internet-related
regulatory policies are continuing to develop, and it is possible that we could
be exposed to regulation in the future. We could be adversely affected if any
regulatory change results in the application of access charges to Internet
service providers because this would substantially increase the cost of using
the Internet. Since one of the largest components of our operating costs is
telecommunications expense, any increase in such costs would have a material
adverse effect on our cost of revenues and gross margins. 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.
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, 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.
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IF INTERNET USAGE DOES NOT CONTINUE TO GROW, WE MAY NOT BE ABLE TO GROW OUR
BUSINESS AND INCREASE OUR REVENUES.
If our assumption that use of the Internet will continue to grow turns out
to be incorrect, we will not be able to grow our business and increase our
revenues. 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 cause our user base and our
advertising revenues to decrease.
OUR BRAND AND BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE NOT 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. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NetZero currently does not hold any derivative instruments and does not
engage in hedging activities. Also, NetZero is not currently party to any
transactions denominated in a foreign currency. Thus, NetZero's exposure to
interest rate and foreign exchange fluctuations is minimal.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(D) USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES. On September 29,
1999, NetZero completed an initial public offering of its common stock, $.001
par value. The shares of common stock sold in this offering were registered
under the Securities Act of 1933, as amended, on a Registration Statement on
Form S-1 (Reg. No. 333-82827) that was declared effective by the SEC on
September 23, 1999. The offering commenced on September 24, 1999. All
11.5 million shares of common stock registered under the Registration Statement
(including 1.5 million shares sold pursuant to the exercise of the underwriters'
over-allotment option) were sold at a price of $16 per share. The aggregate
price of the offering amount registered was $184 million.
In connection with the initial public offering, NetZero paid an aggregate of
$12.9 million in underwriting discounts and commissions to the underwriters and
paid other expenses in the amount of approximately $1.8 million. After deducting
the underwriting discounts and commissions and the estimated offering expenses,
NetZero received net proceeds from the offering of approximately
$169.3 million. As of March 31, 2000, NetZero had used approximately
$51 million of the net proceeds from the offering to fund its operating losses,
its working capital requirements and capital expenditures. The balance of the
proceeds will be used for general corporate purposes including additions and
enhancements to the Company's server and network infrastructure, working
capital, expansion of its sales and marketing capabilities and brand-name
promotions. NetZero may also use a portion of its proceeds for acquisitions of
complementary businesses, services or technology. Pending these uses, the net
proceeds of the offering will be invested in short-term, interest-bearing,
investment-grade instruments. None of the net proceeds from the offering were
paid directly or indirectly to any director, officer, general partner of NetZero
or their associates, persons owning 10% or more of any class of equity
securities of NetZero, or an affiliate of NetZero.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amended and Restated Start Page Agreement dated as of February 1, 2000 by
and between NetZero and LookSmart, Ltd.
10.2 The ZeroPort Advertising Agreement dated as of February 5, 2000 by and
between NetZero and idealab!, Inc.
10.3 Employment Agreement dated as of December 1, 1999, by and between NetZero
and Brian Woods.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On February 14, 2000, NetZero filed a report on Form 8-K/A to report the
financial statements of AimTV, Inc. and selected pro forma financial information
in connection with NetZero's acquisition of AimTV, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETZERO, INC.
(REGISTRANT)
By: /s/ CHARLES S. HILLIARD
--------------------------------------------------------------------
Charles S. Hilliard
SENIOR VICE PRESIDENT, FINANCE
AND CHIEF FINANCIAL OFFICER
Dated: May 15, 2000
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Exhibit 10.1
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN REDACTED PROVISIONS OF
THIS AGREEMENT. THE REDACTED PROVISIONS ARE IDENTIFIED BY THREE ASTERISKS AND
ENCLOSED BY BRACKETS. THE CONFIDENTIAL PORTIONS HAVE BEEN FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
AMENDED AND RESTATED START PAGE AGREEMENT
This Amended and Restated Start Page Agreement (the "Agreement"),
effective as of the 1st day of February 2000 (the "Effective Date"), is made by
and between LookSmart, Ltd., a Delaware corporation with a principal place of
business at 625 Second Street, San Francisco, CA 94107 ("LOOKSMART"), and
NetZero, Inc., a Delaware corporation with a principal place of business at 2555
Townsgate Road, Westlake Village, CA 91361 ("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 ZeroPort") 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; and
WHEREAS the parties are currently party to that certain Start Page
Agreement between the parties dated April 30, 1999, as amended by that certain
Amendment No. 1 to Start Page Agreement between the parties dated September 1,
1999 (as amended, the "Existing Agreement"); and
WHEREAS, the parties desire to replace the Existing Agreement in its
entirety with this Agreement.
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 have jointly designed and created 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 continues to be made available to NetZero's ISP subscribers for
the term of the Agreement. The Co-branded Site (other than the Co-Branded Start
Page) shall be in substantially the form in effect as of the Effective Date.
i. LookSmart shall, at no cost to NetZero, continue
to host the appropriate portions of the Co-branded Site so that they
include or link to appropriate
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branding material of both parties, including co-branded versions of the
LookSmart Services (the "CO-BRANDED SERVICES") and a co-branded version
of 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.
b. The parties shall develop a new Co-branded Start Page which
shall replace the existing Co-Branded Start Page. The new Co-Branded Start Page,
which shall be launched when mutually agreed to by the parties but in no event
later than February 16, 2000 unless delayed beyond such date by NetZero, shall
be created, designed and developed pursuant to the following provisions:
i. The Co-branded Start Page will include a LookSmart
general interest, multi-category and keyword search function similar to
that set forth on Exhibit A ("LookSmart Search") and may include any of
the following: (a) LookSmart directory of sites and all updates to such
directory, (b) LookSmart key word search capabilities, (c) Inktomi
search capabilities, and (d) subject to 1(c), links to other LookSmart
services and products. LookSmart will be allocated a space above the
fold (when viewed with a maximized browser on an 800x600 pixel
resolution screen) on the Co-Branded Start Page equal in size and
parameters and location to that set forth in the illustration attached
hereto as Exhibit A (the "LookSmart Space") in which LookSmart will
offer LookSmart Search and advertising. The content, design, format and
all other aspects of the remainder of the Co-Branded Start Page (the
"NetZero Space") shall be determined by NetZero. NetZero currently
anticipates that the NetZero Space will be a "mosaic" of a variety of
third party sponsors and advertisements which will include content and
links to third party sites, although NetZero may change the composition
or content of the NetZero Space at its discretion subject to Section
1(b)(ii). LookSmart and NetZero shall coordinate to minimize conflicts
between advertisers in the LookSmart Space and advertisers in the
NetZero Space.
ii. NetZero shall be entitled to offer advertising,
sponsorships, content, buttons, links or other products or services of
its own choosing on the NetZero Space; provided, however, that NetZero
shall not provide placement in the NetZero Space for general purpose,
multi-category and keyword search services or direct advertising for
services that compete directly with LookSmart Search ("Competitive
Services"). Competitive Services shall exclude NetZero's existing deal
with RealNames and any renewals, amendments or modifications thereof.
For clarification, Competitive Services shall not include a search
service (i) that focuses primarily on a specialized category of
interest (E.G. health, automobiles, or particular industries), (ii)
whose primary business is focused on local geographic areas, or (iii)
that provides specialized ecommerce functionality, such as shopping
agents, auction robots and other comparative functions, as a primary
part of such search service.
iii. Subject to the foregoing, LookSmart shall have
final approval of the LookSmart Space design.
c. ADVERTISING. LookSmart will be responsible for all
advertising related activities on all of the pages on the Co-branded Site
(except for the NetZero Space) and for all
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advertising related activities on the Co-branded Services. In no event shall
LookSmart display advertising on the Co-branded Site, including the LookSmart
Space, or Co-branded Services for any internet access services (free or 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,
at no cost to NetZero, all of the Co-branded Services, the Co-branded Start Page
and those portions of the Co-branded Site for which LookSmart is responsible for
selling advertising. During the Term, NetZero may elect to maintain, operate,
host and serve the Co-Branded Start Page, PROVIDED, that the Co-branded Start
Page will be accessed via an URL substantially similar to
"www.looksmart.netzero.net", or use URL masking, that will allow LookSmart to
count the "reach" of the Co-branded Start Page. So long as LookSmart is hosting
the Co-branded Start Page as described hereunder, the URL of the Co-branded
Start Page shall continue to be substantially similar to
"http://netzero.looksmart.net".
e. OTHER SEARCH SERVICES. LookSmart shall provide the keyword
search functionality of LookSmart Search services in the Search Interface and
ClubZero Search (as such terms are defined in Section 1(f)).
f. OBLIGATIONS OF NETZERO. Except as provided 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 Interface (as defined below).
ii. The ZeroPort will not contain (a) a search button
which displays or links to Competitive Services or (b) a start button
which displays or links to a start page with Competitive Services.
iii. NetZero shall provide a start button and search
button on The ZeroPort which link to the Co-Branded Start Page and the
Search Interface (as defined below), respectively. The configuration of
such buttons shall initially be substantially similar to that as
currently set forth on The ZeroPort, although such configuration may be
changed from time to time with the mutual consent of the parties, which
consent will not be unreasonably withheld. LookSmart acknowledges that
the configuration will change when NetZero releases a dockable version
of The ZeroPort, PROVIDED, that the implementation of the LookSmart
Space will remain the same.
iv. NetZero shall develop a search interface that
drops down from The ZeroPort when a user clicks on the search button,
and LookSmart shall provide the keyword search functionality and
LookSmart category links of LookSmart Search in such search interface
(the "Search Interface"). Subject to the space constraints of the
Search
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Interface as developed by NetZero, LookSmart may include in the Search
Interface the same elements included in the Co-branded Start Page.
v. NetZero has launched a new service named MyZStart
and ClubZero (collectively, "ClubZero"), comprised of personalized and
topical pages. NetZero will place a search box on the ClubZero
homepage, and LookSmart shall provide keyword search functionality of
LookSmart Search services through such search box ("ClubZero Search").
In addition, NetZero shall place LookSmart category links on relevant
ClubZero pages as mutually agreed upon by both parties ("ClubZero
Links"). The homepage of ClubZero shall not contain a search box or
interface which defaults to Competitive Services.
g. EXCEPTIONS. Notwithstanding anything to the contrary
herein, NetZero shall have the right to replace the Co-Branded Start Page with a
start page that does not include the LookSmart Space or LookSmart Search for up
to 10% of the logons to the NetZero ISP Service as determined on a monthly
basis, PROVIDED, that such start page shall not contain placement for
Competitive Services.
h. This Agreement shall not apply in any respect to NetZero's
versions of The ZeroPort, the NetZero ISP Service, ClubZero or start page (the
"NetZero Products") designed primarily for non-English speaking consumers,
consumers in countries outside of the United States of America or consumers with
specific ethnic origins. As such, none of the restrictions with respect to
NetZero or its services shall apply to the foregoing nor shall NetZero be
entitled to utilize the Co-branded Start Page under this Agreement for such
purposes.
i. This Agreement shall apply to custom, private label and
co-branded versions of the NetZero Products (collectively, "Custom Products")
and NetZero and LookSmart shall abide by their obligations hereunder with
respect to such Custom Products. Notwithstanding the foregoing; NetZero shall
not be required to use the Co-Branded Start Page or provide LookSmart with any
of the other benefits specified in this Agreement with respect to a Custom
Product if (i) a third party with which NetZero is creating a Custom Product has
a relationship with a provider of Competitive Services, (ii) the Custom Product
does not incorporate Competitive Services or (iii) NetZero has another
reasonable bona fide business reason for not incorporating the LookSmart Search
services. Additionally, if NetZero reasonably believes that a transaction
involving a specific Custom Product will result in an increase in Referrals
during the 120 days following the transaction by more than fifteen percent (15%)
over the level of Referrals during the 120 days immediately preceding such
transaction (a "Large Transaction") if the Co-branded Start Page is used with
the Large Transaction, LookSmart shall be provided a right of first refusal to
participate in the Large Transaction under the terms of this Agreement and shall
be given notice of the Large Transaction. Such notice shall include the
following information with respect to the applicable Large Transaction: identity
of the third party, the proposed distribution of CD-ROM's containing NetZero's
client access software and placement of hyperlinks to NetZero download pages, a
general description of the marketing plan, and NetZero's good faith estimate of
the increase in the level or Referrals during the 120 day period following the
transaction. During the 15 day period following such notice, LookSmart may elect
to participate in the Large Transaction under the terms and conditions specified
in this Agreement. Such election must be made within such 15 day period, and
once made, shall be
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binding on LookSmart. If LookSmart does not make such election, the applicable
Customized Product associated with the Large Transaction shall not be subject to
this Agreement. Within fifteen (15) days after the six month anniversary of the
Effective Date, NetZero shall provide to LookSmart written notice setting forth
the ratio of the number of Referrals attributable to Custom Products to the
number of all Referrals during the 120 days immediately preceding the six month
anniversary (the "Ratio"). If the Ratio is greater than one third (1/3), then
within fifteen (15) days after receipt of such notice, LookSmart may elect to
not be the default start page for any Custom Product for which NetZero executes
an agreement after such fifteen (15) day period. If LookSmart makes such
election, all such future Custom Products shall not be subject to this
Agreement.
j. NetZero acknowledges that LookSmart may, subject to the
terms of this Agreement, modify the Co-branded Site, including the design within
the LookSmart Space and excluding the NetZero Space, 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 changes to the
LookSmart Space 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 LookSmart Space which are to be implemented
without NetZero's consent.
k. 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, any ISP locator. LookSmart will place hyperlinks to a NetZero
download page or sign up page as such download page or signup page may be
designated by NetZero, on the homepages of LookSmart.com, and BeSeen and
InsideTheWeb Such links will be above the fold (when viewed with a maximized
browser on an 800x600 pixel resolution screen) at least 50% of the time.
LookSmart will provide such links free of advertising fees or any other charge
to NetZero
2. PAYMENTS.
a. LookSmart agrees to pay NetZero by wire transfer on April
1, 2000 the sum of $[***]. On or about January 1, 2000, LookSmart paid
NetZero the sum of $[***] pursuant to the Existing Agreement. Such amounts
shall be a prepayment against payments to be made under the Existing Agreement
prior to the Effective Date and against payments to be made under this Agreement
after the Effective Date. If this Agreement is terminated for any reason other
than for breach by LookSmart before such prepayment amounts are earned by
NetZero hereunder, NetZero shall promptly return to LookSmart any unearned
amounts.
b. LookSmart shall pay to NetZero [***] per 1000 Referrals as
set forth in the Existing Agreement until February 16, 2000, after which time
LookSmart shall pay to NetZero [***] per 1,000 Referrals (collectively, "CPM
REVENUES"). Within twenty (20) days of the end of each month, LookSmart shall
provide NetZero with information (as described in Section 3 below) regarding the
Referrals and CPM Revenues generated by NetZero during the
- --------
*** Confidential treatment has been requested for the bracketed portions. The
confidential redacted portions have been omitted and filed separately with the
Securities and Exchange Commission.
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preceding month and the payment for such CPM Revenues (unless amounts due are
covered by prepayment). Delinquent payments shall accrue interest at an
annualized rate of 10%. For the purposes of this Agreement, a "REFERRAL" shall
mean any instance that (i) the Co-branded Start Page is displayed to a NetZero
ISP Service subscriber upon such subscriber's login to the NetZero ISP Service,
(ii) the Co-branded Start Page is displayed to a NetZero ISP Service subscriber
after such subscriber clicks through the start button in The ZeroPort so long as
such subscriber is not on a page within the Co-branded Site when
clicking-through to the Co-branded Start Page, or (iii) a NetZero ISP Service
subscriber clicks through the search button in The ZeroPort and a search request
is entered into the Search Interface, so long as such subscriber is not on a
page within the Co-branded Site when clicking-through to the Search Interface,
(iv) a NetZero ISP Service subscriber uses ClubZero Search, or (v) a NetZero ISP
Service subscriber clicks through a ClubZero Link.
3. REPORTING; AUDITING. LookSmart shall provide NetZero with
monthly reports regarding the Referrals delivered, along with a statement of CPM
Revenues relating to such Referrals. NetZero shall have the right, at its
expense, to audit LookSmart's books and records for the sole purpose of
verifying the number of Referrals previously reported. Such audits will be made
not more than twice per year, on not less than ten (10) days written notice,
during regular business hours, by auditors reasonably acceptable to LookSmart.
If the auditor's figures reflect a number different than those reported by
LookSmart, the party benefited by the error shall immediately pay the other
party the difference in CPM Revenues arising from such error. Information
revealed to the auditors shall be kept confidential by such auditors, and such
auditors will sign customary confidentiality agreements if requested by
LookSmart.
4. CO-MARKETING EFFORTS; TESTING.
a. 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.
b. NetZero agrees to use its commercially reasonable efforts
as follows. NetZero has the ability to identify URLs being visited by its
subscribers and LookSmart has the ability to classify URLs into categories and
sell and serve advertising targeted by those categories. LookSmart and NetZero
agree to test the performance of URL targeted banners in The ZeroPort. This test
will begin within 30 days after the execution of this Agreement, and both
parties agree to use commercially reasonable efforts, including the dedication
of any required technical resources, to complete the test within 30 days after
the commencement of such testing. LookSmart and NetZero will mutually agree upon
a list of URLs, not to exceed 500 URLs, which comprise a subset of the LookSmart
directory. During the test period, whenever a NetZero user views a page residing
at or below the agreed upon URLs, NetZero will request a targeted ad from
LookSmart's adserver to be served in The ZeroPort. The parties will together
review the click-through performance of advertisements served in this manner to
evaluate the potential value of selling this inventory in this fashion. The test
will utilize as many impressions as the two companies jointly agree to, but no
less than (1) million ad impressions. NetZero anticipates that within eight to
twelve weeks following the date of this Agreement that it will begin
implementing additional technology that may allow NetZero to target a larger
number of URLs, PROVIDED, that NetZero provides no assurances that it will
successfully implement any such technology within any particular time frame or
at all. If NetZero does implement such
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technology, the parties shall work together in good faith to mutually agree upon
the parameters of additional testing similar to the testing set forth above,
PROVIDED, that the number of URLs shall be mutually agreed to but shall not
exceed an aggregate of 25,000 and the number of ad impressions delivered by
NetZero will be mutually agreed to but shall not be less than an aggregate of
four (4) million. The parties agree to commence the testing within a reasonable
time after the new technology is implemented. NetZero does not warrant the
results of the testing. With respect to all of the testing set forth above,
LookSmart will provide the advertising creative. In the event LookSmart receives
compensation for the advertising delivered in the tests, such net compensation
shall be shared 50/50 with NetZero. LookSmart acknowledges that the testing
(including the creative) must not conflict with NetZero's obligations to third
parties such as category exclusivity or previously sold keywords or URLs.
c. The purpose of the testing set forth in this Section 4 is
to gather information to assess the technical and business feasibility of the
parties entering into a relationship which is entirely separate from the
relationship set forth in this Agreement. A separate relationship could involve
LookSmart selling NetZero's inventory or the license of technology and data by
LookSmart to NetZero. However, neither party is obligated to enter into such a
relationship and the failure to enter into such a relationship shall in no way
affect the parties' obligations under this Agreement. If the parties do enter
into such relationship, the parties understand that the payment amount for
Referrals hereunder may be increased, although there is no assurance that such
payments will be increased.
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, the LookSmart directory and
editorial database, LookSmart Services and all aspects of the Co-branded Site
(except the NetZero Space), LookSmart Search 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. NetZero shall not have the right to resell,
sublicense, re-transmit or otherwise distribute all or any part of the LookSmart
directory and editorial database except as set forth herein. 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
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Software (including without limitation The ZeroPort), any NetZero trademarks and
all aspects of the NetZero Space and ClubZero, 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") starting on
the Effective Date through February 15, 2001 unless terminated earlier in
accordance with Section 14.
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
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this Agreement, (ii) is the sole owner or is a valid licensee of the
NetZero Software and The ZeroPort, 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 ZeroPort.
ii. LookSmart (i) has the full and exclusive right to
grant or otherwise permit NetZero to access the Co-branded Site
(including the LookSmart Space and excluding the NetZero Space) 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, CLUBZERO, 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,
shareholders, employees, accountants, attorneys, agents,
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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 ZeroPort, 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 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 services
offered by LookSmart on the Co-branded Site, the Search Interface or ClubZero
Search (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
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,
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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 develop a significant
publicity campaign, including joint press releases, and shall work together in
good faith 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 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 services to any other
start page or search services of its choice until LookSmart has cured such
delinquency.
b. EFFECT OF TERMINATION. Upon such termination (including
termination pursuant to Section 7), (i) LookSmart shall remove the Co-branded
Site and (ii) each party shall
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promptly deliver to the other party all originals and copies of any of the other
party's content or material provided by the other party hereunder. Each party
shall ensure that such materials have been erased from all computer memories and
storage devices within its possession or control.
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.
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.
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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.
625 Second Street
San Francisco, CA 94107
Attention: SVP, Business Development
With a copy to: Senior Counsel at the same address
If to NetZero: NetZero, Inc.
2555 Townsgate Road
Westlake Village, CA 91362
Attention: President; General Counsel
With a copy to: Brobeck, Phleger & Harrison LLP
38 Technology Drive
Irvine, California 92618
Facsimile: (949) 790-6301
Attention: Kevin D. 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
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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.
Executed as of the date first written above.
NetZero, Inc. LookSmart, Ltd.
By: /s/ Frederic A. Randall, Jr. By: /s/ C. Tucker
--------------------------------- --------------------------------
Name: Frederic A. Randall, Jr. Name: Christopher Tucker
------------------------------- ------------------------------
Title: SVP & General Counsel Title: Sr. VP Business Development
------------------------------ -----------------------------
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EXHIBIT 10.2
THE ZEROPORT ADVERTISING AGREEMENT
This Advertising Agreement ("Agreement") is effective as of February 5, 2000
(the "Effective Date"), and is by and between NETZERO, INC., a Delaware
corporation with its principal place of business located at 2555 Townsgate Road,
Westlake Village, CA 91361 ("NetZero") and IDEALAB!, INC., a ___________________
corporation with its principal place of business located at 130 West Union
Street, Pasadena, CA 91103 ("Buyer").
1. PURPOSE. NetZero provides free dial-up Internet access services (the "NetZero
Service") to its subscribers ("Subscribers"). Buyer offers capital and resources
to infuse startup companies with the development strategies and financial
support needed to rapidly introduce innovative products and services (the "Buyer
Services"). In conjunction with the NetZero Service, a persistent window ("The
ZeroPort") is displayed to Subscribers while connected to the NetZero Service.
2. BUYER'S DELIVERY OBLIGATIONS. Buyer shall provide advertising creative and
related materials to NetZero within two (2) business days from the Effective
Date of this Agreement.
3. IMPRESSION DELIVERY. NetZero shall deliver a total of Two Billion
(2,000,000,000) run of site banner advertising impressions for Buyer Services
and the companies related to Buyer Services ("Impressions") during the Term of
the Agreement at a net CPM of $1.50. In no event shall the number of Impressions
delivered during any single calendar month exceed 20% of NetZero's total banner
inventory delivered for such month. NetZero shall use commercially reasonable
efforts to display no more than six ads for a particular company of Buyer during
a single Subscriber session. For clarification, NetZero may display up to six
ads for each of several companies of Buyer during such Subscriber session.
4. DATA. NetZero shall provide to Buyer a list the 1,000,000 URL's with the most
visits by Subscribers during each calendar month during the Term (or all URL's
if less than 1,000,000 URL's have at least one visit during such month). Such
list shall be provided in CD-ROM format within seven (7) days after the end of
the applicable month. Additionally, NetZero shall provide to Buyer the
Subscriber tracking data (which shall not include Subscriber usernames, email
addresses or any personally identifiable information) collected by NetZero for
the twenty-four (24) hour periods as follows: the first period to be on or about
seven days after the Effective Date, and subsequent periods on or about the
seventh day of each month during the Term. Such data shall be unformatted and
provided electronically or on other media to be mutually agreed upon by the
parties. All information provided under this Section shall be considered NetZero
Confidential Information, PROVIDED, that Buyer shall have the right to use such
data for Buyer's internal business purposes.
5. PAYMENT. In consideration of the Impressions and the data provided hereunder,
Buyer shall pay NetZero a total of Three Million Dollars ($3,000,000).
6. TERM. The term of this Agreement (the "Term") will begin on the Effective
Date and will continue until July 15, 2000 or such earlier date on which NetZero
has delivered the Impressions hereunder and has provided Buyer with the
applicable data set forth in Section 4.
7. This Agreement, together with the Terms and Conditions attached hereto and
incorporated herein by this reference and that certain Standard Advertising
Insertion Rider by and between the parties dated December 3, 1999 ("Rider")
incorporated herein by this reference, contains the entire understanding of the
parties hereto with respect to the transactions and matters contemplated herein
and supersedes all previous agreements, communications and understandings and
course of dealing between Buyer and NetZero concerning the subject matter
hereof.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives.
NETZERO, INC. IDEALAB!, INC.
By: /s/ CHARLES S. HILLARD By: /s/ MARCIA GOODSTEIN
Name: Charles S. Hilliard Name: Marcia Goodstein
Title: SVP & CFO Title: Chief Operating Officer
Date: 2/9/00 Date: 2/9/00
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TERMS AND CONDITIONS
1. PAYMENT. NetZero shall provide to Buyer on a monthly basis within fifteen
(15) days following the last day of the month a report indicating the number of
Impressions delivered during such month and the applicable amounts due. Buyer
shall make the applicable payment within thirty (30) days after receipt of such
report. All payments shall be made in U.S. dollars. Buyer shall pay, and
indemnify and hold NetZero harmless against, all sales, use, excise, value-added
or similar tax, fee or duty not based on NetZero's net income, including any
penalties and interest, as well as any costs associated with the collection or
withholding thereof, levied on any of the activities conducted or payments made
by Buyer hereunder.
2. REPORTING AND AUDIT RIGHTS. NetZero shall track, by independently verifiable
means, the Impressions delivered during the Term. NetZero shall provide Buyer
with a monthly written report within ten (10) days after the end of each
calendar month stating the number of Impressions delivered for such month.
NetZero shall keep, maintain and preserve for at least one (1) year following
termination or expiration of the Term, accurate records relating to the delivery
of Impressions during the Term. During the Term and the six (6) month period
following expiration or termination of the Term, Buyer shall have the right, at
its expense, to audit such records for the purpose of verifying NetZero's
reports. Audits shall be made upon not less than five (5) days' prior written
notice and during regular business hours. NetZero shall promptly deliver any
underdelivered Impressions as revealed by any audit hereunder.
3. LICENSE OF BUYER MATERIALS. Buyer hereby grants to NetZero a non-exclusive,
non-transferable, royalty-free license to use, reproduce, display, transmit, and
redistribute Buyer's and Buyer's companies' advertising creative and related
materials ("Buyer Materials") during the Term solely in furtherance of NetZero's
performance under this Agreement. The foregoing license shall terminate
automatically upon the expiration of the Term or other termination of this
Agreement.
4. REPRESENTATIONS AND WARRANTIES.
a. Each party represents and warrants to the other that: (i) it 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 its provisions; (ii) it is duly authorized to execute and deliver this
Agreement and to perform its obligations; and (iii) this Agreement is valid and
legally binding upon it and the execution, delivery and performance of this
Agreement by such party does not conflict with any other agreement, instrument
or understanding to which it is a party or by which it may be bound nor would
violate any law or regulation of any court, governmental body or agency having
jurisdiction over it.
b. Buyer hereby represents, warrants, and covenants to NetZero that (i) it
has the full right, title and authority to grant the license of the Buyer
Materials set forth herein and Buyer is not aware of any violation of law or
infringement of third party intellectual property rights that would result from
such use of such license by NetZero and (ii) with respect to its use of any and
all Subscriber information received from NetZero, it will at all times fully
comply with NetZero's Privacy Statement posted on the NetZero site and any law
or regulation of any governmental body or agency having jurisdiction over it.
5. DISCLAIMER. EXCEPT FOR THE WARRANTIES EXPRESSLY SET FORTH IN SECTION 4 ABOVE,
EACH PARTY DISCLAIMS ALL WARRANTIES, EXPRESS, IMPLIED, OR STATUTORY, INCLUDING
BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, NEITHER
PARTY MAKES ANY WARRANTIES WITH RESPECT TO ITS SERVICES.
6. LIABILITY LIMITATIONS. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER
PARTY FOR (I) INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY DAMAGES
ARISING FROM SUCH PARTY'S PERFORMANCE OR NON-PERFORMANCE UNDER ANY PROVISION OF
THIS AGREEMENT OR THE PROVISION OF SUCH PARTY'S SERVICES (INCLUDING SUCH DAMAGES
INCURRED BY THIRD PARTIES), SUCH AS, BUT NOT LIMITED TO, LOSS OF REVENUE OR
ANTICIPATED PROFITS OR LOST BUSINESS, (II) THE COST OR PROCUREMENT OF SUBSTITUTE
GOODS, SERVICES OR TECHNOLOGY OR (III) ANY AMOUNT IN EXCESS OF THE AMOUNT PAID
OR PAYABLE BY BUYER TO NETZERO DURING THE TERM. NOTWITHSTANDING ANYTHING IN THIS
AGREEMENT TO THE CONTRARY, THIS SECTION SHALL NOT LIMIT EITHER PARTY'S LIABILITY
TO THE OTHER FOR WILLFUL AND MALICIOUS MISCONDUCT, BREACH OF CONFIDENTIALITY
OBLIGATIONS, OR FULFILLMENT OF ANY INDEMNIFICATION OBLIGATIONS HEREUNDER.
7. INDEMNIFICATION AND INFRINGEMENT REMEDIES.
a. NETZERO'S INDEMNITY. NetZero shall defend, indemnify and hold Buyer and
its successors and assigns harmless from and against all third party claims,
suits and proceedings and any and all damages, liabilities costs and expenses
(including reasonable attorneys' fees and court costs) finally
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awarded against Buyer as a result of any and all such claims, suits and
proceedings against Buyer arising from (i) infringement by the NetZero Service,
The ZeroPort, or any content on The ZeroPort (excluding Buyer Materials) of any
third party patent, copyright, trademark, or trade dress or (ii)
misappropriation by NetZero of any third party trade secret in connection with
any of the foregoing. In the event NetZero determines that such an infringement
may exist, NetZero may, at its option and expense, take such action as its deems
appropriate to eliminate such infringement or, if such infringement cannot be
avoided in a commercially reasonable manner as determined by NetZero, terminate
this Agreement. NetZero assumes no liability for infringement claims arising
from combination of the NetZero Service, The ZeroPort, or the content on
ZeroPort with any products or services not provided by NetZero.
b. BUYER'S INDEMNITY. Buyer shall defend, indemnify and hold NetZero and
its successors and assigns harmless from and against all third party claims,
suits and proceedings and any and all damages, liabilities costs and expenses
(including reasonable attorneys' fees and court costs) finally awarded against
NetZero as a result of any and all such claims, suits and proceedings against
NetZero arising from (i) infringement by the Buyer Materials of any third party
patent, copyright, trademark, or trade dress, (ii) misappropriation by Buyer of
any third party trade secret in connection with any of the foregoing, (iii) any
libelous, defamatory, disparaging, pornographic or obscene materials contained
in any of the Buyer Materials provided to NetZero hereunder or (iv) any act or
failure to act by Buyer in connection with its use of any Subscriber information
received from NetZero.
c. INDEMNIFICATION PROCEDURES. The right of a party (the "indemnified
party") to indemnification under this Agreement shall be conditioned upon the
following: prompt written notice to the party obligated to provide
indemnification (the "indemnifying party") of any claim, action or demand for
which indemnity is claimed; control of the investigation, preparation, defense
and settlement thereof by the indemnifying party; and such reasonable
cooperation by the indemnified party, at the indemnifying party's request and
expense, in the defense of the claim. The indemnified party shall have the right
to participate in the defense of a claim by the indemnifying party with counsel
of the indemnified party's choice at the indemnified party's expense. The
indemnifying party shall not, without the prior written consent of the
indemnified party which shall not be unreasonably withheld, settle, compromise
or consent to the entry of any judgment that imposes any liability upon the
indemnified party.
8. CONFIDENTIALITY OBLIGATIONS. The parties acknowledge and agree that, as a
result of negotiating, entering into and performing this Agreement, each party
(a "receiving party") has and will have access to certain Confidential
Information (as defined below) of the other party (a "disclosing party"). Each
receiving party acknowledges and agrees that misuse and/or disclosure of the
Confidential Information of the disclosing party could adversely affect the
disclosing party's business. Accordingly, the parties agree that, during the
Term, the receiving party shall (a) use and reproduce the disclosing party's
Confidential Information only to perform its obligations under and for the
purposes specified in this Agreement, (b) restrict disclosure of the disclosing
party's Confidential Information to its employees and contractors with a need to
know the Confidential Information to enable the receiving party to perform its
obligations under this Agreement, and (c) not disclose the disclosing party's
Confidential Information to any third party (including, but not limited to, any
third-party consultant, contractor, or agent) without the prior written approval
of the disclosing party and without first obtaining such third party's written
agreement to maintain the confidentiality of the disclosing party's Confidential
Information under terms and conditions at least as stringent as those set forth
in this Section 8. The receiving party further agrees that, following the
expiration or earlier termination of the Term, it shall promptly return to the
disclosing party all Confidential Information of the disclosing party or destroy
such Confidential Information and so certify in writing to the disclosing party.
Notwithstanding the requirements of this Section 8, the receiving party may
disclose Confidential Information of the disclosing party to the extent it is
required to do so under law or in a judicial or other governmental investigation
or proceeding, provided that the receiving party gives the disclosing party
prompt written notice of the compelled disclosure and cooperates with the
disclosing party in seeking a protective order or any other available
protections available to limit the disclosure of the disclosing party's
Confidential Information.
a. CONFIDENTIAL INFORMATION DEFINED. As used in this Agreement, the term
"Confidential Information" shall mean: (i) all information relating to the
disclosing party's business, including, without limitation, computer programs,
technical drawings, algorithms, names and expertise of employees and
consultants, know-how, processes, trade secrets, inventions (whether patentable
or not) and other technical, business, financial, customer and product
development plans, Subscriber information, forecasts, strategies and
information; and (ii) other information relating to either party that is not
generally known to the public. Notwithstanding the foregoing, the term
"Confidential Information" specifically excludes (a) information that is in the
public domain or enters the public domain through no action or default of the
receiving party; (b) information that is known to the receiving party without
restriction, prior to receipt from the disclosing party from its own independent
sources as evidenced by the
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receiving party's written records; (c) information that the receiving party
receives from a third party known by the receiving party to have a legal right
to transmit such information, and not under any obligation of confidentiality;
and (d) information that the receiving party can establish, through written
records created in the normal course of the receiving party's business, was
independently developed by the receiving party's employees or agents without any
use of or reference to the disclosing party's Confidential Information. All
Subscriber information received from NetZero shall be deemed NetZero's
Confidential Information.
9. PRESS RELEASES. Each party shall obtain the other party's prior written
approval, which shall not be unreasonably withheld or delayed, of all press
releases that such party issues which reference this Agreement. Notwithstanding
the foregoing, following the initial press release, if any, announcing the
relationship hereunder, the parties shall have the right to refer to the other
by name and to use the description, in whole or in part, set forth in such press
release without the consent of the other party.
10. TERMINATION. Either party may immediately terminate this Agreement if (a)
the other party files a petition for bankruptcy or is adjudicated bankrupt, a
petition in bankruptcy is filed against the other party and such petition is not
dismissed within sixty (60) days of the filing date, the other party becomes
insolvent or makes an assignment for the benefit of its creditors, or a receiver
is appointed for the other party; (b) the other party materially breaches
Section 8 of this Agreement; or (c) the other party materially breaches any
provision of this Agreement other than Section 8 and fails to cure such breach
within fifteen (15) days after written notice is received by the breaching party
identifying the breach. Sections 1, 2, 4-8 and 12-13 and all rights to accrued
payments and causes of action shall survive expiration or any termination of the
Agreement.
11. FORCE MAJEURE. If either party is delayed or 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.
12. ASSIGNMENT; BINDING EFFECT; SUBCONTRACTING. Neither Buyer nor NetZero may
assign this Agreement or any of its rights or obligations hereunder without the
prior written consent of the other party; provided, however, that either party
may assign this Agreement to an acquirer of all or of substantially all of such
party's equity securities, assets or business relating to the subject matter of
this Agreement or to any entity controlled by, controlling or under common
control with such party. Any purported assignment agreements in violation of
this Section 12 shall be null, void and of no effect.
13. MISCELLANEOUS.
a. CHOICE OF LAW AND FORUM. This Agreement shall be governed by and
construed in accordance with the laws of the State of California applicable to
contracts entered into and wholly to be performed within California, without
regard to conflicts of laws provisions thereof. The sole jurisdiction for all
disputes arising under or relating to this Agreement shall be the state and
federal courts located in the County of Los Angeles, California. Each party
hereby consents to the personal jurisdiction of such courts and waives any
objection it has or may have to the personal jurisdiction of, and venue in, such
courts. In any action to enforce this Agreement the prevailing party will be
entitled to recovery its costs and reasonable attorneys' fees.
b. AMENDMENT AND WAIVER. Except as otherwise expressly provided herein, any
provision of this Agreement may be amended or modified and the observance of any
provision of this Agreement may be waived (either generally or any particular
instance and either retroactively or prospectively) only in the form of a
writing signed by both parties. The failure of either party to enforce its
rights under this Agreement at any time for any period shall not be construed as
a waiver of such rights.
c. SEVERABILITY. In the event that any of the provisions of this Agreement
shall be held by a court of competent jurisdiction to be unenforceable, such
provisions shall be limited or eliminated to the minimum extent necessary so
that this Agreement shall otherwise remain in full force and effect and
enforceable.
d. SCOPE OF AGREEMENT. Unless otherwise agreed to in writing by NetZero,
this Agreement applies to the NetZero Services in the United States only and
excludes non-English speaking and other custom or non-standard versions of The
ZeroPort or the NetZero Service.
e. NOTICES. All notices required to be given under this Agreement must be
given in writing and delivered either by hand, certified mail, return receipt
requested, postage pre-paid, or Federal Express or other commercial overnight
delivery service with tracking capabilities, all delivery charges prepaid, and
addressed to the applicable party's address set forth in this Agreement or such
other address as to which the party has notified the other party in accordance
with this paragraph. Notice shall be deemed effective upon receipt, provided,
however, that notice sent by mail shall be deemed received three (3) days after
deposit in the U.S. mails unless received sooner. Notices shall be to the
attention of the person executing this Agreement, and if such notice is being
provided to NetZero, with a copy to NetZero's General Counsel.
Page 5
<PAGE>
f. CONSTRUCTION. In the event of any conflict or inconsistency between
these Terms and Conditions and any other provision of this Agreement, such other
provision shall control for purposes of interpretation of such conflicting or
inconsistent provisions.
g. COUNTERPARTS. This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original, but both of which together shall
constitute one and the same instrument. This Agreement may be executed by
facsimile signature and facsimile signatures shall be fully binding and
effective for all purposes and shall be given the same effect as original
signatures.
h. RELATIONSHIP OF PARTIES. NetZero and Buyer are independent contractors
under this Agreement. Neither party has authority to enter into agreements of
any kind on behalf of the other.
i. HEADINGS. Headings and captions are for convenience only and are not to
be used in the interpretation of this Agreement.
Page 6
<PAGE>
Exhibit 10.3
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
effective as of the 1st day of December, 1999, by and between NetZero, Inc., a
Delaware corporation (the "Company"), with principal corporate offices at 2555
Townsgate Road, Westlake Village, CA 91361, and Brian Woods, whose address is
22722 Chimera Lane, Topanga, CA 90290 ("Employee").
1. EMPLOYMENT.
1.1 The Company hereby agrees to employ Employee, and Employee hereby
accepts such employment, on the terms and conditions set forth herein,
commencing December 1, 1999 (or, if later, the date the Conditions, as
defined below are fulfilled) (the "Effective Date"), and continuing
through December 1, 2002 (the "Term"), unless such employment is
terminated earlier as provided in Section 4 below.
1.2 Employee's employment shall be contingent upon (i) the approval by the
Company's Board of Directors of this Agreement and (ii) the
consummation of the acquisition of AimTV, Inc. by the Company pursuant
to the Merger Agreement and Plan of Reorganization dated November 15,
1999 (collectively, the "Conditions"). If the Conditions are not met
by December 15, 1999, this Agreement shall terminate and be of no
force or effect.
2. DUTIES OF EMPLOYEE.
2.1 Employee shall serve as Senior Vice President, Chief Marketing Officer
of the Company. In this capacity, Employee shall perform customary,
appropriate and reasonable duties including such duties as are
delegated to him from time to time by the Chief Executive Officer or
the Board of Directors of the Company (the "Board"). Employee shall
report directly to the Company's Chief Executive Officer.
2.2 Employee agrees to devote Employee's full time, attention, skill and
efforts to the performance of his duties for the Company during the
Term; provided, however, that the Company acknowledges that Employee
has certain responsibilities to, and involvement in and with, the
following entities and the Company agrees that Employee may fulfill
such responsibilities and continue such involvement without in any way
jeopardizing or otherwise affecting his employment by the Company or
any of his rights hereunder so long as such involvement does not
materially interfere with Employee's duties hereunder.
(a) WHITE BONE ENTERTAINMENT LLC, its affiliates and their respective
successors and assigns. Employee has a non-employee ownership
interest in, and is a member of, White Bone Entertainment
1
<PAGE>
LLC. White Bone's principal business is the development,
production, financing, distribution and exploitation of motion
pictures, television programs and related activities.
(b) RETAIL MEDIA SYSTEMS. Employee serves on the board of directors
of Retail Media Systems.
In addition, this Agreement shall not be interpreted to
prohibit Employee from making passive personal investments or
engaging in charitable and public service activities to the
extent such activities do not materially interfere with
Employee's duties hereunder.
3. COMPENSATION AND OTHER BENEFITS.
3.1 BASE SALARY. During the Term, the Company shall pay to Employee a base
salary of One Hundred Fifty Thousand Dollars ($150,000) per year (the
"Base Salary"), payable at the rate of Twelve Thousand Five Hundred
Dollars ($12,500.00) per month, with payments to be made in accordance
with the Company's standard payment policy and subject to such
withholding as may be required by law.
3.2 BONUS. During the Term, the Employee shall also be eligible to receive
an annual cash bonus at the same time as other Senior Vice Presidents
of up to 70% of Employee's base salary for each full fiscal year or a
pro rata amount for a partial fiscal year (the "Annual Bonus"), less
withholding required by law, based on performance criteria established
by the Board or the Company's Chief Executive Officer. Employee shall
not be eligible to receive any unpaid Annual Bonus if his employment
hereunder is terminated pursuant to either Section 4.1, or if Employee
voluntarily resigns.
3.3 VACATION. Employee shall be entitled initially to four (4) weeks paid
vacation with increases in accordance with the Company's standard
vacation policies.
3.4 OTHER BENEFITS. Employee shall be eligible to participate, as of the
date of Employee's employment, in all group life, health, medical,
dental or disability insurance or other employee, health and welfare
benefits made available generally to other senior executives of the
Company on the same terms as such senior executives. If Employee
elects to participate in any of such plans, Employee's portion of the
premium(s) will be deducted from Employee's paycheck.
3.5 BUSINESS EXPENSES. The Company shall promptly reimburse Employee for
all reasonable and necessary business expenses incurred by Employee in
connection with the business of the Company and the performance of his
duties under this Agreement, subject to Employee providing the Company
with reasonable documentation thereof.
2
<PAGE>
3.6 OPTION GRANT. Effective on the date Employee commences employment with
the Company, Employee shall be granted a stock option under the
Company's 1999 Stock Incentive Plan for 327,273 shares of the
Company's Common Stock. The option shall have an exercise price equal
to the closing per share of Common Stock as reported on the Nasdaq
National Market on the date Employee commences employment. Employee
shall acquire a vested interest in twenty-five percent of the Option
shares upon the first-year anniversary of the commencement of
Employee's employment with the Company and in the remaining
seventy-five percent of the Option shares in thirty-six (36) equal
monthly installments, beginning one month following such first-year
anniversary.
4. TERMINATION.
4.1 TERMINATION FOR CAUSE.
(a) Termination "for cause" is defined as follows: the Company
terminates Employee's employment with the Company (1) if Employee
is convicted of a felony or commits an act of moral turpitude, in
either case which adversely impacts the Company, (2) if Employee
materially breaches the Company's Confidentiality and Proprietary
Agreement, or (3) if Employee fails, after receipt of detailed
written notice and after receiving a period of at least thirty
(30) days following such notice to cure such failure, to use his
reasonable good faith efforts to follow the direction of the
Company's Board of Directors and to perform his obligations
hereunder.
(b) The Company may terminate this Agreement for any of the reasons
stated in Section 4.1(a) by giving written notice to Employee
without prejudice to any other remedy to which the Company may be
entitled. The notice of termination shall specify in reasonable
detail the grounds for termination. If Employee's employment
hereunder is terminated "for cause" pursuant to this Section 4.1,
Employee shall be entitled to receive hereunder his accrued but
unpaid Base Salary and vacation pay through the date of
termination, and reimbursement for any expenses as set forth in
Section 3.5, through the date of termination, but shall not be
entitled to receive any unpaid portion of the Annual Bonus or any
other amount.
4.2 TERMINATION WITHOUT CAUSE. If Employee's employment is terminated
without "cause" as defined in Section 4.1(a), or if Employee is
Involuntarily Terminated (as defined below), the Company (or its
successor, as the case may be) shall pay to Employee (i) any accrued
but unpaid Base Salary and vacation through the date of termination,
(ii) reimbursement for any expenses as set forth in Section 3.5,
through the date of termination and (iii) a severance payment in an
amount equal to One Hundred Fifty Thousand Dollars ($150,000.00),
payable in one lump sum, subject to withholding as may be required by
law.
3
<PAGE>
As used in this Section 4.2, Employee shall be deemed "Involuntarily
Terminated" if (i) the Company or any successor to the Company
terminates Employee's employment without cause in connection with or
following a Corporate Transaction (as defined in the Company's 1999
Stock Incentive Plan); or (ii) in connection with or following a
Corporate Transaction there is (a) a material reduction in the scope
Employee's day to day responsibilities, (b) a decrease in pay from
that provided by the Company immediately prior to the Corporate
Transaction or (c) a relocation of Employee's place of employment by
more than fifty miles, provided and only if such change, reduction or
relocation is effected without Employee's consent.
5. ASSIGNMENT. Neither the Company nor Employee may assign this Agreement
or any rights or obligations hereunder. This Agreement will be binding
upon the Company and its successors and assigns. In the event of a
Corporate Transaction, the Company shall cause this Agreement to be
assumed by the Company's successor as well as any acquiring or
ultimate parent entity, if any, following any Corporate Transaction.
6. MISCELLANEOUS.
6.1 This Agreement supersedes any and all other agreements, either
oral or in writing, between the parties hereto with respect to
the employment of Employee by the Company, other than the
Confidentiality and Proprietary Agreement attached hereto as
Exhibit A, and constitutes the entire agreement between the
Company and the Employee with respect to its subject matter. In
addition, that certain Stock Restriction Agreement and that
certain Noncompetition Agreement shall remain unaffected by this
Agreement. That certain Employment Agreement between AimTV, Inc.
and Employee dated June 1, 1999 is hereby terminated and of no
further force or effect.
6.2 This Agreement may not be amended, supplemented, modified or
extended, except by written agreement, which expressly refers to
this Agreement, which is signed by each of the parties hereto and
which is authorized by the Company's Board of Directors.
6.3 This Agreement is made in and shall be governed by the laws of
California, without giving effect to its conflicts-of-law
principles.
6.4 In the event that any provision of this Agreement is determined
to be illegal, invalid or void for any reason, the remaining
provisions hereof shall continue in full force and effect.
6.5 Employee represents and warrants to the Company that there is no
restriction or limitation, by reason of any agreement or
otherwise, upon Employee's right or ability to enter into this
Agreement and fulfill his obligations under this Agreement.
4
<PAGE>
6.6 All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by first-class
mail, postage prepaid, registered or certified, or delivered
either by hand, by messenger or by overnight courier service, and
addressed to the receiving party at the respective address set
forth in the heading of this Agreement, or at such other address
as such party shall have furnished to the other party in
accordance with this Section 6.6 prior to the giving of such
notice or other communication.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the first date written above.
NETZERO, INC.
By: /s/ MARK GOLDSTON
----------------------------------------
Mark Goldston, Chief Executive Officer
By: /s/ BRIAN WOODS
----------------------------------------
Brian Woods
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 118,552,000
<SECURITIES> 7,500,000
<RECEIVABLES> 10,912,000
<ALLOWANCES> 625,000
<INVENTORY> 0
<CURRENT-ASSETS> 149,206,000
<PP&E> 32,088,000
<DEPRECIATION> 6,649,000
<TOTAL-ASSETS> 199,531,000
<CURRENT-LIABILITIES> 25,502,000
<BONDS> 0
0
0
<COMMON> 115,000
<OTHER-SE> 166,072,000
<TOTAL-LIABILITY-AND-EQUITY> 199,531,000
<SALES> 16,858,000
<TOTAL-REVENUES> 16,858,000
<CGS> 18,459,000
<TOTAL-COSTS> 18,459,000
<OTHER-EXPENSES> 25,023,000
<LOSS-PROVISION> 175,000
<INTEREST-EXPENSE> 364,000
<INCOME-PRETAX> (24,860,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (24,860,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,860,000)
<EPS-BASIC> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
