<PAGE>
As filed with the Securities and Exchange Commission on January 28, 2000
Registration No. 333-86219
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
eMachines, Inc.
(Exact Name of Registrant as Specified in its Charter)
-----------
<TABLE>
<C> <C> <S>
Delaware 3571 943311182
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
14350 Myford Road, Suite 100
Irvine, California 92606
(714) 481-2828
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
-----------
Stephen A. Dukker
Chief Executive Officer
14350 Myford Road, Suite 100
Irvine, California 92606
(714) 481-2828
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------
Copies to:
<TABLE>
<S> <C>
John A. Fore, Esq. William D. Sherman, Esq.
Paul W. Hartzel, Esq. Stephen J. Schrader, Esq.
Laura A. Malinasky, Esq. Justin L. Bastian, Esq.
Wilson Sonsini Goodrich & Rosati Rochelle A. Krause, Esq.
Professional Corporation Morrison & Foerster LLP
650 Page Mill Road 755 Page Mill Road
Palo Alto, California 94304 Palo Alto, California 94304
(650) 493-9300 (650) 813-5600
</TABLE>
-----------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _________
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _________
---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall hereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to such
Section 8(a), may determine.
===============================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 28, 2000
Shares
[LOGO]
eMachines, Inc.
Common Stock
--------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price of our common stock is expected to be between
$ and $ per share. We applied to list our common stock on The Nasdaq
Stock Market's National Market under the symbol "EEEE."
The underwriters have an option to purchase a maximum of additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 5.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions eMachines
------------- ------------- -------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
Chase H&Q
Robertson Stephens
Salomon Smith Barney
The date of this prospectus is , 2000.
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page
---- ----
<S> <C> <C> <C>
Prospectus Summary.................. 1 Management.......................... 49
Risk Factors........................ 5 Related Party Transactions.......... 55
Special Note Regarding Forward- Principal Stockholders.............. 61
Looking Statements................. 21
Description of Capital Stock........ 63
Use of Proceeds..................... 21
Shares Eligible for Future Sale..... 67
Dividend Policy..................... 21
Underwriting........................ 68
Capitalization...................... 22
Notice to Canadian Residents........ 70
Dilution............................ 23
Legal Matters....................... 71
Selected Financial Data............. 25
Experts............................. 71
Management's Discussion and Analysis
of Financial Condition and Results Additional Information.............. 71
of Operations...................... 27
Index to Financial Statements....... F-1
Business............................ 36
</TABLE>
------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
Dealer Prospectus Delivery Obligation
Until , 2000 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information described more fully elsewhere in this
prospectus. This summary is not complete and does not contain all the
information you should consider before investing in our common stock.
eMachines, Inc.
We are pioneering a new model that combines affordable personal computers,
or PCs, and innovative Internet advertising programs. We offer consumers high-
quality, low-priced PCs with easy access to the Internet. We provide Internet
advertisers with an integrated approach to building their online brands that
includes our client-server software, in-box promotions and keyboards that
provide one-touch access to selected Web sites.
In November 1998, we introduced the first branded sub-$400 PC to the U.S.
retail market. We have sold over two million PCs to date. We sold the third
largest number of desktop PCs through U.S. retailers in 1999, according to PC
Data, and sold the largest number of sub-$600 PCs, the low-priced PC market,
through U.S. retailers in July 1999, according to Ziff Davis' InfoBeads. In
1999, our products won prestigious awards in the low-priced PC desktop
category, including PC Computing's Most Valuable Product, number one on Windows
Magazine's "WinList 100" and Consumer Digest's best value award.
Our affordable PCs and the variety of Internet access options that we offer
make the Internet experience available to a broader spectrum of consumers.
Approximately half of our consumers are first-time PC buyers who may have
limited experience using the Internet and whose first-point of contact with the
Internet is our PC. We believe that these first-time PC buyers represent
significant opportunities for Internet advertisers to reach Internet users who
are not likely to have pre-established Internet brand loyalties.
We intend to aggressively pursue recurring revenue generating opportunities
that extend beyond the purchase of the PC or other Internet connected devices.
To this end, in January 2000, we acquired FreePC, Inc., a Bill Gross' idealab!
company that pioneered subsidizing the purchase price of the PC and Internet
access with advertising sponsorships. Our acquisition of FreePC's expertise,
relationships, technology and technical experience is a key element of our
strategy to enhance our Internet revenues. We offer multiple, integrated
advertising programs, including our eWare and eBoards, that we believe an
Internet advertiser may combine into a powerful campaign capable of
dramatically increasing the effectiveness of its offer.
Our computing and Internet advertising offerings create an integrated PC and
Internet-based service that includes links to selected Web sites and other
Internet resources, effectively making us a "hardware portal" that benefits
both consumers and advertisers. We intend to become the leading hardware portal
by:
. increasing penetration of the consumer market by providing low-priced,
high-quality integrated computing and Internet offerings;
. using our PC business to cost-effectively acquire Internet consumers;
. enhancing recurring Internet revenues through opportunities such as
Internet service payments, e-commerce and Web-based advertising;
. leveraging our established brand to broaden our PC line and to introduce
Internet appliances and Internet-connected peripheral products; and
. continuing to strengthen our strategic relationships with leading
retailers to capture and retain prime shelf space.
We were incorporated in Delaware in September 1998. Our principal executive
offices are located at 14350 Myford Road, Suite 100, Irvine, California 92606
and our telephone number is (714) 481-2828. Our Web site is located at
"www.e4me.com." Information contained on our Web site does not constitute a
part of this prospectus.
-----------
E-MACHINES(R) is our registered United States trademark. The "e" logo,
eMachines(TM), eTower(TM), eView(TM), eOne(TM), PC rEnewal(TM),
AdOptimizer(TM), FreePC(TM) and FreePC Network(TM) are also our trademarks.
This prospectus contains other trademarks and trade names of other companies.
1
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered............................ shares
Common stock to be outstanding after this
offering....................................... shares
Use of proceeds................................. General corporate purposes, including
increasing working capital and investing
in our Internet business.
Proposed Nasdaq National Market symbol.......... EEEE
</TABLE>
The total number of shares of our common stock to be outstanding after this
offering is based on:
. 78,019,538 shares of our common stock and 24,279,369 preferred stock
outstanding as of December 31, 1999;
. 3,995,656 shares of common stock and 17,633,896 shares of preferred
stock issued in connection with the FreePC acquisition completed in
January 2000;
. 41,913,265 shares of common stock issuable upon automatic conversion of
outstanding shares of preferred stock referred to above upon completion
of this offering; and
. shares of common stock offered in this offering.
The above information excludes:
. 1,216,297 shares of common stock issuable upon exercise of options
outstanding as of December 31, 1999, at a weighted average exercise
price of $3.56 per share, and 2,341,600 additional shares authorized to
be issued under our 1998 stock plan;
. 2,891,314 shares of common stock and warrants to purchase 1,239,158
shares of common stock issuable upon exercise of options assumed in the
FreePC acquisition, at a weighted average exercise price of $1.14 per
unit of 1.1 shares of common stock and warrant to purchase .47 shares of
common stock at a warrant exercise price of $17.128 per share;
. 9,269,784 shares of common stock issuable upon exercise of warrants
issued in connection with the FreePC acquisition at a warrant exercise
price of $17.128 per share; and
. shares of common stock issuable to America Online upon exercise of
its warrants. See "Related Party Transactions--Relationship with America
Online, Inc." for a discussion of the America Online warrants.
2
<PAGE>
Summary Financial Information
The pro forma FreePC acquisition statement of operations data below gives
effect to our acquisition of FreePC as if it had taken place on January 1,
1999. The pro forma FreePC acquisition balance sheet data below gives effect to
the FreePC acquisition as if it had taken place on December 31, 1999. The pro
forma statement of operations data reflects $73.0 million of goodwill
amortization arising from the acquisition. The pro forma data is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have resulted if the acquisition had
been in effect during the periods presented, nor is it necessarily indicative
of future operating results or financial position. For an explanation of the
calculation of pro forma amounts see Notes to the Unaudited Pro Forma Condensed
Combined Financial Information included elsewhere in this prospectus.
During 1999, FreePC's business model included distributing free PCs and free
Internet access to their customers. The costs related to these activities in
1999 approximated $21.2 million. Subsequent to our acquisition of FreePC we
have ceased distributing free computers and will cease providing free Internet
service and, accordingly, expect these costs and associated revenues to
decrease substantially.
<TABLE>
<CAPTION>
Year Ended Dec. 31,
1999
Period From ------------------------
Sept. 18, 1998 Pro Forma
(inception) to FreePC
Dec. 31, 1998 Actual Acquisition
-------------- ----------- -----------
(in thousands, except share and per
share data)
<S> <C> <C> <C>
Statements of Operations Data:
Net revenues......................... $ 58,283 $ 814,317 $ 815,518
Cost of revenues..................... 58,088 780,945 784,265
----------- ---------- -----------
Gross profit......................... 195 33,372 31,253
Loss before goodwill amortization.... (1,913) (1,842) (32,491)
Goodwill amortization................ 73,000
----------- ---------- -----------
Loss from operations................. (1,913) (1,842) (105,491)
----------- ---------- -----------
Net loss............................. $ (2,802) $ (5,728) $ (108,515)
=========== ========== ===========
Net loss per common share:
Basic and diluted.................. $ (0.04) $ (0.12) $ (1.37)
=========== ========== ===========
Basic and diluted-pro forma........ $ (0.07) $ (1.04)
========== ===========
Shares used to compute net loss per
share:
Basic and diluted.................. 77,600,000 77,755,172 81,750,828
=========== ========== ===========
Basic and diluted-pro forma........ 86,735,212 104,369,108
========== ===========
<CAPTION>
Dec. 31, 1999
---------------------------------------
Pro forma
Pro Forma FreePC
FreePC Acquisition
Actual Acquisition As Adjusted
-------------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............ $ 114,823 $ 125,762 $
Short-term investments............... 19,897 19,897
Working capital...................... 140,116 140,362
Total assets......................... 331,713 495,587
Long-term obligations................ 1,903 2,236
Redeemable convertible preferred
stock............................... 150,014 150,014
Total stockholders' equity
(deficiency)........................ (7,736) 142,264
</TABLE>
3
<PAGE>
See Note 2 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share data.
The pro forma FreePC acquisition information reflects:
. the issuance of 3,995,656 shares of common stock and 17,633,896 shares
of preferred stock issued in connection with the FreePC acquisition
completed in January 2000; and
. the assumption of options to purchase 2,891,314 shares of common stock
and warrants to purchase 1,239,158 shares of common stock issuable upon
exercise of stock options assumed in the FreePC acquisition at a
weighted average exercise price of $1.14 per unit of 1.1 shares of
common stock and warrant to purchase .47 shares of common stock at a
warrant exercise price of $17.128 per share.
The pro forma FreePC acquisition as adjusted data includes the pro forma
FreePC acquisition information and:
. the conversion of all outstanding shares of preferred stock into
41,913,265 shares of common stock automatically upon completion of this
offering; and
. the issuance of shares of common stock offered in this offering.
Unless otherwise specifically stated, information throughout this prospectus
reflects the eight-for-one stock split of our common stock effected on August
13, 1999 (all share and per share amounts of our common stock have been
retroactively restated to reflect the stock split).
4
<PAGE>
RISK FACTORS
You should carefully consider the following risks before making an
investment decision. The risks described below are intended to highlight risks
that are specific to us and are not the only ones that we face. Additional
risks and uncertainties, such as those that generally apply to our industry or
to companies undertaking initial public offerings, may also impair our business
operations. You should also refer to the other information in this prospectus,
including the discussions in "Special Note Regarding Forward-Looking
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as our Financial Statements and
the related Notes.
Risks Related to Our Combined Business
Because we have operated for a very limited period of time and our business is
still rapidly changing, you have limited information upon which to evaluate our
business.
We were incorporated in September 1998 and sold our first PC in November
1998. To date, most of our revenues have been derived from the sale of PCs and
monitors, and from the provision of customer support and other technical
services related to those PC products. The acquisition of FreePC in January
2000 has allowed us to accelerate our strategy of extending our historical
business as a high-quality, low-priced PC provider to offering computing and
Internet advertising offerings. As a result, we expect to derive a larger
portion of our revenues from Internet advertising sales and recurring Internet
revenues in the future, although our ability to generate significant revenue
from this business is unproven. Our limited operating history and the limited
operating history of FreePC and our evolving businesses make it difficult to
evaluate or predict our future business prospects. You should consider our
business and prospects in light of the risks and difficulties typically
encountered by companies in the early stages of development, particularly those
in the rapidly changing PC and Internet commerce markets.
We have incurred significant losses and expect to incur additional losses in
the future.
We have incurred net losses, and at December 31, 1999, we had an accumulated
deficit of $12.3 million. Although we experienced a period of rapid revenue
growth from PC sales following our inception and reported a profit in our most
recently completed quarter, we may not be able to maintain this revenue growth
and we expect to incur losses in future. Further, FreePC has incurred
significant losses since its inception. In connection with the FreePC
acquisition, we will record a significant amount of goodwill the amortization
of which will adversely affect our earnings and profitability in 2000 and 2001.
We expect to record goodwill of approximately $146 million, to be amortized
over a period of two years. In addition, our operating costs have increased
significantly as a result of the FreePC acquisition. We have not yet generated
significant revenue from our Internet business and we expect to experience
operating losses before goodwill amortization in that business in the future.
As a result, we expect to report losses on an operating basis before goodwill
amortization in our combined business for at least the next several quarters.
Our quarterly operating results are subject to fluctuations and seasonality
that make it difficult to predict our future performance.
We expect our quarterly operating results to fluctuate significantly in the
future due to a number of factors. Because our PC business currently generates
low operating margins, a trend that we expect to continue for the foreseeable
future, slight variations in the prices of our PCs, component or manufacturing
costs or operating costs could significantly affect our operating results in
future periods. In addition, the Internet advertising and e-commerce market is
highly competitive and subject to rapid change and our ability to generate any
significant revenue from that business is unproven. Some of the other factors
that could affect our quarterly operating results include:
. the timing and amount of Internet advertising and e-commerce activity
generated through our hot-key enabled keyboards that provide one-touch
access to selected Web sites, our desktop client software and other
initiatives;
5
<PAGE>
. acceptance by consumers of computing devices that include our Internet
offerings;
. continued acceptance and growth of the Internet as a medium for buying
and selling goods and services;
. acceptance by advertisers of the Internet as an efficient means for
reaching consumers;
. our ability or our suppliers' ability to effectively develop and support
new PC models;
. reductions in the prices of PC products, and new product or Internet
service announcements and introductions, by us or our competitors;
. fluctuations in the amount of, and the number of our PC buyers claiming
product rebates;
. popularity of the PCs and monitors we sell, and changes in our mix of
products;
. achieving and maintaining a low-cost business model in our PC business
and managing the third-party relationships necessary to do so;
. the cost of our PC products, including our key suppliers' component
costs and ability to obtain sufficient supply;
. our key suppliers' ability to manufacture sufficient quantities of our
PC products, and maintain the quality of our PC products; and
. our ability to adequately reserve for price protection credits to
retailers, product rebates, product returns and claims, as well as the
costs of our upgrade programs.
In addition, our limited operating history makes it difficult for us to
accurately identify all of the possible factors and plan our operations
accordingly. Furthermore, because our operating expenses are based on our
expectations of future revenues and we have recently significantly increased
our operating expenses as a result of our acquisition of FreePC, unexpected
quarterly fluctuations in revenue or a failure to generate significant revenue
from our Internet business could significantly harm our operating results. If
our operating results in any future quarter do not meet the expectations of
securities analysts or investors, the price of our common stock could
significantly decline.
Seasonal fluctuations may also affect our quarterly operating results.
Historically, demand for PCs and PC-related services and consumer retail sales
have been significantly stronger in the fourth quarter of each year and weaker
in the first and second quarter of each year. We believe this seasonal impact
on our business of these cycles will increase to the extent that PCs continue
to become more consumer-oriented or entertainment-driven products and e-
commerce continues to gain broader acceptance. As a result, we expect our net
revenues generally to be greater in the fourth quarter and lower in the first
and second quarters of each year from both our PC business and our Internet
business.
We are growing rapidly, and if we are unable to manage this growth
successfully, our business could be significantly harmed.
Our net revenues increased from $58.3 million for the period from our
inception to December 31, 1998, to $814.3 million for the year ended December
31, 1999. Our total number of employees has grown from 13 at December 31, 1998,
to 61 at December 31, 1999. In addition, in January 2000, we acquired FreePC.
As a result of this acquisition, we gained 98 additional employees as of
January 15, 2000. Our growth has placed, and will continue to place, a
significant strain on our management systems, infrastructure, resources and
planning and management processes.
As we grow, we will also need to continue to assimilate new employees, as
well as expand, train and manage our workforce. Several key members of our
management team have joined us recently in connection with our acquisition of
FreePC. These individuals must spend a significant amount of time learning our
management systems and our historical business model and helping us extend that
model to offering integrated computing and Internet solutions, in addition to
performing their regular duties. Further, our senior management team has
limited experience in the management and administration of a public company. If
our senior management team is unable to effectively integrate themselves into
our business or work together as a management team, we may be unable to manage
our business and our business may be significantly harmed.
6
<PAGE>
We are subject to risks associated with acquisitions, in general, and with our
acquisition of FreePC, in particular.
In January 2000, we acquired FreePC. We may not successfully integrate the
additional personnel, operations, technology and products of FreePC into our
business, or retain key personnel. In particular, with the acquisition of
FreePC, we have extended our historical business as a high-quality, low-priced
PC provider to integrated computing and Internet advertising offerings. We may
not realize the expected benefits from these offerings. The acquisition may
also strain our existing financial and managerial controls and reporting
systems and procedures.
We intend to continue to make investments in complementary companies,
products or technologies. If we buy a company, we could have difficulty in
integrating that company's personnel and operations. In addition, the key
personnel may decide not to work for us. If we make other types of
acquisitions, we could have difficulty integrating the acquired technology or
products into our operations. These difficulties could disrupt our ongoing
business, distract our management and employees and increase our expenses. In
addition, as a result of future acquisitions, we may increase our debt or
dilute our existing stockholders if we issue equity securities to pay for the
acquisition.
If we do not maintain our reputation and expand our name recognition, we may
lose consumer and advertising customers.
Developing and maintaining awareness of our "eMachines" brand name is
critical to achieving widespread acceptance of our computing and Internet
advertising offerings. Promotion and enhancement of our brand will depend
largely on whether we cost-effectively provide reliable and desired products
and services to consumers and advertisers and the effectiveness of our
marketing efforts. Currently, retailers are our first point of contact with
consumers. If these retailers reduce or cease advertising our products, we may
need to increase our own sales and marketing expenses to create and maintain
brand awareness among potential consumers. If consumers do not perceive our
products to be of high quality, our brand name and reputation could be
significantly harmed. Also, if advertisers do not perceive our reputation among
consumers to be good, they may not be willing to offer as much for our
services. Furthermore, the importance of brand recognition will increase as
competition in the PC and Internet advertising markets increases. If we fail to
successfully promote our brand name or if we incur significant expenses
promoting and maintaining our brand name, we may lose PC and Internet
advertising sales.
Technology changes rapidly, therefore, we must continually introduce new
products and services to remain competitive or our business will be
significantly harmed.
The PC and Internet advertising markets are both characterized by rapid
ongoing technological change, changes in user requirements and preferences,
frequent new service introductions embodying new processes and technologies and
evolving industry standards and practices that could render our existing
products and services obsolete. We must regularly introduce new products,
including new PC configurations, and enhanced Internet services to maintain
retailer, consumer and advertiser interest in our products and services. Any
new PC or other Internet access devices or Internet services that we introduce
may not be successful. In addition, the successful introduction of new products
or services by us or our competitors may significantly harm the sale of, or
gross margins on, our existing products or services. We may not be able to
quickly adapt to future changes in the PC and Internet access device industry,
in particular, because we do not maintain a PC or Internet access device
research and development group. Currently, we work closely with TriGem
Computer, one of our principal stockholders and the manufacturer of all of our
eTower PCs, to evaluate the latest developments in PC-related technology. If we
do not have access to new technology in the future, we may not be able to
successfully incorporate new technology into our products or deliver new
products or features in a timely and cost-effective manner.
7
<PAGE>
If we lose key personnel or are unable to attract and retain additional
personnel when needed, we may not be able to successfully operate our business.
Our future success depends on the skills, experience and performance of our
senior management and key personnel, especially that of our President and Chief
Executive Officer, Stephen A. Dukker. Additionally, the FreePC management team
is key to the success of our Internet business. We must retain these
individuals and be able to attract and retain additional key personnel when
needed in the future. Competition in the PC and Internet and e-commerce markets
for these types of individuals with business and technical expertise is high.
All of our senior management and key personnel are at-will employees and may
terminate their employment with us at any time without warning. Further, we do
not maintain "key man" life insurance with respect to any of our employees. If
we lose key personnel, especially Mr. Dukker, or if we are not able to attract
and retain additional personnel when needed, we may be unable to successfully
introduce new products and services or otherwise implement our business
strategy.
We are involved in litigation that may be costly and time-consuming.
In July 1999, Compaq Computer Corporation filed a complaint against us,
TriGem Computer, TriGem America and Korea Data Systems as defendants in the
U.S. District Court for the Southern District of Texas based on the defendants'
alleged infringement of 13 patents held by Compaq related to improved system
processing speed, enhanced video graphics, peripheral compatibility and overall
system architecture. The complaint seeks an accounting, treble damages, a
preliminary and permanent injunction from further alleged infringement,
attorneys' fees and other unspecified damages. We filed a response in September
1999, seeking declaratory judgment of noninfringement and invalidity of
Compaq's patents and asserting counterclaims against Compaq that included false
and misleading advertising under the Lanham Act, business disparagement and
unfair competition under Texas common law. The case is currently in the early
stages of discovery. As a result, we are currently unable to estimate total
expenses, possible loss or range of loss that may be ultimately connected with
these allegations. We are indemnified against liability under the terms of our
PC supply agreement. We cannot assure you that Compaq will not succeed in
obtaining monetary damages or an injunction against the production of our PC
products. Our defense of the claims could result in significant expenses and
diversion of management's attention and other resources. Although we believe
our direct financial exposure is limited under our indemnification
arrangements, the results of complex litigation of this sort are inherently
uncertain and difficult to predict and we cannot assure you that the results of
this litigation would not result in our business being significantly harmed,
particularly if it affects production of our PCs.
Packard Bell filed a complaint on October 6, 1999 in Federal District Court
for the Eastern District of California, alleging patent infringement on Packard
Bell patents which it asserts relates to (i) graphics controller, (ii) parallel
port controller, and (iii) bus interface of our eTower machine. We filed a
response in January 2000 disputing infringement and asserting that the patents
at issue are invalid. We are in the early stages of discovery. As a result, we
are currently unable to estimate total expenses, possible loss or range of loss
that may be ultimately connected with these allegations. We are indemnified
against liability under the terms of our PC supply agreement. We cannot assure
you that Packard Bell will not succeed in obtaining monetary damages or an
injunction against the production of our PC products. Our defense of the claims
could result in significant expenses and diversion of management's attention
and other resources. Although we believe our direct financial exposure is
limited under our indemnification arrangements, the results of complex
litigation of this sort are inherently uncertain and difficult to predict and
we cannot assure you that the results of this litigation would not result in
our business being significantly harmed, particularly if it affects production
of our PCs.
In October 1999, David Packard on behalf of a putative nationwide class,
filed a complaint against us as a defendant in the U.S. District Court for the
Eastern District of Texas based on our alleged sale of defective goods.
Essentially identical complaints were filed contemporaneously against Compaq,
Hewlett-Packard and Packard Bell. The complaints claim that a chip in the
defendants' respective PC products contains a defect which may cause an error
to occur when information is written to a floppy disk. The complaint seeks
8
<PAGE>
unspecified monetary damages, injunctive relief and declaratory relief. The
lawsuit against us is in the early stages of discovery and we have not yet
filed a response. Although we believe that we have meritorious defenses and
intend to vigorously defend ourselves in this action, these types of litigation
are inherently complex and unpredictable. We cannot assure you that the suit
will not succeed in obtaining unspecified monetary damages, injunctive and
declaratory relief against the production of our PC products. Our defense of
the claims could result in significant expenses and diversion of management's
attention and other resources. In addition, we cannot assure you that the
results of this litigation would not result in our business being significantly
harmed.
Various other lawsuits, claims and proceedings have been or may be asserted
against us, including those related to product liability, intellectual
property, Internet content, privacy, safety and health and employment matters.
Litigation is expensive and time consuming regardless of the merits of the
claim and could divert management's attention from our business. Moreover, we
cannot predict the outcome of any litigation. Some lawsuits, claims or
proceedings may be disposed of unfavorably to us.
We may not be able to compete effectively if we are not able to protect our
intellectual property.
We rely on a combination of trademark, trade secret, patent and copyright
law and contractual restrictions to protect our intellectual property. e-
machines is our registered trademark in the United States. We have also applied
to register several trademarks including eMachines and the "e" logo in the
United States. We have also applied to register marks in the European
Community, the United Kingdom, Brazil, Japan, Taiwan, China, Canada and Mexico.
We also have a United States patent application currently pending. If we are
not successful in obtaining the patent protection we seek, our competitors may
be able to replicate our ad optimization technology and compete more
effectively against us. The legal protections described above, even if
successful, would afford only limited protection. Unauthorized parties may
attempt to copy aspects of our products, services, or otherwise attempt to
obtain and use our intellectual property. Enforcement of trademark rights
against unauthorized use, particularly over the Internet and in other
countries, may be impractical or impossible and could generate confusion and
diminish the value of the mark. Litigation may be necessary to enforce our
intellectual property rights, to protect our trade secrets and to determine the
validity and scope of the proprietary rights of others. Any litigation could
result in substantial costs and diversion of our resources and could seriously
harm our business and operating results. In addition, our inability to protect
our intellectual property may harm our business and financial prospects.
We may be subject to claims that intellectual property used in our products
infringes the rights of third parties and we could incur significant costs
defending ourselves.
It is common for a company in the PC and software industries to receive
communications from time to time from other parties asserting that they possess
patent rights, copyrights, trademark rights or other intellectual property
rights that cover the company's products. We receive notices from time to time
that the intellectual property used in our products allegedly infringes
intellectual property rights held by others. Assertions of this nature may
subject us to legal proceedings and claims in the ordinary course of our
business. For example, in July 1999, Compaq filed a lawsuit against us alleging
that our PC products infringe a number of its patents. In addition, in October
1999, Packard Bell filed a lawsuit against us alleging infringement of patents
relating to graphics controller, parallel port controller and the bus interface
of our eTower machine. For a discussion of these lawsuits, see the risk factor
"We are involved in litigation that may be costly and time-consuming" above. If
the final judgment of any legal action is decided against us, our business
could be significantly harmed. Intellectual property litigation is expensive
and time consuming regardless of the merits of the claim, and could divert our
management's attention from our business. Any potential intellectual property
litigation could also force us to do one or more of the following:
. stop using the challenged intellectual property or selling our products
or services that incorporate it;
. obtain, if possible, a license to use the challenged intellectual
property or to sell products or services that incorporate it, although a
license may not be available on reasonable terms, or at all; or
. redesign those products or services that are based on or incorporate the
challenged intellectual property.
9
<PAGE>
If we are forced to take any of the foregoing actions, we may be unable to sell
our products or services and our business would be significantly harmed.
Products that contain, or are rumored to contain, defects could result in
significant costs to us or otherwise significantly harm our business.
The design and production of PC components is highly complex. Since we do
not design or produce our own PC products, we rely on suppliers and component
manufacturers to provide us with high-quality products. If any of our PC
products contain defective components, we could experience delays in shipment
of these products and increased costs. Further, the design of software is
highly complex, and software often contains defects that may be undiscovered
for long periods of time. If we are not successful in designing this software,
or if defects in our software or in our PC products are discovered after we
have shipped our affected software or PC products in volume, we could be harmed
in the following ways:
. upgrades, replacements or recalls could impose substantial costs on us;
. rumors, false or otherwise, could be circulated by the press and other
media which could cause a decrease in sales of our products and
significant damage to our brand; and
. our PC buyers could file suits against us alleging damages caused by
defective products.
For example, in October 1999, David Packard on behalf of a putative nationwide
class, filed complaints against us, Hewlett-Packard and Compaq in the U.S.
District Court for the Eastern District of Texas based on alleged sale of
defective goods. The complaint alleges that a chip in the respective
defendants' PC products contains a defect which causes an error to occur when
information is written to a floppy disk. For a discussion of these complaints
and the risks associated with the lawsuit against us, see the risk factor "We
are involved in litigation that may be costly and time-consuming" above.
If demand for Internet access devices, in general, and PCs, in particular, does
not continue to grow, our business will be significantly harmed.
The future success of our business model is dependent on the continued
strong demand for Internet access devices, generally, and for PCs, in
particular. Although we currently focus our efforts on high-quality, low-priced
PC products, we expect consumer demand for more powerful PCs and other Internet
access devices to increase with advances in technology and declines in prices.
To meet these demands, we must successfully gauge the level and timing of
consumer demand for PCs and other Internet access devices and match the supply
of each. The PC and Internet access device markets are characterized by rapid
new product and technology introductions and generally declining prices for
existing products. Demand for PCs and other Internet access devices might be
significantly reduced if consumers perceive little technological advantage in
new products or believe that the price of a new product is not worth the
perceived technical advantage. Further, if consumers view anticipated changes
as significant, such as the introduction of a new operating system or
microprocessor architecture, overall market demand for PCs and other Internet
access devices may decline because potential consumers may postpone their
purchases until release of the new product or in anticipation of lower prices
on existing products following the introduction of new models. Reduced demand
could result in excessive inventories that could take several quarters to
correct. If any of these events occur, our business would be significantly
harmed.
Misappropriation by others of our trademarks and other proprietary rights could
harm our reputation, affect our competitive position and cause us to incur
significant costs to defend our rights.
We rely on a combination of copyright, trademark, patent and trade secret
law and contractual restrictions to establish and protect our technology and
proprietary rights and information. We require employees and
10
<PAGE>
consultants to sign confidentiality agreements. We own only one trademark
registration in the United States and have filed for only one patent
application. Nonetheless, we may not be able to deter misappropriation of our
proprietary information and material in light of the following risks:
. nonrecognition or inadequate protection of our proprietary rights in
certain foreign countries;
. undetected misappropriation of our proprietary information or materials;
and
. unenforceability of confidentiality agreements entered into by our
employees.
We also seek to limit access to our proprietary information and our third-
party licensors' proprietary information. If we are unable to protect our
trademarks and other proprietary rights against unauthorized use by others, our
reputation and brand name would be damaged and our competitive position would
be significantly harmed.
Risks Principally Related to Our Internet Business
The Internet advertising market is new and unproven and may not continue to
develop.
The Internet has not been used as an advertising medium for a sufficient
period of time to demonstrate its effectiveness. Our business would be
adversely affected if the Internet advertising market fails to develop. Most of
our current or potential advertising customers have not devoted a significant
portion of their advertising expenditures to Internet advertising and may not
find Internet advertising to be effective for promoting their products and
services relative to advertising using traditional media.
Currently, there are no widely accepted standards for measuring the
effectiveness of Internet advertising. We cannot be certain that such standards
will develop to sufficiently support Internet advertising as a significant
advertising medium. Advertisers may not accept our or third-party measurements
of impressions or click-throughs on Web sites utilizing our services. In
addition, the effectiveness of Internet advertising depends on the accuracy of
information contained in the databases used to target advertisements. We cannot
be certain that the information in our databases will be accurate or that
advertisers will be willing to have advertisements targeted by any database
containing such potential inaccuracies. Actual or perceived ineffectiveness of
online advertising in general, or accuracy of measurements or database
information in particular, could limit the long-term growth of online
advertising.
The advertising links that we provide using our hot-key-enabled keyboards
and client software and the banner advertisements that we serve may not be
effective advertising methods. Other forms of Internet advertising may be more
effective or gain wider acceptance. Nonetheless, we may not be able to take
advantage of them. Moreover, "filter" software programs that limit advertising
from being delivered to a user's computer are currently available. The Internet
advertising market and our business could be adversely affected if use of
filter software becomes widespread.
Adoption of online direct marketing, particularly by those entities that
have historically relied upon traditional means of direct marketing, such as
telemarketing and direct mail, requires the broad acceptance of a new and
substantially different approach to direct marketing. Intensive marketing and
sales efforts may be necessary to educate prospective advertisers regarding the
uses and benefits of our direct marketing services to generate demand for such
services. Enterprises may be reluctant or slow to adopt a new approach that may
replace, limit, or compete with their existing systems. In addition, since
online direct marketing is emerging as a new and distinct market apart from
online advertising, potential adopters of online direct marketing services will
increasingly demand functionality tailored to their specific requirements.
Our ability to generate Internet-based revenues is unproven and we may never
achieve profitability in the Internet segment of our business.
We first began bundling the eWare desktop client software with our PCs
during December 1999 and did not begin production of our first keyboard with
Internet hot-keys until January 2000. Given our limited history
11
<PAGE>
offering these Internet-based services, evaluating our performance is
difficult. In addition, although FreePC had relationships with a large number
of advertisers, our business model is significantly different than FreePC's,
and these advertisers may not continue to do business with us as we have
discontinued the distribution of free computers and expect to cease providing
free Internet access service. You should consider the uncertainties that we may
encounter as we develop our Internet business in this rapidly evolving market,
such as:
. consumer demand for, and acceptance of, our eWare Internet client and
hot-key-enabled keyboards;
. our ability to create user-friendly applications that appeal to
consumers;
. our ability to contract with content providers who will furnish
information that our users find attractive;
. our ability to support a large number of users;
. our ability to anticipate and adapt to a developing market and to
rapidly changing technologies;
. our unproven and evolving business model; and
. our need to expand significantly our internal resources to support
growth of our product and service offerings.
If we are unable to address successfully these issues, we will be unable to
expand our Internet business, compete effectively or achieve profitability in
the Internet segment of our business.
Our Internet-based revenues will suffer if consumers do not use the hot-keys,
desktop client software and other Internet-related services that we provide
them.
We expect to generate future revenues from sources such as Internet
advertising, sponsorships, e-commerce and Internet application services. The
success of our Internet operations depends upon the use by our consumers of the
hot-keys on our keyboards and our desktop client software to reach selected
advertisers' Web sites. Many of our potential consumers have never purchased
Internet access service, used the Internet, e-mail or other Internet-based
applications or engaged in e-commerce transactions. Potential users must
utilize our desktop client software and hot-keys as part of their Internet and
e-commerce experience in order for us to receive recurring Internet revenues.
Because these keys and the menu bar have only been operational for a limited
period of time and because they are new methods of accessing Web sites and
Internet-based services, whether enough users of our PCs will use these
features to create a sufficiently large audience to attract advertisers is
uncertain. In addition, use of the hot-keys and our desktop client software
depends on the appeal to our consumers of the linked Web sites. We rely on
market research to determine the categories of products and services in which
consumers are likely to be interested. Should our reliance on this research
prove to be misguided, we may fail to select relevant categories of interest to
consumers or fail to adequately provide links to superior content within these
categories. In addition, we have no control over the experience that our
consumers have while visiting these Web sites. Consumers who are not satisfied
with their experience may decide not to use our hot-keys or desktop client
software. Should this occur, our ability to generate advertising revenue will
be significantly harmed.
We face risks related to expanding into new services and business areas, in
particular, e-commerce.
To increase our revenues, we will need to expand our operations by promoting
new or complementary products and by expanding the breadth and depth of our
services. Specifically, our future success will depend, in part, on obtaining
revenues from the facilitation of e-commerce transactions with online and
traditional retailers. The market for e-commerce services is extremely
competitive. Because we have limited experience in this market, we may have
limited success. If we expand our operations in this manner, we will require
significant resources for additional development and such expansion may strain
our management, financial and operational resources. Our expansion into new
product and service offerings may not be timely or may not generate sufficient
revenues to offset their cost. If this occurs, our business will be seriously
harmed.
12
<PAGE>
Our business would be harmed if we are unable to compete successfully for
users.
The markets for PCs, Internet appliances and Internet advertising are
intensely competitive, evolving and subject to rapid technological change.
These markets are characterized by an increasing number of entrants. We compete
for users, and consequently for potential electronic commerce and advertising
revenue, directly or indirectly, with the following categories of competitors:
. vendors of personal computers, such as Apple, Compaq, Dell, Gateway,
Hewlett-Packard and IBM;
. vendors of stand-alone Internet appliances, such as InfoGear, Netpliance
and WebTV;
. Internet service providers, such as America Online, EarthLink,
Mindspring, Microsoft and NetZero;
. Internet portals, such as Excite@Home, Lycos and Yahoo!; and
. providers of Internet advertising services, such as 24/7 Media,
DoubleClick and Engage Technologies.
Virtually all of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a substantially larger
installed base of customers than we do. In addition, many of our competitors
have nationally known brands or well-established relationships and have
extensive knowledge of our industry. Moreover, our current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to increase the ability of their products to
address consumer needs or to combine hardware product and Internet service
offerings.
If we are unable to sell America Online's Internet access services to our PC
buyers, our business would be significantly harmed.
Our future success depends in part on our ability to sell Internet access
services to our PC buyers. The PC industry and the Internet industry are
currently evolving and converging. We believe that this convergence will result
in the PC becoming the Internet appliance that attracts consumers to enter into
multi-year Internet access service contracts. In addition, since we receive
bounty payments and other revenues from America Online depending on the service
our PC buyers choose, our business would be harmed if the reputation of America
Online or the popularity of America Online's AOL Classic or CompuServe 2000
suffer and a significant number of buyers do not also purchase Internet access
service from America Online. If Internet access services fees decline
significantly or become free, an ISP rebate program would be unattractive to
consumers and our business would be significantly harmed.
Our business will be significantly harmed if growth in the use of the Internet
does not continue.
We believe a significant number of our PC buyers are purchasing our products
and services as a means of connecting to the Internet. As a result, our future
success is substantially dependent upon continued growth in Internet use. The
adoption of the Internet medium for commerce and communications generally
requires the understanding and acceptance of a new way of purchasing goods and
exchanging information. The use and acceptance of the Internet may not increase
for a number of other reasons, including the following:
. actual or perceived lack of security of information, such as credit card
numbers, which are transmitted over the Internet;
. high cost or lack of availability of access;
. congestion of traffic or other usage delays on the Internet;
. inconsistent quality of service;
. possible outages due to damage to the Internet;
. uncertainty regarding intellectual property ownership; and
. government regulation of the Internet.
13
<PAGE>
Capacity constraints caused by growth in the use of the Internet may impede
further development of the Internet to the extent that users experience delays,
transmission errors and other difficulties. If the necessary infrastructure,
products, services or facilities are not developed to mitigate the effects of
these factors, or if the Internet does not become a viable and widely used
commercial and communication medium, our business could be significantly
harmed.
If software we develop or software developed by, or licensed from, third
parties, has any unanticipated defects or becomes unavailable, our business
could be significantly harmed.
We have developed and are further developing two-way client software as well
as other applications that will be bundled with our PCs. Some of our Internet-
based services rely on software provided by third parties that is bundled with
our PCs. We have no control over the quality of this software. Our software and
this third- party supplied software may contain undetected errors, defects or
bugs. These defects could cause service interruptions that could damage our
reputation or increase our product repair costs, prevent us from delivering
advertisements, cause us to lose revenue, delay market acceptance of our
Internet-based services or divert our development resources, any of which could
cause our business to suffer. If these problems cannot be fixed in a timely
manner, we may be unable to fulfill our obligations to our advertising
customers, which could significantly harm our business.
If we are unable to cope with significant increases in traffic to our servers,
we may lose user confidence.
Currently, users who use the hot-keys on our keyboards and our eWare client
software to reach our advertisers' Web sites are first directed to our servers
and then re-directed to our advertisers' Web sites. We may experience
significant increases in traffic on our servers for a variety of reasons,
including an increase in sales of our PCs or keyboards. We expect the number of
users of our Internet-enhanced PC products to increase rapidly over time.
Accordingly, our servers must accommodate a high volume of traffic, often at
unexpected times. Our servers have in the past, and may in the future,
experience slower response times than usual or other problems for a variety of
reasons. These events could cause our users to perceive our servers as not
functioning properly and, therefore, cause them to use other methods to access
and use the Internet. If this occurs, our business could be seriously harmed.
Our servers are located at a single site and, in the event of a natural
disaster, our client software would not operate.
We depend on the efficient and uninterrupted operations of our Web servers
and other hardware systems. Our Web servers and other hardware systems are
located in Sunnyvale, California. Our Web servers and other hardware systems
are vulnerable to damage from earthquakes, fire, floods, power loss,
telecommunications failures, and similar events. If any of these events result
in damage to our Web servers or other hardware systems, we may be unable to
deliver Internet advertising and other related Internet services for our
customers until the damage is repaired. If this occurs, we may lose customers,
users of our client software and revenue, as well as incur substantial costs in
repairing any damage.
Online security breaches could result in a loss of consumer confidence in e-
commerce, which could hurt our ability to implement our business strategy.
Because many of our advertisers encourage people to use the Internet to
purchase goods and services, our business could be seriously harmed if Internet
users reduce their use of the Internet because of security concerns. We
currently ask consumers to provide us with registration and other information
and we rely on encryption and authentication technology to securely transmit
this confidential information. In addition, a party that is able to circumvent
the security of our server systems could steal proprietary information or cause
interruptions in our operations. Our efforts to protect our server systems may
not be successful. Any well-publicized compromise of confidential information,
whether during the transmission of data or while it is stored
14
<PAGE>
on our servers, could damage our reputation, expose us to a risk of loss,
litigation or liability, and deter people from using the Internet. Our
insurance policies may not be adequate to reimburse us for losses caused by
security breaches.
We could be exposed to liability or increased costs if new case law is decided,
or new government regulation is enacted, regarding the Internet.
The law relating to our Internet business and operations is evolving, and no
clear legal precedents have been established. For example, tax authorities in a
number of states are currently reviewing the appropriate tax treatment of
companies engaged in e-commerce, and new state tax regulations may subject us
to additional state sales or other taxes. The adoption of any new Internet laws
and regulations or the application of existing laws and regulations to the
Internet and e-commerce could decrease the demand for our products and services
or increase the cost of doing business. In addition, the applicability to the
Internet of existing laws in various jurisdictions governing issues such as
property ownership, sales and other taxes, libel and personal privacy is
uncertain and may take years to resolve. If we were alleged to have violated
federal, state or foreign civil or criminal law, even if we could successfully
defend such claims, it could occupy significant amounts of management's time,
harm our business reputation and negatively affect our operating results and
financial condition.
We may face claims for activities of our customers that could harm our
business.
Our customers' promotion of their products, services and software may not
comply with federal, state and local laws. A wide variety of laws and
regulations govern the content of advertisements and regulate the sale of
products and services. There is also uncertainty as to the application of these
laws to the emerging world of advertising on the Internet. We cannot predict
whether our role in facilitating these marketing activities would expose us to
liability under these laws. We may face civil or criminal liability for
unlawful advertising or other activities of our customers. If we are exposed to
this kind of liability, we could be required to pay substantial fines or
penalties, redesign our business methods, discontinue some of our services or
otherwise expend resources to avoid liability. Any costs incurred as a result
of that liability or asserted liability could harm our business.
Risks Principally Related to Our PC Business
Because our business depends on outsourcing a substantial portion of our PC
operations, if we were unable to do so in the future, our business would be
significantly harmed.
Historically, we have had relatively low manufacturing and operating costs
because we outsource most of our operating and manufacturing functions,
including system assembly, warehouse labor, distribution, research, product
design, warranty services and customer support. In addition, we have had
relatively low distribution costs because we distribute our products primarily
through a limited number of large retailers. We may not be successful in
managing our relationships with any of these third parties, and if existing
third-party suppliers cannot provide these services at commercially reasonable
prices, or at all, and we are not able to find suitable alternative suppliers,
our business would be significantly harmed. Moreover, we may not be able to
monitor or control effectively the quality of the PCs and monitors manufactured
by our suppliers. Low-quality products, poor customer service, or similar
inadequacies may harm our brand name, which would significantly harm our
business.
Because we currently depend solely on three manufacturers for our PCs and
monitors, if supply is reduced or discontinued, our business would be
significantly harmed.
TriGem Computer currently manufactures all of our eTower and eMonster PCs.
Korea Data Systems Co. manufactures our eOne PCs, eSlate notebooks and,
together with the Jean Company, a Taiwanese manufacturer, all of our monitors.
We have no obligation to order, take minimum delivery or purchase products at
pre-negotiated prices from TriGem Computer, Korea Data Systems Co. or Jean
Company. Additionally, other than in the case of TriGem Computer as described
below, absent a purchase order submitted by us, Korea Data
15
<PAGE>
Systems and Jean Company have no contractual obligation to supply us with PCs
and monitors. Further, TriGem Computer's PC production facility in Korea is
currently operating at full capacity. In order to meet anticipated demand for
our products and the products of other customers, TriGem Computer recently
entered into an outsourcing manufacturing agreement for a facility in Xiamen,
China and opened a new facility in Shenyang, China. The Xiamen facility
currently has production capacity of approximately 90,000 PC units per month.
The Shenyang facility is a final-assembly plant with production capacity of
approximately 150,000 PC units per month. Under the terms of our supply
agreement, TriGem Computer has agreed to reserve a portion of its manufacturing
capacity at its facilities to meet our supply requirements. TriGem Computer,
Korea Data Systems Co. and Jean Company provide other vendors with PCs and
monitors. As a result, we may not benefit from any increased production
capacity. If we are unable to obtain a sufficient supply of PCs or monitors to
meet the demand for our products, our business would be significantly harmed.
Our suppliers depend on a limited number of key suppliers for microprocessors
and other components used in our products.
Our suppliers generally use standard parts and components available from a
number of vendors. However, our suppliers are dependent on Intel Corporation
and Advanced Micro Devices, Inc. for their supply of microprocessors. If, in
the future, our suppliers are unable to obtain sufficient quantities of
microprocessors from Intel or Advanced Micro Devices, or if these companies
stop producing microprocessors that meet our needs, our suppliers could
experience increases in component costs or delays in product shipments that
would significantly harm our business. Even where multiple vendors are
available, our suppliers' strategy has been to concentrate purchases from a
single source to obtain favorable pricing. Our business would be significantly
harmed if supply shortages led to price increases or production delays for our
products.
Because average selling prices of PCs decline rapidly, if we fail to properly
manage our inventory our business could be significantly harmed.
The average selling prices of PCs are subject to rapid declines. To address
the problems created by excess inventory in the face of rapid price decreases,
PC vendors must carefully manage their inventory. Additionally, due to our
narrow margins, we must manage our inventory more efficiently than traditional
PC vendors. From time to time in the past, our inventory has been limited by
the capacity of our manufacturers and may be limited in the future. We may be
unsuccessful in managing the supply of our PCs and monitors to meet demand in
the future. Our business is dependent on our ability to quickly sell our PC
products through the retail channel. We must carefully monitor market demand
for, and supply of, our products in an effort to match supply to consumer
demand. If we overestimate the supply needed to meet consumer demand, our
business could be significantly harmed. If we underestimate needed supply or
otherwise maintain too little inventory, we may not be able to react quickly to
sudden increases in market demand for a given product, which may significantly
harm our business.
In connection with the introduction of new products, we may be required to
discount prices of existing products or to give other sales incentives to
retailers. As a result, we may experience price protection adjustments to a
significant degree in the future. For example, in the second quarter of 1999,
we offered a significant price protection to certain retailers in connection
with the introduction of our next generation of products. In addition,
retailers generally have the right to return a portion of excess inventory
purchased in the prior quarter within a limited period of time. Increased
inventory levels in our distribution channels, whether due to a decrease in
consumer demand for our products, lower-than-anticipated demand for PCs in
general, problems in managing product transitions or component pricing
movements could significantly harm our profitability. Production delays at the
beginning of a new PC product cycle could affect our sales of newer products
and how we manage the sale of older PC product inventory held by retailers. If
we are unable to sell our aging products at anticipated prices, our business
could suffer. In managing our supply chain, we must accurately forecast
consumer demand for our products. The amount we establish as reserves for price
adjustments in the event we must credit a retail customer for a price decrease
may be insufficient and any future returns or price protection charges may
significantly harm our business.
16
<PAGE>
The international operations of our suppliers of PCs and monitors expose us to
currency, trade, regulatory, political and other risks.
All of our PCs and monitors are currently being manufactured in Korea, China
and Malaysia by TriGem Computer, Korea Data Systems Co. and Jean Company. These
suppliers' operations, and in turn our operating results, are subject to a
number of risks associated with international operations including:
. fluctuations in currency values;
. export duties, import controls and trade barriers;
. restrictions on the transfer of funds;
. political and economic instability; and
. compliance with foreign laws.
Our business would be significantly harmed if we are unable to compete
successfully in the PC industry.
The PC industry is highly competitive and we expect this competition to
increase significantly, particularly in the low-priced PC market. We have been
able to gain market share by selling high-quality PCs at prices significantly
lower than those offered by established PC vendors. We expect pricing pressures
in the PC market to continue, particularly as more vendors combine Internet
access with the purchase of a PC. PC vendors may continue to reduce their
prices to compete with us at our low price points. Large PC vendors such as
Compaq, Gateway, Hewlett-Packard and IBM have significantly greater financial,
marketing and technical resources than we do and may decide to accept lower
margins or losses on a sustained basis on their low-priced PC sales to regain
market share. The introduction of low-priced PCs combined with the brand
strength, extensive distribution channels and financial resources of the larger
PC vendors may cause us to lose market share.
Most major PC vendors have begun to offer Internet access services. Some PC
vendors are trying to increase their sales of higher-priced PCs by offering
additional services, such as free Internet access for a limited period of time.
In addition, other PC vendors are adopting programs similar to ours that rebate
a portion of the purchase price of PCs in exchange for entering into multi-year
Internet access service contracts. There are relatively few barriers preventing
competitors from entering this market. As a result, new market entrants pose a
threat to our business. We do not own any patented technology that precludes or
inhibits competitors from entering the low-priced PC market. Existing or future
competitors may develop or offer products or services that are comparable or
superior to ours at a lower price, which could significantly harm our business.
For example, in the last quarter of 1999 one retailer began offering its own
branded, low-price PCs in conjunction with Internet access service from America
Online. Our PC and monitor suppliers either are not contractually bound or have
only limited obligations to meet our demand for products and can divert some or
all of their output to others, including our competitors, or sell directly to
the retail channel. If any of these events were to occur, our business would be
significantly harmed unless we were able to successfully compete with these
parties and source high-quality PCs and monitors from other low-cost
manufacturers.
The future of our PC business depends on PCs remaining the predominant Internet
access device.
The future of our PC business depends on PCs remaining the predominant
Internet access device. Internet services are currently accessed primarily by
PCs. However, television set-top boxes, hand-held products and other non-PC
devices may increasingly be used to access the Internet. Television set-top
boxes equipped with modems and cable modems allow users to transmit data at
substantially faster speeds than the analog modems currently incorporated in
our PCs. If consumers prefer this or any other alternative devices to PCs to
access the Internet, sales of our PCs may slow.
17
<PAGE>
Because we depend on licenses of intellectual property from third parties to
produce our PC products, the loss of any of these licenses would significantly
harm our business.
We are required to obtain licenses from software providers in order to
market and sell our products and services. In particular, we currently pre-
install Windows 98 and Microsoft Works on our PCs pursuant to a license.
However, if we are unable to maintain these licenses, or obtain the necessary
licenses in the future, we may be forced to market products without these
technological features or software. We may also be forced to discontinue sales
of our products that incorporate allegedly protected technology for which we
have no license or defend legal actions taken against us relating to our use of
the allegedly protected technology. Our inability to obtain licenses on
competitive terms necessary to sell our PCs at a profit would significantly
harm our business.
If we do not maintain and strengthen our relationships with our retailers, our
ability to generate revenues will suffer and our business will be significantly
harmed.
We depend substantially on retailers to sell our PCs and monitors. Since
inception, we have derived a significant portion of our gross revenues from
sales of our PCs and monitors to a limited number of large retailers. For the
year ended December 31, 1999, approximately 68% of our gross revenues were from
sales of PCs and monitors to Best Buy, Office Depot, Circuit City and
MicroCenter, our four largest retail customers. We expect to continue to derive
a large percentage of our gross revenues from sales of PCs and monitors to a
limited number of leading retailers. However, our retail customers are not
contractually committed to future purchases of our products and could
discontinue carrying our products at any time. In addition, we compete with an
increasing number of companies for access to limited shelf space with these
retailers. Generally, these retailers limit the number of PC brands they carry
and may stop carrying our PCs at any time. Any significant disruption of our
relationship with any of our major retailers, or any significant reduction in
purchases by them, could significantly harm our business.
If we are unable to monitor and manage our product rebate programs, our
business could be significantly harmed.
We currently offer product rebates to buyers of our PCs. We have limited
historical data to assist us in determining what percentage of consumers will
claim these product rebates. At the same time, we must approximate future
product rebate redemptions in order to price our products effectively. Our
business would be significantly harmed if an unexpectedly large number of our
PC buyers redeemed the product rebates to which they were entitled, thereby
reducing the effective average selling price of our products below the level we
anticipated.
We rely on the availability of rebates offered by Internet service providers to
sell our PCs, and if such rebates are discontinued, our business could be
significantly harmed.
To help sell PCs, we rely on the availability of rebates offered by Internet
service providers to purchasers of new computers who subscribe for their
Internet access services. These rebates reduce the effective price of our PC
models, making them more affordable for consumers. If these rebates were
discontinued, the effective prices of our PCs would increase, which likely
would reduce sales of our PCs. A significant decrease in sales of PCs would
harm our business.
We operate under a verbal agreement with one of our suppliers, the terms of
which may be changed in a manner adverse to us.
We currently operate under a verbal agreement with KDS USA, the supplier of
our monitors and certain other of our products. Under this agreement, our
inventory trade payable terms are extended out to 90 days with a cash discount
on PC purchases proportional to the number of days we pay early. This verbal
agreement is described in more detail under "Related Party Transactions." Since
this agreement is not in written form, we may not be able to continue to
operate our business under these terms and these terms may be subject to future
change. If we are unable to continue to operate under this agreement or it is
changed in a manner adverse to us, our business could be significantly harmed.
18
<PAGE>
If we extend credit to retailers that do not repay us, or that pay late, we may
have unexpected losses, which would significantly harm our business.
We extend credit to our retailers, which exposes us to credit risk. Most of
our outstanding accounts receivable are from a limited number of large
retailers. As of December 31, 1999, our four highest outstanding accounts
receivable balances totaled $78.8 million, representing 63% of our gross
accounts receivable, with one customer accounting for $44.7 million,
representing 36% of our gross accounts receivable. In the event that we fail to
monitor and manage effectively the resulting credit risk and a material portion
of our accounts receivable is not paid in a timely manner or becomes
uncollectible, our business would be significantly harmed and we could incur a
significant loss associated with any outstanding accounts receivable.
Risks Related to this Offering
Our principal stockholders can exercise a controlling influence over our
business and affairs.
Immediately after the offering, our four principal stockholders, TriGem
Corporation, Korea Data Systems America, idealab! Holdings, L.L.C. and Stephen
A. Dukker, will own approximately % of our common stock ( % if the
underwriters' over-allotment option is exercised in full). If these
stockholders acted or voted together, they would have the power to elect our
directors and to exercise a controlling influence over our business and
affairs, including:
. any determinations over whether to change the source of our supply of
PCs and monitors;
. the appointment of new management;
. any determinations with respect to mergers, acquisitions or other
business combinations;
. future issuances of debt and equity securities; and
. the approval of any action requiring the consent of the stockholders,
including amendments to our certificate of incorporation.
In addition, this concentration of ownership could prevent a change in control
that might otherwise be beneficial to stockholders.
We may have potential conflicts of interest with our principal stockholders
that could be resolved in a manner that is inconsistent with other
stockholders' interests.
Conflicts of interest may arise between us and our principal stockholders in
a number of areas relating to our present and ongoing relationships, which
could be resolved in a manner that is inconsistent with our other stockholders'
interests. Conflicts of interests that may arise include:
. the ongoing supply relationships between us and our principal corporate
stockholders that may result in terms that are not as favorable to us as
arrangements we could negotiate at arm's length between unrelated
parties;
. potential competitive business activities;
. potential acquisitions or financing transactions;
. sales or other dispositions by these principal stockholders of shares of
our common stock, including through the exercise of their registration
rights; and
. tax and intellectual property matters.
Substantial future sales of our common stock in the public market may depress
our stock price.
Our current stockholders hold a substantial number of shares of our common
stock that they will be able to sell in the public market in the future. Sales
of a substantial number of shares of our common stock after this
19
<PAGE>
offering could cause our stock price to fall. In addition, the sale of these
shares could impair our ability to raise capital through the sale of additional
stock. You should read "Shares Eligible for Future Sale" for a full discussion
of shares that may be sold in the public market in the future.
Our management has broad discretion over the use of the proceeds from this
offering.
Our management has broad discretion over the use of the proceeds of this
offering. Accordingly, it is possible that our management may allocate the
proceeds differently than investors in this offering would have preferred, or
that we will fail to maximize our return on the proceeds. See "Use of Proceeds"
for a more complete description of our current intention regarding the net
proceeds of this offering.
As a new investor you will experience immediate and substantial dilution.
If you purchase common stock in this offering, you will pay more for your
shares than the amount paid by existing stockholders who acquired shares before
this offering. As a result, the value of your investment based on the value of
our net tangible assets, as recorded on our books, will be less than the amount
you pay for shares of common stock in this offering. In addition, the total
amount of our capital will be less than what it would have been had all the
existing stockholders and optionees paid the same amount per share of common
stock as you will pay in this offering. See "Dilution" for a more complete
description of the dilution of your investment in our common stock upon the
completion of this offering.
Our charter documents and Delaware law could make it more difficult for a third
party to acquire us and discourage a takeover.
Our certificate of incorporation and bylaws are designed to make it
difficult for a third party to acquire control of us, even if a change in
control would be beneficial to stockholders. For example, our amended and
restated certificate of incorporation to be filed upon completion of this
offering, authorizes our board of directors to issue up to 25,000,000 shares of
preferred stock without previously designated rights and privileges. Without
stockholder approval, the board of directors has the authority to attach
special rights, including voting and dividend rights, to this preferred stock.
With these rights, preferred stockholders could make it more difficult for a
third party to acquire our company, including takeover attempts that might
result in a premium over the market price for shares of our common stock.
Our charter documents will, subject to appropriate corporate action, create
a classified board of directors, eliminate the right of stockholders to call a
special meeting of stockholders, and eliminate the ability of stockholders to
take action by written consent. As a Delaware corporation, we are also subject
to the Delaware anti-takeover statute contained in Section 203 of the Delaware
General Corporation Law. See "Description of Capital Stock--Delaware Anti-
Takeover Law and Certain Charter and Bylaw Provisions" for a more complete
description of Section 203 of the Delaware General Corporation Law. These
provisions could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders.
Our stock price may be volatile.
Prior to this offering, there has not been a public market for our common
stock. We cannot predict the extent to which investor interest in eMachines
will lead to the development of a trading market or how liquid that market
might become. The initial public offering price for our shares will be
determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market.
In addition, the stock markets in general, and The Nasdaq National Stock
Market and technology companies in particular, have experienced extreme price
and volume fluctuations that have often been unrelated or disproportionate to
the operating performance of such companies. The trading prices of many
comparable technology companies' stocks are at or near historical highs. These
trading prices are substantially above historic levels and may not be
sustained. These broad market and industry factors may seriously impact the
market price of our common stock, regardless of our actual operating
performance.
20
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"intend," "potential" or "continue" or the negative of such terms or other
comparable terminology. These forward-looking statements include, but are not
limited to, statements about our plans, objectives, expectations and intentions
and other statements contained in the prospectus that are not historical facts.
These statements are only predictions. We cannot guarantee future results,
levels of activity, performance or achievements. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including the risk outlined under "Risk Factors" and
elsewhere in this prospectus.
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the shares
of common stock offered will be approximately $ million (approximately
$ million if the underwriters' over-allotment option is exercised in
full), at an assumed initial public offering price of $ per share (less
underwriting discounts and commissions and estimated offering expenses). The
primary purposes of this offering are to increase our working capital and
invest in our Internet business.
We intend to use the net proceeds from this offering for general corporate
purposes, including working capital, the expansion of our Internet and e-
commerce operations and additional sales and marketing efforts. We intend to
invest in research and development to support our Internet business. We also
intend to invest in sales and marketing activities to expand our Internet
business. In addition, we may use a portion of the net proceeds to acquire
complementary products, technologies or businesses. We currently have no
commitments or agreements and are not involved in any negotiations with respect
to any such transactions. We have not allocated any specific amount of the
proceeds for the purposes listed above. The amounts actually expended for the
purposes listed above will depend upon a number of factors, including the
growth of our sales and customer base, the type of efforts we make to develop
our Internet products and competitive developments in the Internet and PC
markets. Therefore, we cannot specify with certainty the amounts that may be
allocated to the particular uses of the net proceeds of this offering. Pending
use of the net proceeds of this offering, we intend to invest the net proceeds
in interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future.
21
<PAGE>
CAPITALIZATION
The following table sets forth our unaudited capitalization as of December
31, 1999 on an actual, pro forma FreePC acquisition and pro forma as adjusted
bases. The actual column reflects our capitalization as of December 31, 1999 on
a historical basis, without any adjustments to reflect subsequent events. The
pro forma FreePC acquisition information reflects:
. the issuance of 3,995,656 shares of common stock and 17,633,896 shares
of preferred stock issued in connection with the FreePC acquisition
completed in January 2000; and
. the assumption of options to purchase 2,891,314 shares of common stock
and warrants to purchase 1,239,158 shares of common stock issuable upon
exercise of stock options assumed in the FreePC acquisition at a
weighted average exercise price of $1.14 per unit of 1.1 shares of
common stock and warrant to purchase .47 shares of common stock at a
warrant exercise price of $17.128 per share.
The pro forma as adjusted data includes the pro forma FreePC acquisition
information and:
. the conversion of all outstanding shares of preferred stock into
41,913,265 shares of common stock automatically upon consummation of the
offering; and
. the issuance of shares of common stock offered in this offering.
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------
Pro Forma
FreePC Pro Forma
Actual Acquisition As Adjusted
-------- ----------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Long-term obligations........................ $ 1,903 $ 2,236 $ 2,236
Redeemable convertible preferred stock, $0.01
par value: 25,000,000 shares authorized
(actual, pro forma FreePC acquisition, pro
forma as adjusted); 24,279,369 outstanding
(actual and pro forma FreePC acquisition);
no shares outstanding (pro forma as
adjusted)................................... 150,014 150,014 --
Stockholders' equity (deficiency):
Convertible preferred stock, $0.01 par
value: 25,000,000 shares authorized,
(actual, pro forma FreePC acquisition, pro
forma as adjusted); no shares outstanding,
(actual); 17,633,896 shares issued and
outstanding (pro forma FreePC
acquisition); no shares outstanding (pro
forma as adjusted)........................ -- 33,993 --
Common stock, $0.0000125 par value:
250,000,000 authorized, (actual, pro forma
FreePC acquisition and pro forma as
adjusted); 78,019,538 outstanding
(actual); 82,015,194 outstanding (pro
forma FreePC acquisition); 123,928,459
shares outstanding (pro forma as
adjusted)................................. 1 6
Additional paid-in capital................. 6,582 122,584
Unearned stock compensation................ (1,550) (1,550) (1,550)
Notes receivable from stockholders......... (500) (500) (500)
Accumulated deficit........................ (12,269) (12,269) (12,269)
-------- -------- -------
Total stockholders' equity (deficiency).... (7,736) $142,264
-------- -------- -------
Total capitalization..................... $144,181 $294,514
======== ========
</TABLE>
The above information excludes:
. 1,216,297 shares of common stock issuable upon exercise of options
outstanding as of December 31, 1999, at a weighted average exercise
price of $3.56 per share, and 2,341,600 additional shares authorized to
be issued under our 1998 stock plan;
22
<PAGE>
. 2,891,314 shares of common stock and warrants to purchase 1,239,158
shares of common stock issuable upon exercise of options assumed in the
FreePC acquisition, at a weighted average exercise price of $1.14 per
unit of 1.1 shares of common stock and warrant to purchase .47 shares of
common stock at a warrant exercise price of $17.128 per share;
. 9,269,784 shares of common stock issuable upon exercise of warrants
issued in connection with the FreePC acquisition at a warrant exercise
price of 17.128 per share; and
. shares of common stock issuable to America Online upon exercise of
its warrants. See "Related Party Transactions--Relationship with America
Online, Inc." for a discussion of the America Online warrants.
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
common stock after this offering. Pro forma net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the pro forma number of shares of common stock outstanding. Dilution
in pro forma net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of common stock in
this offering and the net tangible book value per share of common stock
immediately after the completion of this offering.
Our pro forma net tangible book value as of December 31, 1999 was $143.6
million or $1.16 per share of common stock. Pro forma net tangible book value
per share represents the amount of our stockholders' equity divided by
123,928,459 shares of our common stock. This number of shares is based on:
. 78,019,538 shares of our common stock and 24,279,369 preferred stock
outstanding as of December 31, 1999;
. 3,995,656 shares of common stock and 17,633,896 shares of preferred
stock issued in connection with the FreePC acquisition completed in
January 2000; and
. 41,913,265 shares of common stock issuable upon automatic conversion of
outstanding shares of preferred stock referred to above upon completion
of this offering.
After giving effect to the sale of the shares of common stock in this
offering at an assumed public offering price of $ per share (less estimated
underwriting discounts and commissions and estimated offering expenses), our
pro forma as adjusted net tangible book value as of December 31, 1999 would
have been $ or $ per share. This represents an immediate increase in net
tangible book value of $ per share to existing stockholders and an immediate
dilution in net tangible book value of $ per share to new investors of common
stock in this offering, or % of the assumed initial public offering price of
$ per share. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $
Pro forma net tangible book value per share as of December 31,
1999.......................................................... $1.16
Increase per share attributable to new investors............... $
-----
Pro forma as adjusted net tangible book value per share after
this offering.................................................. $
----
Dilution per share to new investors............................. $
====
</TABLE>
23
<PAGE>
The following table sets forth, as of December 31, 1999, the differences
between the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid by existing holders of
common stock (on a pro forma basis to reflect issuance of 3,995,656 shares of
common stock and 17,633,896 shares of preferred stock issued in connection with
the FreePC acquisition completed in January 2000, and 41,913,265 shares of
common stock issuable upon automatic conversion of outstanding preferred stock
upon completion of this offering) and by new investors, before deducting
underwriting discounts and commissions and estimated offering expenses, at an
assumed public offering price of $ per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------- -------------------- Average Price
Number Percent Amount Percent Per Share
----------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 123,928,459 % $182,615,940 % $1.47
New investors........... $
----------- ----- ------------ ----- -----
Total................. 100.0% $ 100.0%
===== ============ =====
</TABLE>
The foregoing discussion and table assume no exercise of the underwriters'
over-allotment option and excludes the effect of:
. 1,216,297 shares of common stock issuable upon exercise of options
outstanding as of December 31, 1999, at a weighted average exercise
price of $3.56 per share, and 2,341,600 additional shares authorized to
be issued under our 1998 stock plan;
. 2,891,314 shares of common stock and warrants to purchase 1,239,158
shares of common stock issuable upon exercise of options assumed in the
FreePC acquisition, at a weighted average exercise price of $1.14 per
unit of 1.1 shares of common stock and warrant to purchase .47 shares of
common stock at a warrant exercise price of $17.128 per share;
. 9,269,784 shares of common stock issuable upon exercise of warrants
issued in connection with the FreePC acquisition at a warrant exercise
price of $17.128 per share; and
. shares of common stock issuable to America Online upon exercise of
its warrants. See "Related Party Transactions--Relationship with America
Online, Inc." for a discussion of the America Online warrants.
24
<PAGE>
SELECTED FINANCIAL DATA
You should read the selected financial data set forth below in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our Financial Statements and related Notes included
elsewhere in this prospectus. The financial data and other operating
information as of and for the period from inception to December 31, 1998 and as
of and for the year ended December 31, 1999 are derived from audited financial
statements included elsewhere in this prospectus.
The pro forma financial data gives effect to the FreePC acquisition
completed in January 2000. You should read the pro forma data in conjunction
with the audited Consolidated Financial Statements and related Notes of FreePC
included elsewhere in this prospectus. The pro forma data below is presented
for illustrative purposes only and is not necessarily indicative of the
operating results or financial position that would have resulted if the
acquisition had been in effect during the periods presented, nor is it
necessarily indicative of future operating results or financial position. For
an explanation of the calculation of pro forma amounts see Notes to the
Unaudited Pro Forma Condensed Combined Financial Information.
<TABLE>
<CAPTION>
Year Ended Dec. 31, 1999
-------------------------
Sept. 18, 1998 Pro Forma
(inception) to FreePC
Dec. 31, 1998 Actual Acquisition
-------------- ----------- ------------
(in thousands, except share
and per share data)
<S> <C> <C> <C>
Statements of Operations Data:
Net Revenues:
Hardware revenues net.............. $ 58,283 $ 812,233 $ 812,233
Internet revenues.................. 2,084 3,285
----------- ----------- ------------
Net Revenues....................... 58,283 814,317 815,518
Cost of revenues.................... 58,088 780,945 784,265
----------- ----------- ------------
Gross profit..................... 195 33,372 31,253
Operating expenses:
Sales and marketing................ 840 15,298 35,445
Customer service and technical
support........................... 269 9,049 9,049
General and administrative......... 988 9,535 13,016
Stock-based compensation........... 11 1,332 3,234
Research and development........... 2,059
Goodwill amortization.............. 73,000
Write-down of assets held for
sale.............................. 941
----------- ----------- ------------
Total operating expenses......... 2,108 35,214 136,744
----------- ----------- ------------
Loss from operations................ (1,913) (1,842) (105,491)
Financing charges and interest
expense, net....................... (889) (3,886) (3,024)
----------- ----------- ------------
Net loss............................ $ (2,802) $ (5,728) $ (108,515)
=========== =========== ============
Net loss per common share:
Basic and diluted.................. (0.04) (0.12) (1.37)
=========== =========== ============
Basic and diluted--pro forma....... (0.07) (1.04)
=========== ============
Shares used to compute net loss per
share:
Basic and diluted.................. 77,600,000 77,755,172 81,750,828
=========== =========== ============
Basic and diluted--pro forma....... 86,735,212 104,369,108
=========== ============
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Dec. 31, 1999
----------------------
Pro Forma
FreePC
Dec. 31, 1998 Actual Acquisition
------------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................ $ 3,791 $ 114,823 $ 125,762
Short-term investments................... 19,897 19,897
Working capital (deficiency)............. (1,311) 140,166 140,362
Total assets............................. 60,011 331,713 495,587
Long-term obligations.................... 560 1,903 2,236
Redeemable convertible preferred stock
deficiency.............................. -- 150,014 150,014
Total stockholders' equity (deficiency).. (1,351) (7,736) 142,264
</TABLE>
See Note 2 of Notes to Financial Statements for an explanation of the
determination of the weighted average common and common equivalent shares used
to compute net loss per share.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus contains forward-looking statements the accuracy of which
involves risks and uncertainties. We use words such as "anticipates,"
"believes," "plans," "expects," "future" and "intends" and similar expressions
to identify forward-looking statements. Prospective investors should not place
undue reliance on these forward-looking statements, which apply only as of the
date of this prospectus. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, including the
risks we face described in "Risk Factors" and elsewhere in this prospectus.
Overview
We are pioneering a new model that combines affordable personal computers,
or PCs, and innovative Internet advertising programs including our client-
server software, in-box promotions and keyboards that provide one-touch access
to selected Web sites. We were incorporated in September 1998 and sold our
first PC in November 1998. We intend to aggressively pursue recurring revenue
generating opportunities that extend beyond the purchase of the PC or other
Internet connected devices. To this end, in January 2000, we acquired FreePC,
Inc., a Bill Gross' idealab! company that pioneered subsidizing the purchase
price of the PC and Internet access with advertising sponsorships. Our
acquisition of FreePC's expertise, relationships, technology and technical
experience is a key element of our strategy to enhance our Internet revenues.
We outsource the design and manufacturing of our PCs and monitors as well as
technical support, warehouse staffing, inspection, repair and repackaging of
returned PCs, and administration of our rebate program to third parties. As a
result, we have a relatively small internal organization that consisted of 61
employees as of December 31, 1999. Our hardware outsourcing strategy enables us
to minimize capital investment, maintain a low product cost structure and
respond quickly to market changes. As a result of our acquisition of FreePC, we
added 98 employees, significantly expanding our expertise in Internet-related
technologies, marketing and sales.
To date, we have derived substantially all of our revenues from the sales of
PCs and monitors to a limited number of large retailers. For the year ended
December 31, 1999, approximately 68% of our gross revenues were from sales of
PCs and monitors to our four largest retail customers. We expect to continue to
derive a significant percentage of our gross revenues from sales of PCs and
monitors to a limited number of leading retailers, as well as an increasing
portion from Internet-related activities.
We operate primarily in the United States. To date, all of our sales and
substantially all of our purchases from our suppliers have been made in U.S.
dollars. As a result, changes in currency exchange rates do not generally have
a direct effect on our financial position. However, we do face foreign
business, political and economic risks because our supply of PCs and monitors
are manufactured outside of the United States. In addition, changes in currency
exchange rates may affect the cost of the PCs and monitors we purchase from our
foreign suppliers, thereby indirectly affecting consumer demand for our
products and our net revenues. We intend to expand our sales outside of North
America.
Our gross margins on hardware are affected by fluctuations in demand for our
products, the mix of products sold, the timing of new product implementations,
new product introductions by us and our competitors, changes in our pricing
policies and those of our competitors and component costs. In the future, our
gross margins may also be affected by fluctuations in demand for our Internet-
related services.
Our founding stockholders were Stephen A. Dukker, our Chief Executive
Officer, President and a member of our board of directors, and two wholly-owned
U.S. subsidiaries of Korean PC and monitor manufacturers--TriGem Corporation
and Korea Data Systems America. TriGem Computer, the parent corporation of
TriGem Corporation, manufactures all of our eTower PCs and eMonster PCs. Korea
Data Systems Co. Ltd., the parent corporation of Korea Data Systems America,
manufactures our eOne PCs, eSlate notebook PCs and, together with the Taiwanese
manufacturer Jean Company, all of our monitors. Historically, we purchased
substantially all of our PCs and monitors from KDS USA, a company wholly-owned
by Lap Shun Hui, which in turn
27
<PAGE>
purchased them from these manufacturers. Mr. Hui is a member of our board of
directors and one of our stockholders. On January 24, 2000, we entered into a
supply agreement with TriGem Computer pursuant to which we will purchase all of
our TriGem-manufactured PCs directly from TriGem Computer. In the future, we
may establish supply relationships with other PC and monitor manufacturers.
In connection with our acquisition of FreePC, Inc., we issued 3,995,656
shares of our common stock and 17,633,896 shares of our preferred stock for all
of the outstanding shares of capital stock of FreePC. In addition, we issued
warrants to purchase 9,269,784 shares of our common stock and we assumed
options exercisable for 2,891,314 shares of common stock and warrants to
purchase 1,239,158 shares of common stock issuable upon exercise of options
that we assumed in connection with the acquisition. As a result of the
acquisition, each share of FreePC capital stock issued or subject to an option
to purchase FreePC common stock was exchanged for 1.10 shares of our common
stock and a warrant to purchase 0.47 shares of our common stock. We accounted
for the acquisition using the purchase method. In connection with the FreePC
acquisition, we will record a significant amount of goodwill the amortization
of which will adversely affect our earnings and profitability in 2000 and 2001.
We expect to record goodwill of approximately $146 million, to be amortized
over a period of two years. In addition, our operating costs have increased
significantly as a result of the FreePC acquisition. We have not yet generated
significant revenue from our Internet business and we expect to experience
operating losses before goodwill amortization in that business in the future.
As a result, we expect to report losses on an operating basis before goodwill
amortization in our combined business for at least the next several quarters.
Hardware Revenues, net
To date all of our hardware revenue has been derived from sales of our PCs
and monitors. We sell a variety of PC configurations and monitor models to our
retail customers. When appropriate, we have introduced and intend to continue
to introduce enhanced configurations of our PCs, new PC models and new Internet
devices. Generally, our lowest-priced PC model carries significantly lower
gross margins than our other PC models. We do not require retail customers to
buy PCs and monitors as a bundled package. To date, we have sold substantially
more PCs than monitors.
We recognize revenues from PC and monitor sales at the time products are
shipped to our retail customers. Revenues are recorded net of outbound shipping
costs, returns, price protection and estimated costs for sales incentive
programs. Sales incentive programs consist primarily of cash rebates offered by
us to our PC buyers. In general, we offer a product rebate during a redemption
period which extends for up to thirty days after the PC is purchased. We rely
on historical data to forecast the percentage of our PC buyers who will redeem
their product rebates. If in a given period these redemptions exceed our
expectations, our gross margin and operating results will be adversely
impacted. In addition, we intend to modify from time to time our product rebate
programs in response to changing market conditions. These modifications may
affect the mix of PCs sold, our gross margin and the percentage of rebates
redeemed.
We also derive limited revenues from the sale of extended service contracts
and technical support provided on an as-needed basis. We offer these services
through Sykes Enterprises, Inc., a third-party customer service provider. Our
PC buyers receive free technical support for fifteen days following their
initial support call under our technical support program. After this period,
our PC buyers who require additional support can choose to enter into an
extended service contract or pay on a per incident basis until the issue is
resolved. We recognize revenues from extended service contracts ratably over
the contract period and from technical support calls outside the initial
fifteen-day period of free support as the services are performed.
Internet Revenues
We began to earn and report Internet revenues in the third quarter of 1999
under our marketing agreement with America Online. Under the agreement, America
Online provides Internet service provider, or ISP, rebates to our PC buyers to
significantly reduce the net effective price of our PCs. To obtain an ISP
rebate, our PC buyers must enter into an agreement with America Online to
subscribe to America Online's CompuServe Internet access service over a
predetermined period of time at a stated monthly fee. In addition to the rebate
28
<PAGE>
provisions, the agreement also provides that we include America Online's
software on our PCs. America Online pays us recurring revenue or a one-time fee
depending on which service or plan a PC buyer elects. We recognize these
revenues when reported to us by America Online.
In the fourth quarter of 1999, we deployed our private label Internet access
service, e-machines.net, for consumers. We provide Internet access service
through our Internet service provider agreement with UUNET.
In December 1999, we began pre-installing desktop client software on our
PCs. We generate Internet revenues form our client software and, in the future,
expect revenue from our client software to increase as we expand our Internet
business. We also expect to generate Internet revenue from sales to advertisers
related to our hot-key enabled keyboard, in-box promotions and other Internet
services.
We expect future Internet revenues to be derived primarily from advertising
generated by our keyboard buttons, our desktop client software, pre-loaded
software offerings and other Internet-related services. As a result, we expect
Internet revenues to increase as a percentage of our total revenues. We believe
that the revenue we derive from these services likely will depend upon our
satisfaction of specified performance criteria. Depending upon the type of
service offered and the performance criteria specified, we may recognize
revenue as PCs are shipped to our retail customers, as impressions are
displayed, as click-throughs occur, or as otherwise may be appropriate. To the
extent performance criteria are not met we may defer recognition of some or all
of the corresponding revenues.
29
<PAGE>
Results of Operations
Because of our limited operating history, the recent acquisition of FreePC
and the rapidly evolving nature of our business, we believe that year-to-year
period comparisons and quarter-to-quarter period comparisons are not meaningful
and should not be relied upon as an indication of future performance. The
following results of operations does not include results of operations of
FreePC. The following table presents our operating results for the period from
September 18, 1998 (inception) to December 31, 1998 and each of the four
quarters in the year ended December 31, 1999, and the year ended December 31,
1999.
<TABLE>
<CAPTION>
Period from
Sept. 18, 1998 Quarter Ended
(inception) to -------------------------------------------------------- Year Ended
Dec. 31, 1998 Mar. 31, 1999 June 30, 1999 Sept. 30, 1999 Dec. 31, 1999 Dec. 31, 1999
-------------- ------------- ------------- -------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Net revenues:
Hardware revenues,
net.................. $58,283 $137,434 $213,879 $155,282 $305,638 $812,233
Internet revenues..... -- -- -- 611 1,473 2,084
------- -------- -------- -------- -------- --------
Net revenues....... 58,283 137,434 213,879 155,893 307,111 814,317
------- -------- -------- -------- -------- --------
Cost of revenues...... 58,088 131,101 207,689 150,119 292,036 780,945
Gross profit....... 195 6,333 6,190 5,774 15,075 33,372
Operating expenses:
Sales and marketing.. 840 2,719 2,798 2,697 7,084 15,298
Customer service and
technical support... 269 949 1,573 3,245 3,282 9,049
General and
administrative...... 988 1,106 2,187 2,572 3,670 9,535
Stock-based
compensation........ 11 41 99 1,181 11 1,332
------- -------- -------- -------- -------- --------
Total operating
expenses.......... 2,108 4,815 6,657 9,695 14,047 35,214
------- -------- -------- -------- -------- --------
Income (loss) from
operations.......... (1,913) 1,518 (467) (3,921) 1,028 (1,842)
Financing charges and
interest
expense, net........ (889) (2,390) (2,570) (113) 1,187 (3,886)
------- -------- -------- -------- -------- --------
Net income (loss).. $(2,802) $ (872) $ (3,037) $ (4,034) $ 2,215 $ (5,728)
======= ======== ======== ======== ======== ========
<CAPTION>
Period from
Sept. 18, 1998 Quarter Ended
(inception) to -------------------------------------------------------- Year Ended
Dec. 31, 1998 Mar. 31, 1999 June 30, 1999 Sept. 30, 1999 Dec. 31, 1999 Dec. 31, 1999
-------------- ------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
As a Percentage of Net
Revenues:
Net revenues:
Hardware revenues,
net.................. 100.0% 100.0% 100.0% 99.6% 99.5% 99.7%
Internet revenues..... -- -- -- 0.4 0.5 0.3
------- -------- -------- -------- -------- --------
Total net
revenues.......... 100.0 100.0 100.0 100.0 100.0 100.0
------- -------- -------- -------- -------- --------
Cost of revenues...... 99.7 95.4 97.1 96.3 95.1 95.9
Gross profit....... 0.3 4.6 2.9 3.7 4.9 4.1
Operating expenses:
Sales and marketing.. 1.4 2.0 1.3 1.7 2.3 1.9
Customer service and
technical support... 0.5 0.7 0.7 2.1 1.1 1.1
General and
administrative...... 1.7 0.8 1.0 1.6 1.2 1.2
Stock-based
compensation........ 0.0 0.0 0.1 0.8 0.0 0.1
------- -------- -------- -------- -------- --------
Total operating
expenses.......... 3.6 3.5 3.1 6.2 4.6 4.3
------- -------- -------- -------- -------- --------
Income (loss) from
operations.......... (3.3) 1.1 (0.2) (2.5) 0.3 (0.2)
Financing charges and
interest
expense, net........ (1.5) (1.7) (1.2) (0.1) 0.4 (0.5)
------- -------- -------- -------- -------- --------
Net income (loss).. (4.8)% (0.6)% (1.4)% (2.6)% 0.7% (0.7)%
======= ======== ======== ======== ======== ========
</TABLE>
30
<PAGE>
Inception to December 31, 1998 and Year Ended December 31, 1999
Net Revenues
Hardware Revenues, Net
Our hardware revenues, net increased from $58.3 million for the period from
inception to December 31, 1998 to $812.2 million for the year ended December
31, 1999. This increase was due to increased unit shipments at each price point
and the expansion into higher price points. In the third quarter of 1999, we
introduced our eOne PCs priced at $799 and $899 (after product rebates). In the
fourth quarter of 1999, we introduced our eMonster PC for $899 and eSlate
notebook PC for $999 (after product rebates). Net revenue from extended service
contracts and technical support calls during these periods was minimal and
reported with hardware revenues.
Internet Revenues
We recognized total Internet revenues of $2.1 million for the year ended
December 31, 1999. These revenues resulted from the launch of our Internet-
related services including our marketing agreement with America Online. As a
result of the FreePC acquisition, we expect revenues from Internet-related
activities to increase.
Cost of Revenues
Cost of revenues primarily consists of the cost of PCs and monitors,
Microsoft licensing costs, inbound shipping costs, inventory valuation reserves
and costs of providing Internet access through e-machines.net. Cost of revenues
increased from $58.1 million for the period from inception to December 31, 1998
to $780.9 million for the year ended December 31, 1999. This increase was due
to increases in unit shipments and expansion into higher cost products. Gross
margin increased from 0.3% for the period from inception to December 31, 1998
to 4.1% for the year ended December 31, 1999. This increase was due to
increased sales of higher margin products. Our historical gross margins may not
be indicative of our future results of operations. Inventory valuation reserves
are calculated and recorded monthly based on a lower of cost or market analysis
performed each month. Inventory valuation reserves charged to operations in the
year ended December 31, 1999 totalled approximately $533,000.
Operating Expenses
Sales and Marketing
Sales and marketing expenses consist primarily of cooperative advertising
incentives paid to retail customers, net of cooperative advertising credits
earned by us from component suppliers, and marketing development funds given by
us to certain retail customers. Cooperative advertising discounts are given to
retail customers at time of product invoicing as a reduction of net invoice
price. Reclass from G&A sales and marketing expenses also include payroll
expenses for sales and marketing personnel. Included in sales and marketing
expenses for the year ended December 31, 1999 was approximately $700,000 of
bonus expense paid to our President and Chief Executive Officer pursuant to an
employment agreement we entered into with him. The provisions of the agreement
requiring a cash bonus to him was terminated effective June 30, 1999, and no
further bonus expense pursuant to this agreement is expected. Sales and
marketing expenses have increased from approximately $840,000 for the period
from inception to December 31, 1998 to $15.3 million for the year ended
December 31, 1999. As a percentage of net revenues, sales and marketing costs
increased from 1.4% for the period from inception to December 31, 1998 to 1.9%
for the year ended December 31, 1999. These increases were primarily due to
increased commission expenses, cooperative advertising costs and marketing
development funds associated with increased sales volumes. Our sales and
marketing expenses in absolute dollars will increase as sales increase and as
we increase the number of our sales representatives. As a result of the FreePC
acquisition, our in-house sales force increased from three to 17, of which 14
are primarily devoted
31
<PAGE>
to Internet-related activities and of which three are primarily devoted to our
PC business. We expect sales and marketing expenses to increase as we expand
our Internet-related activities.
Customer Service and Technical Support
Customer service and technical support expenses consist primarily of the
cost of technical support provided for us by Sykes to buyers of our PCs as well
as subscribers to e-machines.net. For either of these services, Sykes charges
on a per minute basis for each support call they receive. We expect customer
service and technical support expenses to increase to the extent our sales
volumes increase. Customer service and technical support expenses increased
from approximately $269,000 for the period from inception to December 31, 1998
to $9.0 million for the year ended December 31, 1999. We expect our customer
service and technical support expenses to increase as we expand our Internet-
related activities.
General and Administrative
General and administrative expenses consist primarily of payroll and related
expenses for management and administrative personnel, outsourced warehousing
activities, facilities expenses, professional service fees, travel and other
general corporate expenses. General and administrative expenses increased from
approximately $988,000, or 1.7% of net revenues, for the period from inception
to December 31, 1998, to approximately $9.5 million, or 1.2% of net revenues,
for the year ended December 31, 1999. We anticipate that general and
administrative expenses will increase in absolute dollars due to increased
expenses associated with the addition of personnel and additional professional
fees, including costs associated with being a public company. In addition, we
anticipate that general and administrative expenses may increase in future
periods as a result of our acquisition of FreePC and litigation costs
associated with legal proceedings. For a discussion of these proceedings, see
"Business--Legal Proceedings."
Stock-based Compensation
Stock-based compensation arises when an option to purchase stock, with an
exercise price less than the fair value of the underlying stock, is granted to
an employee. The amount of compensation equals the spread between the exercise
price and the fair value of the underlying stock. Stock-based compensation is
considered earned, and we recognize the related expense, as the options vest.
From inception to December 31, 1999, we recognized approximately $1.3 million
of stock-based compensation, with a one-time charge of $1.1 million in the
quarter ended September 30, 1999 in connection with an employment agreement
with our President and Chief Executive Officer. As of December 31, 1999, $1.6
million of stock-based compensation was unearned and will be amortized
according to the vesting schedules of the relevant options.
Goodwill
In connection with the FreePC acquisition, we will record a significant
amount of goodwill the amortization of which will adversely affect our earnings
and profitability in 2000 and 2001. We expect to record goodwill of
approximately $146.0 million, to be amortized over a period of two years.
Financing Charges and Interest Expense, Net
Financing charges and interest expense, net consists primarily of interest
on trade payables and interest income from cash equivalents and short-term
investments. Financing charges and interest expense, net increased from
$889,000, for the period from inception to December 31,1998, to $3.9 million
for the year ended December 31, 1999. Finance charges and interest expense
related to trade payable financing increased from approximately $889,000, or
1.5% of net revenues, for the period from inception to December 31,1998 to
approximately $6.5 million, or 0.8% of net revenues, for the year ended
December 31, 1999. This increase in absolute dollars was due to increases in
trade payable financing associated with greater inventory purchases, resulting
from higher sales volumes. On August 18, 1999, we completed a private placement
of 24,279,369
32
<PAGE>
shares of our Series A preferred stock providing us with net proceeds of
approximately $146.3 million, which enabled us to establish vendor payment
terms of net thirty days, eliminating most interest on trade payables for the
remainder of 1999. In addition, we invested the private placement proceeds in
cash equivalents and other interest bearing short-term investments, resulting
in $2.6 million of interest income in 1999.
Liquidity and Capital Resources
To date, we have financed our operations by extended payment terms on trade
payables, issuance of common and preferred stock, and issuance of subordinated
notes payable to stockholders. The private placement of 24,279,369 shares of
our Series A preferred stock on August 18, 1999 provided us with net proceeds
of approximately $146.3 million. A portion of the proceeds from the issuance of
our Series A preferred stock was used to reduce trade payables. As of December
31, 1999, our sources of liquidity consisted of $114.8 million in cash and cash
equivalents, and $19.9 million in short-term investments. As of December 31,
1999, trade payables were $131.9 million with terms of net 30 days. As of
December 31, 1999, we had outstanding $560,000 of long-term subordinated notes
payable to stockholders, which bear interest at 5.79% and mature on June 7,
2004.
Net cash provided by operating activities was $2.1 million for the period
from inception to December 31, 1999. Net cash used in operating activities was
$13.5 million for the year ended December 31, 1999. Cash provided by operating
activities for these periods consisted primarily of increases in trade
payables. Cash used in operating activities for these periods consisted
primarily of increases in accounts receivable and inventories.
Net cash used in investing activities was approximately $298,000 for the
period from inception to December 31, 1998, and approximately $21.7 million in
the year ended December 31, 1999. Net cash used in investing activities for
these periods consisted primarily of purchases of property and equipment and
short-term investments.
Net cash provided by financing activities was $2.0 million for the period
from inception to December 31, 1998. Net cash provided by financing activities
for the year ended December 31, 1999, was $146.3 million and consisted of the
proceeds from the issuance of preferred stock.
We currently anticipate that the net proceeds of this offering, together
with our available funds as of December 31, 1999, will be sufficient to meet
our anticipated needs for at least the next 12 months. If additional funds are
required, financing may not be available on acceptable terms, if at all, and
may be dilutive to our stockholders.
Year 2000 Issues
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
change in the century. We have designed our products to be year 2000 compliant.
We are not aware of any errors that have occurred since the turn of the
century. To date, the amount spent on year 2000 preparations has been
immaterial. If any errors or defects become evident, we may incur costs to
resolve them, however, we do not expect to make any material expenditures
related to year 2000 compliance issues in the future.
Quantitative and Qualitative Discussion of Market Risk
We are exposed to fluctuations in interest rates and market values of our
investments. Our exposure to fluctuations in interest rates and market values
of our investments relates primarily to our short-term investment portfolio,
which is included in cash and cash equivalents and short-term investments. We
have not used derivative financial instruments in our investment portfolio. We
invest our excess cash in highly liquid commercial paper and U.S. Government
debt securities with maturities of less than one year, and, by policy, we limit
the amount of credit exposure to any one issuer. Due to the short-term nature
of our investments, the impact of interest rate changes would not be expected
to have a significant impact on the value of these investments. The effect of
interest rate and investment risk on us has not been significant.
33
<PAGE>
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may
have their fair market value adversely impacted due to a rise in interest
rates, while floating rate securities may produce less income than expected if
interest rates fall. Our fixed rate debt consists of $560,000 in notes payable,
bearing interest at 5.79 percent, from various stockholders.
We have limited our investments to short-term, highly rated, fixed income
facilities such as repurchase agreements collateralized by government
securities and A-1/P-1 commercial paper. We intend to maintain our current
investment policy, which is designed to preserve principal while at the same
time maximizing the after-tax income we receive from our investments without
significantly increasing risk. Some of the securities that we may invest in may
be subject to market risk. This means that a change in prevailing interest
rates may cause the principal amount of the investment to fluctuate. For
example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds, government and non-government debt securities.
We currently have no floating rate indebtedness, hold no derivative
instruments and do not earn significant foreign sourced income. Accordingly,
changes in interest rates or currency exchange rates do not generally have a
direct effect on our financial position. In addition, we have primarily
operated in the United States and Canada and all purchases and sales to date
have been made in U.S. dollars. Foreign currency exchange rates, however, may
affect the cost of our PCs and monitors purchased from our foreign suppliers,
thereby indirectly affecting consumer demand for our products and our net
revenues. In addition, to the extent that changes in interest rates and
currency exchange rates affects general economic conditions, we would also be
affected by such changes.
Quarterly Fluctuations
We have a limited operating history upon which you can base an evaluation of
our business and prospects. Our prospects must be considered in light of the
risks, expenses, and difficulties encountered by companies in their early stage
of development. It is likely that in some future quarter our operating results
may fall below the expectations of securities analysts and investors. In this
event, the trading price of our common stock may fall significantly. See "Risk
Factors" for a more complete description of the risks we face. We believe that
the factors influencing quarterly variability include the following:
. the overall growth in the computer industry;
. shifts in short-term demand for our products resulting, in part, from
the introduction of new products or updates of existing products;
. the intensity of price competition among us and our competitors as
influenced by various factors;
. the fact that virtually all sales in a given quarter result from orders
booked in that quarter; and
. the popularity of, and seasonal or other fluctuations in demand for,
Internet services generally and e-machines.net in particular.
Traditionally, computer sales in the fourth quarter are historically higher
than in the previous three quarters. We believe that this pattern of higher
fourth quarter sales is partially due to customer buying patterns relating to
calendar year-end business and holiday purchases.
Results of Operations--FreePC
Since inception, FreePC had incurred significant operating losses. For the
year ended December 31, 1999, FreePC had a net loss of $29.8 million. In
addition, at December 31, 1999, FreePC had an accumulated deficit of $30.4
million. During the year ended December 31, 1999, FreePC incurred operating
expenses of $28.5 million.
34
<PAGE>
During the year ended December 31, 1999, FreePC recorded net revenues of $1.2
million, primarily from the sale of banner advertisements and from revenues
generated from its start page. In particular, for the year ended December 31,
1999, FreePC generated approximately $211,000, or 17.6% of its total revenues,
from its start page. For the year ended December 31, 1999, FreePC also
generated approximately $1 million, or 82.4% of its total revenues, from banner
advertisements sold through its own proprietary client software. Of the total
cost of revenues, $3.1 million consisted of Internet service provider costs to
support FreePC's users. FreePC sales and marketing expenses consisted primarily
of expenditures associated with its distribution of free computers. Of the
total sales and marketing expenses, approximately $18.1 million consisted of
costs incurred by FreePC to acquire users. During 1999, FreePC's business model
included distributing free personal computers and free Internet access to their
customers. The costs related to these activities in 1999 approximated $21.2
million. Subsequent to our acquisition of FreePC we have ceased distributing
free computers and we will cease providing free Internet service and,
accordingly, expect these cost and associated revenues to decrease
substantially. Sales and marketing expenses also include the salaries of a
direct sales force. Product development expenses primarily represents software
engineers and programmers. General and administrative expense primarily
represents management and administrative personnel and professional and
consulting expense.
Effects of Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," which requires an enterprise to report, by major components and as a
single total, the change in its net assets during the period from nonowner
sources, and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers. We had no
comprehensive income items to report for the period from inception to December
31, 1998 and the year ended December 31, 1999. We currently operate one
reportable segment under SFAS No. 131. Adoption of these statements at our
inception did not impact our financial position, results of operations or cash
flows.
In June 1998, SFAS No 133 "Accounting for Derivative Instruments and Hedging
Activities" was released. The statement requires the recognition of all
derivatives as either assets or liabilities in the balance sheet and the
measurement of those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the planned use of the derivative and
the resulting designation. We are required to implement the statement in the
first quarter of fiscal 2001. We have not used derivative instruments and
believe the impact of adoption of this statement will not have a significant
effect on the financial statements.
35
<PAGE>
BUSINESS
Overview
We are pioneering a new model that combines affordable personal computers,
or PCs, and innovative Internet advertising programs including our client-
server software, in-box promotions and keyboards that provide one-touch access
to selected Web sites. We introduced the first branded sub-$400 PC in the U.S.
retail market. Since the sale of our first PC in November 1998, we have sold
over two million PCs. We sold the third largest number of desktop PCs through
U.S. retailers in 1999, according to PC Data, and sold the largest number of
sub-$600 PCs sold through U.S. retailers in July 1999, according to Ziff
Davis's InfoBeads. In 1999, our products won prestigious awards in the low-
priced desktop PC category, including PC Computing's Most Valuable Product
(MVP), number one on Windows Magazine's "WinList 100" and Consumer's Digest's
best value.
Our affordable PCs and the variety of Internet access options that we offer
make the Internet experience available to a broader spectrum of consumers.
Approximately half of our consumers are first-time PC buyers who may have
limited experience using the Internet and whose first-point of contact with the
Internet is our PC. We believe that these first-time PC buyers represent
significant opportunities for Internet advertisers to reach Internet users who
are not likely to have established Internet brand loyalties.
We intend to aggressively pursue recurring revenue generating opportunities
that extend beyond the purchase of the PC or other Internet connected devices.
To this end, in January 2000, we acquired FreePC, Inc., a Bill Gross' idealab!
company that pioneered subsidizing the purchase price of the PC and Internet
access with advertising sponsorships. Our acquisition of FreePC's expertise,
relationships, technology and technical experience is a key element of our
strategy to enhance our Internet revenues. We offer multiple, integrated
advertising programs, including our eWare and eBoards, that a company may
combine into a powerful campaign that is capable of dramatically increasing the
effectiveness of its offer. Our computing and Internet advertising offerings
create an integrated PC and Internet marketing service that includes links to
selected Web sites and other Internet resources, effectively making us a
hardware portal that benefits both consumers and advertisers.
Industry Background
The Internet has emerged as a global platform that allows millions of people
to share information, communicate and conduct business. International Data
Corporation, or IDC, estimates that there were approximately 159 million
Internet users worldwide at the end of 1998 and that the number of users will
grow to approximately 510 million by the end of 2003. The increased
availability of compelling media content on the Internet has enabled the
Internet to compete with traditional media such as television and radio for the
attention of consumers and serve as an effective channel for marketing goods
and services.
The PC is the primary means by which consumers access the Internet.
According to IDC, PCs accounted for approximately 94% of the access devices
connected to the Internet in the United States during 1998. We believe that PCs
and other devices that offer an architecture sufficiently flexible to run most
applications and accommodate frequently changing Internet technologies are
ideally suited for accessing the Internet because they provide consumers with
an affordable, media-rich Internet experience. In addition, many of the most
popular PC software applications, such as those used for personal finance,
games and education, have been enhanced through the addition of Internet-
enabled features.
The price of PCs had historically been a limiting factor to broad
penetration of the consumer market. In July 1997, first time PC buyers spent an
average of $1,880 and replacement PC buyers spent a slightly lower average of
$1,830, according to a May 1998 Inteco Corporation report. This factor was
dramatically reduced in November 1998 when we introduced the first branded sub-
$400 PC sold through U.S. retailers. In July 1999, Microsoft, Prodigy and
America Online introduced rebates of up to $400 when PC buyers entered into
multi-year contracts for Internet access, or ISP rebates. The combination of
these low-priced PCs and ISP rebates
36
<PAGE>
reduced the effective up-front cost of accessing the Internet with a PC to as
low as zero. This has contributed to a dramatic increase in the number of PCs
sold with Internet access.
The significant increase in sales of PCs priced at less than $600
precipitated market share consolidation in the retail PC industry. According to
Ziff Davis Market Intelligence, sales of sub-$600 PCs increased as a percentage
of the total retail market from 0.7% in September 1998 to 47.0% in August 1999.
Several retail PC vendors were unable to compete successfully at these prices
primarily due to the need for economies of scale in both production and
component costs, component shortages and limited retail shelf space. This led
to a significant increase in market share amongst the top three providers of
retail PCs. In December 1999, according to PC Data, Compaq Computer
Corporation, Hewlett-Packard and eMachines had a combined U.S. retail PC market
share in excess of 78%.
The increase in the number of people with Internet access that was enabled
by the proliferation of lower-priced PCs has fueled the growth of Internet
shopping, or e-commerce. An October 1999 Dataquest survey indicated that 52% of
Internet users made Internet purchases in the first nine months of 1999. Recent
data continues to illustrate the increasing use of the Internet for e-commerce.
Shop.org, an Internet retailers' organization, estimates that total Internet
sales increased from $14.9 billion in 1998 to $36 billion in 1999.
To take advantage of this large and increasingly active commercial audience,
companies are accelerating the deployment of marketing initiatives aimed at
Internet users. Many companies have established Web sites to market or sell
products and services over the Internet, including approximately 99% of Fortune
500 companies. The growth of competition on the Internet, however, has
increased the costs of acquiring and retaining consumers. For example, customer
acquisition costs among online brokerage competitors during 1999 went as high
as $700, according to the New York Times. In addition, major Internet service
providers, such as America Online and Microsoft Network, have recently been
paying up to $400 per customer to attract PC buyers through popular rebate
programs. Companies continue to invest heavily in advertising and marketing
programs to differentiate their services and establish brand loyalty that will
transcend price competition.
Today, companies are using Internet and traditional advertising in order to
build their Internet brands. In 1998, according to Jupiter Communications,
companies in the United States spent a total of $160 billion in traditional
advertising and $2.1 billion in Internet advertising. Currently, large
aggregated audiences make Internet portals one of the predominant channels of
Internet advertising. Internet portals are Web sites or online services that
offer a broad array of resources and services, including Web searching and
links to other Web sites. Advertisers are increasingly questioning the
efficiency of this channel. Because the leading portals attract a large
percentage of the Internet population, demand, and consequently prices, for key
ad slots is high. In addition, we believe that a large portion of the leading
portals' audience consists of long-term Internet users who have already
established Internet purchasing brand loyalties. Finally, like traditional
advertising, Internet advertising has been limited in its ability to target a
specific audience.
These inefficiencies are prompting companies to search for better Internet
advertising solutions. According to a November 1999 Jupiter Communications
report, the key to acquiring new users is "grabbing their attention and loyalty
as early as possible. As a result, the computer and its components (i.e., the
keyboard, mouse and desktop) have become the new prime real estate." A new
solution is needed to enable Internet advertisers and e-commerce providers to
cost-effectively connect with consumers who do not have pre-existing Internet
brand loyalties.
The eMachines Solution
We combine the distribution of affordable PCs with the delivery of
innovative Internet marketing programs, including keyboards that provide one-
touch access to selected Web sites and other Internet resources, desktop
software and in-box promotions. Our integrated computing and Internet offering
is designed to enable consumers to easily gain access to and use the Internet
and allow us to enable advertisers to cost-effectively reach a significant base
of first-time PC buyers. Our Internet marketing programs are designed to allow
us to
37
<PAGE>
enable advertisers to continuously communicate with our growing base of
consumers. Our two-way client-server software is designed to allow us to
automatically deliver updated marketing offers, system software upgrades and
provide other useful functions. This tightly integrated offering creates a
"hardware portal" that benefits both advertisers and consumers.
Benefits to Consumers
Our solution offers consumers the following benefits:
High-quality PCs, low-priced. We are the leading provider of PCs in the
$399-$599 price range (after product rebates), making PCs and the Internet
experience affordable to a broader spectrum of consumers. Due to our unit
volume and because of our established relationships with national retailers and
our low-cost, outsourced business model, we have been able to consistently
offer high-quality PCs at attractive prices and configurations. In 1999, our
products won prestigious awards in the low-priced desktop PC category,
including PC Computing's Most Valuable Product (MVP), Windows Magazine's
"WinList 100" and Consumer's Digest's best value.
Easy access to the Internet. We offer consumers a variety of Internet access
options, including AOL Classic, CompuServe 2000 with rebates up to $400 for
multi-year service contracts, and our e-machines.net service--all pre-installed
for easy activation. In addition, through our retail partners, rebates of up to
$400 are available on our PCs in connection with MSN, Prodigy and other major
Internet access service providers.
An enhanced Internet experience. We enhance our PC hardware and software to
eliminate the need for consumers to navigate through portals and search engine
Web pages. These enhancements include:
. Our Internet keyboard. Our eBoard improves upon typical portal functions
by offering one-touch access to popular content categories such as
shopping, travel and finance, and selected Web sites.
. Our desktop client software. Our desktop client software encourages and
facilitates Internet navigation with e-commerce, content and
informational links organized for easy one- and two-click access, a
multi-engine search box and a tray of "touch-tiles" from which users can
choose. This surfing assistant also permits the delivery of banner ads
targeted to users' interests. In addition, our desktop client software
is designed to continuously provide consumers with customer support
information and periodic updates to system and utilities software.
. Exclusive offers. We provide a variety of exclusive in-box, Web-based
and e-mail offers to our consumers that they can use for discounts on
various Internet products and services.
Benefits to Advertisers
Our solution provides advertisers the following benefits:
Direct link to a large number of first-time PC buyers. Since November 1998,
we have sold over two million PCs, of which approximately 960,000 were to
first-time buyers. We believe first-time buyers present significant
opportunities for Internet advertisers since it is likely they have not yet
established their Internet brand loyalties. Our solution enables our
advertisers to reach a growing base of Internet users at their first point of
contact, the PC.
Multiple integrated advertising programs. We offer a full suite of
advertising and marketing opportunities for e-commerce providers to communicate
offers to consumers. These include:
. Direct-access keyboard keys--allowing one-touch access to an
advertiser's Web site;
. Desktop icons--providing on-screen, branded, click-based links to
sponsors' content;
. Pre-loaded software applications;
. In-box printed or electronic brochures, coupons and other merchandise or
service offers;
38
<PAGE>
. Desktop banner advertising--delivered through our desktop client
software; and
. Targeted e-mail--enabling advertisers to reach consumers who have
requested offers relating to their specified areas of interest.
Our solution allows Internet advertisers to combine these delivery methods into
a powerful way to reach consumers. For example, an Internet brokerage firm
might provide a link to its Web site, an in-box brochure and a preloaded
commercial, supported by an e-mail campaign--a combination that dramatically
increases the impact of the offer.
Continuous access to the consumer. Our Internet marketing solution is
designed to allow advertisers to continuously communicate with consumers. Our
two-way client-server desktop software is designed to allow us to automatically
deliver updated marketing offers, system software upgrades and other consumer
utilities when a consumer connects with the Internet. Branded keyboard keys and
desktop icons allow continuous visibility of an advertiser's brand and message
whether or not the user is on the Internet. In addition, we offer our
advertisers the opportunity to reach our users through targeted e-mail
campaigns. Taken together, these programs allow us to provide advertisers with
the opportunity to update and enhance their message and communicate with the
same group of consumers over a long period of time.
The eMachines Strategy
We intend to become the leading hardware portal that benefits both consumers
and advertisers. We plan to leverage our strong relationship with consumers,
key retailers and Internet advertisers to increase PC sales and generate
significant recurring Internet revenue. Our strategy includes the following
core elements:
Increase penetration of the consumer market. We intend to increase our
market share by continuing to offer low-priced, high-quality integrated
computing and Internet solutions, continuing to drive down consumer price
points as they become cost effective. We plan to expand our penetration of the
retail space by continuing to work with retailers, America Online and other
Internet service providers to continue programs designed to significantly
reduce the effective, up-front price of our PCs to the consumer when a PC buyer
subscribes to Internet access services. We believe that our economies of scale,
low-cost business model and recurring Internet revenue create significant
competitive barriers to entry in the retail PC market, particularly at lower PC
price points. We believe that our hot-key enabled keyboard, desktop software
and targeted exclusive marketing offers, combined with our low-priced PCs, will
increase consumer purchases of our PCs and Internet-related recurring revenue.
Use low-cost PC business to cost-effectively acquire Internet consumers. We
intend to use our low-cost PC business to cost-effectively acquire Internet
consumers who will provide us with an opportunity to generate growing recurring
revenue from Internet advertisers. This provides us with a significant
competitive advantage over other Internet companies whose business strategy
requires them to incur substantial up-front costs to acquire Internet
consumers. Our PC business model allows us to offer high-quality, low-priced
PCs by outsourcing to established industry providers most of our major
operating and manufacturing functions, including system assembly, warehouse
labor, distribution, research and development, product design, warranty and
customer support. We intend to maintain low PC distribution, sales, marketing
and administrative costs by continuing to distribute and advertise our PC
products primarily through a limited number of large retailers.
Enhance recurring Internet revenue opportunities. We intend to aggressively
pursue recurring revenue-generating opportunities. These include Internet
service payments, e-commerce and Web-based advertising. We are creating a
series of desktop client software programs designed to provide consumers with a
wide variety of useful functionality with minimal invasiveness to encourage
access to selected e-commerce sites from which we will receive marketing
payments and sales commissions. These programs will be intentionally "ISP-
agnostic"--meaning consumers can use them and we receive Internet revenue no
matter which Internet service provider they choose, enabling us to have a
direct and continuing relationship with our PC buyers who choose
39
<PAGE>
AOL Classic, CompuServe 2000, MSN, e-machines.net or any other service
provider. We also intend to further enhance our Internet revenues by
introducing a keyboard with 19 more buttons than a standard keyboard in the
second quarter of 2000, which buttons will be available to sell or "rent" to
Internet advertisers.
Leverage our established brand to broaden our product family. We intend to
leverage our brand and strong distribution channels to:
. Broaden our PC line. We are expanding our market position from being the
leading brand in sub-$600 PCs to being a leading supplier of high value
PCs at a broader range of price points. For example, in October 1999, we
introduced the eMonster 500 at $899, delivering the first 500 Mhz
Pentium III, DVD-equipped desktop PC for under $1,000. In December, we
also introduced the eSlate 400, one of the first sub-$1,000 notebook PCs
offered through major U.S. retailers. In the fourth quarter of 1999,
approximately 24% of our total units sold were at or above $799 (after
product rebates). When appropriate, we intend to introduce new, high-
value products at varying price points.
. Introduce Internet appliances. We intend to develop and introduce
various Internet appliance products. Internet appliances offer a natural
downward extension of our low-priced PC offerings, providing us with
similar types of Internet revenue opportunities, including both
advertising and Internet service provider revenue sharing.
. Introduce Internet-connected peripheral products. We intend to develop
and introduce PC-related products, such as MP3 players, that download
content from the Internet. By distributing these products, we intend to
install advertising client software programs on the PCs that host these
Internet-connected devices, thereby expanding our recurring revenue
opportunities.
Leverage the retail channel. We intend to continue to strengthen our
strategic relationships with leading retailers to capture and retain prime
shelf space. We believe that by distributing our products through retailers, we
can continue to increase awareness of our brand at a relatively low cost to us,
thereby efficiently reaching millions of potential PC buyers and Internet
users. For the year ended December 31, 1999, sales of PCs and monitors to our
four largest retail customers--Office Depot, Best Buy, Circuit City and
MicroCenter--accounted for approximately 68% of our gross revenues. We will
continue to sell our products through leading retailers to benefit from their
marketing campaigns that feature our products nationwide in television, radio,
newspaper, magazine and catalog advertisements. We believe we are an attractive
partner to leading retailers because our low-priced, high-quality PCs and
integrated Internet offerings drive high sales volumes that, in turn, provide
significant profit opportunities to retailers.
Furthermore, the high desirability of our low-priced PCs as Internet access
devices combines well with retailers' recent strategic alliances with Internet
service providers such as America Online and MSN, which provide additional
incentives to the retailers to sell Internet-connected products. We believe our
relationships with these retailers enable us to quickly introduce updated
system configurations, new products and merchandising programs on a national
basis. The retail channel also enables us to effectively target first-time PC
buyers who typically do not purchase through mail order or Internet channels.
Products and Services
PC and monitor products. We currently offer our eTower line of Intel Celeron
based value priced PCs at retail prices ranging from $399 to $799 (after
product rebates). We also currently offer our Intel Pentium III based eMonster
line of high performance PCs at retail prices ranging from $899 to $1,099
(after product rebates). Each PC comes with pre-installed software, including
Windows 98, selected software applications, our own desktop client software and
other utilities, and is Internet ready. In August 1999, we introduced the eOne
PC, an integrated single-piece PC and monitor based on the Windows-Intel
architecture for $799 (after product rebates). In December 1999, we also
introduced the eSlate400, one of the first sub-$1,000 notebook PCs offered
through major U.S. retailers. We update our PC configurations when appropriate
to accommodate the
40
<PAGE>
introduction of new components and sub-systems that we believe our PC buyers
will find attractive. We also offer 15-inch monitors for $149, 17-inch monitors
for $239 and 19-inch monitors for $349.
Keyboard and desktop client software offerings. Using a combination of
proprietary and licensed technology, we have developed Internet aides that
allow consumers to reach selected Web sites through one-touch access keys on
our keyboards and desktop client software programs.
. eBoard. Our Internet-enhanced keyboard offers six more buttons than a
standard keyboard that provide one-touch access to selected Web sites.
We call the extra keys eKeys. In addition, we have developed and expect
to ship in the second quarter of 2000 an enhanced keyboard featuring 19
eKeys. eKeys direct users to Internet resources in categories such as
travel, shopping, banking, finance, auctions, chat and entertainment,
among others, providing functionality similar to that of an Internet
portal. Sponsors' color logos may also appear on the eBoard in a
removable label strip above the eKeys. With the touch of one eKey, which
is under the control of our servers, the PC will initiate a browser
window and take the user directly to a selected sponsor's site or
resource index. We can redirect the eKeys to new destination sites as we
add or change advertisers.
. eWare. eWare is a slim on-screen toolbar that encourages and facilitates
Internet navigation. Our current version includes 160 e-commerce links
in its eShop menu, 240 content/informational links in its eSurf menu, a
multi-engine search box and tray of "touch-tiles" from which users can
choose. The touch-tiles are small logos that link directly to sponsored
Web sites. The user may "drag and drop" the tiles the user chooses from
the eShop and eSurf menus into a tray that remains on-screen unless
closed. eWare also currently supports one rotating banner ad that offers
special deals available only to eWare users. In keeping with the slim
format of the application, the banner is a 468x60 pixel advertisement
scaled down 75%, making eWare one of the least intrusive advertising-
sponsored desktop applications available today.
. Two-way desktop client software. A key element of our plan is to create
an ongoing relationship with the consumer through our two-way desktop
client software that we acquired as a result of the FreePC acquisition.
This software is designed to reside on a user's PC and interact with our
servers on a regular basis unless disabled by the user.
Internet access services. We offer consumers a variety of Internet access
options, including AOL Classic, CompuServe 2000 (with rebates up to $400 for
multi-year service contracts), and our e-machines.net service--all pre-
installed for easy activation.
. America Online. In June 1999, we entered into a marketing agreement with
America Online under which it will provide rebates to our PC buyers to
significantly reduce the net effective price of our PCs. To obtain an
ISP rebate, our PC buyers must enter into an agreement with America
Online to subscribe to America Online's CompuServe Internet access
service over a predetermined period of time for a stated monthly fee. In
addition to the rebate provisions, the marketing agreement also provides
that we will include America Online's software on our PCs. America
Online will pay us recurring revenue or a one-time fee depending on
which service or plan a PC buyer elects.
. e-machines.net. The vast majority of our consumers either have pre-
established Internet service provider relationships or have purchased
their PC in conjunction with an ISP rebate offer from America Online,
MSN or Prodigy. To meet the needs of the remaining consumers, we offer
our private-label Internet access service, e-machines.net. We have
entered into an Internet service provider agreement with UUNET to
provide our program on a nationwide basis.
Technology
Underlying our keyboard and desktop client software offerings are a number
of licensed and proprietary technologies developed by our Internet research and
development team. These technologies have been designed
41
<PAGE>
to provide an integrated computing and Internet experience to our consumers.
Technologies supporting our current offerings include:
. Client content caching. Advertising and other content that is delivered
to the desktop is stored in the client content cache. This allows the
user to interact with Internet content and advertising even when the
computer is no longer connected to the Internet.
. Logging/monitoring tools. With a user's permission, our logging and
monitoring technology collects and analyzes the user's Internet access
patterns. This proprietary technology uploads the data that it collects
at the desktop to our servers via the Internet. We have developed
scalable technology to parallel process this data using our servers.
. PC system maintenance and upgrades. Our system updating technology is
designed to allow us to detect the software configuration on our
products and automatically deliver new software upgrades to and perform
maintenance on the device.
. Server architecture. We use high-capacity redundant servers that are
designed to be fault-tolerant. Our servers use open source software such
as Apache, Perl, and Linux so that we can quickly integrate new
functionality into our existing server systems using standard
applications. Our servers are hosted at a third-party facility in
Sunnyvale, California, which provides redundant communications lines and
emergency power backup. We closely monitor our servers to maintain 24
hours a day, seven days a week availability.
. Advertising optimization technology. Our proprietary advertising
optimization technology is designed to maximize our advertising sales by
allowing us to match advertising content delivery with consumers'
preferences, increasing effectiveness and consumer usage.
Research and Development
We have assembled a team of technology professionals to develop new
Internet-related technologies as well as enhancements to our current Internet-
related products and services. We have focused our research and development
efforts on increasing the performance and scalability of our eBoard, eWare and
two-way desktop client software. As of January 15, 2000, our Internet
development team consisted of 21 technology professionals. These professionals
are divided into client, server, data management and quality assurance teams
that work together to develop our Internet marketing programs. The client team
consists of developers who are experienced in Windows technologies such as MFC
and C++, Internet Explorer, Netscape and ActiveX/COM. The server team
concentrates on Linux technologies such as Apache, Perl, C, CGI and HTML. The
data management team consists of personnel who specialize in database design,
development, and administration and data storage. The quality assurance team
consists of specialists who seek to ensure that our information systems
products and services meet our standards and end-user requirements. Most of our
Internet developers have technical degrees from nationally-recognized colleges
and universities. We are seeking to hire additional skilled technology
professionals for research and development. If we encounter delays in hiring,
our business operating results and financial conditions could be significantly
harmed.
The success of our future research and development efforts depends on a
number of factors, including our ability to identify emerging technological
trends in our target markets, develop and maintain competitive products,
enhance our products by adding innovative features that differentiate our
products from those of competitors, bring products to market on a timely basis
at competitive prices, properly identify target markets and respond effectively
to new technological changes of new product announcements by others.
Intellectual Property Rights
Our success and ability to compete are dependent upon our technology and
intellectual property. Although we rely on copyright, trade secret and
trademark law to protect our technology and intellectual property, we believe
that factors such as the technological and creative skills of our personnel,
new products and services
42
<PAGE>
and frequent service enhancements are more essential to establishing and
maintaining an intellectual property leadership position. e-machines is our
registered trademark in the United States. We have one U.S. patent application
pending and various U.S. trademark applications pending including eMachines,
the "e" logo, eBoard, eMonster and eTower. We have filed for trademark
protection for the mark "eMachines" and our "e" logo in the European
Communities, the United Kingdom, Japan, Taiwan, China, Canada, Brazil and
Mexico.
We generally enter into confidentiality agreements with our employees and
consultants. Our confidentiality agreements generally require our employees and
consultants to hold in confidence and not disclose any of our proprietary
information. Despite our efforts to protect our proprietary information,
unauthorized parties may attempt to obtain and use our proprietary information.
Policing unauthorized use of our proprietary information is difficult, and the
steps we have taken might not prevent misappropriation, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as do
the laws of the United States.
We collect and use data derived from users of our PCs. This data is intended
to be used for advertisement targeting and for predicting advertisement
performance. Although we believe that we have the right to use such data, trade
secret, copyright or other protection may not be available for such information
or others may claim rights to such information. Use of this data creates the
potential for claims to be made against us. Such claims could be based on
copyright or trademark infringement, invasion of privacy or other legal
theories. Although we carry general liability insurance, our insurance may not
cover potential claims of this type or may not be adequate to indemnify us for
all liability that may be imposed.
PC Sourcing, Distribution and Customer Service
Sourcing. We outsource manufacturing of all of our PCs and monitors. TriGem
Computer currently manufactures all of our eTower and eMonster PCs. Korea Data
Systems Co. manufactures our eOne PCs, eSlate notebook computers, and, together
with the Taiwanese manufacturer Jean Company, all of our monitors. TriGem
Computer and Korea Data Systems Co. are ISO 9001 certified and Jean Company is
ISO 9002 certified. We have no long-term obligation to order, take minimum
delivery or purchase at a pre-negotiated price from TriGem Computer, Korea Data
Systems Co. or Jean Company.
Under the terms of the supply agreement that we entered into with TriGem
Computer in January 2000, TriGem Computer has agreed to reserve a portion of
its manufacturing capacity to meet our supply requirements. In addition to its
Korean manufacturing facility, TriGem Computer recently entered into an
outsourcing manufacturing agreement for a facility in Xiamen, China, and opened
a new facility in Shenyang, China. The Xiamen facility currently has production
capacity of approximately 90,000 PC units per month. The Shenyang facility is a
final-assembly plant with production capacity of approximately 150,000 PC units
per month. TriGem Computer has supplied PCs to Epson, Hewlett-Packard, Nokia
Corp., Olivetti S.p.A., Sharp Electronics Corporation, and Sotec. Korea Data
Systems Co. has supplied monitors to OEMs, distributors and retailers including
Best Buy, Compaq, CompUSA, IBM, Ingram Micro Inc. and Tech Data Corporation.
We will pay TriGem Computer for its supply and services on a "cost plus"
basis, which price shall be adjusted monthly based upon TriGem Computer's then
current costs. Pursuant to the agreement, we will place requisitions and
purchase orders each month. TriGem Computer's is obligated to meet such
purchase orders based on the projections we provide to TriGem Computer in our
annual plan. Except to the extent that we place requisitions and purchase
orders with TriGem Computer we have no obligation to purchase products from
TriGem Computer. TriGem Computer has provided several warranties to us,
including that all of its products will be free from defects in design,
material and workmanship. The term of the agreement is for two years, and
automatically renews for one year periods, unless either party provides written
notice of its intent to terminate one hundred and eighty (180) days prior to
the expiration of the initial term or any subsequent term.
Unlike TriGem Computer, Korea Data Systems Co. and Jean Company have no
contractual obligation to supply us with PCs and monitors. We are free to
change or expand our base of original equipment manufacturer suppliers at any
time, and we are currently engaged in such discussions with other suppliers.
43
<PAGE>
Distribution. We take possession of all manufactured goods at the origin
port of loading with the exception of one monitor model. We currently use one
steamship line and one freight forwarder to transport the goods from Asia to
our distribution center in Irvine. Our main distribution facility has over
85,000 square feet of warehouse space available for cross-dock shipping and
receiving. As of January 15, 2000, the distribution center was staffed with 9
full-time employees and approximately 50 temporary employees covering two
shifts, Monday through Friday. The distribution center staff is responsible for
planning and managing inbound and outbound shipments, special handling of
inventory, inventory control, verification of defective returns and
refurbishment coordination with TriGem America. Special handling services
include: product bundling, labeling, palletization, re-packaging, and parts
distribution.
Two off-site locations are also used during peak periods to maximize overall
productivity at the main distribution facility. Outbound transportation for all
locations is assigned based on the terms of sale. Transportation routing is
based on customer need, shipment weight, and cube dimensions. We are currently
using a transportation consulting firm for the majority of shipments with a
limited remainder of orders booked directly with carriers.
Customer Service. In order to maintain low costs, we outsource substantially
all technical support related to our PCs and our Internet access service to
Sykes, a leading supplier of technical support outsourcing services. We offer
technical support services free for 15 days after the first call from our PC
buyer seeking assistance. We believe that buyers of our PCs require the most
assistance during the first two weeks after they begin using their PC.
Following that period, PC buyers who require additional support can choose to
enter into an extended service contract or pay for technical support on a per-
incident basis until the problem is resolved.
Under our supply agreement with TriGem Computer, TriGem has agreed to
provide warranty and refurbishment services to eMachines. TriGem has warranted
that products that it produces shall be free from defects, and has agreed to
repair or replace and return, without cost to us or consumers, all defective
products returned within the warranty period, which lasts for fifteen months
from the date a product is delivered. If the returned products are not
defective, TriGem will charge us a service fee. Under the refurbishment
provisions of the agreement, we can return to TriGem all products that our
retailers return to us. If the returned products are defective, TriGem will
provide us with a full credit. TriGem will charge us a fee for each returned
product that is found not to be defective.
Prior to January 24, 1999, the date we entered into the supply agreement
with TriGem Computer, we sent all products returned to us to TriGem for
refurbishment. If a returned product was determined to be defective, and less
than 120 days old, TriGem refurbished and returned the product to us and gave
us a credit for a portion of the original invoice price. If a defective product
was less than 120 days old, TriGem merely refurbished and returned the product
to us. If a returned product was determined not to be defective, TriGem charged
us a service fee.
Additionally, Korea Data Systems Co. and Jean Company have agreed to warrant
monitors sold to us for 18 and 36 months, respectively. We offer a 12-month
warranty covering defects in materials or workmanship on every PC and monitor
we sell.
Sales and Marketing
Our PC sales and marketing strategy is focused on selling our products and
services through leading retailers. In recent years, retailers have attracted
fewer PC buyers as a result of the availability of custom configured systems at
substantially lower prices from direct vendors such as Dell, Gateway 2000 and
Micron Electronics. We believe that the introduction of sub-$600 PCs has
increased the number of first-time PC buyers, many of whom viewed high prices
as a barrier to PC ownership. Since first-time buyers are less likely to want
or need custom configurations and less likely to already have Internet access,
the introduction of the sub-$600 PC has also enabled retail stores to re-emerge
as significant PC vendors. Our strategy of selling primarily through leading
retailers has enabled us to leverage their sales and marketing efforts. As a
result, we have been able to establish our brand while maintaining a relatively
small sales and marketing organization. As of January 15, 2000, our PC sales
and marketing group consisted of 11 employees.
44
<PAGE>
Our Internet advertiser sales and marketing personnel that we acquired as a
result of the FreePC acquisition focus their attention on attracting top brand
advertisers. These advertisers may purchase keyboard buttons and other
sponsorships along with on-screen advertisements and periodic e-mail offers
that provide us with a recurring revenue stream following the initial purchase
of one of our PCs. Our Internet sales and marketing personnel operate out of
our headquarters in the Los Angeles area and three regional offices in
New York, San Francisco and Chicago. As of January 15, 2000, we had 17 sales
professionals and 7 members in the Internet marketing group.
Competition
The markets for PCs, Internet devices and Internet advertising are intensely
competitive, evolving and subject to rapid technological change. These markets
are characterized by an increasing number of entrants. We compete for users,
and consequently for potential electronic commerce and advertising revenue,
directly or indirectly, with the following categories of competitors:
. vendors of personal computers, such as Apple, Compaq, Dell, Gateway,
Hewlett-Packard and IBM;
. vendors of stand-alone Internet appliances, such as InfoGear, Netpliance
and WebTV;
. Internet service providers, such as America Online, EarthLink,
Mindspring, Microsoft and NetZero;
. Internet portals, such as Excite@Home, Lycos and Yahoo!; and
. providers of Internet advertising services, such as 24/7 Media,
DoubleClick and Engage Technologies.
The Internet devices industry is highly competitive, and we expect this
competition to continue. The primary competitive factors determining success in
the market for Internet devices include price, quality, brand and distribution.
We expect pricing pressures in the PC market to continue, particularly as a
result of the introduction of a variety of product rebate programs that include
Internet access with the purchase of an Internet device. Additionally,
traditional PC vendors may reduce their prices to compete with us at our price
points or offer additional services. There are relatively few barriers
preventing our competitors from capitalizing on the convergence of the PC and
Internet markets. As a result, new integrated computing and Internet services
offerings pose a threat to our business.
The Internet access services market is also highly competitive, and we
expect competition in this market to increase significantly. The primary
competitive factors determining success in the market for Internet users
include a reputation of reliable service, effective customer support, pricing,
easy-to-use software, geographic coverage and scope of services. This market is
new and subject to rapid change, including the introduction of new
technologies, price declines and well-funded promotional campaigns. In addition
to offering our own Internet access service, we actively support the customer
acquisition and retention efforts of America Online, from which we receive
registration bounties and/or ongoing revenues. Potential competitors to these
companies include established and new Internet service providers, national
telecommunications companies, regional Bell operating companies, competitive
local exchange carriers, online cable services, alternative e-commerce Internet
advertising vendors and potential new entrants to the Internet services market
such as computer hardware vendors or computer retailers. A shift in market
share away from our partners could negatively affect our revenues.
The Internet advertising market is highly competitive as well, and we expect
competition in this market to increase significantly. The primary competitive
factors determining success in the market for advertising customers include the
size and demographic profile of a user base, the ability to target users based
on specific demographic criteria, pricing, geographic coverage and the
effectiveness of the sales force. We believe we have a competitive advantage in
all of these areas because of our widespread distribution, our growing customer
base, and our ability to target marketing offers based on a close relationship
with our customers established
45
<PAGE>
from the point of sale of the PC. Companies competing for advertising and
marketing expenditures, however, may develop increasingly sophisticated
technologies and provide compelling alternatives that could pose a threat to
our revenues.
The consolidation of existing competitors, new entrants to the PC and
Internet service markets or alliances between PC vendors and Internet service
providers may result in greater competition for us. In addition to America
Online, some of our current or future strategic partners may become our
competitors. Competition is likely to remain intense as large, diversified
telecommunications and media companies acquire Internet service providers, as
Internet service providers and PC vendors merge and as Internet service
providers consolidate.
Most of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a substantially larger
installed base of customers than we do. In addition, many of our competitors
have nationally known brands or well-established relationships and have
extensive knowledge of our industry. Moreover, our current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to increase the ability of their products to
address consumer needs or to combine hardware product and service offerings.
The introduction of low-priced PCs combined with the brand strength, extensive
distribution channels and financial resources of the larger PC vendors may
cause us to lose market share.
Customers and Markets
Our customers include computer retailers as well as Internet advertisers.
Retailers. We currently sell our products to leading retailers, catalog and
on-line merchandisers in the United States and Canada. Our customer list
includes:
<TABLE>
<S> <C> <C>
America Online Fry's Electronics Navy Exchange
Best Buy Future Shop Nexcom
BJ's Wholesale Club Hard Technologies Office Depot
BrandsMart Ingram-Micro Onsale, Inc.
Circuit City Insight Outpost.com
CompUSA J&R Computer World QVC
Costco Marine Corps. Sears
Creative Computers Merisel Canada Staples
Cyberian Outpost MicroCenter TigerDirect
Damark International MicroWarehouse Value America
Fingerhut Nationwide Electronics Walmart
</TABLE>
For the year ended December 31, 1999, approximately 68% of our gross
revenues were from sales of PCs and monitors to our four largest retail
customers. Sales to Best Buy represented 21% of our gross revenues for the year
ended December 31, 1999. Further, sales to Office Depot and Circuit City each
represented 20% of our gross revenues for the year ended December 31, 1999.
This concentration of sales allows us to maintain a low-cost infrastructure
while establishing preferred vendor status with large leading retailers. We
intend to continue to sell the majority of our PCs and monitors to a limited
number of large retailers for the foreseeable future.
Advertisers. Our development of customer relationships with advertisers is
currently in its early stages. Since our acquisition of FreePC in January 2000,
we have signed advertising agreements with USBancshares.com, eBay, Amazon.com
and GoTo.com for our hot-key enabled keyboards. In addition, we are taking
advantage of the numerous advertiser relationships cultivated by FreePC prior
to the acquisition. We are in discussions with a wide variety of these
companies and others about opportunities to reach consumers via our new
hardware portal model.
46
<PAGE>
Facilities
Our principal executive and distribution facilities are located in Irvine,
California. We lease approximately 147,000 square feet at this facility
pursuant to a lease that expires in 2004, unless terminated earlier or extended
as described below. Under the terms of the lease, we make monthly payments of
approximately $84,000, increasing to approximately $97,000 over the term of the
lease. We have an option to extend the term of the lease for an additional 60-
month period. We sublease approximately 48,000 square feet of these facilities,
pursuant to a verbal agreement, to TriGem America for monthly payments of
approximately $27,000, increasing to approximately $32,000 over the term of the
sublease. TriGem America uses this space to refurbish our returned PCs.
Our principal Internet advertising office is located in Pasadena,
California. We lease approximately 19,000 square feet at this facility pursuant
to an agreement with Bill Gross' idealab!, one of our principal stockholders,
and we have a right of first offer to lease an additional 9,905 square feet at
this location. The initial term of the agreement is for one year commencing in
June 1999, with an option to extend for up to four additional one-year terms.
We also lease space in New York and San Francisco to support our Internet
advertising sales efforts.
Legal Proceedings
In July 1999, Compaq Computer Corporation filed a complaint against us,
TriGem Computer, TriGem America and Korea Data Systems as defendants in the
U.S. District Court for the Southern District of Texas based on the defendants'
alleged infringement of 13 patents held by Compaq related to improved system
processing speed, enhanced video graphics, peripheral compatibility and overall
system architecture. The complaint seeks an accounting, treble damages, a
preliminary and permanent injunction from further alleged infringement,
attorneys' fees and other unspecified damages. We filed a response in September
1999, seeking declaratory judgment of noninfringement and invalidity of
Compaq's patents and asserting counterclaims against Compaq that included false
and misleading advertising under the Lanham Act, business disparagement and
unfair competition under Texas common law. The case is currently in the early
stages of discovery. As a result, we are currently unable to estimate total
expenses, possible loss or range of loss that may be ultimately connected with
these allegations. We are indemnified against liability under the terms of our
PC supply agreement. We cannot assure you that Compaq will not succeed in
obtaining monetary damages or an injunction against the production of our PC
products. Our defense of the claims could result in significant expenses and
diversion of management's attention and other resources. Although we believe
our direct financial exposure is limited under our indemnification
arrangements, the results of complex litigation of this sort are inherently
uncertain and difficult to predict and we cannot assure you that the results of
this litigation would not result in our business being significantly harmed,
particularly if it affects production of our PCs.
Packard Bell filed a complaint on October 6, 1999 in Federal District Court
for the Eastern District of California, alleging patent infringement on Packard
Bell patents which it asserts relates to (i) graphics controller, (ii) parallel
port controller, and (iii) bus interface of our eTower machine. We filed a
response in January 2000 disputing infringement and asserting that the patents
at issue are invalid. We are in the early stages of discovery. As a result, we
are currently unable to estimate total expenses, possible loss or range of loss
that may be ultimately connected with these allegations. We are indemnified
against liability under the terms of our PC supply agreement. We cannot assure
you that Packard Bell will not succeed in obtaining monetary damages or an
injunction against the production of our PC products. Our defense of the claims
could result in significant expenses and diversion of management's attention
and other resources. Although we believe our direct financial exposure is
limited under our indemnification arrangement, the results of complex
litigation of this sort are inherently uncertain and difficult to predict and
we cannot assure you that the results of this litigation would not result in
our business being significantly harmed, particularly if it affects production
of our PCs.
In October 1999, David Packard on behalf of a putative nationwide class,
filed a complaint against us as a defendant in the U.S. District Court for the
Eastern District of Texas based on our alleged sale of defective goods.
Essentially identical complaints were filed contemporaneously against Compaq,
Hewlett-Packard and
47
<PAGE>
Packard Bell. The complaints claim that a chip in the defendants' respective PC
products contains a defect which may cause an error to occur when information
is written to a floppy disk. The complaint seeks unspecified monetary damages,
injunctive relief and declaratory relief. The lawsuit against us is in the
early stages of discovery and we have not yet filed a response. Although we
believe that we have meritorious defenses and intend to vigorously defend
ourselves in this action, these types of litigation are inherently complex and
unpredictable. We cannot assure you that the class action suit will not succeed
in obtaining unspecified monetary damages, injunctive and declaratory relief
against the production of our PC products. Our defense of the claims could
result in significant expenses and diversion of management's attention and
other resources. In addition, we cannot assure you that the results of this
litigation would not result in our business being significantly harmed.
It is common in the PC manufacturing industry for patent, trademark and
other intellectual property claims to be asserted against companies. We receive
notices from time to time that our technology allegedly infringes on
intellectual property rights held by others. As a result, we may be required to
defend legal actions relating to allegedly protected technology. Various other
lawsuits, claims and proceedings have been or may be asserted against us,
including those related to product liability, intellectual property,
environmental, safety and health and employment matters. Litigation is
expensive and time consuming regardless of the merit of the claim and could
divert management's attention from our business. Moreover, the outcome of
litigation cannot be predicted with certainty. Some lawsuits, claims or
proceedings may be disposed of unfavorably to us.
Employees
We operate with a relatively small number of employees, significantly
reducing our fixed cost base. As of January 15, 2000, we employed a total of
159 people, including 23 in Internet sales, 11 in channel sales, eight in
marketing, 67 in operations and 32 in finance and accounting. None of our
employees are represented by a labor union, and we have no collective
bargaining agreements. We consider our relations with our employees to be good.
48
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth information with respect to our executive
officers and directors as of January 15, 2000.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Stephen A. Dukker....... 47 President, Chief Executive Officer and Director
Steven H. Miller........ 44 Vice President, Chief Financial Officer and Secretary
Donald S. La Vigne...... 34 Executive Vice President, Strategy and Business Development
Audrey U. Finci......... 42 Executive Vice President, Operations
Steve Chadima........... 49 Vice President, Marketing
James Weissenborn....... 36 Vice President, Advertising Sales
Hong Soon Lee........... 39 Chairman of the Board
Michael Hong............ 38 Director
Lap Shun Hui (2)........ 44 Director
Bill Gross.............. 41 Director
Jung Koh................ 46 Director
Nathan Morton (1)(2).... 51 Director
C. Toms Newby, III
(1)(2)................. 32 Director
</TABLE>
- ---------------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
Stephen A. Dukker has served as our President, Chief Executive Officer and a
member of our board of directors since founding us in September 1998. From
October 1997 through August 1998, Mr. Dukker was Senior Vice President of
Merchandising and Operations of Computer City. Prior to that, Mr. Dukker was
President of OPTi, a manufacturer of PC multimedia and core logic
semiconductors, from January 1995 through September 1997. From May 1994 through
October 1994, Mr. Dukker was President of Videologic, Inc., a United Kingdom-
based designer and manufacturer of semiconductors and videocards. Mr. Dukker
currently serves on the board of directors of OPTi and Digital Persona. Mr.
Dukker attended the University of Chicago.
Steven H. Miller has served as our Vice President, Chief Financial Officer
and Secretary since June 1999. Mr. Miller was employed by Ingram Micro, Inc., a
wholesale distributor of technology products and services, from May 1992
through May 1999, most recently as Vice President and Controller. Mr. Miller is
a CPA and received a B.A. in Economics from the University of California, Santa
Barbara.
Donald S. La Vigne has served as our Executive Vice President, Strategy and
Business Development since January 2000. Mr. La Vigne was the Chief Executive
Officer and President of FreePC, Inc. from its founding in February 1999 until
we acquired FreePC. Prior to that, from February 1997 to January 1999, Mr. La
Vigne was the founder and President of Stanton Capital, a private investment
firm. From April 1994 to January 1997, Mr. La Vigne was with Esprit de Corp., a
global apparel and retail company, as its head of the Executive Committee and
interim Chief Executive Officer of its U.S. operations. Prior to Esprit, Mr. La
Vigne was an investment banker with Hambrecht & Quist from June 1989 to April
1994. Mr. La Vigne received a B.A. in Government from Harvard College.
Audrey Finci has served as our Executive Vice President, Operations since
January 2000 and had previously held that position at FreePC since October
1999. Prior to that, Ms. Finci was employed by the
49
<PAGE>
Walt Disney Company since September 1988, most recently as the Executive Vice
President of Disney Direct Marketing and head of Operations and Technology for
Disney Consumer Products, a division of the Walt Disney Company. Ms. Finci is a
CPA and received a B.A. from UCLA and an M.B.A. from the University of Southern
California.
Steve Chadima has served as our Vice President, Marketing since January
2000. Mr. Chadima was the Vice President, Marketing for FreePC from March 1999
until we acquired Free PC. From November 1995 to January 1999, Mr. Chadima was
the Senior Vice President and General Manager of Connors Communications, Inc.,
a consumer technology public relations and online marketing firm. Prior to
that, Mr. Chadima was with Knowledge Adventure, Inc., an educational software
publisher, where he was co-founder and served as Vice President of Marketing
from 1990 to November 1995. Mr. Chadima holds a B.A. from the University of
California, Irvine, and an M.B.A. from Stanford University.
James Weissenborn has served as our Vice President, Advertising Sales since
January 2000. He held the same position with FreePC from May 1999 until we
acquired FreePC. Prior to joining FreePC, Mr. Weissenborn was Vice President of
Sales Development and Marketing at Univision, a Hispanic television network,
from May 1998 to May 1999. From January 1992 to May 1998, Mr. Weissenborn was
Vice President of Sales, Western Region at Comedy Central, a cable television
company. Mr. Weissenborn has a B.A. from the University of California,
Berkeley.
Hong Soon Lee has been Chairman of our board of directors since September
1998. Mr. Lee is currently President, Chief Executive Officer and a member of
the board of directors of TriGem Computer and has served in various positions
at TriGem Computer since June 1994. In addition, Mr. Lee has been a director of
TriGem Corporation since July 1997. Mr. Lee received a B.S. from Korea
University and a M.S. in Engineering from the Florida Institute of Technology.
Michael Hong has been a member of our board of directors since January 2000.
Mr. Hong also began serving as Executive Vice President and Chief Financial
Officer of TriGem Computer in January 2000, where he started in May 1999 as
Senior Advisor on financial matters. From January 1995 through May 1999, Mr.
Hong served as Vice President of Business Development for North Asia and
Country Manager (Korea) at General Electric Capital. Mr. Hong currently serves
on the board of directors of Gemini Capital Management LTD. He received a B.A.
from Harvard University and an M.B.A. from the Wharton School at the University
of Pennsylvania.
Lap Shun Hui has been a member of our board of directors since September
1998. Mr. Hui is currently President and a member of the board of directors of
KDS USA, a position he has held since June 1995. From January 1993 through June
1995, Mr. Hui was Chief Executive Officer of Orchestra Multisystems, a company
that was acquired by KDS USA. Mr. Hui received a B.S. in Business from the
State University of New York at Buffalo and an M.B.A. from McMaster University,
Ontario, Canada.
Bill Gross has been a member of our board of directors since January 2000.
Since March 1996, Mr. Gross has served as Chairman of the Board and President
of Bill Gross' idealab!, a company that creates and operates Internet
businesses. From June 1991 to January 1997, he served as Chairman of Knowledge
Adventure, Inc., an educational software publisher, which he founded. Mr. Gross
serves on the board of directors of Ticketmaster Online-CitySearch, Inc.
(formerly CitySearch, Inc.), GoTo.com, Inc., NetZero, Inc. and several other
private companies. Mr. Gross received his B.S. in Mechanical Engineering from
the California Institute of Technology.
Jung Koh has been a member of our board of directors since our formation in
September 1998. Mr. Koh also serves as Vice Chairman of Korea Data Systems Co.,
a position he has held since 1983. In addition, Mr. Koh has been a member of
the board of directors of Du Go since 1983. Mr. Koh received a B.A. from Rhode
Island College.
Nathan Morton has been a member of our board of directors since August 1999.
Mr. Morton is currently Chairman of both Buildnet, Inc., a provider of e-
business, technology, and project management systems for the building industry,
and Handtech.com, a retailer of computer and Internet-related products,
positions he has held since November 1998. In addition, Mr. Morton currently
serves as Chairman of Starpower and as Senior
50
<PAGE>
Partner of Channel Marketing. From July 1997 through September 1998, Mr. Morton
was Co-Chairman and Chief Executive Officer of Computer City. Prior to that,
Mr. Morton served as President and Chief Executive Officer of Open Environment
from March 1994 through February 1996. Mr. Morton has a B.A. from State
University of New York at Buffalo.
C. Toms Newby, III has been a member of our board of directors since August
1999. Mr. Newby joined Technology Crossover Ventures, a venture capital firm,
in April 1996 and has been a General Partner since July 1998. From 1994 through
April 1996, Mr. Newby was an associate at Montgomery Securities in the
Corporate Finance Technology Group. Mr. Newby currently serves on the board of
directors of Emerald Solutions, Inc., an Internet and information technology
consulting firm. Mr. Newby received a B.S. from the University of North
Carolina and an M.B.A. from Stanford University.
Board of Directors
We currently have authorized eight directors. Our amended and restated
certificate of incorporation to be filed in connection with this offering
provides that the terms of office of the members of the board of directors will
be divided into three classes: Class I, whose term will expire at the annual
meeting of stockholders to be held in 2001, Class II, whose term will expire at
the annual meeting of stockholders to be held in 2002, and Class III, whose
term will expire at the annual meeting of stockholders to be held in 2003. At
each annual meeting of stockholders after the initial classification, the
successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. Any additional directorships resulting from an increase in
the number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one-third of the total number of
directors. This classification of our board of directors may have the effect of
delaying or preventing changes in our control or management.
Committees
Our board of directors has an audit committee and a compensation committee.
The audit committee consists of Messrs. Morton and Newby. The audit committee
reviews our internal accounting procedures and consults with and reviews the
services provided by our independent accountants. The compensation committee
consists of Messrs. Morton, Newby and Hui. The compensation committee reviews
the compensation and benefits of our employees and directors and makes
recommendations to our board of directors.
Compensation
Directors do not receive cash compensation from us for the services they
provide as directors, although non-employee directors are reimbursed for
expenses incurred in connection with attending board and committee meetings.
Compensation Committee Interlocks and Insider Participation
Prior to August 1999, our board of directors did not maintain a standing
compensation committee, and the entire board participated in all decisions
regarding compensation of our executive officers. During that period, Stephen
A. Dukker, our President and Chief Executive Officer, participated as a member
of our board of directors in deliberations concerning executive officer
compensation. In August 1999, the board formed the compensation committee and
appointed Messrs. Morton and Newby as committee members. In December 1999, Mr.
Hui was also appointed as a committee member. None of the members of the
compensation committee is currently or has ever been at any time since our
formation, one of our officers or employees. No member of the compensation
committee serves as a member of the board of directors or compensation
committee of any entity that has one or more officers serving as a member of
our board of directors or compensation committee.
51
<PAGE>
Executive Officers
Compensation
The following table sets forth the compensation earned during 1999 by our
Chief Executive Officer and our other executive officer who earned more than
$100,000 during 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual ------------
Compensation Securities
----------------- Underlying
Name and Principal Positions Salary Bonus Options
- ---------------------------- -------- -------- ------------
<S> <C> <C> <C>
Stephen A. Dukker................................ $333,646 $699,647 227,897
President and Chief Executive Officer
Steven Miller.................................... $105,404 $ 35,000 200,000
Vice President, Chief Financial Officer
</TABLE>
Option Grants in Last Fiscal Year
The following table sets forth information relating to stock options granted
during 1999 to our Chief Executive Officer and the other executive officer
named in the Summary Compensation Table above. The option granted to Stephen A.
Dukker pursuant to an employment agreement was granted below fair market value,
outside of our 1998 stock plan, and was fully-vested. The fair market value was
not determined by the board of directors at the time of grant and is implied
from the price per share paid by the investors in the Series A preferred stock.
The option granted to the other executive officer in the last year was granted
under the 1998 stock plan and was granted at a fair market value as determined
by the board of directors on the date of grant. The board of directors
determined the fair market value based on our financial results and prospects.
Of the shares subject to the option, 20% vests and becomes exercisable on the
first anniversary of the date of grant, and an additional 20% of the shares
subject to the option vests on each anniversary of the date of grant
thereafter. The percentage of the total options set forth below is based on an
aggregate of 1,035,097 options granted to employees during 1999. The potential
realizable values in the table below represent hypothetical gains that could be
achieved for the options if exercised at the end of the option term. The
assumed 5% and 10% rates of stock price appreciation are provided in accordance
with rules of the SEC and do not represent our estimate or projection of the
future common stock price.
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------- Potential Realizable Value
Number of % of Total Fair at Assumed Annual Rates of
Securities Options Market Stock Appreciation for Option
Underlying Granted to Exercise Value on Term
Options Employees Price Per the Date Expiration --------------------------------
Name Granted in 1999 Share of Grant Date 0% 5% 10%
- ---- ---------- ---------- --------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen A. Dukker....... 227,897 21.8% $1.61 $6.38 8/18/09 $1,087,069 $2,001,471 $3,404,343
Steven H. Miller........ 200,000 19.2 3.75 3.75 6/15/09 -- 471,671 1,195,307
</TABLE>
Fiscal Year-End Option Values
Neither of the executive officers named in the summary compensation table
exercised any options during 1999. The following table sets forth information
concerning exercisable and unexercisable stock options held by the named
executive officers and the value of those options as of December 31, 1999. The
value of unexercised in-the-money options is based on an assumed initial
offering price of $ per share minus the actual exercise price of the
option, multiplied by the number of shares underlying the option.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at December 31, 1999 December 31, 1999
-------------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Stephen A.
Dukker........... 227,897 -- $ --
Steven H. Miller.. -- 200,000 -- $
</TABLE>
52
<PAGE>
Employment Agreement
In June 1999, we entered into an employment agreement with Stephen A.
Dukker, our President and Chief Executive Officer, which agreement was amended
and restated in August 1999. The agreement provides for an annual base salary
of $300,000 with a variable bonus. For the period from September 18, 1998
through June 30, 1999, the bonus was equal to $1 for each central processor
unit shipped during the period. For the period July 1, 1999 through November
30, 1999, Mr. Dukker's bonus is a fully vested non-forfeitable option to
purchase 227,897 shares of our common stock at an exercise price of $1.61 per
share. The agreement provides that if we terminate Mr. Dukker's employment
without cause, if Mr. Dukker voluntarily terminates his employment after he is
relocated without his consent, if his duties or benefits are materially
reduced, or if his employment terminates because of death or disability, we
must continue to pay his base salary and bonus through the term of the
agreement which ends in September 2001. Upon a change of control of eMachines,
and unless the acquiror of eMachines assumes Mr. Dukker's employment agreement,
Mr. Dukker shall be entitled to payment of his base salary and bonus through
the term of the agreement, all of Mr. Dukker's unvested options shall
immediately vest and our right to repurchase any restricted stock held by Mr.
Dukker shall terminate.
Limitations on Directors' and Officers' Liability and Indemnification
Our certificate of incorporation limits the liability of our directors to
the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability associated
with any of the following:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemption; or
. any transaction from which the director derived an improper personal
benefit.
The limitation of a director's liability does not apply to liabilities
arising under the federal securities laws and does not affect the availability
of equitable remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws also provide that we shall
indemnify our directors and executive officers and may indemnify our other
officers and employees and other agents to the fullest extent permitted by law.
We believe that indemnification under our bylaws covers at least negligence and
gross negligence on the part of indemnified parties. Our bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether our bylaws would permit indemnification. We intend to
obtain and maintain directors' and officers' liability insurance, under which
our directors and officers may be indemnified against liability they may incur
for serving in their capabilities as directors and officers.
We have entered into indemnification agreements with each of our directors
and officers. The indemnification agreements contain provisions that require us
to, among other things, indemnify our officers and directors against
liabilities that may arise by reason of their status or service as directors or
officers (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to cover our directors
and officers under any of our liability insurance policies applicable to our
directors and officers.
We believe that these provisions and agreements are necessary to attract and
retain qualified persons as directors and officers.
53
<PAGE>
Stock Plans
1998 Stock Plan
Our 1998 stock plan was approved by our board of directors in September
1998. We have reserved a total of 3,200,000 shares of our common stock for
issuance under the plan. The plan provides for the granting to our employees of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and for the granting to employees, including
officers and directors, nonemployee directors and consultants of nonstatutory
stock options and stock purchase rights. Unless terminated sooner, this plan
will terminate automatically in 2008.
Our 1998 stock plan is administered by our board of directors and, thus, the
board determines the terms of the options or stock purchase rights granted,
including the exercise price, the number of shares subject to each option or
stock purchase right, the vesting and the form of consideration payable upon
such exercise. In addition, the board has the authority to amend, suspend or
terminate the plan, provided that no such action may affect any share of common
stock previously issued and sold or any option previously granted and then
outstanding under the plan.
Options and stock purchase rights granted under our 1998 stock plan are not
generally transferable by the optionee, and each option and stock purchase
right is exercisable during the lifetime of the optionee only by the optionee.
Options granted under the plan must generally be exercised within three months
of the end of optionee's status as our employee or consultant, or within twelve
months after his or her termination by death or disability, but in no event
later than the expiration of the option's ten-year term. In the case of stock
purchase rights, unless the board determines otherwise, the agreement
evidencing the grant shall provide that we have a repurchase option exercisable
upon the voluntary or involuntary termination of his or her employment for any
reason (including death or disability). In this event, the purchase price per
share will be equal to the original price and may be paid by cancellation of
his or her outstanding indebtedness to us, if any. Our repurchase option shall
lapse at a rate determined by the board. The exercise price of any incentive
stock options granted under this plan and any nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, must be at least equal to the fair market value of
our common stock on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting power of all classes of our
outstanding capital stock, the exercise price of any incentive stock option
granted must equal at least 110% of the fair market value on the grant date and
the term of such incentive stock option must not exceed five years. The term of
all other options granted under the plan may not exceed ten years.
Our 1998 stock plan provides that in the event of our merger with or into
another corporation, a sale of substantially all of our assets, each option or
right shall be assumed or an equivalent option or right substituted by the
successor corporation. If the outstanding options or rights are not assumed or
substituted, our board shall provide for the optionee to have the right to
exercise the option or stock purchase right as to all of the optioned stock,
including shares as to which it would not otherwise be exercisable, for a
period of fifteen days from the date of such notice, and the option or stock
purchase right will terminate upon the expiration of such period.
FreePC 1999 Stock Plan and Guide.com 1998 Stock Plan
In connection with the FreePC acquisition, we assumed all outstanding
options issued under the FreePC 1999 stock plan as of January 14, 2000. These
assumed options became options to purchase an aggregate of 2,746,607 shares of
our common stock and warrants to purchase 1,177,117 shares of our common stock.
All material terms of the FreePC options are the same as the terms of our 1998
stock plan described above.
In connection with FreePC's merger with Guide.com, FreePC had assumed all
outstanding options issued under the Guide.com 1998 stock plan as of March 4,
1999. We also assumed these options when we acquired FreePC. These assumed
options became options exercisable for an aggregate of 144,707 shares of our
common stock and warrants to purchase 62,041 shares of our common stock. All
material terms of the Guide.com options are the same as the terms of our 1998
stock plan described above.
54
<PAGE>
RELATED PARTY TRANSACTIONS
Relationship with TriGem Computer, TriGem Corporation, TriGem America, Korea
Data Systems Co., Korea Data Systems America and KDS USA
TriGem Computer, a Korean company, is the parent company of TriGem
Corporation, a California corporation. Prior to this offering TriGem
Corporation owned 23.6% of our outstanding common stock after giving effect to
the conversion of all outstanding preferred stock. Hong Soon Lee, Chairman of
our board of directors and one of our stockholders, is also the President,
Chief Executive Officer and a member of the board of directors of TriGem
Computer and a director of TriGem Corporation. Michael Hong, a member of our
board of directors, is also Chief Financial Officer for TriGem Computer.
Korea Data Systems Co., a Korean company, is the parent company of Korea
Data Systems America. Prior to this offering Korea Data Systems America owned
23.3% of our outstanding common stock after giving effect to the conversion of
all outstanding preferred stock. Jung Koh, a member of our board of directors
and one of our stockholders also serves as Vice Chairman of Korea Data Systems
Co.
We have entered into a number of agreements, both written and verbal, with
TriGem Computer, TriGem Corporation, TriGem America, Korea Data Systems Co.,
Korea Data Systems America and KDS USA. These agreements are described below.
Trademark Assignment
Under an agreement entered into on June 10, 1999 and amended on August 16,
1999, Korea Data Systems America transferred to us the trademark "E-MACHINES"
for 419,538 shares of our common stock, which we issued to it on August 18,
1999. We agreed to license back to Korea Data Systems America use of the
trademark solely in the Republic of Korea.
Lease
We lease approximately 147,000 square feet of office and warehouse space
located at 14350 Myford Road, Irvine, California from the Irvine Company under
a written lease entered into on November 30, 1998. Our monthly rent is
approximately $84,000 subject to annual increases that will increase our rent
in the fifth year of the lease to approximately $97,000. The lease terminates
in 2004, subject to our right to extend the term. Our performance under the
lease is guaranteed by Korea Data Systems America. Pursuant to a verbal
agreement, we sublease approximately 48,000 square feet of this space to TriGem
America, a subsidiary of TriGem Computer, for a monthly rental of approximately
$27,000 increasing to approximately $32,000 over the term of the sublease.
Subordinated Notes
In connection with our initial capitalization, we issued a subordinated note
payable to TriGem Corporation in the amount of $270,000 and a subordinated note
payable to Korea Data Systems America in the amount of $290,000. See "--
Capitalization Agreements" for a description of our initial capitalization. The
subordinated notes bear interest at 5.79% and are due on June 7, 2004. The
subordinated notes may be prepaid without penalty at our option.
Supply of eOne PCs, eSlate Notebook Computers and Monitors
We currently source all of our eOne PCs, eSlate notebook computers and
monitors from KDS USA, a company that is wholly owned by Lap Shun Hui, a member
of our board of directors and one of our stockholders. All of the eOne PCs and
the eSlate notebook computers and a limited number of our monitors are
manufactured by Korea Data Systems Co., and all of our monitors are
manufactured by Korea Data Systems
55
<PAGE>
Co. We have no obligation to order, take minimum delivery or purchase at pre-
negotiated prices from KDS USA or Korea Data Systems Co. Additionally, KDS USA
and Korea Data Systems Co. have no contractual obligation to supply us with PCs
and monitors.
Supply of eTower and eMonster PCs
On January 24, 2000, we entered into an original design manufacturer
agreement with TriGem Computer. Pursuant to the agreement, TriGem Computer has
agreed to design, procure and assemble certain computer components, and to
provide support for the assembled products. We will pay TriGem Computer for its
supply and services on a "cost plus" basis, which price shall be adjusted
monthly based upon TriGem Computer's then current costs. Pursuant to the
agreement, we will place requisitions and purchase orders each month. TriGem
Computer is obligated to meet such purchase orders based on the projections we
provide to TriGem Computer in our annual plan. Except to the extent that we
place requisitions and purchase orders with TriGem Computer we have no
obligation to purchase products from TriGem Computer. TriGem Computer has
provided several warranties to us, including that all of its products will be
free from defects in design, material and workmanship. The term of the
agreement is for two years, and automatically renews for one year periods,
unless either party provides written notice of its intent to terminate one
hundred and eighty (180) days prior to the expiration of the initial term or
any subsequent term.
Inventory Purchases and Extended Payment Terms
During the period from inception until December 31, 1998, we purchased an
aggregate of approximately $71 million in PCs and monitors from TriGem
Corporation and KDS USA. Pursuant to a verbal agreement with TriGem Corporation
and Korea Data Systems Co., we financed our inventory purchases by extending
payment of our accounts payable up to ninety days. Under a verbal agreement
between us, TriGem Corporation, Korea Data Systems Co. and KDS USA, we
transferred approximately $58 million of our accounts payable obligations as of
December 31, 1998 to KDS USA. Pursuant to a verbal agreement with KDS USA,
trade payables are subject to payment terms that allow us ninety days to pay
and that provide a discount on PC payables proportional to the number of days
that we pay early. The effective interest rate as of June 30, 1999 was a 10%
annual rate. During the year ended December 31, 1999, we purchased an aggregate
of $805.4 million in PCs and monitors from KDS USA. As of December 31, 1999,
approximately $131.9 million in payables were outstanding to KDS USA. In
connection with these inventory purchases, approximately $889,000 of finance
charges was incurred for the period ended December 31, 1998, and $6.5 million
of finance charges were incurred for the year ended December 31, 1999.
Warranties and PC Repair Service
Under our original design manufacturer agreement with TriGem Computer,
TriGem has agreed to provide warranty and refurbishment services to eMachines.
TriGem has warranted that products that it produces shall be free from defects,
and has agreed to repair or replace and return, without cost to us or
consumers, all defective products returned within the warranty period, which
lasts for fifteen months from the date a product is delivered. If the returned
products are not defective, TriGem will charge us a service fee. Under the
refurbishment provisions of the agreement, we can return to TriGem all products
that our retailers return to us. If the returned products are defective, TriGem
will provide us with a full credit. TriGem will charge us a fee for each
returned product that is found not to be defective.
Prior to January 24, 1999, the date we entered into the original design
manufacturer agreement with TriGem Computer, we sent all products returned to
us to TriGem for refurbishment. If a returned product was determined to be
defective, and less than 120 days old, TriGem refurbished and returned the
product to us and gave us a credit for a portion of the original invoice price.
If a defective product was less than 120 days old, TriGem merely refurbished
and returned the product to us. If a returned product was determined not to be
defective, TriGem charged us a service fee.
56
<PAGE>
Under verbal agreement, Korea Data Systems Co. warrants its monitors for
eighteen months. (parts and labor included).
Cooperative Advertising Costs
For the period from inception until December 31, 1998, TriGem Computer
agreed to credit us $363,000 for cooperative advertising credits from component
suppliers. In July 1999, this amount was offset against amounts due to KDS USA.
Freight Costs
For the period from inception until December 31, 1998, TriGem Computer
agreed to credit us $173,000 in freight costs for products shipped to us from
TriGem Computer. In July 1999, this amount was offset against amounts due to
KDS USA.
Capitalization Agreements
On June 10, 1999, pursuant to agreements reached in September 1998, we
issued an aggregate of 77,600,000 shares of our common stock at a price per
share of $0.03. Among the purchasers of our common stock were the following
officers, directors and stockholders of more than 5% of our outstanding shares,
and their immediate family members:
<TABLE>
<CAPTION>
Aggregate
Number of Purchase
Stockholder Shares Price
- ----------- ---------- ---------
<S> <C> <C>
TriGem Corporation......................................... 29,200,000 $730,000
Korea Data Systems America................................. 28,400,000 710,000
Stephen A. Dukker.......................................... 8,000,000 200,000
Chul Chung................................................. 2,400,000 60,000
Jung Koh................................................... 2,400,000 60,000
Hong Soon Lee.............................................. 2,400,000 60,000
Hong Sun Lee............................................... 1,600,000 40,000
Lap Shun Hui............................................... 1,600,000 40,000
Dae Soo Koh................................................ 1,600,000 40,000
</TABLE>
Hong Sun Lee is Hong Soon Lee's brother and Dae Soo Koh is Jung Koh's
brother. Both Hong Sun Lee and Dae Soo Koh were members of our board of
directors until August 1999 when they resigned in connection with the Series A
preferred stock financing.
Messrs. Dukker, Chung, Hui, Jung Koh, Dae Soo Koh, Hong Soon Lee and Hong
Sun Lee paid for their shares with full recourse promissory notes. Each of the
notes matures in June 2004 and bears interest until maturity at 5.79% per year.
Each note is secured with the shares issued to each purchaser.
On June 10, 1999, we also entered into a Shareholders Agreement with the
above purchasers of our common stock. This agreement superseded an earlier
agreement that had been entered into solely by two of our principal
stockholders, TriGem Corporation and Korea Data Systems America, on April 1,
1999. The Shareholders Agreement terminated upon the closing of the sale of our
Series A preferred stock in August 1999. When it was in effect, this Agreement
provided for board review of significant business decisions, a voting agreement
as to election of directors and a buy-sell agreement among TriGem Corporation
and Korea Data Systems America. When it was in effect, it also provided for
limited preferential supply arrangements with TriGem Computer and Korea Data
Systems Co.
57
<PAGE>
Series A Preferred Stock Financing
On August 18, 1999, we sold an aggregate of 24,279,369 shares of our Series
A preferred stock at a price per share of $6.38.
America Online, a stockholder of more than 5% of our outstanding shares
prior to this offering, purchased 7,832,079 shares for an aggregate price of
$50 million. C. Toms Newby, III, one of our directors, is a member of
Technology Crossover Management III, L.L.C., the general partner of TCV III
(GP), TCV III, L.P., TCV III (Q), L.P. and TCV III Strategic Partners, L.P.
Entities affiliated with Technology Crossover Management III, L.L.C. purchased
3,602,757 shares for an aggregate price of approximately $23 million.
In connection with the sale of our Series A preferred stock, we also entered
into an Amended and Restated Rights and Restrictions Agreement with the
purchasers of our preferred stock and all holders of our common stock. This
agreement superseded a Rights and Restrictions Agreement entered into on June
10, 1999 with certain purchasers of our common stock. For a description of the
key terms of the Amended and Restated Rights and Restrictions Agreement, see
"Description of Capital Stock--Registration Rights".
Holders of Series A preferred stock have the right, subject to applicable
legal or regulatory limitations, to purchase shares in the initial public
offering up to an aggregate amount of $10 million. Each holder has the right to
elect to purchase a pro-rata share of an amount of shares equal to $10,000,000
divided by the per share public offering price of this offering. A holder's
pro-rata share is determined by dividing its shares of Series A preferred stock
by the total amount of outstanding Series A preferred stock. Within five days
after the date of the preliminary prospectus with respect to the initial public
offering, we are required to send to holders a copy of the prospectus and a
notice with respect to their right to purchase their pro-rata share. Holders
that wish to purchase their pro-rata portion of shares will be required to
respond to us within the time period specified in the notice.
Relationship with America Online, Inc.
In June 1999, we entered into a marketing agreement with America Online
under which America Online will provide rebates to our PC buyers to
significantly reduce the net effective price of our PCs. To obtain a rebate,
our PC buyers must enter into an agreement with America Online to subscribe to
America Online's CompuServe Internet access service over a predetermined period
of time at a stated monthly fee. We will share in the payments made by
subscribers to America Online for internet access. America Online purchased
2,271,303 shares of our Series A preferred stock on August 18, 1999, and
purchased an additional 5,560,776 shares in September 1999 upon receipt of
regulatory approval. See "Related Party Transactions--Series A Preferred Stock
Financing." Additionally, we granted America Online a warrant to purchase
shares of our common stock at an aggregate exercise price of $3.6 million. This
warrant expires five years after the date of grant. The number of shares that
may be purchased upon exercise of the warrant is equal to the aggregate
exercise price divided by the greater of 1.25 times the initial offering price
of our common stock or $7.98. If there is no successful completion of an
initial public offering, the number of shares issuable upon exercise of the
warrant is equal to the aggregate exercise price of the warrant divided by
$11.82. Upon receipt of regulatory approval, we will issue America Online an
additional warrant to purchase shares of common stock at an aggregate exercise
price of $8.9 million under the same terms as the earlier warrant. The maximum
number of shares that America Online may receive, subject to anti-dilution
adjustments, upon exercise of its warrants is 1,566,219.
Employment and Indemnification Agreements
We have entered into an employment agreement with our President and Chief
Executive Officer, Stephen A. Dukker.
In January 2000, we entered into an employment agreement with Donald S. La
Vigne, our Executive Vice President, Strategy and Business Development, Audrey
U. Finci, our Executive Vice President, Operations, Steve Chadima, our Vice
President, Marketing, and James Weissenborn, our Vice President, Advertising
Sales. These employment agreements became effective on January 14, 2000, the
date that we acquired FreePC.
58
<PAGE>
Under Mr. La Vigne's employment agreement, we have agreed to pay Mr. La
Vigne an annual base salary of $199,000 and to grant him an option to purchase
250,000 shares of our common stock. The option will vest as to 20% of the
shares subject to the option one year after the date of grant, and as to 20% of
the shares on each subsequent anniversary of the date of grant, subject to Mr.
La Vigne's continued employment with us on each vesting date. In addition, Mr.
La Vigne agreed to waive acceleration of vesting as to a portion of his options
to purchase Free PC common stock in exchange for our assumption of such
options. Upon a change of control of e-Machines or an "involuntary termination"
of Mr. La Vigne's employment, all of the unvested options and warrants that we
issued in exchange for the Free PC options that we assumed will fully vest and
be immediately exercisable. If Mr. La Vigne's employment is otherwise
terminated he will be eligible for severance benefits in accordance with the
Company's established severance policy as then in effect.
Under Ms. Finci's employment agreement, we have agreed to pay Ms. Finci an
annual base salary of $199,000 and to grant her an option to purchase 175,000
shares of our common stock. The option will vest as to 10% of the shares
subject to the option six months after the date of grant, as to an additional
10% of the shares one year after the date of grant and as to 20% of the shares
on each subsequent anniversary of the date of grant, subject to Ms. Finci's
continued employment with us on each vesting date. In addition, Ms. Finci
agreed to waive acceleration of vesting as to a portion of her options to
purchase Free PC common stock in exchange for our assumption of such options.
Upon a change of control of e-Machines or an "involuntary termination" of Ms.
Finci's employment, all of the unvested options and warrants that we issued in
exchange for the Free PC options that we assumed will fully vest and be
immediately exercisable. If Ms. Finci's employment is otherwise terminated she
will be eligible for severance benefits in accordance with the Company's
established severance policy as then in effect.
Under Mr. Weissenborn's employment agreement, we have agreed to pay Mr.
Weissenborn an annual base salary of $160,000, a bonus of $10,000 on the last
day of each fiscal quarter if our internet division meets its quarterly budget,
and to grant him an option to purchase 125,000 shares of our common stock. The
option will vest as to 20% of the shares subject to the option one year after
the date of grant, and as to 20% of the shares on each subsequent anniversary
of the date of grant, subject to Mr. Weissenborn's continued employment with us
on each vesting date. In addition, Mr. Weissenborn agreed to waive acceleration
of vesting as to a portion of his options to purchase Free PC common stock in
exchange for our assumption of such options. Upon a change of control of e-
Machines or an "involuntary termination" of Mr. Weissenborn's employment, all
of the unvested options and warrants that we issued in exchange for the Free PC
options that we assumed will fully vest and be immediately exercisable. If Mr.
Weissenborn's employment is otherwise terminated he will be eligible for
severance benefits in accordance with the Company's established severance
policy as then in effect.
Under Mr. Chadima's employment agreement, we have agreed to pay Mr. Chadima
an annual base salary of $175,000 and to grant him an option to purchase
125,000 shares of our common stock. The option will vest as to 20% of the
shares subject to the option one year after the date of grant, and as to 20% of
the shares on each subsequent anniversary of the date of grant, subject to Mr.
Chadima's continued employment with us on each vesting date. In addition, Mr.
Chadima agreed to waive acceleration of vesting as to a portion of his options
to purchase Free PC common stock in exchange for our assumption of such
options. Upon a change of control of e-Machines or an "involuntary termination"
of Mr. Chadima's employment, all of the unvested options and warrants that we
issued in exchange for the Free PC options that we assumed will fully vest and
be immediately exercisable. If Mr. Chadima's employment is otherwise terminated
he will be eligible for severance benefits in accordance with the Company's
established severance policy as then in effect.
We have entered into agreements with each of our directors and officers that
provide for indemnification. See "Management--Limitations on Directors' and
Officers' Liability and Indemnification."
Relationship with Bill Gross' idealab! and its affiliated entities
Bill Gross, one of our directors, is the managing member of idealab!
Holdings, L.L.C., a California limited liability company, and the Chairman and
a stockholder of Bill Gross' idealab!. Bill Gross' idealab!, is a
59
<PAGE>
member of idealab! Holdings. Bill Gross' idealab! founded FreePC in January
1999. Prior to this offering, idealab! Holdings and related entities owned
approximately 15% of our outstanding common stock after giving effect to the
conversion of all outstanding preferred stock.
Our subsidiary, FreePC, has entered into a number of agreements, both
written and verbal, with Bill Gross' idealab! and its affiliated entities.
These agreements are described below.
Lease
FreePC leases approximately 19,000 square feet of office space in Pasadena,
California, pursuant to a written agreement with Bill Gross' idealab! Under the
agreement, we have a right to rent an additional 9,905 square feet at this
location. The initial term of the agreement is for one year, and FreePC has an
option to extend the lease for four additional one-year terms.
Shared Expenses
From its inception until July 1999, FreePC shared facilities and received a
number of management services, including accounting, payroll processing, access
to shared local area computer communications network, and general business
insurance from Bill Gross' idealab!. Bill Gross' idealab! charged FreePC a
management fee for the use of its facilities and the services provided.
Advertising Agreements
FreePC has entered into various advertising agreements with companies that
are affiliated with Bill Gross' idealab!. The total revenue generated from such
entities during the year ended December 31, 1999 aggregated approximately
$218,000.
60
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of January 15, 2000 and as adjusted
to reflect the sale of common stock offered hereby by the following:
. each stockholder known by us to own beneficially more than 5% of our
common stock;
. our President and Chief Executive Officer and the other executive
officer named in the Summary Compensation Table;
. each member of our board of directors; and
. all members of our board of directors and executive officers as a group.
The percentage ownership in the table below is based on 123,928,427 shares
outstanding as of January 15, 2000. The number of shares includes 41,913,265
shares of common stock issuable upon the automatic conversion of our preferred
stock upon completion of this offering. Except as otherwise indicated, we
believe that the beneficial owners of the common stock listed below, on the
information furnished by them, have sole voting power and investment power with
respect to such shares. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options or warrants held by that
person that are currently exercisable or will become exercisable within sixty
days after January 15, 2000 are deemed outstanding, while such shares are not
deemed outstanding for purposes of computing percentage ownership of any other
person. Unless otherwise indicated below, the persons and entities named in the
table have sole voting and investment power with respect to all shares
beneficially owned, subject to community property laws where applicable. The
address for those individuals for whom an address is not otherwise indicated is
eMachines, Inc., 14350 Myford Road, Suite 100, Irvine, CA 92606.
<TABLE>
<CAPTION>
Percentage of Shares
Outstanding
-----------------------
Number of Prior to
Name or Group Beneficial Owners Shares Offering After Offering
- ------------------------------- ---------- -------- --------------
<S> <C> <C> <C>
TriGem Corporation.......................... 29,200,000 23.6% %
14350 Myford Road
Irvine, CA 92606
Korea Data Systems America, Inc............. 28,819,538 23.3
12300 Edison Way
Garden Grove, CA 92841
Bill Gross (1).............................. 18,595,363 15.0
c/o idealab! Holdings, L.L.C.
130 W. Union Street
Pasadena, CA 91103
Entities affiliated with idealab! Holdings,
L.L.C. (2)................................. 18,595,363 15.0
130 W. Union Street
Pasadena, CA 91103
America Online, Inc.(3)..................... 8,889,340 7.2
22000 AOL Way
Dulles, VA 20166
Stephen A. Dukker(4)........................ 8,227,897 6.6
C. Toms Newby, III (5)...................... 3,602,757 2.9
c/o Technology Crossover Ventures
575 High Street, Suite 400
Palo Alto, CA 94301
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Percentage of Shares
Outstanding
-----------------------
Number of Prior to
Name or Group Beneficial Owners Shares Offering After Offering
- ------------------------------- ---------- -------- --------------
<S> <C> <C> <C>
Jung Koh................................... 2,400,000 1.9
Korea World Trade Center Bldg., Room #204
159, Samsung-dong
Kangnam-gu Seoul, Korea
Hong Soon Lee.............................. 2,400,000 1.9
45-2 YOIDO
Youngdeungpo Seoul, Korea
Lap Shun Hui............................... 1,600,000 1.3
12350 Edison Way
Garden Grove, CA 92841
Nathan Morton.............................. -- *
Steve Miller............................... -- *
All directors and executive officers as a
group (12 persons) (6).................... 40,454,265 30.8
</TABLE>
- ---------------------
* Less than 1% of the outstanding shares of common stock.
(1) Includes (a) 12,265,514 shares held by idealab! Holdings, L.L.C. and
5,256,651 shares subject to warrants that are exercisable within sixty days
of January 15, 2000, (b) 193,933 shares held by idealab! Capital Partners
I-A, L.P. and 83,116 shares subject to warrants that are exercisable within
sixty days of January 15, 2000 and (c) 557,303 shares held by idealab!
Capital Partners I-B, L.P. and 238,846 shares subject to warrants that are
exercisable within sixty days of January 15, 2000. Mr. Gross is a managing
member of both idealab! Capital Management I, LLC, the general partner of
Capital Partners I-A, L.P. and Capital Partners I-B, L.P., and idealab!
Holdings, LLC, and as such may be deemed to exercise voting and investment
power over the shares held by these entities. Mr. Gross disclaims
beneficial ownership of such shares, except to the extent of his
proportionate interest therein.
(2) Includes (a) 12,265,514 shares held by idealab! Holdings, L.L.C. and
5,256,651 shares subject to warrants that are exercisable within sixty days
of January 15, 2000, (b) 193,933 shares held by idealab! Capital Partners
I-A, L.P. and 83,116 shares subject to warrants that are exercisable within
sixty days of January 15, 2000 and (c) 557,303 shares held by idealab!
Capital Partners I-B, L.P. and 238,846 shares subject to warrants that are
exercisable within sixty days of January 15, 2000. Mr. Gross is a managing
member of both idealab! Capital Management I, LLC, the general partner of
Capital Partners I-A, L.P. and Capital Partners I-B, L.P., and idealab!
Holdings, LLC, and as such may be deemed to exercise voting and investment
power over the shares held by these entities. Mr. Gross disclaims
beneficial ownership of such shares, except to the extent of his
proportionate interest therein.
(3) Includes 1,057,261 shares of common stock issuable pursuant to the exercise
of warrants at an assumed exercise price of $11.82 per share. See
"Description of Capital Stock--Options and Warrants" for a discussion of
the exercise price of these warrants.
(4) Includes 227,897 shares subject to options which are exercisable within
sixty days of January 15, 2000.
(5) Includes 26,161 shares held by TCV III (GP), 124,263 shares held by TCV
III, L.P., 3,302,768 shares held by TCV III (Q), L.P. and 149,565 shares
held by TCV III Strategic Partners, L.P. (collectively, the "TCV Funds")
over which Mr. Newby has neither voting nor dispositive power and as to
which Mr. Newby disclaims beneficial ownership except to the extent of his
pecuniary interest in those shares. Mr. Newby is a member of Technology
Crossover Management III, L.L.C. ("TCM III"), the general partner of the
TCV Funds. Jay C. Hoag and Richard H. Kimball are the sole managing members
of TCM III who together have sole investment control with respect to TCM
III and, therefore, the TCV Funds. Consequently, TCM
62
<PAGE>
III and Messrs. Hoag and Kimball may each be deemed to beneficially own all
of the shares held by the TCV Funds. TCM III and Messrs. Hoag and Kimball
each disclaim beneficial ownership of such shares, except to the extent of
their respective pecuniary interests in those shares. The address for each
of these entities is c/o Technology Crossover Ventures, 575 High Street,
Suite 400, Palo Alto, California 94301.
(6) Represents shares held by our executive officers, directors and entities
affiliated with them. Includes:
. 641,190 shares subject to options which are exercisable within 60 days
of January 15, 2000;
. 177,982 shares issuable upon exercise of warrants issuable upon exercise
of options exercisable within 60 days of January 15, 2000;
. 6,200,856 shares issuable upon exercise of outstanding warrants
exercisable within 60 days of January 15, 2000;
. 288,248 shares issuable upon exercise of outstanding warrants
exercisable within 60 days of January 15, 2000 subject to our right of
repurchase, which lapses over time; and
. 672,580 shares subject to our right of repurchase, which lapses over
time.
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
250,000,000 shares of common stock, $0.0000125 par value per share, and
25,000,000 shares of preferred stock, $0.01 par value per share. The following
description of our capital stock is only a summary. You should refer to our
certificate of incorporation and bylaws as in effect upon the closing of this
offering, which are included as exhibits to the registration statement of
which this prospectus forms a part, and by the provisions of applicable
Delaware law.
Common Stock
As of January 15, 2000, there were 133,198,261 shares of common stock
outstanding, assuming the automatic conversion of all outstanding shares of
convertible preferred stock into common stock and the exercise of all warrants
to purchase our common stock. These shares were held of record by
approximately 100 stockholders. There will be shares of common
stock outstanding, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options or warrants after January 15,
2000, after giving effect to the sale of our common stock in this offering.
Dividend Rights. Subject to preferences that may apply to shares of our
preferred stock outstanding at the time, the holders of outstanding shares of
our common stock are entitled to receive dividends out of assets legally
available at the times and in the amounts as our board of directors may
determine.
Voting Rights. Each holder of our common stock is entitled to one vote for
each share of common stock held on all matters submitted to a vote of
stockholders. We do not provide for cumulative voting of directors in our
certificate of incorporation.
No preemptive or similar rights. Holders of our common stock are not
entitled to preemptive rights and our common stock is not subject to
conversion or redemption.
Right to receive liquidation distributions. Upon a liquidation, dissolution
or winding-up of our company, the holders of common stock are entitled to
share ratably with holders of any participating preferred stock in all assets
remaining after payment of all liabilities and the liquidation preferences of
any outstanding preferred stock. Each outstanding share of common stock is,
and all shares of common stock to be outstanding upon completion of this
offering will be, fully paid and nonassessable.
63
<PAGE>
Preferred Stock
Upon the consummation of this offering, the outstanding shares of Series A,
Series B and Series C preferred stock will automatically convert into common
stock. Upon completion of this offering, our board will be authorized, without
action by the stockholders, to issue 25,000,000 shares of preferred stock in
one or more series and to fix the rights, preferences, privileges and
restrictions of each wholly unissued series and any of its qualifications,
limitations or restrictions. These rights, preferences and privileges may
include dividend rights, conversion rights, voting rights, terms of redemption,
liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of any series, all or any of which
may be greater than the rights of the common stock. The issuance of preferred
stock could adversely affect the voting power of holders of common stock and
the likelihood that the holders of common stock will receive dividend payments
and payments upon liquidation. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, among other things, have the effect of delaying, deferring or
preventing a change in control of our company and may adversely affect the
market price of our common stock and the voting and other rights of the holders
of our common stock. We have no current plan to issue any shares of preferred
stock.
Registration Rights
Pursuant to an amended and restated rights and restrictions agreement we
entered into in connection with our Series A preferred stock financing and a
rights and restrictions agreement entered into in connection with the FreePC
acquisition, certain holders of our common stock and all holders of our
preferred stock are entitled to rights with respect to the registration of
their shares under the Securities Act as described below.
Demand Registration Rights. At any time after six months following this
offering, pursuant to the rights and restrictions agreement we entered into in
connection with our Series A preferred stock financing, and at any time after
one year following this offering, pursuant to the rights and restrictions
agreement we entered into in connection with the FreePC acquisition, the
holders of at least 50% of the shares of common stock issuable upon conversion
of our preferred stock can request that we register all or a portion of their
shares, so long as the total offering price of the shares to the public is at
least $15,000,000. We will be required to file only one registration statement
in response to their demand registration rights. We may postpone the filing of
a registration statement for up to 120 days, in the case of the rights and
restrictions agreement we entered into in connection with our Series A
preferred stock financing, and up to 180 days in the case of the rights and
restrictions agreement we entered into in connection with the FreePC
acquisition, once in a twelve-month period if we determine that the filing
would not be in the best interests of us and our stockholders.
Piggyback Registration Rights. If we register any securities for public
sale, the holders of the shares of common stock and common stock issuable upon
conversion of our preferred stock will have the right to include their shares
in the registration statement subject to the ability of the underwriters to
limit the number of shares included in the offering in view of market
conditions. However, this right does not apply to a registration statement
relating to any of our employee benefit plans or a corporate reorganization.
These registration rights expire three years after this offering is completed.
Form S-3 Registration Rights. The holders of not less than an aggregate of
25% of the shares of common stock and the common stock issuable upon conversion
of our preferred stock can request that we register their shares if we are
eligible to file a registration statement on Form S-3 and if the total price of
the shares offered to the public is at least $2,500,000. These holders may only
require us to file two registration statements on Form S-3 in any 12 month
period and only three registration statements in all. We may postpone the
filing of a registration statement for up to 120 days once in a 12 month period
if we determine that the filing would be seriously detrimental to us and our
stockholders.
We will pay all of the expenses, except underwriters' and brokers' discounts
and commissions, incurred in connection with the demand registrations and
piggyback registrations described above. The participating holders will bear
all expenses incurred in connection with the exercise of their Form S-3
registration rights.
The registration rights described above will expire with respect to a
particular stockholder if it can sell all of its shares in a three month period
following this offering under Rule 144 of the Securities Act.
64
<PAGE>
Options and Warrants
As of January 15, 2000, options to purchase 858,400 shares of common stock
were outstanding and subject to our 1998 stock plan, options to purchase
2,496,789 shares of common stock and warrants to purchase 1,177,117 shares of
common stock were outstanding and subject to the FreePC 1999 stock plan and
options to purchase 131,545 shares of common stock and warrants to purchase
62,017 shares of common stock were outstanding and subject to the Guide.com
1998 stock plan. An additional 2,341,600 shares are authorized to be issued
under our 1998 plan. See "Management--Stock Plans." Each FreePC option we
assume will continue to have, and be subject to, the same terms and conditions
as set forth in the stock plans of FreePC and the respective option agreements
governing such options immediately prior to the acquisition, except that such
options are exercisable for units comprised of shares of our common stock and
warrants to purchase our common stock and the number of shares subject to the
option and the exercise price have been adjusted to reflect the exchange ratio
in the acquisition. As a bonus for the period from July 1, 1999 through
November 30, 1999, Mr. Dukker was granted a fully vested option to purchase
227,897 shares of our common stock at an exercise price of $1.61 per share. In
addition, as of January 15, 2000, options to purchase 138,000 shares of common
stock outside of our 1998 stock plan were outstanding.
We have also issued warrants to purchase shares of common stock at an
aggregate exercise price of $12.5 million in connection with a marketing
agreement with America Online. See "Related Party Transactions-- Relationship
with America Online, Inc." for a description of the marketing agreement. The
number of shares that may be purchased upon exercise of the warrant is equal to
the aggregate exercise price divided by the greater of 1.25 times the initial
offering price of our common stock or $7.98. If there is no successful
completion of an initial public offering, the number of shares issuable upon
exercise of the warrant is equal to the aggregate exercise price of the warrant
divided by $11.82. This warrant will remain outstanding after the completion of
the offering until August 18, 2004, unless sooner exercised. The maximum number
of shares that America Online may receive, subject to anti-dilution
adjustments, upon exercise of its warrants is 1,566,219.
Additionally, pursuant to our acquisition of FreePC, we issued warrants to
purchase an aggregate of 9,269,784 shares of common stock to FreePC
stockholders at a per share exercise price of $17.128.
Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions
Delaware Law
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents some
Delaware corporations from engaging, under some circumstances, in a "business
combination," which includes a merger or sale of 10% or more of the
corporation's assets with any "interested stockholder," meaning a stockholder
who owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of the stockholder, for three years following the
date that the stockholder became an "interested stockholder" unless:
. the transaction is approved by the board of directors prior to the date
the interested stockholder attained that status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or
. on or subsequent to such date the business combination is approved by
the board and authorized at an annual or special meeting of stockholders
by at least two-thirds of the outstanding voting stock that is not owned
by the interested stockholder.
A Delaware corporation may opt out of this provision with an express
provision in its original certificate of incorporation or an express provision
in its certificate or incorporation or bylaws resulting from a
65
<PAGE>
stockholders' amendment approved by at least a majority of the outstanding
voting shares. However, we have not opted out of this provision. The statute
could prohibit or delay mergers or other takeover or change-in-control attempts
and, accordingly, may discourage attempts to acquire us.
Charter and Bylaw Provisions
Our certificate of incorporation and bylaws will provide, subject to
appropriate corporate action, that:
. following the completion of this offering, stockholders may not act by
written consent without a meeting;
. following the completion of this offering, stockholders may not call
special meetings of the stockholders; and
. our board of directors will be divided into three classes, each serving
staggered three-year terms, which means that only one class of directors
will be elected at each annual meeting of stockholders, with the other
classes continuing for the remainder of their respective terms, and
directors may only be removed for cause.
In addition, our certificate of incorporation does not provide for
cumulative voting. We also indemnify officers and directors against losses that
they may incur in investigations and legal proceedings resulting from their
services to us, which may include services in connection with the takeover
defense measures.
These provisions of our certificate of incorporation and bylaws may have the
effect of delaying, deferring or discouraging another person from acquiring
control of us, including takeover attempts that might result in a premium over
the market price for the shares of our common stock.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is .
Nasdaq Stock Market National Market Listing
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "EEEE."
66
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have shares of common
stock outstanding based on shares outstanding as of January 15, 2000. Of these
shares, the shares sold in this offering will be freely transferable
without restriction under the Securities Act, unless they are held by
"affiliates" as that term is used under the Securities Act and the Regulations
promulgated thereunder.
Of these shares, the remaining shares were sold by us in reliance on
exemptions from the registration requirements of the Securities Act, are
restricted securities within the meaning of Rule 144 under the Securities Act
and become eligible for sale in the public market as follows:
. beginning ninety days after the effective date, 393,930 shares will
become eligible for sale, subject to the provisions of Rules 144 and
701;
. beginning 180 days after the effective date, 102,298,907 additional
shares will become eligible for sale, subject to the provisions of Rules
144, 144(k) or 701, upon the expiration of agreements not to sell such
shares entered into between the underwriters and such stockholders;
. beginning on January 14, 2001, the remaining shares will become eligible
for sale, subject to the provisions of Rule 144.
Beginning 180 days after the date of this prospectus, approximately
additional shares subject to vested options as of the date of
completion of this offering will be available for sale subject to compliance
with Rule 701 and upon the expiration of agreements not to sell such shares
entered into between the underwriters and such stockholders. Although the
underwriters currently have no plans to release any portion of the shares
subject to lock up agreements, they may do so at any time, without notice.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned restricted shares for at least one year is entitled to sell, within any
three-month period commencing ninety days after the date of completion of this
offering, a number of shares that does not exceed the greater of 1% of the then
outstanding shares of common stock (approximately shares immediately after this
offering), or the average weekly trading volume in the common stock during the
four calendar weeks preceding such sale, subject to the filing of a Form 144
with respect to such sale and certain other limitations and restrictions. In
addition, a person who is not deemed to have been our affiliate at any time
during the ninety days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years, would be entitled to sell
such shares under Rule 144(k) without regard to the requirements described
above.
Any of our employees, officers or directors of or consultant who purchased
his or her shares prior to the date of completion of this offering or who holds
vested options as of that date pursuant to a written compensatory plan or
contract is entitled to rely on the resale provisions of Rule 701, which
permits nonaffiliates to sell their Rule 701 shares without having to comply
with the public-information, holding-period, volume-limitation or notice
provisions of Rule 144 and permits affiliates to sell their Rule 701 shares
without having to comply with Rule 144's holding-period restrictions, in each
case commencing ninety days after the date of completion of this offering.
However, we and our officers, directors and stockholders have agreed not to
sell or otherwise dispose of any shares of our common stock for the 180-day
period after the date of this prospectus without the prior written consent of
the underwriters. See "Underwriting."
As soon as practicable after the date of completion of this offering, we
intend to file a registration statement on Form S-8 under the Securities Act to
register shares of common stock reserved for issuance under our 1998 stock
plan, thus permitting the resale of such shares by nonaffiliates in the public
market without restriction under the Securities Act. Such registration
statements will become effective immediately upon filing.
Prior to this offering, there has been no public market for our common
stock, and any sale of substantial amounts in the open market may adversely
affect the market price of our common stock offered hereby.
67
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000 we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, FleetBoston Robertson
Stephens Inc., Hambrecht & Quist LLC and Salomon Smith Barney Inc. are acting
as representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation.............................
FleetBoston Robertson Stephens Inc.................................
Hambrecht & Quist LLC..............................................
Salomon Smith Barney Inc...........................................
---------
Total............................................................
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of nondefaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the initial public offering price less
the underwriting discounts and commissions. The option may be exercised only to
cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
------------------- -------------------
Without With Without With
Over- Over- Over- Over-
allotment allotment allotment allotment
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Underwriting Discounts and
Commissions paid by us................ $ $ $ $
Expenses payable by us................. $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We and our executive officers, directors and certain other of our security
holders have agreed not to offer, sell, contract to sell, announce an intention
to sell, pledge or otherwise dispose of, directly or indirectly, or file with
the Securities and Exchange Commission a registration statement under the
Securities Act relating to, any shares of common stock or securities
convertible into or exchangeable or exercisable for any common stock without
the prior written consent of Credit Suisse First Boston Corporation for a
period of 180 days after the date of this prospectus.
68
<PAGE>
The underwriters have reserved for sale, at the initial public offering
price (1) up to shares of the common stock for employees, directors
and certain other persons associated with us who have expressed an interest in
purchasing common stock in this offering and (2) up to an additional
shares for the holders of our preferred stock in connection with a pre-existing
contractual right between us and those holders. The number of shares available
for sale to the general public in this offering will be reduced to the extent
these persons purchase the reserved shares. Any reserved shares not so
purchased will be offered by the underwriters to the general public on the same
terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.
We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "EEEE."
In August 1999, we issued an aggregate of 24,279,369 shares of our Series A
preferred stock at a per share price of $6.38 in a private placement. Credit
Suisse First Boston Corporation acted as the placement agent for this private
placement, and it received a customary fee for its services. In addition,
Merchant Capital, Inc., an affiliate of Credit Suisse First Boston Corporation,
purchased 156,641 shares of Series A preferred stock.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include:
. the information in this prospectus and otherwise available to the
underwriters;
. the history and the prospects for the industry in which we will compete;
. the ability of our management;
. the prospects for our future earnings;
. the present state of our development and our current financial
condition;
. the general condition of the securities markets at the time of this
offering; and
. the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids in accordance with Regulation
M under the Exchange Act.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
69
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (i) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under the securities laws, (ii) where
required by law, that the purchaser is purchasing as principal and not as
agent, and (iii) the purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or these persons. All or a substantial portion of the assets of
the issuer and these persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or these
persons in Canada or to enforce a judgment obtained in Canadian courts against
the issuer or these persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. This report must be
in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.
70
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Legal matters will be passed upon for the underwriters by Morrison
& Foerster, LLP, Palo Alto, California. As of the date of this prospectus,
members of Wilson Sonsini Goodrich & Rosati, Professional Corporation, and an
investment partnership composed of current and former members of Wilson Sonsini
Goodrich & Rosati, Professional Corporation, beneficially owned an aggregate of
33,000 shares of capital stock and warrants to purchase an additional 14,145
shares of common stock.
EXPERTS
The consolidated financial statements of eMachines, Inc. as of December 31,
1999 and for the period from September 18, 1998 (inception) to December 31,
1998 included in this prospectus and the related financial statement schedule
included elsewhere in the registration statement have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports appearing herein
and elsewhere in this registration statement, and are included in reliance upon
the reports of such firm given upon their authority as experts in accounting
and auditing.
The consolidated financial statements as of and for each of the two years
ended December 31, 1999 appearing in this Prospectus and the Registration
Statement of FreePC, Inc. have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in the reliance upon such report given on the authority of such
firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.,
a registration statement on Form S-1 under the Securities Act with respect to
the shares of common stock offered hereby. This prospectus does not contain all
the information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to us and our common
stock, reference is made to the registration statement and to the exhibits and
schedules filed therewith. Statements contained in this prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of the contract or
other document filed as an exhibit to the registration statement, each
statement being qualified in all respects by this reference. A copy of the
registration statement may be inspected by anyone without charge at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of all or any portion of the
registration statement may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
prescribed fees. The Commission maintains a Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
71
<PAGE>
INDEX TO FINANCIAL STATEMENTS
eMachines, Inc.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................. F-2
Balance Sheets........................................................... F-3
Statements of Operations................................................. F-4
Statements of Stockholders' Equity (Deficiency).......................... F-5
Statements of Cash Flows................................................. F-6
Notes to Financial Statements............................................ F-7
Unaudited Pro Forma Condensed Combined Financial Information
<CAPTION>
Page
----
<S> <C>
Unaudited Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1999............................................ F-20
Unaudited Pro Forma Condensed Combined Balance Sheet at December 31,
1999.................................................................... F-21
Notes to Unaudited Pro Forma Condensed Combined Financial Information.... F-22
FreePC, Inc.
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors........................................... F-23
Consolidated Balance Sheets ............................................. F-24
Consolidated Statements of Operations ................................... F-25
Consolidated Statements of Stockholders' Equity.......................... F-26
Consolidated Statements of Cash Flows ................................... F-27
Notes to Consolidated Financial Statements............................... F-28
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of eMachines, Inc.
We have audited the accompanying balance sheets of eMachines, Inc. (the
"Company") as of December 31, 1998 and December 31, 1999 and the related
statements of operations, stockholders' equity (deficiency) and cash flows for
the period September 18, 1998 (inception) to December 31, 1998 and the year
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998 and
1999 and the results of its operations and its cash flows for the period
September 18, 1998 (inception) to December 31, 1998 and the year ended December
31, 1999 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Los Angeles, California
January 27, 2000
F-2
<PAGE>
eMachines, Inc.
BALANCE SHEETS
December 31, 1998 and December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
December 31, 1999
---------------------
December 31,
1998 Actual Pro Forma
------------ -------- -----------
(unaudited)
(Note 2)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 3,791 $114,823
Short-term investments.................... 19,897
Accounts receivable, less allowances ($239
and $2,160 at December 31, 1998 and
December 31, 1999, respectively)......... 43,303 123,726
Inventories............................... 12,270 65,260
Prepaid and other current assets.......... 127 3,992
-------- --------
Total current assets.................... 59,491 327,698
Property and equipment, Net (Note 4)........ 268 1,827
Other assets................................ 252 2,188
-------- --------
$ 60,011 $331,713
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Trade payables-related party (Note 9)..... $ 57,785 $131,935
Accounts payable.......................... 327 12,939
Accrued rebates........................... 1,838 22,803
Accrued expenses and other current
liabilities.............................. 852 19,855
-------- --------
Total current liabilities............... 60,802 187,532
Deferred revenue--noncurrent portion........ 1,343
--------
Subordinated notes payable to stockholders
(Note 5)................................... 560 560
-------- --------
Redeemable convertible preferred stock--
Series A; $.01 par value; 25,000,000 shares
authorized; 24,279,369 shares outstanding
at December 31, 1999 (Note 6).............. 150,014 $ --
-------- --------
Commitments and contingencies (Note 8)......
Stockholders' equity (deficiency) (Notes 6
and 9):
Preferred stock, $.01 par value;
25,000,000 shares authorized; no shares
issued and outstanding................... -- -- --
Common stock, $.0000125 par value;
250,000,000 shares authorized; 77,600,000
and 78,019,538 shares outstanding at
December 31, 1998 and December 31, 1999.. 1 1 3
Additional paid-in capital................ 2,527 6,582 156,596
Unearned stock compensation............... (577) (1,550) (1,550)
Notes receivable from stockholders........ (500) (500) (500)
Accumulated deficit....................... (2,802) 12,269 12,269
-------- -------- --------
Total stockholders' equity
(deficiency)........................... (1,351) (7,736) $142,280
-------- -------- ========
$ 60,011 $331,713
======== ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
eMachines, Inc.
STATEMENTS OF OPERATIONS
Period from September 18, 1998 (inception) to December 31, 1998,
and the year ended December 31, 1999
(in thousands, except share information)
<TABLE>
<CAPTION>
Period from
September 18,
1998
(inception) to Year Ended
December 31, December 31,
1998 1999
-------------- ------------
<S> <C> <C>
Net Revenues:
Hardware revenues, net...................... $ 58,283 $ 812,233
Internet revenues........................... 2,084
---------- ----------
Net revenues.............................. 58,283 814,317
Cost of revenues.............................. 58,088 780,945
---------- ----------
Gross profit................................ 195 33,372
Operating expenses:
Sales and marketing......................... 840 15,298
Customer service and technical support...... 269 9,049
General and administrative.................. 988 9,535
Stock-based compensation (Note 6)........... 11 1,332
---------- ----------
Total operating expenses.................. 2,108 35,214
---------- ----------
Loss from operations.......................... (1,913) (1,842)
Financing charges and interest expense, net
(Notes 3 and 9).............................. (889) (3,886)
---------- ----------
Net loss...................................... $ (2,802) $ (5,728)
Accretion of mandatorily redeemable preferred
stock to redemption value.................... (3,739)
---------- ----------
Net loss attributable to common stockholders.. $ (2,802) $ (9,467)
========== ==========
Net loss per common share:
Basic and diluted........................... $ (0.04) $ (0.07)
========== ==========
Basic and diluted--unaudited pro forma...... $ (0.07)
==========
Shares used to compute net loss per share:
Basic and diluted........................... 77,600,000 77,755,172
========== ==========
Basic and diluted--unaudited pro forma ..... 86,735,212
==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
eMachines, Inc.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Period from September 18, 1998 (inception) to December 31, 1998,
and the year ended December 31, 1999
(in thousands, except share information)
<TABLE>
<CAPTION>
Common Stock Additional Unearned
----------------- Paid-in Stock Notes Accumulated
Shares Amount Capital Compensation Receivable Deficit Total
---------- ------ ---------- ------------ ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, at September
17, 1998...............
Capital Contributions
(Note 6).............. 77,600,000 $ 1 $1,939 $(500) $ 1,440
Compensatory stock
options............... 588 $ (588)
Amortization of
unearned stock
compensation.......... 11 11
Net loss............... $ (2,802) (2,802)
---------- --- ------ ------- ----- -------- -------
Balance, at December 31,
1998................... 77,600,000 1 2,527 (577) (500) (2,802) (1,351)
Issuance of common
stock................. 419,538 50 50
Issuance of common
stock warrants........ 1,700 1,700
Compensatory stock
options............... 2,305 (2,305) --
Amortization of
unearned stock
compensation.......... 1,332 1,332
Accretion of
mandatorily redeemable
convertible preferred
stock................. (3,739) (3,739)
Net loss............... (5,728) (5,728)
---------- --- ------ ------- ----- -------- -------
Balance, at December 31,
1999................... 78,019,538 $ 1 $6,582 $(1,550) $(500) $(12,269) $(7,736)
========== === ====== ======= ===== ======== =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
eMachines, Inc.
STATEMENTS OF CASH FLOWS
Period from September 18, 1998 (inception) to December 31, 1998,
and the year ended December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Period from
September 18,
1998
(inception) Year Ended
to December December 31,
31, 1998 1999
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $ (2,802) $ (5,728)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Provision for bad debts and sales returns ...... 239 2,394
Depreciation and amortization................... 30 420
Stock-based compensation expense................ 11 1,332
Changes in operating assets and liabilities:
Accounts receivable........................... (43,542) (82,817)
Inventories................................... (12,270) (52,990)
Prepaid and other current assets.............. (127) (3,865)
Other assets.................................. (252) (349)
Trade payables-related party.................. 57,785 74,150
Accounts payable.............................. 327 12,612
Accrued rebates............................... 1,838 20,965
Accrued expenses and other current
liabilities.................................. 852 19,003
Deferred revenue--non current portion......... 1,343
-------- --------
Net cash provided by (used in) operating
activities................................. 2,089 (13,530)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment............. (298) (1,816)
Purchases of short-term investments............... (19,897)
--------
Net cash used in investing activities....... (298) (21,713)
-------- --------
Cash flows from financing activities:
Issuance of subordinated notes payable to
stockholders..................................... 560
Issuance of common stock.......................... 1,440
Issuance of preferred stock....................... 146,275
-------- --------
Net cash provided by financing activities... 2,000 146,275
-------- --------
Net increase in cash................................ 3,791 111,032
Cash and cash equivalents, beginning of period...... 3,791
-------- --------
Cash and cash equivalents, end of period............ $ 3,791 $114,823
======== ========
Supplemental disclosure of cash flow information:
Issuance of common stock in exchange for notes
receivable....................................... $ 500
========
Supplemental disclosure of noncash financing
activities:
During 1999, the Company issued warrants valued at
$1,700 to a third party (see Note 6--America
Online Agreement and Warrants)...................
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
eMachines, Inc.
NOTES TO FINANCIAL STATEMENTS
Period from September 18, 1998 (inception) to December 31, 1998,
and the year ended December 31, 1999
(in thousands, except share information)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
eMachines, Inc. (the "Company"), a Delaware corporation, is a distributor of
affordable personal computers and a provider of Internet advertising programs
including client-server software, in-box promotions and keyboards that provide
one-touch access to selected Web sites.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of net revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents--Cash equivalents consist primarily of investments in
commercial paper, repurchase agreements and money market funds. The Company
considers all highly liquid investments purchased with maturities of three
months or less to be cash equivalents.
Short-term Investments--The Company accounts for short-term investments in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Short-term
investments consist of highly liquid commercial paper and U.S. Government debt
securities with maturities of less than one year but greater than three months
when purchased. In accordance with SFAS No. 115, investments are categorized as
held to maturity and are carried at amortized cost (unless there is a decline
in the value of the individual securities that is other than temporary).
Realized gains and losses are recognized in the statement of operations in the
period that they are earned or incurred.
Concentration of Credit Risk--Financial instruments that potentially subject
the Company to credit risk are principally cash and cash equivalents, short-
term investments and accounts receivable. Cash and cash equivalents are
deposited with high credit quality financial institutions. Accounts receivable
are derived from net revenues earned from retail customers in the United States
and are denominated in U.S. dollars. The Company performs ongoing credit
evaluations of its customers and maintains an allowance for potential credit
losses. The Company's sales are concentrated in the U.S. retail channel and, as
a result, the Company maintains individually significant receivable balances
with certain retailers. While the Company frequently monitors and manages this
risk, financial difficulties on the part of one or more of the Company's retail
customers may have a material adverse effect on the Company. For the period
from September 18, 1998 (inception) to December 31, 1998, Office Depot, Best
Buy, Inc., and MicroCenter accounted for 31%, 24% and 15% of gross revenues,
respectively. These customers accounted for approximately 30%, 24% and 10% of
total accounts receivable at December 31, 1998, respectively. For the year
ended December 31, 1999, Office Depot, Circuit City, Best Buy, Inc., and
MicroCenter accounted for 20%, 20%, 21% and 6%, of gross revenue, respectively.
These customers accounted for approximately 13%, 7%, 36% and 7% of total
accounts receivable at December 31, 1999, respectively.
Financial Instruments--The Company's financial instruments include notes
receivable from stockholders and subordinated notes payable to stockholders. At
December 31, 1999, the fair values of these instruments cannot be determined
due to their related party nature.
Inventories--Inventories consist principally of personal computers and
monitors and are stated at the lower of cost, determined by the moving average
method, or market.
F-7
<PAGE>
eMachines, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period from September 18, 1998 (inception) to December 31, 1998,
and the year ended December 31, 1999
(in thousands, except share information)
Property and Equipment--Property and equipment are stated at cost.
Depreciation and amortization is provided for over the estimated useful lives
of the assets, or the related lease terms if shorter, using the straight-line
method.
Revenue Recognition, Returns and Sales Incentives--Revenue on product sales
is recognized upon shipment. Revenue is recorded net of allowances for rebates
and other sales incentives. The allowances for sales returns, rebates and other
sales incentives are accrued concurrently with the recognition of revenue. Upon
shipment, the Company also provides for the estimated cost that may be incurred
for product warranties and post-sales support. Products are sold to customers
under a limited one-year warranty against material defects, which period is
covered by the terms provided to the Company by the product's manufacturer, a
related party (see Note 9). Deferred revenue represents payments received in
advance from consumers who purchase the Company's PCs and enter into contracts
obligating the Company to provide technical support for extended periods of
time, generally 3 years. Revenue from these extended service contracts is
recognized ratably over the term of the contracts as the services are
performed.
Stock-Based Compensation--The Company accounts for stock-based employee
compensation arrangements in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation expense is based on the difference, if any, on the date of grant,
between the fair value of the Company's stock and the exercise price. The
Company accounts for stock options issued to nonemployees in accordance with
the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
Income Taxes--The Company accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes," which requires recognition of deferred
income tax liabilities and assets for the expected future income tax
consequences of events that have been included in the financial statements or
income tax returns. Under this method, deferred income tax liabilities and
assets are determined based on the temporary difference between the financial
statement and income tax basis of assets and liabilities using presently
enacted tax rates in effect. Valuation allowances are established when
necessary to reduce deferred income tax assets to the amounts that are more
likely than not to be realized.
Net Loss Per Share--The Company computes net income (loss) per share in
accordance with SFAS No. 128, "Earnings Per Share" which requires dual
presentation of basic earnings per share ("EPS") and diluted EPS. Basic EPS is
computed using the weighted average number of common shares outstanding during
the period. Diluted EPS is computed using the weighted average number of common
shares and potentially dilutive shares outstanding during the period. Potential
common shares consist of shares issuable upon the exercise of stock options and
warrants using the treasury stock method and convertible preferred stock.
Common share equivalents are excluded from the computation in loss periods as
their effect would be antidilutive. The following table sets forth potentially
dilutive securities that were excluded in the computation of diluted net loss
per share in the periods presented, as their effect would have been
antidilutive.
F-8
<PAGE>
eMachines, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period from September 18, 1998 (inception) to December 31, 1998,
and the year ended December 31, 1999
(in thousands, except share information)
<TABLE>
<CAPTION>
Period from
September 18,
1998 (inception) Year Ended
to December 31, December 31,
1998 1999
---------------- ------------
<S> <C> <C>
Weighted average dilutive effect of common stock
equivalents:
Series A Preferred Stock...................... 8,480,041
Common stock options.......................... 32,785 166,809
------ ---------
32,785 8,646,850
====== =========
</TABLE>
Pro Forma Stockholders' Equity and Net Loss Per Share (Unaudited)--The
unaudited pro forma stockholders' equity at December 31, 1999 reflects the
automatic conversion of Series A redeemable convertible preferred stock
outstanding as of December 31, 1999 as if it had occurred as of that date. Pro
forma net loss per share is computed using the weighted average number of
common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's Series A redeemable convertible preferred stock
into shares of the Company's common stock effective upon the closing of the
Company's initial public offering as if such conversion occurred on August 18,
1999 (date of original issuance). The resulting pro forma adjustment for the
year ended December 31, 1999 includes (i) an increase in the weighted average
shares used to compute the basic net loss per share of 8,980,040 and (ii) a
decrease in the net loss attributable to common stockholders to reflect a
reduction in the accretion of manditorily redeemable convertible preferred
stock of $3,729.
Effects of Recent Accounting Pronouncements--In June 1997, the Financial
Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive
Income," which requires an enterprise to report, by major components and as a
single total, the change in its net assets during the period from nonowner
sources, and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers. The Company had no
comprehensive income items to report for the period from September 18, 1998
(inception) to December 31, 1998 and the year ended December 31, 1999. The
Company currently operates one reportable segment under SFAS No. 131. Adoption
of these statements at our inception did not impact the Company's financial
position, results of operations or cash flows.
In June 1998, SFAS No 133 "Accounting for Derivative Instruments and Hedging
Activities" was released. The statement requires the recognition of all
derivatives as either assets or liabilities in the balance sheet and the
measurement of those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the planned use of the derivative and
the resulting designation. The Company is required to implement the statement
in the first quarter of fiscal 2001. The Company has not used derivative
instruments and believes the impact of adoption of this statement will not have
a significant effect on the financial statements.
F-9
<PAGE>
eMachines, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period from September 18, 1998 (inception) to December 31, 1998,
and the year ended December 31, 1999
(in thousands, except share information)
3. SHORT-TERM INVESTMENTS
The following is a summary of short-term investments being held to maturity
at December 31, 1999:
<TABLE>
<S> <C>
Aggregate market.................................................... $19,906
Gross unrealized gains.............................................. 9
Amortized cost basis for:
Commercial paper.................................................. 14,920
U.S. government debt securities................................... 4,977
</TABLE>
Gross unrealized losses on short-term investments during the year ended
December 31, 1999, were not significant. Interest and investment income of
$2,645 is included in financing charges and interest expense, net, in the
accompanying statement of operations for the year ended December 31, 1999.
Approximately $9,936 and $9,961 of the short-term investments mature in January
and February 2000, respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment, net consists of:
<TABLE>
<CAPTION>
December
31,
Useful ------------
Lives 1998 1999
------- ---- ------
<S> <C> <C> <C>
Furniture and office equipment......................... 5 years $ 27 $ 417
Computers and information systems...................... 5 years 271 1,040
Machinery and equipment................................ 5 years 231
Motor vehicles......................................... 5 years 94
Leasehold improvements................................. 5 years 332
---- ------
298 2,114
Accumulated depreciation and amortization.............. (30) (287)
---- ------
Property and equipment, net............................ $268 $1,827
==== ======
</TABLE>
5. SUBORDINATED NOTES PAYABLE TO STOCKHOLDERS
On December 18, 1998, the Company issued subordinated notes payable to
TriGem and KDS America, both stockholders of the Company (see Note 9), in the
amount of $270 and $290, respectively, bearing interest at 5.79%. Interest
payments are due each May 31 and November 30. Principal and any unpaid interest
are due on June 7, 2004. The notes may be prepaid at the Company's option
without penalty.
6. STOCKHOLDERS' EQUITY
In June of 1999, the stockholders of the Company formally executed a stock
purchase agreement that defines the terms and conditions of the Company's
initial capitalization. The stock purchase agreement memorializes the binding
verbal agreements under which the stockholders of the Company had been
operating since inception. The Company issued 77,600,000 shares of common stock
for an aggregate purchase price of $1,940. Of the total, $500 is evidenced by
promissory notes, which bear interest at an annual rate of 5.79% and are due on
June 7, 2004. The notes are collateralized by a pledge of the Company's common
stock and are full recourse notes. All shares issued in connection with the
stock purchase agreement have been treated as issued and outstanding since
incorporation.
F-10
<PAGE>
eMachines, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period from September 18, 1998 (inception) to December 31, 1998,
and the year ended December 31, 1999
(in thousands, except share information)
Stock Split--In July 1999, the Board of Directors authorized an eight-for-
one stock split that became effective on August 13, 1999 and an increase in the
authorized shares of its common stock to 200,000,000 shares. In conjunction
with the stock split, the par value of the common stock was reduced from $.0001
to $.0000125. All references in the accompanying consolidated financial
statements to number of shares, sales prices and per share amounts of the
Company's common stock have been retroactively restated to reflect the
increased number of common shares outstanding. In addition, stockholders'
equity has been restated to give retroactive recognition to the stock split by
reclassifying from additional paid-in capital to common stock the par value of
the additional shares arising from the split.
Preferred stock--In August 1999, the Board of Directors amended the
Company's certificate of incorporation to authorize the Company to issue two
classes of stock, to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares which the Company is authorized to issue is
three hundred million (300,000,000) shares. Two hundred fifty million
(250,000,000) shares ("Shares") shall be Common Stock, par value $0.0000125 per
share, and fifty million (50,000,000) shares shall be preferred stock, par
value $0.01 per share. Of the authorized shares of Preferred Stock, a total of
twenty-five million (25,000,000) shares shall be designated Series A Preferred
Stock ("Series A Preferred"). On August 18, 1999 the Company issued 24,279,369
shares of Series A Preferred Stock (including 5,560,776 shares issued upon
regulatory approval in September 1999) for proceeds of $146,275 (net of
approximately $8,738 in offering costs). The amended certificate of
incorporation and bylaws authorize the Board of Directors to designate
preferred stock with special rights, including voting and dividend rights, that
could make it more difficult for a third party to acquire the Company,
including takeover attempts that might result in a premium over the market
price for shares of the Company's common stock. The Company's charter documents
also eliminate the right of stockholders to call a special meeting of
stockholders, require stockholders to comply with advance notice requirements
before raising a matter at a meeting of stockholders and eliminate the ability
of stockholders to take action by written consent. The significant terms of the
Series A Preferred Stock include:
Conversion--The Series A Preferred Stock is convertible, at the option of
the holder, at the conversion rate then in effect, at any time after issuance
of such share. Each share of Preferred Stock shall automatically be converted
into shares of Common Stock at the Conversion Price at the time in effect for
such share of Preferred Stock immediately upon the earlier of (i) the closing
an underwritten firm commitment public offering of the Company's Common Stock
yielding gross proceeds to the Company (prior to expenses and underwriting
commissions) in excess of $30,000 and at a price per share greater than 133% of
the Series A Preferred Stock original issuance price per share (as adjusted for
any stock dividends, combinations or splits with respect to such shares), and
(ii) the election to convert all Preferred Stock into Common Stock by holders
of at least a majority of the then outstanding shares of Preferred Stock. The
initial conversion rate is one-to-one and is subject to adjustment based upon
subdivisions or combinations of Common Stock and certain dividends,
distributions and common stock equivalents.
Mandatory Redemption--The Company shall offer to redeem the unconverted
shares of Series A Preferred Stock outstanding on January 1, 2004, reduced by
the number of shares converted into Common Stock after January 1, 2004 through
the date of redemption, as follows:
<TABLE>
<CAPTION>
Cumulative
Redemption Redemption
Percentage Date
---------- -----------
<S> <C>
33.3%.................. August 2004
66.7%.................. August 2005
100.0%.................. August 2006
</TABLE>
F-11
<PAGE>
eMachines, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period from September 18, 1998 (inception) to December 31, 1998,
and the year ended December 31, 1999
(in thousands, except share information)
The redemption price is payable in cash and is equal to the sum of the
original issue price plus cumulative but unpaid dividends. If any portion of
the redemption amount is not paid by the Company on the redemption date,
dividends will continue to accrue on the shares tendered for redemption and
late fees will accrue at an annual rate of 15% until the entire redemption
amount is paid.
Liquidation Preference--In the event of the liquidation, dissolution or
winding up of the Company, the holders of Series A Preferred Stock will be
entitled to receive, in preference to the holders of Common Stock, the amount
of $6.38 per share, which presently is equal to the aggregate amount of
$155,013, plus declared and unpaid dividends, if any. After payment has been
made to the holders of the Series A Preferred Stock, any remaining assets are
distributable ratably to the holders of Common Stock.
Voting--Each holder of shares of Series A Preferred Stock is entitled to the
number of votes equal to the number of shares of Common Stock into which each
share is then convertible. Series A Preferred Stock holders also have the
following voting rights:
Board of Directors--Three of the Company's current common stockholders are
entitled to elect a total of five of the Company's seven board members. Holders
of Series A Preferred Stock, voting together as a class, are entitled to elect
one member to the Company's Board of Directors. All remaining members of the
Board of Directors shall be elected by the holders of the then-outstanding
shares of Common Stock and Series A Preferred Stock, voting together as a
single class.
Protective Provisions--As long as 4,000,000 shares of the Series A Preferred
Stock is outstanding, the Company is required to obtain the written consent of
at least 50% of the preferred shareholders before taking certain corporate
actions.
Dividends--The holders of Series A Preferred Stock are entitled to receive
noncumulative dividends only when and if declared by the Company's Board of
Directors, equal to $0.45 per share per year. Dividends shall be paid to the
holders of Series A Preferred Stock prior to any cash dividends paid to the
holders of Common Stock. The Company has not declared any dividends to date
with respect to the Series A Preferred Stock or Common Stock.
America Online Agreement and Warrants--In June 1999, a Marketing Agreement
with America Online, Inc. ("AOL") was executed whereby the Company agreed to
pre-install and distribute America Online's AOL and CompuServe services or
other AOL products and services on the Company's PCs. The agreement also
provides for an Internet Service Provider ("ISP") rebate program. Under the
terms of this agreement, consumers who purchase the Company's PCs and enter
into a three-year Internet service contract with AOL's CompuServe service are
eligible to receive an ISP rebate directly from AOL of up to $400 (dollars not
in thousands). AOL is obligated to offer the rebates for two years, which
commenced with the program's launch in the third quarter of 1999. The Marketing
Agreement expires in June 2004 and contains an additional five-year renewal
option.
Additionally, the Marketing Agreement required the Company issue AOL
warrants, subject to AOL's participation in a Series A Preferred Stock
financing. Accordingly, AOL was granted warrants to purchase common stock at an
aggregate exercise price of $12,500. The warrants vested immediately on the
grant date and expire five years after the date of grant. The number of shares
that may be purchased upon exercise of the warrant, according to the terms of
the Marketing Agreement, is equal to the aggregate exercise price divided by
the greater of 1.25 times the initial public offering price of the Company's
common stock and $7.98. If there is
F-12
<PAGE>
eMachines, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period from September 18, 1998 (inception) to December 31, 1998,
and the year ended December 31, 1999
(in thousands, except share information)
no successful completion of an initial public offering, the number of shares
issuable upon exercise of the warrant is equal to the aggregate exercise price
of the warrant divided by $11.82. The estimated fair value of the warrants of
$1,700 was recorded as a deferred cost which is included in other assets on the
accompanying December 31, 1999 balance sheet, and is being amortized to expense
over the 5 year term of the marketing agreement. Approximately $113 of the
deferred cost associated with the warrant was amortized to expense during 1999.
As of December 31, 1999, none of the warrants issued to AOL had been exercised.
Stock Options--The Company has a stock option plan (the "Plan") under which
employees, consultants and directors may be granted options to purchase common
stock up to an aggregate of 3,200,000 shares. Options are generally granted at
not less than the fair market value at grant date, vest over five years, and
expire ten years after the grant date. The Company's Board of Directors is
authorized to grant options outside of the plan. When the exercise price of
employee stock options equals the fair value of the underlying stock on the
date of grant, no compensation expense is recorded. Compensation expense is
recognized for the fair value of options granted to nonemployees and to the
extent the fair value of the underlying stock exceeds the exercise price of
employee stock options. The fair value of options granted to nonemployees
during the period from September 18, 1998 (inception) to December 31, 1998 was
not significant. In December 1999, the Company granted 52,000 options to
nonemployees with a weighted average exercise price of $8.00 per share. The
options were valued at approximately $133 using the Black-Scholes option
pricing model and the following assumptions: risk-free interest rate of 5.35
percent, expected lives of five years, volatility of 44 percent, and dividend
yield of zero. During 1999 approximately $86 of stock-based compensation was
recognized in connection with these options. During the period from September
18, 1998 (inception) to December 31, 1998, and the year ended December 31,
1999, the Company issued employee common stock options with exercise prices
less than the fair value of its underlying common stock. The weighted average
fair value of the common stock, based upon securities transactions entered into
by the Company with certain unrelated third parties, was $6.38 per share and
$6.45 per share for the period from September 18, 1998 (inception) through
December 31, 1998 and the year ended December 31, 1999, respectively.
Accordingly, the Company recorded $588 and $2,305 as the intrinsic value of
such options for the period from September 18, 1998 (inception) through
December 31, 1998 and the year ended December 31, 1999, respectively. Stock-
based compensation of $11 and $1,332 was amortized to expense during the period
from September 18, 1998 (inception) to December 31, 1998 and the year ended
December 31, 1999, respectively. At December 31, 1998 and December 31, 1999 the
Company had $577 and $1,550, respectively, in deferred stock compensation
related to these options, which will be amortized to expense through 2004.
F-13
<PAGE>
eMachines, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period from September 18, 1998 (inception) to December 31, 1998,
and the year ended December 31, 1999
(in thousands, except share information)
A summary of option transactions follows:
<TABLE>
<CAPTION>
Plan Non-Plan
------------------------------------------ -------------------------------------
Number Range of
Number Weighted-Average Range of of Weighted-Average Exercise
of Shares Exercise Price Exercise Prices Shares Exercise Price Prices
--------- ---------------- --------------- ------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Granted during 1998..... 270,000 $0.06 $0.03--$0.13
-------
Outstanding, December
31, 1998............... 270,000 $0.06 $0.03--$0.13
Granted................. 677,200 $4.99 $0.13--$8.00 357,897 $2.39 $1.61--$3.75
Canceled................ (88,800) $0.31 $0.03--$3.75
------- -------
Outstanding, December
31, 1999............... 858,400 $4.15 $0.03--$8.00 357,897 $2.39 $1.61--$3.75
======= =======
</TABLE>
As of December 31, 1999, there were 2,341,600 shares available for future
grant under the Plan.
Additional information regarding options outstanding as of December 31, 1999
is as follows:
<TABLE>
<CAPTION>
Plan
-------------------------------------------------------------
Options Outstanding Options Exercisable
----------------------------- -------------------------------
Weighted Weighted
Weighted Average Weighted Average
Number Average Remaining Average Remaining
Range of of Exercise Contractual Number Exercise Contractual
EercisexPrices Shares Price Life (years) of Shares Price Life (years)
- --------------- ------- -------- ------------ --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
$0.03...... 136,000 $0.03 8.7 27,200 $0.03 8.7
$0.13...... 73,600 $0.13 8.6 11,360 $0.13 8.9
$1.25...... 95,600 $1.25 9.3
$1.61......
$3.75...... 215,200 $3.75 9.5
$8.00...... 338,000 $8.00 9.7 32,000 $8.00 9.5
------- ------
858,400 $4.15 9.4 70,560 $3.66 9.1
======= ======
<CAPTION>
Non-Plan
--------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------ -------------------------------
Weighted
Average Weighted
Weighted Remaining Weighted Average
Average Contractual Average Remaining
Range of Number Exercise Life Number Exercise Contractual
EercisexPrices of Shares Price (years) of Shares Price Life (years)
- --------------- --------- -------- ----------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
$0.03......
$0.13......
$1.25......
$1.61...... 227,897 $1.61 9.6 227,897 $1.61 9.6
$3.75...... 130,000 $3.75 9.4
$8.00......
--------- ---------
357,897 $2.39 9.5 227,897 $1.61 9.6
========= =========
</TABLE>
Accounting for Stock-Based Compensation--As permitted under SFAS No. 123,
the Company has elected to follow APB Opinion No. 25 and related
Interpretations in accounting for stock-based awards to employees. Pro forma
information regarding net income and earnings per share is required by SFAS No.
123. This information is required to be determined as if the Company had
accounted for its stock-based awards to employees under the fair value method
of that statement. The fair value of each option grant was estimated on the
date of grant using the minimum value option-pricing model with the following
weighted-average assumptions used for grants during the period from September
18, 1998 (inception) through December 31, 1998 and the year ended December 31,
1999: risk-free interest rates of 4.4 percent and 5.2 percent, expected lives
of five years for both periods, and dividend yield of zero for both periods.
The minimum value option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions. The weighted-average estimated fair value of
employee stock options granted during period from September 18, 1998
(inception) to December 31, 1998 and the year ended December 31, 1999 was $4.41
and $2.59 per share, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is assumed to be amortized to expense over the options' vesting period.
Had the Company accounted for its stock-based awards to employees under the
fair value method
F-14
<PAGE>
eMachines, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period from September 18, 1998 (inception) to December 31, 1998,
and the year ended December 31, 1999
(in thousands, except share information)
prescribed by SFAS No. 123, the net loss reported during the period from
September 18, 1998 (inception) through December 31, 1998 and the year ended
December 31, 1999 would have been increased by approximately $3 and $39,
respectively, and there would have been no impact on reported earnings per
share.
7. INCOME TAXES
The Company's deferred income tax assets are comprised of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Reserves not recognized for income tax purposes......... $ 169 $ 947
Accrued expenses........................................ 844 1,618
Net operating loss carryforwards........................ 168
AMT credits............................................. 397
Valuation allowance..................................... (1,181) (2,962)
------- -------
Net deferred income tax assets.......................... $ -- $ --
======= =======
</TABLE>
The Company established a 100% valuation allowance at December 31, 1998 and
December 31, 1999 due to the uncertainty of realizing future income tax
benefits from its deferred income tax assets.
The provision for income taxes differs from the amount computed by applying
the federal statutory income tax rate to income before taxes as follows:
<TABLE>
<CAPTION>
Period from
September 18, 1998 Year Ended
(inception) to December 31,
December 31, 1998 1999
------------------ ------------
<S> <C> <C>
Tax benefit computed at federal
statutory rate........................ (35.0) (35.0)
Stock-based compensation............... 8.1
State taxes and other.................. 0.8 2.5
Increase in valuation allowance........ 34.2 24.4
----- -----
Total.................................. -- % -- %
===== =====
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
Operating Leases--The Company leases its corporate office and warehouse
space under an operating lease expiring in 2004. The lease, which is guaranteed
by KDS America, a stockholder, is renewable at the Company's option for an
additional five-year term. Future minimum rental commitments under the lease
agreement as of December 31, 1999, excluding sublease rentals, are as follows:
<TABLE>
<S> <C>
2000............................................................... $1,036
2001............................................................... 1,086
2002............................................................... 1,124
2003............................................................... 1,159
2004............................................................... 194
------
$4,599
======
</TABLE>
F-15
<PAGE>
eMachines, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period from September 18, 1998 (inception) to December 31, 1998,
and the year ended December 31, 1999
(in thousands, except share information)
Rental expenses under operating leases during the period from September 18,
1998 (inception) to December 31, 1998 and the year ended December 31, 1999
amounted to approximately $6 and $1,064 respectively.
The Company subleases a portion of its warehouse space to TriGem America
Corporation, a related party (see Note 9). The total minimum rentals to be
received in the future under the sublease, which expires in 2004, amounted to
$1,498 as of December 31, 1999. Sublease rental income during the year ended
December 31, 1999, amounted to approximately $347.
Legal Proceedings--In July 1999, Compaq Computer Corporation ("Compaq")
filed a complaint against the Company, TriGem Computer Inc., TriGem America
Corporation and Korea Data Systems as defendants in the U.S. District Court for
the Southern District of Texas based on the defendant's alleged infringement of
13 patents held by Compaq related to improved system processing speed, enhanced
video graphics, peripheral compatibility and overall system architecture. The
complaint seeks an accounting, treble damages, a preliminary and permanent
injunction from further alleged infringement, attorneys' fees and other
unspecified damages. The Company filed a response in September 1999, seeking
declaratory judgment of invalidity and of Compaq's patents and asserting
counterclaims against Compaq that included false and misleading advertising
under the Lanham Act, business disparagement and unfair competition under Texas
common law. The case is currently in the early stages of discovery. In October
1999, Packard Bell filed a complaint in Federal District Court for the Eastern
District of California, alleging patent infringement on Packard Bell patents
which it asserts relates to (i) graphics controller, (ii) parallel port
controller, and (iii) bus interface of the Company's eTower machine. The
Company filed a response in January 2000 disputing infringement and asserting
that the patents at issue are invalid. The Company is currently unable to
estimate the total expenses, possible loss or range of loss that may be
ultimately connected with these allegations. The Company is indemnified against
liability under the terms of its Original Design Manufacture Agreement with
TriGem Computer (see Note 8). The Company's defense of the claims could result
in significant expenses and diversion of management's attention and other
resources. Although the Company believes its direct financial exposure is
limited under its indemnification arrangement, the results of complex
litigation of this sort are inherently uncertain and difficult to predict and
the Company cannot assure that the results of this litigation would not result
in the Company's business being significantly harmed, particularly if it
affects the Company's products.
Also in October 1999, David Packard, on behalf of a putative nationwide
class, filed a complaint against the Company as a defendant in the U.S.
District Court for the Eastern District of Texas based on our alleged sale of
defective goods. Essentially identical complaints were filed contemporaneously
against Compaq, Hewlett Packard and Packard Bell. The complaints claim that a
chip in the defendants PC products contains a defect which may cause an error
to occur when information is written to a floppy disk. The complaint seeks
unspecified monetary damages, injunctive and declaratory relief. The lawsuit
against the Company is in the early stages of discovery and the Company has not
yet filed a response. Although the Company believes that they have meritorious
defenses and intend to vigorously defend themselves in this action, these types
of litigation are inherently complex and unpredictable. The Company cannot
assure you that the class action suit will not succeed in obtaining unspecified
monetary damages, injunctive and declaratory relief against the production of
its PC products. The Company's defense of the claims could result in
significant expenses and diversion of management's attention and other
resources. In addition, the Company cannot assure you that the results of this
litigation would not result in the Company's business being significantly
harmed.
Employment Agreement--In August 1999, the Company entered into an amended
and restated employment agreement with its President and Chief Executive
Officer, who is also a stockholder. Under the terms of the
F-16
<PAGE>
eMachines, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period from September 18, 1998 (inception) to December 31, 1998,
and the year ended December 31, 1999
(in thousands, except share information)
agreement the Company is obligated for a three-year term, commencing September
18, 1998, to pay the executive officer a minimum annual salary of $300 and an
annual bonus. From September 18, 1998 through June 30, 1999, the bonus was
equal to $1 for each CPU unit (dollars not in thousands) shipped. In August
1999, the Company granted the executive a fully vested, non-forfeitable option
to purchase 227,897 shares of the Company's common stock at an exercise price
of $1.61 per share, which is less than the fair value of the underlying common
stock. The fair value of the common stock based upon securities transactions
entered into by the Company with certain unrelated third parties, was $6.38 per
share at the time the Company became obligated to grant the option.
Accordingly, in August 1999 the Company recorded stock based compensation
expense of $1,084 as the intrinsic value of the option which is reflected as
stock-based compensation in the statement of operations (see Note 6).
Approximately $126 and $700 of bonus expense under the employment agreement is
reflected in selling and market expense in the accompanying statements of
operations for the period from September 18, 1998 (inception) to December 31,
1998, and the year ended December 31, 1999, respectively.
9. RELATED PARTIES
Manufacture and Supply of PCs and Monitors--Two of the Company's major
stockholders, TriGem and KDS America, are the wholly owned subsidiaries of
Korean companies; TriGem Computer Inc. ("TriGem Computer") and Korea Data
Systems Co. Ltd. ("KDS Ltd."), respectively. All of the PCs sold by the Company
are manufactured by TriGem Computer, except for the eOne and eSlate, which are
manufactured by KDS Ltd. All of the monitors sold by the Company are either
manufactured by KDS Ltd., or supplied by KDS Ltd. through its relationship with
Jean Company Ltd. ("Jean"), an unrelated third party.
During the period from September 18, 1998 (inception) to December 31, 1998,
the Company purchased its PCs and monitors from TriGem America Corporation
("TriGem America"), another wholly owned subsidiary of TriGem Computer, and
Korea Data Systems (USA), Inc. ("KDS USA"), respectively. Under an agreement
between the Company, TriGem America, KDS Ltd., Jean, and KDS USA, $57,785 of
the Company's accounts payable obligations as of December 31, 1998 to TriGem
America, KDS Ltd., and Jean, collectively, were transferred to KDS USA. KDS USA
is wholly owned by a Board member of the Company. During the year ended
December 31, 1999, the Company purchased its PCs and monitors directly from KDS
USA.
On January 24, 2000, the Company entered into an Original Design Manufacture
Agreement ("ODM Agreement") with TriGem Computer. Pursuant to the agreement,
TriGem Computer agreed to design, procure and assemble certain computer
components, and to provide support for the assembled products. The Company will
pay TriGem Computer for its supply and services on a "cost plus" basis, which
price shall be adjusted monthly based upon TriGem Computer's then current
costs. The agreement requires the Company to issue requisitions and purchase
orders to TriGem Computer each month. TriGem Computer's obligated to meet such
purchase orders based on the projections the Company provides to TriGem
Computer in an annual plan. TriGem Computer has provided several warranties to
the Company, including that all of its products will be free from defects in
design, material and workmanship. The agreement provides the Company certain
remedies in the event that products sold to the Company by TriGem Computer are
defective. Commencing with the execution of the agreement on January 24, 2000,
these remedies include reimbursing the Company for the costs of defective
products. The agreement also provides that the Company may be reimbursed by
TriGem Computer for all reasonable costs related to defective products that
might arise with respect to products sold to the Company prior to January 24,
2000, which amounted to approximately $12.9 million in 1999. The term of the
agreement is for two years, and automatically renews for one-year periods,
unless either party provides written
F-17
<PAGE>
eMachines, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period from September 18, 1998 (inception) to December 31, 1998,
and the year ended December 31, 1999
(in thousands, except share information)
notice of its intent to terminate one hundred and eighty days prior to the
expiration of the initial term or any subsequent term.
Inventory Purchases and Extended Payment Terms--During the period from
September 18, 1998 (inception) to December 31, 1998 and the year ended December
31, 1999, the Company purchased $70,989 and $805,372, respectively, of
inventories from TriGem Corporation and KDS USA, collectively, under extended
payment terms which resulted in an effective interest rate of 12% from
September 18, 1998 (inception) through March 31, 1999 and 10% from April 1,
1999 through August 18, 1999. Subsequent to the Series A Preferred Stock
financing (See Note 6--Preferred Stock) in August 1999, the Company ceased
financing its inventory purchases. As of December 31, 1998 and December 31,
1999, payables of approximately $57,785 and $131,935, respectively, were
outstanding to KDS USA. Approximately $889 and $6,530 of finance charges were
incurred in connection with the inventory purchases.
PC Repair Service--During the period from September 18, 1998 (inception) to
December 31, 1998 and the year ended December 31, 1999, the Company had an
arrangement with TriGem America to provide PC repair services for PCs returned
to the Company by its customers. Under the terms of the arrangement, the
Company was assessed a $15 per unit service charge (dollars not in thousands)
for the testing and repackaging of PC returns determined to be nondefective.
For the period from September 18, 1998 (inception) to December 31, 1998 and the
year ended December 31, 1999, these charges, which are included in cost of
revenues, amounted to approximately $43 and $1,855, respectively. The ODM
Agreement with TriGem Computer executed in January 2000 contains similar repair
service terms.
Trademark Assignment Agreement--Under an agreement entered into on June 10,
1999, and amended on August 16, 1999, KDS America transferred to the Company
the trademark "E-MACHINES" for 419,538 shares of the Company's common stock,
which the Company issued to KDS America on August 18, 1999. The trademark was
recorded at KDS Americas' historical cost basis of $50 and is included in other
assets in the accompanying advance sheet. In connection with the agreement the
Company agreed to license KDS America use of the trademark in the Republic of
Korea.
10. SUBSEQUENT EVENTS
FreePC Acquisition--Effective January 2000, the Company acquired FreePC,
Inc. ("FreePC"). In connection with the acquisition, the Board of Directors
amended and restated the Company's certificate of incorporation to designate
14,000,000 and 11,000,000 shares of its 50,000,000 authorized Preferred Stock
as Series B Preferred Stock and Series C Preferred Stock, respectively. The
Series B Preferred Stock and Series C Preferred Stock contain rights and
preferences similar to those of the Series A Preferred Stock described in Note
6, except they are not redeemable and each share of Series A and Series B
Preferred Stock convert into 1.1 shares of common stock. To consummate the
merger the Company issued 3,995,656 shares of common stock, 10,175,517 shares
of Series B Preferred Stock, 7,458,379 shares of Series C Preferred Stock, and
warrants to purchase 9,269,784 shares of the Company's common stock, in
exchange for all of the outstanding shares of capital stock of FreePC. In
addition, the Company reserved 4,130,342 shares of its common stock for
issuance upon the exercise of 2,891,314 FreePC and Guide.com (a predecessor of
FreePC) common stock options assumed in connection with the acquisition,
including 1,239,158 warrants issuable upon exercise of the options. The
exchange ratio was approximately 1.1 shares of the Company's common stock and
warrants to purchase 0.47 shares for each share of FreePC capital stock and
options to purchase FreePC common stock. The aggregate purchase price was
approximately $150,500. The transaction has been accounted for using the
purchase method.
F-18
<PAGE>
eMachines, Inc.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(in thousands, except share information)
The following unaudited pro forma condensed combined financial information
for eMachines consists of the Unaudited Pro Forma Condensed Combined Statement
of Operations for the year ended December 31, 1999, and the Unaudited Pro Forma
Condensed Combined Balance Sheet as of December 31, 1999.
In January 2000, eMachines, Inc. completed a transaction whereby one of its
wholly-owned subsidiaries merged with and into FreePC, Inc. ("FreePC"). In
connection with the acquisition the Company issued 3,995,656 shares of common
stock, 10,175,517 shares of Series B Preferred Stock, 7,458,379 shares of
Series C Preferred Stock, and warrants to purchase 9,269,784 shares of the
Company's common stock, in exchange for all of the outstanding shares of
capital stock of FreePC. In addition, the Company reserved 4,130,342 shares of
its common stock for issuance upon the exercise of 2,891,314 FreePC common
stock options assumed in connection with the acquisition, including 1,239,158
warrants issuable upon exercise of the options. The Unaudited Pro Forma
Condensed Combined Statement of Operations for the year ended December 31, 1999
gives effect to the FreePC acquisition as if it had taken place on January 1,
1999. The Unaudited Pro Forma Condensed Combined Balance Sheet gives effect to
the FreePC acquisition as if it had taken place on December 31, 1999.
The Unaudited Pro Forma Condensed Combined Statement of Operations combines
eMachines' historical results of operations for the year ended December 31,
1999 with FreePC's historical results for the year ended December 31, 1999. The
FreePC acquisition will be accounted for using the purchase method of
accounting. The pro forma financial information has been prepared on the basis
of assumptions described in the notes.
The pro forma financial information should be read in conjunction with the
related notes included in this document and the audited financial statements
and notes of eMachines, and the audited financial statements and notes of
FreePC included elsewhere in this prospectus. The pro forma financial
information is presented for illustrative purposes only and is not necessarily
indicative of the operating results or financial position that would have
occurred if the acquisition had been in effect during the periods presented,
nor is it necessarily indicative of future operating results or financial
position.
F-19
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(Amounts in thousands, except per-share data)
<TABLE>
<CAPTION>
Pro Forma
eMachines FreePC Adjustments Total
---------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Statements of Operations
Data:
Net revenues............. $ 814,317 $ 1,201 $ 815,518
Cost of revenues......... 780,945 3,320 784,265
---------- -------- ------------
Gross profit/(loss)....... 33,372 (2,119) 31,253
Operating expenses:
Sales and marketing..... 15,298 20,147 35,445
Customer service and
technical support...... 9,049 -- 9,049
General and
administrative......... 9,535 3,481 13,016
Stock-based
compensation........... 1,332 1,902 3,234
Research and
development............ 2,059 2,059
Goodwill amortization... $ 73,000 (4) 73,000
Write-down of assets
held for sale.......... 941 941
---------- -------- ---------- ------------
Total operating
expenses............. 35,214 28,530 73,000 136,744
---------- -------- ---------- ------------
Loss from operations...... (1,842) (30,649) (73,000) (105,491)
Financing charges and
interest expense, net.... (3,886) 862 (3,024)
---------- -------- ---------- ------------
Net loss.................. $ (5,728) $(29,787) $ (73,000) $ (108,515)
Accretion of manditorily
redeemable preferred
stock to redemption
value.................... (3,739) (3,739)
---------- -------- ---------- ------------
Net loss attributable to
common stockholders...... $ (9,467) $(29,787) $ (73,000) $ (112,254)
========== ======== ========== ============
Net loss per common share:
Basic and diluted........ $ (0.07) $ (1.33)
========== ============
Basic and diluted--pro
forma................... $ (0.07) $ (1.04)
========== ============
Shares used to compute net
loss per share:
Basic and diluted........ 77,755,172 3,995,656 (1) 81,750,828
========== ========== ============
Basic and diluted--pro
forma................... 86,735,212 17,633,896 (1) 104,369,108
========== ========== ============
</TABLE>
See notes to unaudited pro forma condensed combined financial information.
F-20
<PAGE>
eMachines, Inc.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
as of December 31, 1999
(Amounts in thousands)
<TABLE>
<CAPTION>
Pro Forma
eMachines FreePC Adjustments Total
--------- ------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $114,823 $10,939 $125,762
Short-term investments.............. 19,897 -- 19,897
Accounts receivable (net)........... 123,726 137 123,863
Inventories......................... 65,260 -- 65,260
Prepaid expenses and other current
assets............................. 3,992 2,661 6,653
-------- ------- --------
Total current assets.............. 327,698 13,737 341,435
Property and equipment................ 1,827 1,406 3,233
Other assets.......................... 2,188 1,776 3,964
Goodwill.............................. $146,955 (1) 146,955
-------- ------- -------- --------
Total assets...................... $331,713 $16,919 $146,955 $495,587
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current Liabilities:
Accounts payable.................... $144,874 $ 7,391 $152,265
Accrued rebates..................... 22,803 22,803
Accrued expenses and other current
liabilities........................ 19,855 1,928 3,722 (2) 26,005
500 (3)
-------- ------- -------- --------
Total current liabilities......... 187,532 9,319 4,222 201,073
Non-current Liabilities............... 1,903 333 2,236
Redeemable convertible preferred
stock................................ 150,014 -- 150,014
Stockholders' equity (deficit)........ (7,736) 7,267 150,000 (1) 142,264
-- (7,267)(1) --
-------- ------- -------- --------
Total liabilities and
stockholders' equity (deficit)... $331,713 $16,919 $146,955 $495,587
======== ======= ======== ========
</TABLE>
See notes to unaudited pro forma condensed combined financial information.
F-21
<PAGE>
eMachines, Inc.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
(Amounts in thousands, except per-share data)
The pro forma financial information gives effect to the following pro forma
adjustments:
(1) In connection with the acquisition, FreePC common shares, preferred shares
and common stock options were converted to eMachines equivalent shares and
options, plus warrants, by taking the number of FreePC shares and options
multiplied by the exchange ratio of approximately 1.1 for common and
preferred shares and by the exchange ratio of approximately 0.47 for
warrants. The transaction will be accounted for using the purchase method
of accounting. The purchase price, based on an independent valuation, is
estimated at $150,500, including approximately $500 for professional fees.
The pro forma adjustment to "stockholders' equity" reflects the elimination
of FreePC's stockholders' equity ($7,267) and the impact of the issuance of
eMachines' common stock ($150,000) in connection with the FreePC merger.
The total estimated purchase price for the FreePC acquisition has been
allocated on a preliminary basis to assets and liabilities based on
management's best estimates of their fair value with the excess costs over
the net assets acquired of $146,955 being allocated to goodwill. This
allocation is subject to change pending a final analysis of the value of
the assets acquired and liabilities assumed. The impact of such changes
could be material.
(2) Represents acquisition liabilities assumed in connection with the
acquisition of FreePC. The liabilities are based on management's best
estimates of the costs to exit the FreePC Network business, including
costs to terminate two ISP contracts used to provided free internet access
to users of the FreePC Network and employee termination costs. As a result
of the purchase of FreePC, free internet access will no longer be provided
to users of the FreePC Network. FreePC's contracts with internet access
providers require minimum payments regardless of usage levels. The total
of these minimum payments has been included in the estimate. This number
is subject to change in the event that FreePC can terminate the contracts
for a fee less than the minimum required payments. The impact of such fees
could be material.
(3) Represents estimated acquisition costs incurred in connection with the
merger.
(4) The pro forma adjustment is for amortization of goodwill over a two year
estimated life.
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Directors and Stockholders
FreePC, Inc.
We have audited the accompanying consolidated balance sheets of FreePC, Inc.
and Subsidiary (the Company) as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of FreePC, Inc.
and subsidiary as of December 31, 1998 and 1999, and the consolidated results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
Los Angeles, California
January 14, 2000
F-23
<PAGE>
FreePC, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
-----------------------
1998 1999
--------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 125,000 $ 10,839,000
Restricted cash..................................... -- 100,000
Receivables, net.................................... 56,000 137,000
Prepaid expenses and other current assets........... -- 301,000
Assets held for sale................................ -- 2,360,000
--------- ------------
Total current assets.............................. 181,000 13,737,000
Fixed assets, net..................................... 42,000 1,406,000
Domain names, net of accumulated amortization of
$8,000 and $91,000 at December 31, 1998 and 1999,
respectively......................................... 269,000 1,574,000
Other assets.......................................... -- 202,000
--------- ------------
Total assets...................................... $ 492,000 $ 16,919,000
========= ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable.................................... $ 136,000 $ 2,143,000
Accrued expenses.................................... 11,000 970,000
Payable to related parties.......................... 21,000 5,248,000
Current portion of capital lease obligation......... -- 63,000
--------- ------------
168,000 8,424,000
Long-term capital lease obligation, less current
portion.............................................. -- 333,000
Unearned revenue.................................... 58,000 895,000
Commitments...........................................
Stockholders' equity:
Preferred stock, $0.001 par value, liquidation
preference over common stockholders:
Series A Convertible Preferred Stock; 10,000,000
shares authorized, none issued and outstanding at
December 31, 1998 and 9,250,000 issued and
outstanding at December 31, 1999................. -- 93,000
Series B Convertible Preferred Stock; 7,000,000
shares authorized, none issued and outstanding at
December 31, 1998 and 6,780,000 issued and
outstanding at December 31, 1999................. -- 33,900,000
Common stock, $0.001 par value, 50,000,000 shares
authorized, 1,260,097 issued and outstanding at
December 31, 1998 and 3,517,241 shares issued and
outstanding at December 31, 1999................... 1,000 3,000
Additional paid-in capital.......................... 881,000 11,121,000
Deferred stock compensation......................... -- (7,447,000)
Accumulated deficit................................. (616,000) (30,403,000)
--------- ------------
Total stockholders' equity........................ 266,000 7,267,000
--------- ------------
Total liabilities and stockholders' equity........ $ 492,000 $ 16,919,000
========= ============
</TABLE>
See accompanying notes.
F-24
<PAGE>
FreePC, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December
31
--------------------
1998 1999
-------- -----------
<S> <C> <C>
Revenues.................................................. $134,000 $ 1,201,000
Cost of revenues.......................................... 16,000 3,320,000
-------- -----------
118,000 (2,119,000)
Operating expenses:
Sales and marketing..................................... 136,000 20,147,000
General and administrative.............................. 148,000 3,481,000
Research and development................................ 288,000 2,059,000
Amortization of deferred stock compensation............. -- 1,902,000
Write-down of assets held for sale...................... -- 941,000
-------- -----------
Total operating expenses.............................. 572,000 28,530,000
-------- -----------
Loss from operations...................................... 454,000 30,649,000
Other income (expense):
Interest income......................................... -- 902,000
Other, net.............................................. 1,000 (39,000)
-------- -----------
Loss before provision for income taxes.................... 453,000 29,786,000
Provision for income taxes................................ 2,000 1,000
-------- -----------
Net loss.................................................. $455,000 $29,787,000
======== ===========
</TABLE>
See accompanying notes.
F-25
<PAGE>
FreePC, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
December 31, 1999
<TABLE>
<CAPTION>
Series A and B
Convertible Preferred
Stock Common Stock Additional Total
---------------------- ---------------- Paid-in Deferred Accumulated Stockholders'
Shares Amount Shares Amount Capital Compensation Deficit Equity
---------- ----------- --------- ------ ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1998................... -- $ -- 774,155 $1,000 $ 150,000 $ -- $ (161,000) $ (10,000)
Issuance of common
stock for cash....... -- -- 179,380 -- 270,000 -- -- 270,000
Issuance of common
stock for assets or
services.............. -- -- 170,305 -- 256,000 -- -- 256,000
Issuance of common
stock for domain
names................. -- -- 136,257 -- 205,000 -- -- 205,000
Net loss............... -- -- -- -- -- -- (455,000) (455,000)
---------- ----------- --------- ------ ----------- ----------- ------------ ------------
Balance at December 31,
1998................... -- -- 1,260,097 1,000 881,000 -- (616,000) 266,000
Issuance of common
stock for assets or
services.............. -- -- 101,332 -- 500,000 -- -- 500,000
Issuance of common
stock for cash........ -- -- 2,036,250 2,000 18,000 -- -- 20,000
Exercise of stock
options............... -- -- 102,745 -- 31,000 -- -- 31,000
Deferred stock
compensation.......... -- -- -- -- 9,529,000 (9,291,000) -- 238,000
Amortization of
deferred stock
compensation.......... -- -- -- -- -- 1,844,000 -- 1,844,000
Issuance of warrant.... -- -- -- -- 137,000 -- -- 137,000
Issuance of Series A
Convertible Preferred
Stock at $0.01 per
share for cash........ 9,250,000 93,000 -- -- -- -- -- 93,000
Issuance of Series B
Convertible Preferred
Stock at $5.00 per
share for cash........ 6,780,000 33,900,000 -- -- -- -- -- 33,900,000
Exercise of warrants... -- -- 16,817 -- 25,000 -- -- 25,000
Net loss............... -- -- -- -- -- -- (29,787,000) (29,787,000)
---------- ----------- --------- ------ ----------- ----------- ------------ ------------
Balance at December 31,
1999................... 16,030,000 $33,993,000 3,517,241 $3,000 $11,121,000 $(7,447,000) $(30,403,000) $ 7,267,000
========== =========== ========= ====== =========== =========== ============ ============
</TABLE>
See accompanying notes
F-26
<PAGE>
FreePC, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
-----------------------
1998 1999
--------- ------------
<S> <C> <C>
Operating activities:
Net loss............................................ $(455,000) $(29,787,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation expense.............................. 7,000 250,000
Amortization expense.............................. 8,000 184,000
Amortization of deferred stock compensation....... -- 1,902,000
Write-down of assets held for sale................ -- 941,000
Provision for doubtful accounts................... 14,000 35,000
Changes in operating assets and liabilities:
Receivables..................................... (71,000) (116,000)
Prepaid expenses and other current assets....... -- (301,000)
Other assets.................................... -- (22,000)
Accounts payable and accrued expenses........... 115,000 2,966,000
Payable to related party........................ 275,000 5,227,000
Unearned revenue................................ 58,000 837,000
--------- ------------
Net cash used in operating activities......... (49,000) (17,884,000)
Investing activities:
Purchase of fixed assets............................ (41,000) (4,281,000)
Purchase of domain names............................ (70,000) (1,028,000)
--------- ------------
Net cash used in investing activities......... (111,000) (5,309,000)
Financing activities:
Proceeds from the issuance of common stock.......... 270,000 76,000
Proceeds from the issuance of Series A Convertible
Preferred Stock.................................... -- 93,000
Proceeds from the issuance of Series B Convertible
Preferred Stock.................................... -- 33,900,000
Cash restricted for equipment lease................. -- (100,000)
Payments under capital lease obligations............ -- (62,000)
--------- ------------
Net cash provided by financing activities..... 270,000 33,907,000
--------- ------------
Net increase in cash and cash equivalents............. 110,000 10,714,000
Cash and cash equivalents at beginning of year........ 15,000 125,000
--------- ------------
Cash and cash equivalents at end of year.............. $ 125,000 $ 10,839,000
========= ============
Supplemental disclosures:
Income taxes paid................................... $ 2,000 $ 1,000
Interest paid....................................... -- 34,000
Non-cash transactions:
Common stock and warrants issued for assets or
services........................................... $ 205,000 $ 638,000
Common stock issued in exchange for debt
forgiveness........................................ 256,000 --
Fixed assets acquired under capital leases.......... -- 458,000
</TABLE>
See accompanying notes.
F-27
<PAGE>
FreePC, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. THE COMPANY AND BASIS OF PRESENTATION
FreePC, Inc. (FreePC) was incorporated on January 25, 1999. Beginning in
June 1999, the Company began providing consumers with free computers while
offering online advertisers a means to reach those consumers. Beginning June
1999, the Company began offering its users a free computer and free unlimited
Internet access, as well as free e-mail and navigational tools. Beginning
December 1999, the Company will no longer provide free computers, but will
continue to provide Internet access to its existing users.
In March 1999, Guide.com, Inc. (Guide.com) entered into an agreement with
FreePC, whereby Guide.com became a wholly owned subsidiary of FreePC
(collectively the Company). Under the terms of the agreement, FreePC issued
0.0996562 shares of FreePC common stock in exchange for each outstanding share
of Guide.com's common stock. The combination has been accounted for as a
reorganization of entities under common control and was completed in the second
quarter of 1999. Operations of Guide.com have been included in the consolidated
financial statements as if the reorganization occurred January 1, 1998.
Guide.com was incorporated in the state of Delaware on July 30, 1997, and
launched its service in October 1997. Guide.com provided an online guide to
restaurants and other various Internet content in cities across the Unites
States. Guide.com's customer base was located principally in the United States.
In August 1999, the Company discontinued the advertising services provided at
Guide.com's web site. The Guide.com web site remains in operation and provides
users a link to services provided at the FreePC web site.
On November 24, 1999, FreePC entered into an agreement with eMachines, Inc.
(eMachines) whereby FreePC will become a wholly owned subsidiary of eMachines.
The acquisition is intended to be accounted for as a purchase business
combination and is expected to be completed in January 2000. The terms of the
merger call for shares of FreePC common stock to be exchanged for shares of
eMachines common stock and warrants to purchase additional shares of eMachines
common stock; shares of FreePC Series A Convertible Preferred Stock to be
exchanged for shares of eMachines Series B Preferred Stock and warrants to
purchase additional shares of eMachines common stock and shares of FreePC
Series B Convertible Preferred Stock to be exchanged for shares of eMachines
Series C Preferred Stock and warrants to purchase additional shares of
eMachines common stock. The exchange ratio for FreePC common stock and Series A
and B Convertible Preferred Stock into eMachines common and preferred stock and
warrants are based on an Exchange Ratio, as defined, to be determined
immediately before the close of the merger. In addition, all options to
purchase FreePC's common stock will be converted into options to purchase
eMachines common stock.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
FreePC and its wholly owned subsidiary Guide.com. All intercompany accounts and
transactions have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Prior to June 30, 1999, the Company's revenues were derived principally from
the sale of banner advertisements and referrals of users to other web sites.
Referral revenues were recognized when referrals were made to other web sites,
provided that no significant company obligations remained and collection of the
related receivable was probable. Beginning in June 1999, the Company's revenue
was derived principally from banner advertisements and from the Company's start
page agreement. The Company's obligations typically include the guarantee of a
minimum number of impressions or the satisfaction of other performance
criteria.
F-28
<PAGE>
FreePC, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Advertising revenue is recognized as the impressions are displayed or as click-
through occurs, depending on the contract terms, provided that no significant
obligations remain and collection of the related receivable is probable. To
date, the duration of the Company's advertising commitments has generally
averaged from one to twelve months. To the extent minimum guaranteed
impressions or other performance criteria are not met, the Company defers
recognition of the corresponding revenues until the remaining guaranteed
impressions or other performance criteria are met.
Use of Estimates
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 and
accompanying notes. Actual results could differ from those estimates.
Advertising Costs
The Company expenses the costs of advertising as incurred. Advertising
expense for the years ended December 31, 1998 and 1999 was $109,000 and
$355,000, respectively, and is included in the consolidated statement of
operations in sales and marketing expense.
Customer Acquisition Costs
Included in sales and marketing expense is the cost of personal computers
given away to users in exchange for a 30-month user agreement. The Company
considers the cost of the computers as the cost of procuring customers and
recognizes the expense upon delivery of the computer to the customer. For the
year ended December 31, 1999 the Company recorded approximately $18.1 million
of computer acquisition costs. No computer acquisition costs were incurred
during the year ended December 31, 1998.
Product Development Costs
Product development costs incurred by the Company to date to develop,
enhance, manage, monitor and operate the Company's interfaces, databases and
web sites and related technologies are expensed as incurred. The Company has
adopted Statement of Position No. 98-1 "Accounting For the Costs of Computer
Software Developed or Obtained For Internal Use" (SOP 98-1). SOP 98-1 requires
computer software cost associated with internal use software to be charged to
operations as incurred until certain capitalization criteria are met. No such
costs have been capitalized to date.
Cash Equivalents
The Company considers all investments with a maturity of three months or
less when purchased to be cash equivalents.
Restricted Cash
Under the terms of an equipment lease agreement, the Company maintains a
$100,000 letter of credit as collateral for the lease as a security deposit.
The letter of credit expires in June 2000.
Concentration of Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, and trade
accounts receivable.
F-29
<PAGE>
FreePC, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
The Company maintains cash and cash equivalents with various major financial
institutions. At times, such amounts may exceed the F.D.I.C. limits. The
Company limits the amount of credit exposure with any one financial institution
and believes that no significant concentration of credit risk exists with
respect to cash investments. The Company's trade accounts receivable are
derived primarily from revenue earned from customers located in the United
States. The Company extends credit based upon an evaluation of each customer's
financial condition and generally collateral is not required. The Company
maintains an allowance for doubtful accounts based upon the expected
collectibility of trade accounts receivable.
Two customers comprised 15% and 55%, respectively, of the trade accounts
receivable balance at December 31, 1998. Two customers comprised 21.9% and
17.5%, respectively, of the trade accounts receivable balance at December 31,
1999. During the year ended December 31, 1998 three customers comprised 30.1%,
22.6% and 12.6%, respectively, of revenues. During the year ended December 31,
1999 one customer accounted for 17.5% of revenues.
Sources of Supplies
The Company relies on third-party networks, local telephone companies and
other companies to provide data communications capacity. Although management
believes that alternate telecommunications facilities could be found in a
timely manner, any disruption of these services could have an adverse effect on
the Company's financial position and results of operations.
Assets Held for Sale
At December 31, 1999, the Company held 5,000 computers for sale which were
purchased in September 1999 for distribution to FreePC users, but never placed
in service. On January 11, 2000, the Company sold 1,000 of those computers for
$520,000 resulting in an impairment charge of $105,000 which was recorded as of
December 31, 1999. In addition, management recognized an additional impairment
charge assuming an additional discount of 20% on the remaining 4,000 computers
of $836,000. The total impairment charge of $941,000 has been included in the
consolidated statement of operations as a write-down of assets held for sale.
The net book value of the remaining 5,000 computers, totaling $2,184,000, is
included in assets held for sale and is classified as a current asset.
In December 1999, management held six domain names for sale which are
carried at the lower of amortized cost or fair value less cost to sell. The
amortized net book value of the domain names at December 31, 1998 and 1999 was
$269,000 and $176,000, respectively, and is included in assets held for sale.
No impairment charge was recorded as of December 31, 1998 or 1999.
Fixed Assets
Fixed assets are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets of six
months to five years. Maintenance and repairs are charged to expense as
incurred.
Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards (SFAS) No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." The Company assesses the impairment of long-lived assets
and
F-30
<PAGE>
FreePC, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
certain identifiable intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment loss would be recognized when estimated future cash flows expected
to result from the use of the asset and its eventual disposition is less than
its carrying amount.
Domain Names
Domain names are stated at cost. Amortization is calculated using the
straight-line method over the estimated useful lives of the assets of three
years.
Other Assets
Other assets include refundable security deposits the Company is required to
maintain with its telecommunications service providers under agreements
expiring in 2000.
Income Taxes
Income taxes are accounted for under SFAS No. 109, "Accounting for Income
Taxes." Under SFAS No. 109, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax basis of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion (APB) No.
25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB 25, compensation expense is recognized over the
vesting period based on the difference, if any, on the date of grant between
the deemed fair value of the Company's stock for accounting purposes and the
exercise price. The Company accounts for stock issued to non-employees at the
estimated fair value of the underlying option or warrant in accordance with the
provisions of SFAS No. 123.
3. RECEIVABLES
Receivables, net consists of the following:
<TABLE>
<CAPTION>
December 31
-----------------
1998 1999
------- --------
<S> <C> <C>
Trade accounts receivable............................... $71,000 $124,000
Employee receivables.................................... -- 12,000
Other receivables....................................... -- 51,000
Allowance for doubtful accounts......................... (15,000) (50,000)
------- --------
$56,000 $137,000
======= ========
</TABLE>
F-31
<PAGE>
FreePC, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
4. FIXED ASSETS
Fixed assets consists of the following:
<TABLE>
<CAPTION>
December 31
------------------
1998 1999
------- ----------
<S> <C> <C>
Computer hardware (including equipment under
capital leases)..................................... $49,000 $1,224,000
Computer software.................................... -- 252,000
Furniture and fixtures............................... -- 171,000
Other fixed assets................................... -- 16,000
------- ----------
49,000 1,663,000
Less accumulated depreciation........................ 7,000 257,000
------- ----------
$42,000 $1,406,000
======= ==========
</TABLE>
5. STOCKHOLDERS' EQUITY
Common Stock
Holders of common stock are entitled to receive, when and if declared by the
Board of Directors, dividends and other distributions in cash, stock or
property from the Company's assets or funds legally available for those
purposes subject to any dividend preferences that may be attributable to
holders of convertible Preferred Stock. Holders of common stock are entitled to
one vote for each share held of record on all matters on which stockholders may
vote. Holders of common stock are not entitled to cumulative voting for the
election of directors.
There are no preemptive, conversion, redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
fully paid and non-assessable. In the event of liquidation, dissolution or
winding up, holders of common stock are entitled to share ratably in the assets
available for distribution.
On December 13, 1999, the Company purchased the domain names freepc.com and
freepc.net. The purchase price of $1,637,000 consists of $1 million cash,
100,000 shares of common stock at $5.00 per share and a warrant to purchase
100,000 shares of common stock at an exercise price of $5.00 per share. The
common stock was recorded at fair value of $5.00 per share and the warrant was
recorded at fair value of $137,000 based on the Black-Scholes option pricing
model. As of December 31, 1999, the warrant was outstanding and expires on
March 1, 2000.
On January 25, 1999, FreePC issued 2,036,250 shares of common stock to a
consultant and two employees for cash totaling $20,000, or $0.01 per share.
These shares are subject to restricted stock agreements. Under the terms of
these agreements, the Company has the right to repurchase any unvested shares
at the original issue price in the event the employee ceases to be an employee
or service provider of the Company. Any unvested shares shall automatically
vest immediately prior to a change in control of the Company.
Preferred Stock
In general, holders of Series A and B Convertible Preferred Stock are
entitled to one vote for each share of common stock then issuable upon its
conversion. For so long as at least 5,000,000 shares of Series A Convertible
Preferred Stock are outstanding, the holders of Series A Convertible Preferred
Stock shall be entitled to elect one director. For so long as at least
1,000,000 shares of Series B Convertible Preferred Stock are outstanding, the
holders of Series B Convertible Preferred Stock shall be entitled to elect one
director. The
F-32
<PAGE>
FreePC, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
holders of Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock, voting as a separate class, are entitled to vote upon the
following matters: (a) changing the authorized number of shares of Series A or
Series B Convertible Preferred Stock, (b) creating or authorizing any equity
securities having preference over that series of Convertible Preferred Stock,
(c) amending the Articles in a manner that would adversely change the rights of
that series of Convertible Preferred Stock, (d) repurchasing or redeeming
common stock or that series of Convertible Preferred Stock or (e) paying any
dividends on the common stock or Convertible Preferred Stock.
The holders of each series of Convertible Preferred Stock are entitled to
receive, out of any funds legally available therefore, noncumulative dividends
at a rate of 8% of the respective issuance price per share per annum. No such
dividends have been declared or paid to date.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Convertible Preferred Stock are entitled to receive an initial
liquidation preference equal to the price per share of such series of
Convertible Preferred Stock, plus declared and unpaid dividends. After the full
liquidation preference on all outstanding shares of Convertible Preferred Stock
has been paid, any remaining assets and funds will be distributed ratably among
the holders of common stock, Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock, assuming full conversion of each such series of
Convertible Preferred Stock until the holders of Convertible Preferred Stock
have received an additional two times the initial liquidation preference price
per share of each such series. Thereafter, any remaining assets and funds will
be distributed ratably among the holders of common stock.
Each share of Convertible Preferred Stock is convertible at the holders'
option at any time into common stock, according to a ratio which is one-for-
one, subject to anti-dilution protection. Each share of Convertible Preferred
Stock automatically converts at the earlier of (a) the closing of a firm
commitment underwritten public offering of the Company's securities with at
least $15 million in gross proceeds at a per share offering price of at least
$10.00 or (b) the consent of at least 50% of the outstanding shares of each
series of Convertible Preferred Stock.
Registration Rights
The holders of Convertible Preferred Stock have certain registration rights
with respect to the shares of Convertible Preferred Stock held by them. The
Convertible Preferred Stock holders may require the Company to register their
shares upon the written demand of the holders of at least 20% of the
outstanding Convertible Preferred Stock and common stock issuable upon
conversion thereof. In addition, the holders are also entitled to include their
securities in future registration statements the Company files under the
Securities Act of 1933, referred to as piggyback registration rights. The
holders of Convertible Preferred Stock are also entitled, subject to certain
limitations, to require the Company to register their securities on a Form S-3
registration once the Company is eligible to use a Form S-3 in connection with
these rights. However, the Convertible Preferred Stock holders are restricted
from exercising these rights until one year after the Company's initial public
offering or March 31, 2004.
Warrants
As of December 31, 1998, the Company had Common Stock Warrants outstanding
entitling the holders to purchase 16,817 shares of common stock, respectively,
at a price per share of $1.51. In February 1999, the warrants were exercised.
At December 31, 1999, the Company had a warrant outstanding to purchase
100,000 shares of common stock at an exercise price of $5.00 per share.
F-33
<PAGE>
FreePC, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Deferred Stock Compensation
The excess of the deemed fair value of the Company's common stock over the
exercise price of options granted to employees and non-employees during the
year ended December 31, 1999, at the date of grant amounted to an aggregate of
$9,529,000. As a result, $9,291,000 was recorded and reflected as a reduction
of stockholders' equity for options granted to employees and $238,000 was
recorded and reflected as other assets for options granted to vendors and
consultants. The deemed fair value of the common stock was determined by the
Company based on the selling prices of contemporaneous sales of each series of
Preferred Stock considering the relative rights and privileges of each
security, the stages of development of the Company's business and the inherent
risks and perceived future potential of the Company at the time of grant or
issuance. Amortization of deferred stock compensation is charged to operations
evenly over the vesting period of the options. During the year ended December
31, 1999, deferred stock compensation amortization of $1,844,000 and $58,000
was recorded for employees and non-employees, respectively. The deferred stock
compensation amortization relates only to stock options awarded; the salaries
and related benefits of these employees and services provided by consultants or
vendors are included in the applicable cost of revenue or operating expense
line item.
6. STOCK BASED COMPENSATION
On December 10, 1998, the stockholders of Guide.com adopted the Guide.com
1998 Stock Option Plan (the Guide.com Plan) which was assumed by FreePC under
the reorganization. Under the terms of the reorganization, no further options
will be granted under the Guide.com Plan. Each grant of options under the
Guide.com Plan vests on a case-by-case basis as approved by the administrator,
generally over a range of immediately vested to vesting over four years and
expires no later than 10 years from the date of grant. Under the Guide.com
Plan, the Company has granted options to employees and non-employees to
purchase shares of the Company's common stock at a price equal to the fair
market value of the common stock on the date of grant.
On January 25, 1999, the Board of Directors of the Company adopted the
FreePC, Inc. 1999 Stock Plan (the FreePC Plan). A maximum of 4,000,000 shares
of common stock have been reserved for issuance under this plan. All employees
and consultants to the Company are eligible to participate under the FreePC
Plan. Each option granted under the plan generally vests over four years and
expires no later than 10 years from the date of grant. Under the FreePC Plan,
certain outstanding options will fully vest upon a change in control.
Information with respect to the Company's two stock option plans is as
follows:
<TABLE>
<CAPTION>
Exercise
Shares Price
--------- -------------
<S> <C> <C>
Outstanding at January 1, 1998................. -- $ --
Granted....................................... 203,044 1.51
Exercised..................................... -- --
Canceled...................................... -- --
--------- -------------
Outstanding at December 31, 1998............... 203,044 1.51
Granted....................................... 2,821,318 0.01 to 8.80
Exercised..................................... (102,745) 0.01 to 1.51
Canceled...................................... (284,855) 0.01 to 1.51
--------- -------------
Outstanding at December 31, 1999............... 2,636,762 $0.01 to 8.80
========= =============
</TABLE>
There were 100,928 and 435,338 options exercisable at December 31, 1998 and
1999, respectively. The weighted average fair value of options granted during
the years ended December 31, 1998 and 1999 was $0.01 and $4.08, respectively.
F-34
<PAGE>
FreePC, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
The weighted average exercise prices for options outstanding and exercisable
at December 31, 1999 and the weighted average remaining contractual life for
options outstanding at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
------------------------------ ----------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Number Average
Number of Life Exercise of Exercise
Range of Exercise Price Shares (Years) Price Shares Price
----------------------- --------- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
$0.01.................. 818,091 9.17 $0.01 56,939 $0.01
0.50.................. 1,392,077 9.53 0.50 264,077 0.50
1.51.................. 148,594 8.09 1.51 58,722 1.51
8.80.................. 278,000 9.86 8.80 55,600 8.80
--------- -------
2,636,762 435,338
========= =======
</TABLE>
SFAS No. 123 requires disclosure of pro forma net loss based upon the fair
value of the options issued. The Company calculated the fair value of each
option granted on the date of the grant using the Black-Scholes options pricing
model as prescribed by SFAS No. 123 using the following assumptions for the
year ended December 31:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Risk-free interest rate...................................... 5.6% 5.9%
Volatility................................................... 65% 65%
Expected life (in years)..................................... 5 4.5
Dividend yield............................................... 0.00% 0.00%
</TABLE>
The option pricing model requires the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those of traded
options and because changes in the assumptions can materially affect the fair
value estimate, in management's opinion, the existing model does not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Using the
above assumptions, the Company's pro forma net loss for the years ended
December 31, 1998 and 1999 would be $455,000 and $29,931,000, respectively.
F-35
<PAGE>
FreePC, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
7. COMMITMENTS
Lease Commitments
Future minimum lease payments under noncancelable capital and operating
lease commitments at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Lease Leases
-------- ---------
<S> <C> <C>
December 31, 2000....................................... $179,000 $299,000
December 31, 2001....................................... 179,000 63,000
December 31, 2002....................................... 54,000 39,000
December 31, 2003....................................... 30,000 4,000
December 31, 2004....................................... 72,000 --
-------- --------
Total minimum obligations............................... 514,000 $405,000
========
Less amounts representing interest...................... 118,000
--------
Present value of minimum lease payments................. 396,000
Less current portion.................................... 63,000
--------
Total long-term portion................................. $333,000
========
</TABLE>
Cost and accumulated depreciation of equipment under capital leases was
$416,000 and $83,000, respectively at December 31, 1999. Depreciation of
equipment under capital leases is included in depreciation expense in the
accompanying consolidated statement of operations. Prior to 1999, the Company
had no equipment under capital lease.
Total rental expense for operating leases was $23,000 and $197,000 for the
years ended December 31, 1998 and 1999, respectively.
Equipment Financing Arrangement
In May 1999, the Company entered into a 36-month line of credit arrangement
with a leasing institution that provides for sales and leaseback transactions
of capital equipment up to a maximum of $3,000,000. Under this agreement,
$3,000,000 was available for future financing transactions at December 31,
1999.
On July 21, 1999, and April 14, 1999, the Company entered into two separate
one-year agreements for the purchase of data communications capacity. Minimum
commitments under the contracts for 2000 are $3,386,000.
F-36
<PAGE>
FreePC, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
8. INCOME TAXES
As a result of the net operating losses incurred since inception, no income
tax provision has been recorded except for state minimum taxes of
approximately $2,000 and $1,000 for the years ended December 31, 1998 and
1999, respectively. The following is a reconciliation of the statutory federal
income tax rate to the Company's effective income tax rate for the year ended
December 31:
<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
Statutory federal rate............................. (34)% (34)%
State income taxes, net of federal benefit......... (6) (6)
Valuation allowance................................ 40 37
Nondeductible stock compensation................... -- 2
Other.............................................. -- 1
-------- ----------
-- % -- %
======== ==========
The components of the deferred tax assets and related valuation allowance
are as follows at December 31:
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $200,000 $4,263,000
Depreciation....................................... -- 6,707,000
Other.............................................. -- 379,000
-------- ----------
200,000 11,349,000
Less valuation allowance........................... 200,000 11,349,000
-------- ----------
Net deferred tax assets.......................... $ -- $ --
======== ==========
</TABLE>
Due to the uncertainty surrounding the timing of realizing the benefits of
its deferred tax assets in future tax returns, the Company has recorded a
valuation allowance equal to the total deferred tax assets.
At December 31, 1998 and 1999, the Company has net operating losses
carryforwards for both federal and state income tax purposes of approximately
$399,000 and $10,600,000, respectively, which are available to offset future
taxable income, if any, through 2005 and 2019, respectively.
Utilization of the above carryforwards may be subject to limitations, which
may ultimately inhibit the Company's ability to use carryforwards in the
future. The utilization of the loss carryforwards may be further limited as a
result of the acquisition of the Company by eMachines.
9. RELATED PARTY TRANSACTIONS
During 1998, the Company shared facilities and received certain management
services, including certain accounting, payroll processing, access to shared
local area computer communications network and general business insurance from
idealab!, a significant stockholder of the Company. idealab! charged a
management fee for the use of its facilities and services provided. Management
fees incurred during the year ended December 31, 1998 totaled $56,000.
In June 1999, the Company entered into a lease agreement beginning in July
1999 with idealab! for office space in a building adjacent to the idealab!
facility. The management fee and leasing fee incurred during the year ended
December 31, 1999 was $76,000 and $112,000, respectively.
F-37
<PAGE>
FreePC, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
From inception through December 31, 1998, Guide.com's founder and
significant stockholder was the Chairman of the Company. No compensation was
paid by the Company for his services. The value of these services was not
material to the financial statements.
On May 21, 1999, the Company entered into an agreement with Compaq Computer
Corporation, a former stockholder, to purchase 10,000 computers for
approximately $8.1 million. On September 23, 1999, the Company entered into an
agreement with Shopping.com, a wholly owned subsidiary of a stockholder, to
purchase 20,025 Compaq computers for approximately $12.5 million. During 1999,
approximately 25,000 computers were distributed to subscribers. At December 31,
1999, amounts due to Shopping.com, which have not been paid totaled $5,224,000
and is included in the financial statements as a payable to related parties.
During the years ended December 31, 1998 and 1999, the Company recognized
advertising revenues from related parties totaling $49,000, or 36%, and
$268,000, or 22%, of revenues, respectively.
F-38
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by eMachines in connection with
the sale of Common Stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................... $ 55,600
NASD filing fee................................................ 20,500
Nasdaq National Market listing fee............................. *
Printing and engraving costs................................... 300,000
Legal fees and expenses........................................ *
Accounting fees and expenses................................... *
Blue Sky fees and expenses..................................... 5,000
Transfer Agent and Registrar fees.............................. 5,000
Miscellaneous expenses......................................... *
--------
Total........................................................ $
========
</TABLE>
- ---------------------
*To be filed by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation to
indemnify officers, directors and third parties acting on behalf of the
Registrant if such person acted in good faith and in a manner reasonably
believed to be in and not opposed to the best interest of the Registrant, and,
with respect to any criminal action or proceeding, the indemnified party had no
reasonable cause to believe his or her conduct was unlawful. Section 145 also
permits a corporation to include in its charter documents, and in agreements
between the corporation and its directors and officers, provisions expanding
the scope of indemnification beyond that specifically provided by the current
law.
Article X of the Registrant's Amended and Restated Certificate of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Delaware law.
Article VI of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the Registrant.
The Registrant has entered into indemnification agreements with its officers
and directors, in addition to indemnification provided for in the Registrant's
Amended and Restated Certificate of Incorporation and in its Bylaws.
Item 15. Recent Sales of Unregistered Securities
During the past three years, the Registrant has issued unregistered
securities as described below.
(a) On June 10, 1999, the Registrant issued 77,600,000 shares of its common
stock at $0.03 per share in exchange for cash and notes to TriGem Corporation,
Korea Data Systems America, Inc. and the Registrant's directors. These
securities have been issued in a transaction exempt from registration under the
Securities Act of 1933 in reliance upon Section 4(2) of the Securities Act of
1933.
(b) During the period from August 18, 1999 through September 1999, the
Registrant issued an aggregate of 24,279,369 shares of Series A convertible
preferred stock to 36 investors at $6.384 per share. These securities have been
issued in a transaction exempt from registration under the Securities Act of
1933 in reliance upon Section 4(2) of the Securities Act of 1933 and Rule 506
of Regulation D thereunder.
II-1
<PAGE>
(c) On August 18, 1999, the Registrant issued 419,538 shares of its common
stock to Korea Data Systems America pursuant to an agreement (amending
trademark assignment). These securities have been issued in a transaction
exempt from registration under the Securities Act of 1933 in reliance upon
Section 4(2) of the Securities Act of 1933.
(d) On August 18, 1999, the Registrant issued a warrant to purchase shares
of its common stock to America Online at an aggregate exercise price of $3.6
million in connection with a marketing agreement. The Registrant issued an
additional warrant to purchase shares of its common stock at an aggregate
exercise price of $8.9 million in September 1999. The maximum number of shares
issuable, subject to anti-dilution adjustments, upon exercise of the warrants
is 1,566,219. These securities have been issued in a transaction exempt from
registration under the Securities Act of 1933 in reliance upon Section 4(2) of
the Securities Act of 1933.
(e) On January 14, 2000, pursuant to an Agreement and Plan of Reorganization
between the Registrant and FreePC, the Registrant issued to the stockholders of
FreePC: 3,995,656 shares of common stock; warrants to purchase an additional
9,269,724 shares of common stock; 10,175,516 shares of Series B preferred stock
and 7,458,379 shares of Series C preferred stock. In addition, the Registrant
assumed options exercisable for (i) an aggregate of 2,891,275 shares of common
stock; and (ii) warrants to purchase an aggregate of 1,239,067 shares of common
stock. These securities have been issued in transactions exempt from
registration under the Securities Act of 1933 in reliance upon Section 4(2) of
the Securities Act of 1933.
(f) Through December 31, 1999, the Registrant granted, pursuant to its stock
option plan and outside of its stock option plan, options to purchase an
aggregate of 1,313,097 shares of common stock. The options granted under the
stock option plan were issued to the Registrant's officers and employees at
exercise prices ranging from $0.025 to $8.00. The options granted outside of
the stock option plan were granted to its officers, directors, employees and
consultants at prices ranging from $1.61 to $3.75. A significant portion of
these options were issued pursuant to the Registrant's stock option plan. These
securities have been issued in transactions exempt from registration under the
Securities Act of 1933 in reliance upon Rule 701 promulgated under the
Securities Act of 1933. Where Rule 701 has not been available, the securities
have been issued in transactions exempt from registration under the Securities
Act of 1933 in reliance upon Section 4(2) of the Securities Act of 1933.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
1.1** Form of Underwriting Agreement
2.1 Agreement and Plan of Reorganization by and among the Registrant,
eMachines Acquisition Corp. and FreePC, Inc. dated as of November 24,
1999
3.1 Restated Certificate of Incorporation of the Registrant
3.2** Form of Amended and Restated Certificate of Incorporation of the
Registrant to be filed upon the closing of the offering
3.3 Amended and Restated Bylaws
3.4** Amended and Restated Bylaws of the Registrant to be in effect after
the closing of the offering
4.1** Specimen Common Stock Certificate
4.2 Form of Warrant to Purchase Shares of Common Stock issued pursuant to
the Acquisition of FreePC, Inc.
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
10.1* Form of Security Agreement entered into between the Registrant and
each of Chul Chung, Stephen A. Dukker, Lap Shun Hui, Dae Soo Koh, Jung
Koh, Hong Soon Lee and Hong Sun Lee dated as of June 10, 1999
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
10.2* Form of Promissory Note from each of Chul Chung, Stephen A. Dukker,
Lap Shun Hui, Dae Soo Koh, Jung Koh, Hong Soon Lee and Hong Sun Lee
dated as of June 10, 1999
10.3* Amended and Restated Rights and Restrictions Agreement dated as of
August 18, 1999
10.4* Subordinated Promissory Note dated as of June 7, 1999 for TriGem
Corporation
10.5* Subordinated Promissory Note dated as of June 7, 1999 for Korea Data
Systems America, Inc.
10.6* Form of Indemnification Agreement between the Registrant and each of
its directors and executive officers
10.7** 1998 Stock Plan and form of agreements thereunder
10.8*+ Marketing Agreement between the Registrant and America Online dated
as of June 17, 1999
10.9* Amended and Restated Employment Agreement dated as of August 18, 1999
for Stephen Dukker
10.10* Trademark Assignment Agreement dated as of June 10, 1999
10.11* Agreement (Amending Trademark Assignment) dated as of August 16, 1999
10.12* Industrial Lease between the Registrant and the Irvine Company dated
as of November 30, 1998
10.13* Common Stock Purchase Warrant issued on August 18, 1999 to America
Online, Inc.
10.14* Option to Purchase Common Stock issued on August 18, 1999 to Stephen
Dukker
10.15 Rights and Restrictions Agreement dated January 14, 2000
10.16 Agreement of sublease between FreePC, Inc. and Bill Gross' idealab!
dated as of June 29, 1999
10.17 FreePC, Inc. 1999 Stock Plan and form of agreements thereunder
10.18** Employment Agreement dated as of January 14, 2000 for Donald La Vigne
10.19** Employment Agreement dated as of January 14, 2000 for Audrey Finci
10.20**+ Original Design Manuafacturer Agreement between TriGem Computer, Inc.
and the Registrant dated as of January 24, 2000
10.21** Employment Agreement dated as of January 14, 2000 for Steve Chadima
10.22** Employment Agreement dated as of January 14, 2000 for James
Weissenborn
10.23** Common Stock Purchase Warrant issued in September 1999 to America
Online, Inc.
22.1 List of Subsidiaries
23.1 Consent of Deloitte & Touche, LLP, Independent Accountants
23.2 Consent of Ernst & Young, LLP Independent Auditors
23.3** Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(see Exhibit 5.1)
24.1* Power of Attorney
24.2 Power of Attorney (see page II-6)
27.1** Financial Data Schedules
</TABLE>
- ---------------------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment has been requested for certain portions of this
exhibit pursuant to Rule 406 under the Securities Act of 1933, as amended.
The omitted portions of this agreement have been separately filed with the
Commission.
II-3
<PAGE>
(b) Financial Statement Schedules
Schedule
- --------
II - Valuation and Qualifying Accounts*
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
- ---------------------
* Previously filed.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
. For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
. For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 2 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Irvine, State of California, on the 28th day of January, 2000.
eMachines, Inc.
/s/ Stephen A. Dukker
By: _________________________________
Stephen A. Dukker
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Stephen A. Dukker President, Chief Executive January 28, 2000
____________________________________ Officer and Director
(Stephen A. Dukker) (Principal Executive
Officer)
/s/ Steven H. Miller Vice President and Chief January 28, 2000
____________________________________ Financial Officer
(Steven H. Miller) (Principal Financial and
Accounting Officer)
* Director January 28, 2000
____________________________________
(Lap Shun Hui)
* Director January 28, 2000
____________________________________
(Jung Koh)
* Director January 28, 2000
____________________________________
(Hong Soon Lee)
* Director January 28, 2000
____________________________________
(Nathan Morton)
* Director January 28, 2000
____________________________________
</TABLE>(C. Toms Newby, III)
/s/ Steven H. Miller
*By: __________________________
(Steven H. Miller)
Attorney-in-fact
II-5
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen A. Dukker and Steven H. Miller and each
of them, his attorney-in-fact, each with the power of substitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that such attorneys-in-fact and agents or any of them, or
his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Bill Gross Director January 28, 2000
____________________________________
(Bill Gross)
/s/ Michael Hong Director January 28, 2000
____________________________________
(Michael Hong)
</TABLE>
II-6
<PAGE>
SCHEDULE II
eMachines, Inc.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance Additions Balance
at charged to at end
beginning costs and of
Description of period expenses Deductions period
----------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
receivable and sales returns:
Period from September 18
(inception), 1998 to December 31,
1998............................... -- 239 -- 239
Year ended December 31, 1999........ 239 2,394 (473)(a) 2,160
Inventory reserve for lower of cost or
market
Period from September 18
(inception), 1998 to December 31,
1998............................... -- -- -- --
Year ended December 31, 1999........ -- 533 (31)(b) 502
</TABLE>
- ---------------------
(a) Decrease due to changes in estimate
(b) Decrease due to inventory adjustments
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
1.1** Form of Underwriting Agreement
2.1 Agreement and Plan of Reorganization by and among the Registrant,
eMachines Acquisition Corp. and FreePC, Inc. dated as of November 24,
1999
3.1 Restated Certificate of Incorporation of the Registrant
3.2** Form of Amended and Restated Certificate of Incorporation of the
Registrant to be filed upon the closing of the offering
3.3 Amended and Restated Bylaws
3.4** Amended and Restated Bylaws of the Registrant to be in effect after
the closing of the offering
4.1** Specimen Common Stock Certificate
4.2 Form of Warrant to Purchase Shares of Common Stock issued pursuant to
the Acquisition of FreePC, Inc.
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
10.1* Form of Security Agreement entered into between the Registrant and
each of Chul Chung, Stephen A. Dukker, Lap Shun Hui, Dae Soo Koh, Jung
Koh, Hong Soon Lee and Hong Sun Lee dated as of June 10, 1999
10.2* Form of Promissory Note from each of Chul Chung, Stephen A. Dukker,
Lap Shun Hui, Dae Soo Koh, Jung Koh, Hong Soon Lee and Hong Sun Lee
dated as of June 10, 1999
10.3* Amended and Restated Rights and Restrictions Agreement dated as of
August 18, 1999
10.4* Subordinated Promissory Note dated as of June 7, 1999 for TriGem
Corporation
10.5* Subordinated Promissory Note dated as of June 7, 1999 for Korea Data
Systems America, Inc.
10.6* Form of Indemnification Agreement between the Registrant and each of
its directors and executive officers
10.7** 1998 Stock Plan and form of agreements thereunder
10.8*+ Marketing Agreement between the Registrant and America Online dated as
of June 17, 1999
10.9* Amended and Restated Employment Agreement dated as of August 18, 1999
for Stephen Dukker
10.10* Trademark Assignment Agreement dated as of June 10, 1999
10.11* Agreement (Amending Trademark Assignment) dated as of August 16, 1999
10.12* Industrial Lease between the Registrant and the Irvine Company dated
as of November 30, 1998
10.13* Common Stock Purchase Warrant issued on August 18, 1999 to America
Online, Inc.
10.14* Option to Purchase Common Stock issued on August 18, 1999 to Stephen
Dukker
10.15 Rights and Restrictions Agreement dated as of January 14, 2000
10.16 Agreement of sublease between FreePC, Inc. and Bill Gross' idealab!
dated as of June 29, 1999.
10.17 FreePC, Inc. 1999 Stock Plan and form of agreements thereunder
10.18** Employment Agreement dated as of January 14, 2000 for Donald La Vigne
10.19** Employment Agreement dated as of January 14, 2000 for Audrey Finci
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
10.20**+ Original Design Manuafacturer Agreement between TriGem Computer, Inc.
and the Registrant dated as of January 24, 2000
10.21** Employment Agreement dated as of January 14, 2000 for Steve Chadima
10.22** Employment Agreement dated as of January 14, 2000 for James
Weissenborn
10.23** Common Stock Purchase Warrant issued in September 1999 to America
Online, Inc.
22.1 List of Subsidiaries
23.1 Consent of Deloitte & Touche, LLP, Independent Accountants
23.2 Consent of Ernst & Young LLP, Independent Auditors
23.3** Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(see Exhibit 5.1)
24.1* Power of Attorney
24.2 Power of Attorney (see page II-6)
27.1** Financial Data Schedules
</TABLE>
- ---------------------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment has been requested for certain portions of this
exhibit pursuant to Rule 406 under the Securities Act of 1933, as amended.
The omitted portions of this agreement have been separately filed with the
Commission.
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
eMACHINES, INC.
eMACHINES ACQUISITION CORP.
AND
FREEPC, INC.
Dated as of November 24, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I THE MERGER........................................................................................ 2
1.1 The Merger...................................................................................... 2
1.2 Effective Time; Closing......................................................................... 2
1.3 Effect of the Merger............................................................................ 2
1.4 Certificate of Incorporation; Bylaws............................................................ 2
1.5 Directors and Officers.......................................................................... 2
1.6 Effect on Capital Stock......................................................................... 3
1.7 Dissenting Shares............................................................................... 5
1.8 Surrender of Certificates....................................................................... 5
1.9 No Further Ownership Rights in Company Common Stock............................................. 7
1.10 Lost, Stolen or Destroyed Certificates.......................................................... 7
1.11 Tax Consequences................................................................................ 7
1.12 Legends......................................................................................... 7
1.13 Taking of Necessary Action; Further Action...................................................... 7
1.14 Certain Securities Law Matters.................................................................. 7
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................................................... 8
2.1 Organization of the Company..................................................................... 8
2.2 Capital Structure............................................................................... 9
2.3 Subsidiaries.................................................................................... 10
2.4 Authority....................................................................................... 10
2.5 Company Financial Statements.................................................................... 11
2.6 No Undisclosed Liabilities...................................................................... 11
2.7 No Changes...................................................................................... 11
2.8 Tax and Other Returns and Reports............................................................... 13
2.9 Restrictions on Business Activities............................................................. 14
2.10 Title of Properties; Absence of Liens and Encumbrances; Condition of Equipment.................. 14
2.11 Intellectual Property........................................................................... 15
2.12 Agreements, Contracts and Commitments........................................................... 18
2.13 Interested Party Transactions................................................................... 20
2.14 Governmental Authorization...................................................................... 20
2.15 Litigation...................................................................................... 20
2.16 Accounts Receivable............................................................................. 20
2.17 Minute Books.................................................................................... 20
2.18 Environmental................................................................................... 21
2.19 Labor Matters................................................................................... 21
2.20 Insurance....................................................................................... 22
2.21 Compliance With Laws............................................................................ 22
2.22 Complete Copies of Materials.................................................................... 22
2.23 Employee Benefit Plans.......................................................................... 22
2.24 No Commitments Regarding Future Products........................................................ 24
</TABLE>
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
2.25 Third Party Consents............................................................................ 24
2.26 Brokers' and Finders' Fees...................................................................... 24
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB......................................... 24
3.1 Organization, Standing and Power................................................................ 25
3.2 Capital Structure............................................................................... 25
3.3 Authority....................................................................................... 26
3.4 Parent Financial Statements..................................................................... 26
3.5 Broker's and Finders' Fees...................................................................... 26
3.6 No Material Adverse Change...................................................................... 26
3.7 Litigation...................................................................................... 27
3.8 Title to Property and Assets.................................................................... 27
3.9 Material Contracts and Other Commitments........................................................ 27
3.10 Proprietary Rights.............................................................................. 27
3.11 No Conflict of Interest......................................................................... 28
3.12 Employee Benefit Plans.......................................................................... 28
3.13 Tax Returns and Payments........................................................................ 28
3.14 Labor Agreements and Actions.................................................................... 29
3.15 Permits......................................................................................... 29
3.16 Corporate Documents............................................................................. 29
3.17 Insurance....................................................................................... 29
3.18 Year 2000 Compatibility......................................................................... 29
3.19 Customers and Suppliers......................................................................... 29
3.20 Complete Copies of Materials.................................................................... 30
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME.............................................................. 30
4.1 Conduct of Business of the Company.............................................................. 30
4.2 No Solicitation................................................................................. 32
4.3 Conduct of Business of Parent................................................................... 33
ARTICLE V ADDITIONAL AGREEMENTS............................................................................. 34
5.1 Stockholder Approval............................................................................ 34
5.2 Access to Information........................................................................... 34
5.3 Confidentiality................................................................................. 35
5.4 Expenses........................................................................................ 35
5.5 Public Disclosure............................................................................... 35
5.6 Consents........................................................................................ 35
5.7 FIRPTA Compliance............................................................................... 36
5.8 Blue Sky Laws................................................................................... 36
5.9 Best Efforts; Additional Documents and Further Assurances....................................... 36
5.10 Stock Options................................................................................... 36
5.11 Employment Contracts with Key Employees......................................................... 37
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
5.12 Rights Agreement................................................................................ 37
5.13 Severance Policies; Benefit Plans............................................................... 37
5.14 Updated Information Regarding the Company and the Subsidiary.................................... 38
5.15 Updated Information Regarding Parent............................................................ 38
5.16 Amendment to Parent's Charter................................................................... 38
ARTICLE VI CONDITIONS TO THE MERGER......................................................................... 38
6.1 Conditions to Obligations of Each Party to Effect the Merger.................................... 38
6.2 Additional Conditions to Obligations of Company................................................. 39
6.3 Additional Conditions to the Obligations of Parent and Merger Sub............................... 40
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER............................................................... 41
7.1 Termination..................................................................................... 41
7.2 Effect of Termination........................................................................... 42
7.3 Amendment....................................................................................... 42
7.4 Extension; Waiver............................................................................... 42
ARTICLE VIII GENERAL PROVISIONS............................................................................. 42
8.1 Notices......................................................................................... 42
8.2 Interpretation.................................................................................. 43
8.3 Counterparts.................................................................................... 43
8.4 Miscellaneous................................................................................... 43
8.5 Governing Law................................................................................... 44
8.6 Rules of Construction........................................................................... 44
8.7 Nonsurvival of Representations and Warranties................................................... 44
8.8 Validity........................................................................................ 44
8.9 Descriptive Headings............................................................................ 44
8.10 Specific Performance............................................................................ 44
</TABLE>
-iii-
<PAGE>
INDEX OF EXHIBITS
Exhibit Description
- ------- -----------
A Certificate of Merger
B Certificate of Incorporation of Surviving Corporation
C Rights and Restrictions Agreement
D Form of Warrant
E Parent Charter Amendment
F-A, F-B, and F-C Tax Representation Letters
Schedule
- --------
5.11 Key Employees
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of November 24, 1999, by and among eMACHINES, INC., a Delaware
corporation ("Parent"), eMACHINES ACQUISITION CORP., a Delaware corporation
("Merger Sub") and a wholly owned subsidiary of Parent, and FREEPC, INC., a
Delaware corporation (the "Company").
RECITALS
A. The Boards of Directors of each of the Company, Parent and Merger Sub
believe it is in the best interests of each company and their respective
stockholders that the Company and Merger Sub combine into a single company
through the statutory merger of Merger Sub with and into the Company (the
"Merger") and, in furtherance thereof, have approved the Merger.
B. Pursuant to the Merger, among other things, (i) the outstanding shares
of common stock of the Company, par value of $0.001 per share ("Company Common
Stock"), shall be converted into the right to receive (x) shares of common
stock, par value $0.0000125, of Parent ("Parent Common Stock") and (x) warrants
to purchase additional Parent Common Stock ("Warrants"), (ii) the preferred
stock, series A, par value of $0.001 per share, of the Company ("Company
Preferred Series A Stock") shall be converted into the right to receive shares
of preferred stock, series B, par value $0.01, of Parent ("Parent Preferred
Series B Stock") and Warrants, and (iii) the Preferred Stock, Series B, par
value $0.001 per share, of the Company ("Company Preferred Series B Stock", and
collectively with the Company Series A Preferred Stock, the "Company Preferred
Stock") shall be converted into shares of preferred stock, series C, par value
$0.01, of Parent ("Parent Preferred Series C Stock" and collectively with the
Parent Preferred Series B Stock and the preferred stock, series A of the Parent,
the "Parent Preferred Stock") and Warrants, in each case, in the manner and on
the terms set forth herein. Company Common Stock and Company Preferred Stock
are herein referred to collectively as "Company Stock." Parent Common Stock and
Parent Preferred Stock are herein referred to collectively as "Parent Stock."
C. The Company, Parent and Merger Sub desire to make certain
representations, warranties, covenants and other agreements in connection with
the Merger.
D. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code").
E. The parties intend that the Merger be treated as a "purchase"
transaction for accounting and financial reporting purposes.
NOW, THEREFORE, in consideration of the mutual covenants, premises,
warranties and representations set forth herein, and for other good and valuable
consideration, the parties agree as follows:
-1-
<PAGE>
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the General Corporation Law of the State of Delaware
(the "Delaware Law"), Merger Sub shall be merged with and into the Company, the
separate corporate existence of Merger Sub shall cease and the Company shall
continue as the surviving corporation. The Company as the surviving corporation
after the Merger is hereinafter sometimes referred to as the "Surviving
Corporation."
1.2 Effective Time; Closing. As promptly as practicable after the
-----------------------
satisfaction or waiver of the conditions set forth in Article VI, the parties
hereto shall cause the Merger to be consummated by causing a properly executed
certificate of merger in the form attached hereto as Exhibit A (the "Merger
---------
Certificate"), to be filed with the Secretary of State of the State of Delaware
in accordance with the Delaware Law on the Closing Date (as defined below). The
Merger shall become effective at such time as a properly executed and certified
copy of the Merger Certificate is duly filed with the Secretary of State of the
State of Delaware in accordance with Delaware Law or such later time as Parent
and the Company may agree upon and set forth in the Merger Certificate (the time
the Merger becomes effective being referred to herein as the "Effective Time").
The closing of the Merger (the "Closing") will take place at a time and on a
date (the "Closing Date") to be specified by the parties, which shall be no
later than the second business day after satisfaction of the latest to occur of
the conditions set forth in Article VI at the offices of Wilson Sonsini Goodrich
& Rosati, 650 Page Mill Road, Palo Alto, California 94303-1050, unless another
time, date or place is agreed to in writing by the parties hereto.
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
--------------------
shall be as provided in this Article I, the Merger Agreement and the applicable
provisions of Delaware Law. Without limiting the generality of the foregoing,
and subject thereto, at the Effective Time all the property, rights, privileges,
powers and franchises of the Company and Merger Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of the Company and Merger Sub
shall become the debts, liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
------------------------------------
(a) Unless otherwise determined by Parent prior to the Effective
Time, at the Effective Time the Certificate of Incorporation of the Surviving
Corporation, shall be in the form attached hereto as Exhibit B until thereafter
---------
amended as provided by law and such Certificate of Incorporation.
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended as provided by law, the Certificate of Incorporation of the
Surviving Corporation and such Bylaws.
1.5 Directors and Officers. The sole director of Merger Sub immediately
----------------------
prior to the Effective Time shall be Stephen Dukker, to hold office in
accordance with the Certificate of
-2-
<PAGE>
Incorporation and Bylaws of the Surviving Corporation, and the officers of
Merger Sub immediately prior to the Effective Time shall consist of Stephen
Dukker as President and Treasurer and Donald La Vigne as Secretary, which
individuals will hold the offices set forth opposite their respective names in
Section 1.5 of the Parent Disclosure Letter, in each case, until their
respective successors are duly elected or appointed and qualified.
1.6 Effect on Capital Stock. At the Effective Time, by virtue of the
-----------------------
Merger and without any action on the part of Merger Sub, the Company or the
holders of any of the outstanding shares of the Company or Merger Sub:
(a) Conversion of Company Common Stock. Each share of Company Common
----------------------------------
Stock issued and outstanding immediately prior to the Effective Time (other than
any shares of Company Common Stock to be canceled pursuant to Section 1.6(d) and
any Dissenting Shares (as defined and to the extent provided in Section 1.7(a))
will be canceled and extinguished and be converted automatically into the right
to receive (i) a number of fully paid and non-assessable shares of Parent Common
Stock equal to the product of 0.7 and the Exchange Ratio (as defined in Section
1.6(h)) and (ii) a Warrant to purchase a number of shares of Parent Common Stock
equal to the product of 0.3 and the Exchange Ratio, which Warrant shall be in
the form attached hereto as Exhibit D.
---------
(b) Conversion of Company Preferred Series A Stock. Each share of
----------------------------------------------
Company Preferred Series A Stock issued and outstanding immediately prior to the
Effective Time (other than any shares of Company Preferred Series A Stock to be
canceled pursuant to Section 1.6(d) and any Dissenting Shares (as defined and to
the extent provided in Section 1.7(a)) will be canceled and extinguished and be
converted automatically into the right to receive (i) a number of fully paid and
non-assessable shares of Parent Preferred Series B Stock equal to the product of
0.7 multiplied by the Series B Exchange Ratio (as defined in Section 1.6(h)) and
(ii) a Warrant to purchase a number of shares of Parent Common Stock equal to
the product of 0.3 multiplied by the Series B Exchange Ratio.
(c) Conversion of Company Preferred Series B Stock. Each share of
----------------------------------------------
Company Preferred Series B Stock issued and outstanding immediately prior to the
Effective Time (other than any shares of Company Preferred Series B Stock to be
canceled pursuant to Section 1.6(d) and any Dissenting Shares (as defined and to
the extent provided in Section 1.7(a)) will be canceled and extinguished and be
converted automatically into the right to receive (i) a number of fully paid and
non-assessable shares of Parent Preferred Series C Stock equal to the product of
0.7 multiplied by the Series C Exchange Ratio (as defined in Section 1.6(h))and
(ii) a Warrant to purchase a number of shares of Parent Common Stock equal to
the product of 0.3 multiplied by the Series C Exchange Ratio.
(d) Cancellation of Parent-Owned and Merger Sub-Owned Stock. Each
-------------------------------------------------------
share of Company Stock owned by Merger Sub, Parent or any direct or indirect
wholly owned subsidiary of Parent or of the Company immediately prior to the
Effective Time shall be canceled and extinguished without any conversion
thereof.
(e) Capital Stock of Merger Sub. Each share of common stock, no par
---------------------------
value, of Merger Sub issued and outstanding immediately prior to the Effective
Time shall be converted into
-3-
<PAGE>
and exchanged for one validly issued, fully paid and nonassessable share of
common stock, no par value, of the Surviving Corporation. Each stock certificate
of Merger Sub evidencing ownership of any such shares shall continue to evidence
ownership of such shares of capital stock of the Surviving Corporation.
(f) Adjustments to Exchange Ratio. The Exchange Ratio shall be
-----------------------------
adjusted to reflect fully the effect of any stock split, reverse split, stock
dividend, reorganization, subdivision, reclassification, combination,
recapitalization or other like change with respect to Parent Stock or Company
Stock occurring after the date hereof and prior to the Effective Time.
(g) Fractional Shares. No fraction of a share of Parent Stock will be
-----------------
issued, but in lieu thereof, each holder of shares of Company Stock who would
otherwise be entitled to a fraction of a share of Parent Stock (after
aggregating all fractional shares of Parent Stock to be received by such holder)
shall receive from Parent an amount of cash (rounded to the nearest whole cent)
equal to the product of (i) such fraction, multiplied by (ii) the per share
value of the applicable class of Parent Stock as of the Effective Time , as
determined in good faith by the Board of Directors of the Parent. If the number
of shares of Parent Common Stock to which a Warrant would otherwise entitle the
holder thereof to purchase is not a whole number (after aggregating all
fractional shares that would otherwise be issuable pursuant to Warrants to be
received by such holder), then such number shall be rounded up to the next whole
number.
(h) Definitions. For purposes of this Agreement, the following terms
-----------
shall have the definitions set forth below:
"Company Stock Amount", as of a time of determination, means the
total number of shares of Company Common Stock outstanding as of such
time. For purposes of calculating such number, all shares of Company
Common Stock issuable upon conversion, exchange or exercise of other
securities or rights outstanding at such time (treating such
securities as if fully vested, exercisable, convertible or
exchangeable) shall be included in such total as if issued and
outstanding at such time.
"Exchange Ratio" means an amount equal to (a) the product of 0.25
multiplied by the Parent Common Stock Amount immediately prior to the
Effective Time divided by (b) the product of 0.75 multiplied by the
Company Stock Amount immediately prior to the Effective Time.
"Parent Common Stock Amount", as of a time of determination,
means the total number of shares of Parent Common Stock issued and
outstanding as of such time. For purposes of calculating such number,
all shares of Parent Common Stock issuable upon conversion, exchange
or exercise of other securities or rights outstanding at such time
(treating such securities as if fully vested, exercisable, convertible
or exchangeable), shall be included in such total as if issued and
outstanding at such time.
"Series B Exchange Ratio" means an amount equal to the product of
(a) the Exchange Ratio multiplied by (b) the conversion ratio at which
Company Preferred
-4-
<PAGE>
Series A Stock may be converted into Company Common Stock in
accordance with the Certificate of Incorporation of Company in effect
immediately prior to the Effective Time.
"Series C Exchange Ratio" means an amount equal to the product of
(a) the Exchange Ratio multiplied by (b) the conversion ratio at which
Company Preferred Series B Stock may be converted into Company Common
Stock in accordance with the Certificate of Incorporation of Company
in effect immediately prior to the Effective Time.
1.7 Dissenting Shares.
-----------------
(a) Notwithstanding any provision of this Agreement to the contrary,
any shares of capital stock of the Company held by a holder who has demanded and
perfected appraisal rights for such shares in accordance with Delaware Law and
who, as of the Effective Time, has not effectively withdrawn or lost such
appraisal rights ("Dissenting Shares"), shall not be converted into or represent
a right to receive Parent Common Stock or Parent Preferred Stock, as the case
may be, and Warrants, pursuant to Section 1.6, but the holder thereof shall only
be entitled to such rights as are granted by Delaware Law.
(b) Notwithstanding the provisions of subsection (a), if any holder
of Dissenting Shares shall effectively withdraw or lose (through failure to
perfect or otherwise) his or her appraisal rights, then, as of the later of the
Effective Time or the occurrence of such event, such holder's shares shall
automatically be converted into and represent only the right to receive the
shares of Parent Common Stock or Parent Preferred Stock, as the case may be, and
Warrants, to which such stockholder would otherwise be entitled under Section
1.6 and payment for fractional shares as provided in Section 1.6, without
interest thereon, upon surrender of the certificate representing such shares.
(c) The Company shall give Parent (i) prompt notice of any written
demand received by the Company for appraisal of Company Stock pursuant to the
applicable provisions of Delaware Law and (ii) the opportunity to participate in
all negotiations and proceedings with respect to such demands. The Company shall
not, except with the prior written consent of Parent, voluntarily make any
payment with respect to any such demands or offer to settle or settle any such
demands.
1.8 Surrender of Certificates.
-------------------------
(a) Exchange Agent. Prior to the Effective Time, Parent shall appoint
--------------
an agent (which may be Parent) to act as exchange agent (the "Exchange Agent")
in the Merger.
(b) Parent to Provide Parent Stock and Warrants. Promptly after the
-------------------------------------------
Effective Time, Parent shall make available to the Exchange Agent for exchange
in accordance with this Article I (i) certificates representing the appropriate
number of shares of Parent Common Stock, (ii) the Warrants issuable pursuant to
Section 1.6 and (iii) cash to be paid in lieu of fractional shares of Parent
Common Stock.
-5-
<PAGE>
(c) Exchange Procedures. Promptly after the Effective Time, the
-------------------
Exchange Agent shall cause to be mailed to each holder of record of a
certificate or certificates (the "Certificates") which immediately prior to the
Effective Time represented outstanding shares of Company Stock whose shares were
converted into the right to receive shares of Parent Common Stock or Parent
Preferred Stock, as the case may be, and Warrants pursuant to Section 1.6, (i) a
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form as Parent may
reasonably specify, (ii) a form of qualified investor representation letter
containing an acknowledgement of the qualified investor representations set
forth in Section 1.14 hereof (and which shall be in such form as shall be deemed
reasonably necessary), and (iii) instructions for use in effecting the surrender
of the Certificates in exchange for certificates representing shares of Parent
Common Stock or Parent Preferred Stock, as the case may be, and Warrants. Upon
surrender of a Certificate for cancellation to the Exchange Agent or to such
other agent or agents as may be appointed by Parent, together with such letter
of transmittal and qualified investor representation letter, duly completed and
validly executed in accordance with the instructions thereto, the holder of such
Certificate shall be entitled to receive in exchange therefor a certificate
representing the number of whole shares of Parent Common Stock or Parent
Preferred Stock, as the case may be, and Warrants and payment in lieu of
fractional shares which such holder has the right to receive pursuant to Section
1.6, and the Certificate so surrendered shall forthwith be canceled. Until so
surrendered, each outstanding certificate that, prior to the Effective Time,
represented shares of Company Stock will be deemed from and after the Effective
Time, for all corporate purposes, other than the payment of dividends (except to
the extent provided in Section 1.8(d) below), to evidence the right to receive
the number of full shares of Parent Common Stock or Parent Preferred Stock, as
the case may be, and Warrants into which such shares of Company Stock shall have
been so converted and the right to receive an amount in cash in lieu of the
issuance of any fractional shares in accordance with Section 1.6.
(d) Distributions With Respect to Unexchanged Shares. No dividends or
------------------------------------------------
other distributions declared or made after the Effective Time with respect to
Parent Stock with a record date after the Effective Time will be paid to the
holder of any unsurrendered Certificate with respect to the shares of Parent
Stock represented thereby until the holder of record of such Certificate shall
surrender such Certificate. Subject to applicable law, following surrender of
any such Certificate, there shall be paid to the record holder of the
certificates representing whole shares of Parent Stock issued in exchange
therefor, without interest, at the time of such surrender, the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Parent Stock.
(e) Transfers of Ownership. If any certificate for shares of Parent
----------------------
Stock or any Warrant is to be issued in a name other than that in which the
certificate surrendered in exchange therefor is registered, it will be a
condition of the issuance thereof that the certificate so surrendered will be
properly endorsed and otherwise in proper form for transfer and that the person
requesting such exchange will have paid to Parent or any agent designated by it
any transfer or other taxes required by reason of the issuance of a certificate
for shares of Parent Stock or a Warrant in any name other than that of the
registered holder of the certificate surrendered, or established to the
satisfaction of Parent or any agent designated by it that such tax has been paid
or is not payable.
-6-
<PAGE>
(f) No Liability. Notwithstanding anything to the contrary in this
------------
Section 1.8, to the fullest extent permitted by applicable law, none of the
Exchange Agent, the Surviving Corporation or any party hereto shall be liable to
a holder of shares of Parent Stock, Warrants or Company Stock for any amount
properly paid to a public official pursuant to any applicable abandoned
property, escheat or similar law.
1.9 No Further Ownership Rights in Company Common Stock. All shares of
---------------------------------------------------
Parent Stock and all Warrants issued upon the surrender for exchange of shares
of Company Stock in accordance with the terms hereof (including any cash for
Dissenting Stockholders and fractional shares paid in respect thereof) shall be
deemed to have been issued in full satisfaction of all rights pertaining to such
shares of Company Stock, and there shall be no further registration of transfers
on the records of the Surviving Corporation of shares of Company Stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this Article I.
1.10 Lost, Stolen or Destroyed Certificates. In the event any Certificates
--------------------------------------
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed certificates, upon the making of an
affidavit of that fact by the holder thereof, such shares of Parent Stock,
Warrants and cash for fractional shares, if any, as may be required pursuant to
Section 1.6; provided, however, that Parent may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificates to indemnify Parent (or take such other action,
including delivery of a bond, as any transfer agent for Parent may require)
against any claim that may be made against Parent or the Exchange Agent with
respect to the certificates alleged to have been lost, stolen or destroyed.
1.11 Tax Consequences. It is intended by the parties hereto that the
----------------
Merger shall constitute a reorganization within the meaning of Section 368 of
the Internal Revenue Code of 1986, as amended.
1.12 Legends. Each Certificate shall contain legends in form satisfactory
-------
to Parent and the Company to the effect that the securities represented by such
Certificates have not been registered under the Securities Act of 1933, as
amended (the "Securities Act"), may not be transferred except in compliance with
applicable securities laws, and, in the case of the Parent Preferred Series B
Stock and Parent Preferred Series C Stock, are subject to the Rights and
Restrictions Agreement (the "Rights Agreement"), in the form attached hereto as
Exhibit C.
- ---------
1.13 Taking of Necessary Action; Further Action. If, at any time after the
------------------------------------------
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Merger Sub, the officers and directors of the
Company and Merger Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
1.14 Certain Securities Law Matters. The Parent Securities to be issued
------------------------------
pursuant to this Agreement shall not be registered under the Securities Act in
reliance upon Section 4 (2) of the Securities Act or such other exemption as
Parent and its counsel shall elect.
-7-
<PAGE>
(a) Prior to the Effective Time, the Company shall use its best
efforts to obtain from each holder (for purposes of this Section 1.14, the
"Holders") of shares of Company Stock which are to be converted into shares of
Parent Common Stock or Parent Preferred Stock, as the case may be, and Warrants
(collectively, the "Parent Securities") a qualified representation letter in
such form as may be agreed to by the Company and Parent, and in any event
containing the following representations:
(i) The Holder is acquiring the Parent Securities for
investment for holder's own account only and not with a view to, or for resale
in connection with, any "distribution" thereof within the meaning of the
Securities Act.
(ii) The Holder acknowledges and understands that the Parent
Securities constitute "restricted securities" under the Securities Act and have
not been registered under the Securities Act in reliance upon a specific
exemption therefrom, which exemption depends upon, among other things, the bona
fide nature of Holder's investment intent as expressed herein. In this
connection, Holder understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Holder's representation was predicated solely upon a present intention to hold
these Parent Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Parent Securities, or for a period of one year or any other
fixed period in the future. Holder further understands that the Parent
Securities must be held indefinitely unless they are subsequently registered
under the Securities Act or an exemption from such registration is available.
Holder understands that the certificate evidencing the Securities will be
imprinted with a legend which prohibits the transfer of the Parent Securities
unless they are registered or such registration is not required in the opinion
of counsel satisfactory to the Company, and any other legend required under
applicable state securities laws.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Merger Sub, subject to
such qualifications and exceptions as are set forth in a disclosure letter
delivered prior to the date hereof signed by the Company and acknowledged by the
Parent and Merger Sub (the "Company Disclosure Letter"), as follows:
2.1 Organization of the Company. Each of the Company and the Subsidiary
---------------------------
(as defined in Section 2.3 of the Company Disclosure Letter) is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware. Each of the Company and the Subsidiary has the corporate
power to own its property and to carry on its business as now being conducted
and as currently proposed to be conducted by the Company or the Subsidiary, as
the case may be. Each of the Company and the Subsidiary is duly qualified to do
business and in good standing as a foreign corporation in each jurisdiction in
which the failure to be so qualified would have a Material Adverse Effect on the
Company. For purposes of this Agreement, a "Material Adverse Effect" when used
with respect to any entity means (a) a material adverse effect on the
-8-
<PAGE>
business, assets (including intangible assets), liabilities, financial condition
or results of operations of such entity and its subsidiaries, if any, taken as a
whole, or on the ability of the Surviving Corporation following the Merger to
continue the business of the Company and the Subsidiary substantially as
currently conducted (without the loss of any material rights), or (b) a material
impairment in the ability of such entity to perform any of its obligations under
this Agreement or to consummate the Merger. The Company has delivered a true and
correct copy of its Certificate of Incorporation and Bylaws and the Certificate
of Incorporation and Bylaws of the Subsidiary (or in either case similar
governing instruments), each as amended to date, to Parent or its counsel.
2.2 Capital Structure
-----------------
(a) The authorized capital stock of the Company consists of (i)
50,000,000 shares of Company Common Stock, par value $0.001; (ii) 10,000,000
shares of Company Series A Preferred Stock, par value $0.001; and (iii)
7,000,000 shares of Company Series B Preferred Stock, par value $0.001. As of
the date hereof, the conversion price applicable to the Company Series A
Preferred Stock was $0.01 and the conversion price applicable to the Company
Series B Preferred Stock was $5.00. Each share of Company Series A Preferred
Stock is convertible into one share of Company Common Stock and each share of
Company Series B Preferred Stock is convertible into one share of Company Common
Stock. Upon the filing of the amendment to the Company's Certificate of
Incorporation contemplated by this Agreement, none of the Merger or the other
transactions contemplated by this Agreement will constitute a liquidation or
other event giving rise to any rights to payment to holders of the Company
Preferred Stock under the Company's Certificate of Incorporation.
(b) The authorized capital stock of the Subsidiary consists of 1,000
shares of Common Stock, par value $.001, all of which are owned of record by the
Company. All outstanding shares of Common Stock of the Subsidiary have been
issued in compliance with all federal and state securities laws.
(c) As of the date hereof: (i) there are 3,407,203 shares of the
Company Common Stock issued and outstanding held by the persons at the residence
or office address, and in the amounts, set forth under Section 2.2 of the
Company Disclosure Letter, (ii) there are 9,250,000 shares of the Company Series
A Preferred Stock issued and outstanding held by the persons at the residence or
office addresses, and in the amounts, set forth under Section 2.2 of the Company
Disclosure Letter and (iii) there are 6,780,000 shares of the Company Series B
Preferred Stock issued and outstanding held by the persons at the residence or
office addresses, and in the amounts, set forth under Section 2.2 of the Company
Disclosure Letter. All outstanding shares of Company Stock are duly authorized,
validly issued, fully paid and non-assessable and, except as disclosed in
Section 2.2 of the Company Disclosure Letter, are not subject to preemptive
rights or rights of first refusal created by statute, the Certificate of
Incorporation or Bylaws of the Company or any agreement to which the Company is
a party or by which it is bound. All outstanding shares of Company Stock and all
outstanding options or other rights to purchase Company Stock have been issued
in compliance with all federal and state securities laws. The Company has
reserved 4,233,062 shares of Company Common Stock for issuance to employees and
consultants pursuant to the Company's Stock Option Plans, of which 92,528 shares
have been exercised, and 2,467,832 shares are subject to outstanding,
unexercised options. Section 2.2 of the Company Disclosure Letter also sets
forth a true, correct and complete list of all outstanding options for Company
Stock (which, for
-9-
<PAGE>
each outstanding option, sets forth the name and address of the holder of such
option, the number of shares subject to such option, the exercise price of such
option, the number of shares as to which such option is exercisable and, if the
exercisability of such option will be or is required to be accelerated in any
way by the transactions contemplated by this Agreement or for any other reason,
an indication of the extent of such acceleration). Except as set forth in
Section 2.2 of the Company Disclosure Letter, there are no options, warrants,
calls, rights, commitments or agreements of any character to which the Company
or the Subsidiary is a party or by which either is bound obligating the Company
or the Subsidiary to issue, deliver, sell, repurchase or redeem, or cause to be
issued, delivered, sold, repurchased or redeemed, any shares of the capital
stock of the Company or the Subsidiary or obligating the Company or the
Subsidiary to grant, extend, accelerate the vesting of, change the price of, or
otherwise amend or enter into any such option, warrant, call, right, commitment
or agreement. Except as set forth in Section 2.2 of the Company Disclosure
Letter, there are no registration rights and, to the Company's knowledge, there
are no voting trusts, proxies or other agreements or understandings with respect
to any equity security of any class of stock of the Company or the Subsidiary.
2.3 Subsidiaries. Except for the Subsidiary (as defined in Section 2.3 of
------------
the Company Disclosure Letter), neither the Company nor the Subsidiary has or
has ever had any subsidiaries or affiliated companies and neither otherwise owns
or has ever otherwise owned any shares of stock or any interest in, or control
of, directly or indirectly, any other corporation, partnership, association,
joint venture or business entity.
2.4 Authority. The Company has all requisite corporate power and
---------
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of the Company, subject only to
the approval of the Merger and the other transactions contemplated hereby by the
Company's stockholders as contemplated by Section 6.1(a). The affirmative vote
of the holders of at least a majority (but not necessarily all such holders) of
the outstanding shares of each of the Company Series A Preferred Stock and the
Company Series B Preferred Stock, in each case voting separately as a class, is
required to approve and adopt the amendment to the Certificate of Incorporation
of the Company (the "Amended Company Charter") necessary for the Company to
consummate the transactions set forth herein. This Agreement has been duly
executed and delivered by the Company and constitutes the valid and binding
obligation of the Company. The execution and delivery of this Agreement by the
Company does not, and the consummation of the transactions contemplated hereby
will not, (i) conflict with, or result in any violation of any provision of the
Amended Company Charter, or Bylaws of the Company, or the Certificate of
Incorporation or Bylaws of the Subsidiary, (ii) except as set forth in Section
2.4 of the Company Disclosure Letter, result in any breach of or constitute a
default under (with or without notice or lapse of time, or both), or give rise
to a right of termination, cancellation or acceleration of any obligation or
loss of any benefit under any mortgage, indenture, lease, contract or other
agreement or instrument (including, without limitation, any permit, concession,
franchise or license), or (iii) conflict with or violate any judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to the Company or
the Subsidiary or its properties or assets, except, in the case of clauses (ii)
and (iii), for breaches, defaults, conflicts or violations in which would not
have a Material Adverse Effect on the Company and the Subsidiary. No consent,
approval, order or authorization of, or registration, declaration or filing
with, any court, administrative agency or commission or other governmental
authority or
-10-
<PAGE>
instrumentality ("Governmental Entity"), is required by or with respect to the
Company and the Subsidiary in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby, except
for (i) the filing of the Merger Agreement with the Secretary of State of the
State of Delaware, (ii) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
federal and state securities laws, the laws of any foreign country and the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") and
(iii) such other consents, authorizations, filings, approvals and registrations
which, if not obtained or made, would not have a Material Adverse Effect on the
Company or its ability to consummate the Merger.
2.5 Company Financial Statements.
----------------------------
(a) The Company Disclosure Letter includes a true, correct and
complete copy of the Company's and the Subsidiary's audited consolidated
financial statements (balance sheets, income statements and statements of cash
flow) as of and for the fiscal year ended December 31, 1998 and for the five
month period ended December 31, 1997 and the Company's and the Subsidiary's
unaudited consolidated financial statements for the nine months ended September
30, 1999 (collectively, the "Company Financial Statements"). The Company
Financial Statements have been prepared in accordance with generally accepted
accounting principles applied on a basis consistent throughout the periods
indicated and consistent with each other (except that the unaudited financial
statements for the nine months ended September 30, 1999 do not contain the notes
necessary to be in accordance with generally accepted accounting principles).
The Company Financial Statements present fairly the consolidated financial
condition and operating results of the Company as of the dates and during the
periods indicated therein, subject, in the case of the unaudited financial
statements, to normal year-end adjustments, which will not be material in the
aggregate. The unaudited balance sheet of the Company and the Subsidiary as of
September 30, 1999 is hereinafter referred to as the "Company Balance Sheet."
(b) The financial projections with respect to the Company (and not
the combined business of the Company and the Parent) previously prepared by the
Company and delivered to Parent (the "Projections"), were prepared in good
faith, based on assumptions the Company deems reasonable.
2.6 No Undisclosed Liabilities. There are no liabilities of the Company
--------------------------
or the Subsidiary of any kind whatsoever, whether accrued, contingent, absolute,
determined, determinable or otherwise, and there is no existing condition,
situation or set of circumstances which could reasonably be expected to result
in such a liability, other than: (i) liabilities disclosed or provided for in
the Company Balance Sheet; (ii) liabilities which individually or in the
aggregate are not material to the Company; (iii) liabilities under this
Agreement or disclosed in the Company Disclosure Letter and (iv) operating
expenses, trade payables, borrowings under existing credit agreements or
obligations for the purchase of capital assets consistent with Section 4.1(b)
made or incurred since the date of the Company Balance Sheet in the ordinary
course of business and consistent with past practices.
2.7 No Changes. Since the date of the Company Balance Sheet there has not
----------
been, occurred or arisen any:
-11-
<PAGE>
(a) transaction by the Company or the Subsidiary except in the
ordinary course of business as conducted on that date;
(b) capital expenditures by the Company or the Subsidiary aggregating
more than $50,000;
(c) destruction, damage to, or loss of any assets (including, without
limitation, intangible assets, but excluding all computers distributed to, and
in the possession of the Company's users in the ordinary course of the Company's
business) of the Company or the Subsidiary (whether or not covered by
insurance), either individually or in the aggregate, exceeding $50,000;
(d) pending or, to the Company's or the Subsidiary's knowledge,
threatened charge or complaint of wrongful discharge or other unlawful labor
practice or action;
(e) change in accounting methods or practices (including any change
in depreciation or amortization policies or rates, any change in policies in
making or reversing accruals, or any change in capitalization of software
development costs) by the Company or the Subsidiary;
(f) declaration, setting aside, or payment of a dividend or other
distribution in respect to the shares of the Company or the Subsidiary, or any
direct or indirect redemption, purchase or other acquisition by the Company of
any of its shares, other than repurchases of stock from former employees,
director and consultants in accordance with agreements in effect on the date of
this Agreement providing for the repurchase of shares at cost in connection with
any termination of service to the Company or the Subsidiary;
(g) except as set forth in Section 2.7(g) of the Company Disclosure
Letter, increase in the salary or other compensation payable or to become
payable by the Company or the Subsidiary to any of its officers, directors or
employees, or the declaration, payment, or commitment or obligation of any kind
for the payment by the Company or the Subsidiary of a bonus or other additional
salary or compensation to any such person except in connection with and pursuant
to existing bonus plans;
(h) except as set forth in Section 2.7(h) of the Company Disclosure
Letter, acquisition (other than capital expenditures referenced in Section
2.7(b)), sale or transfer of any asset of the Company or the Subsidiary except
in the ordinary course of business and not in excess of $50,000;
(i) except for contracts, agreements or licenses pursuant to which
the aggregate of payments to become due from or to the Company or the Subsidiary
is less than $50,000 and which are terminable on no more than 60 days' notice,
or as set forth in Section 2.7(i) of the Company Disclosure Letter, formation,
amendment or termination of any contract, agreement or license (including any
distribution agreement) to which the Company or the Subsidiary is a party other
than termination by the Company or the Subsidiary pursuant to the terms thereof;
(j) except as set forth in Section 2.7(j) of the Company Disclosure
Letter, loan by the Company or the Subsidiary to any person or entity, or
guaranty by the Company or the Subsidiary of any loan;
-12-
<PAGE>
(k) except as set forth in Section 2.7(j) of the Company Disclosure
Letter, waiver or release of any rights or claims of the Company or the
Subsidiary, including any write-off or other compromise of any account
receivable of the Company or the Subsidiary, in excess of $50,000 in the
aggregate;
(l) except as set forth in Section 2.7(l) of the Company Disclosure
Letter, the commencement or notice or, to the knowledge of the Company or the
Subsidiary, the threat of commencement of any governmental proceeding against or
investigation of the Company or the Subsidiary or the affairs of either;
(m) other event or condition of any character that has or might
reasonably be expected to have a Material Adverse Effect on the Company;
(n) issuance, sale or redemption by the Company or the Subsidiary of
any of its shares or of any other of its securities, except (i) options
disclosed in Section 2.2 of the Company Disclosure Letter, (ii) repurchases of
stock from former employees, directors and consultants in accordance with
agreements in effect on the date of this Agreement providing for the repurchase
of shares at cost in connection with any termination of service to the Company
and (iii) as otherwise disclosed in Section 2.7(n) of the Company Disclosure
Letter; or
(o) material change in pricing or royalties set or charged by the
Company or the Subsidiary; or
(p) any agreement (written, oral or otherwise) by the Company to do
any of the things described in the preceding clauses (a) through (o) (other than
negotiations with Parent and its representatives regarding the transactions
contemplated by this Agreement).
2.8 Tax and Other Returns and Reports.
---------------------------------
(a) Each of the Company or the Subsidiary has accurately prepared and
timely filed all material required federal, state, local and foreign returns,
estimated tax reports, information statements and reports ("Returns") relating
to any and all Taxes of the Company or the Subsidiary as the case may be, and
such Returns are true and correct in all material respects and have been
completed in accordance with applicable law. For the purposes of this Agreement,
"Tax" or, collectively, "Taxes," means any and all federal, state, local and
foreign taxes, assessments and other similar governmental charges, duties,
impositions and liabilities, including Taxes based upon or measured by gross
receipts, income, profits, sales, use and occupation, and value added, ad
valorem, transfer, franchise, withholding, payroll, recapture, employment,
excise and property taxes, together with all interest, penalties and additions
imposed with respect to such amounts and any obligations of the Company or the
Subsidiary as the case may be, under any agreements or arrangements with any
other person with respect to such amounts to the extent relevant to determining
the tax liability of the Company or the Subsidiary as the case may be. Each of
the Company and the Subsidiary has timely paid all material Taxes required to be
paid with respect to the periods covered by such Returns and has withheld with
respect to its employees all material federal and state income taxes, FICA, FUTA
and other Taxes the Company or the Subsidiary as the case may be, is required to
withhold. The accruals for the Company's and the Subsidiary's Taxes reflected in
the financial statements of the Company and the Subsidiary are sufficient to
discharge the Company's and the
-13-
<PAGE>
Subsidiary's Taxes for all periods through the date of such financial
statements. Each of the Company and the Subsidiary has properly paid or accrued
on its books and records all Tax liabilities of the Company or the Subsidiary as
the case may be, other than Taxes not yet due and payable. Neither the Company
nor the Subsidiary is delinquent in the payment of any material Tax nor is there
any material Tax deficiency outstanding, assessed or, to the Company's or the
Subsidiary's knowledge, proposed against the Company or the Subsidiary as the
case may be, nor has the Company or the Subsidiary executed any waiver of any
statute of limitations on or extending the period for the assessment or
collection of any Tax. No audit or other examination of any Return of the
Company or the Subsidiary is presently in progress. Neither the Company nor the
subsidiary has any liabilities for unpaid federal, state, local and foreign
Taxes, other than Taxes not yet due and payable and Taxes which are adequately
reserved for on the Company's or the Subsidiary's financial statements whether
asserted or unasserted, known or unknown. Neither the Company nor the Subsidiary
is (nor has it ever been) required to join with any other entity in the filing
of a consolidated tax return for federal tax purposes or a consolidated or
combined return or report for state tax purposes. Neither the Company nor the
Subsidiary is a party to or bound by any tax indemnity, tax sharing or tax
allocation agreement. Each of the Company and the Subsidiary has provided, or
made available, to Parent or its legal counsel copies of all federal and state
income and all sales and all periods ending on or after December 31, 1997. There
are no liens on the assets of the Company or the Subsidiary relating to or
attributable to Taxes other than Taxes not yet due and payable. Except as
disclosed in Section 2.8 of the Company Disclosure Letter, neither the Company
nor the Subsidiary, has any property that would be treated as being owned by
persons other than the Company or the Subsidiary as the case may be, pursuant to
Section 168(f)(8) of the Internal Revenue Code of 1954 as in effect immediately
prior to the enactment of the Tax Reform Act of 1986, or any analogous
provisions of any state law. None of the Company's or the Subsidiary's assets
are treated as "tax-exempt use property" within the meaning of Section 168(h) of
the Code. Except as disclosed in Section 2.8(a) of the Company Disclosure
Letter, there is no contract, agreement, plan or arrangement, including but not
limited to the provisions of this Agreement, covering any employee or former
employee of the Company or the Subsidiary that, individually or collectively,
could give rise to the payment of any amount that would not be deductible
pursuant to Section 280G or 404 of the Code.
(b) Neither the Company nor the Subsidiary is subject to any penalty
by reason of a violation of any order, rule or regulation of, or a default with
respect to any Return or any Governmental Entity to which it is subject with
respect to Taxes, which violations or defaults, individually or in the
aggregate, would have a Material Adverse Effect on the Company.
2.9 Restrictions on Business Activities. There is no agreement, judgment,
-----------------------------------
injunction, order or decree binding upon the Company or the Subsidiary which has
or could reasonably be expected to have a Material Adverse Effect on the Company
or the Subsidiary, or which limits or could reasonably be expected to limit the
freedom of the Company or the Subsidiary to own or acquire any property or
engage in any business by the Company or the Subsidiary as currently conducted
or as currently proposed to be conducted.
2.10 Title of Properties; Absence of Liens and Encumbrances; Condition of
--------------------------------------------------------------------
Equipment.
- ---------
(a) Neither the Company nor the Subsidiary owns any real property. Section
2.10(a) of the Company Disclosure Letter sets forth a true, correct and complete
list of all real
-14-
<PAGE>
property leased by the Company or the Subsidiary, the name of the lessor, the
date of the lease and each amendment thereto and the aggregate annual rental or
other fee payable under any such lease. All such leases are valid and effective
in accordance with their respective terms, neither the Company nor the
Subsidiary is in breach or default in any material respect under any such leases
and, to the knowledge of the Company, no other party to any of such leases is in
breach or default in any material respect thereof.
(b) The Company and the Subsidiary each hold good and valid title to, or,
in the case of leased properties and assets, valid leasehold interests in, all
of its tangible properties and assets, real, personal and mixed, used in its
business, free and clear of any liens, charges, pledges, security interests or
other encumbrances, except (i) as reflected in the Company Financial Statements,
(ii) liens for current taxes not yet due and payable, (iii) such imperfections
of title and encumbrances, if any, which are not material in character, amount
or extent, and which do not materially detract from the value, or interfere with
the present use, of the property subject thereto or affected thereby, and (iv)
as otherwise set forth in Section 2.10(b) of the Company Disclosure Letter.
(c) Section 2.10(c) of the Company Disclosure Letter sets forth a true,
correct and complete list of all equipment (the "Equipment") owned or leased by
the Company or the Subsidiary, except individual pieces of equipment owned by
the Company or the Subsidiary, with an individual value of less than $25,000.
The Equipment is, taken as a whole, (i) adequate for the conduct of the business
of the Company or the Subsidiary as the case may be, consistent with its past
practice, (ii) suitable for the uses to which it is currently employed, (iii) in
good operating condition except for ordinary wear and tear, (iv) regularly and
properly maintained, (v) not obsolete, or in need of renewal or replacement,
except for renewal or replacement in the ordinary course of business.
2.11 Intellectual Property.
---------------------
(a) Except as set forth in Section 2.11(a) of the Company Disclosure
Letter, the Company or the Subsidiary owns, or is licensed or otherwise
irrevocably entitled to use rights to, all patents, trademarks, trade names,
service marks, copyrights, and any applications therefor, maskworks, net lists,
schematics, know-how, computer software programs or applications and tangible or
intangible proprietary information or material (excluding the Commercial
Software Rights (as defined in Section 2.11(e) below)) that are used or
currently proposed to be used in the business of the Company or the Subsidiary
as currently conducted or as currently proposed to be conducted within the two
years following the date hereof (the "Company Intellectual Property Rights"),
including without limitation in the "client" software installed on end-users'
PCs, in the network software running the company's internet service, in the
"adserver" software distributing advertisement to end-users' PCs, and in the
advertisement optimizing and data reporting software collecting information from
end-users and responding to such collected information.
(b) Section 2.11(b) of the Company Disclosure Letter sets forth a true,
correct and complete list of all patents, trademarks, registered and material
unregistered copyrights, trade names and service marks, and any applications
therefor, included in the Company Intellectual Property Rights, and specifies
the jurisdictions in which each such Company Intellectual Property Right has
been issued or registered or in which an application for such issuance and
registration has been filed, including the respective registration or
application numbers and the names of all registered owners, together with a list
of all of the Company's and the Subsidiary's currently marketed software
-15-
<PAGE>
products and an indication as to which, if any, of such software products have
been registered for copyright protection with the United States Copyright Office
and any foreign offices and by whom such items have been registered.
(c) Section 2.11(a) of the Company Disclosure Letter sets forth a
true, correct and complete list of (i) any requests the Company or the
Subsidiary has received to make any such registration, including the identity of
the requestor and the item requested to be so registered, and the jurisdiction
for which such request has been made and (ii) all material licenses, sublicenses
and other agreements as to which the Company or the Subsidiary is a party and
pursuant to which the Company or the Subsidiary or any other person is
authorized to use any Company Intellectual Property Right or other trade secret
material to the Company or the Subsidiary or any other person, and includes the
identity of all parties thereto, a description of the nature and subject matter
thereof, the applicable royalty and the term thereof (other than standard non-
exclusive end user and non-exclusive distributor and reseller software license
agreements (in each case, substantially in the Company's standard form for such
agreement, a copy of which has been provided to the Parent or its counsel), none
of which is material). The Company is not, nor will it be as a result of the
execution and delivery of this Agreement or the performance of its obligations
hereunder, in violation of any license, sublicense or agreement described on
Section 2.11(a) or Section 2.11(c) of the Company Disclosure Letter.
(d) Except as set forth in Section 2.11(d) of the Company Disclosure
Letter, the Company is the sole and exclusive owner of, with all right, title
and interest in and to (free and clear of any liens or encumbrances), the
Company Intellectual Property Rights, and has sole and exclusive rights (and is
not contractually obligated to pay any compensation to any third party in
respect thereof) to the use thereof or the material covered thereby. Except as
set forth in Section 2.11(d) of the Company Disclosure Letter, the Company (or
the Subsidiary, as the case may be) has the irrevocable, non-terminable and
indeterminate right to use all of the Company Intellectual Property Rights that
either does not own. Without limiting the generality of the foregoing, except as
set forth in Section 2.11(d) of the Company Disclosure Letter, any Company
Intellectual Property Rights that are licensed to the Company or the Subsidiary
("Licensed Rights") are licensed for an indeterminate term, are not terminable
(whether as result of the consummation of the transactions contemplated hereby
or for any reason) by the licensor, entitle the Company (or the Subsidiary, as
the case may be) to freely sublicense the licensed rights to its distributors,
agents, OEMs, customers, end users and other third parties or their respective
transferees, do not obligate the Company (or the Subsidiary, as the case may be)
to make any royalty or other payment to the licensor, and entitle the Company
(or the Subsidiary, as the case may be) to access to the licensed source code in
the event of any voluntary or involuntary event of bankruptcy of the licensor or
if the licensor shall for any other reason not fulfill its obligations to the
Company (or the Subsidiary, as the case may be) under the applicable license.
(e) Except as set forth in Section 2.11(e) of the Company Disclosure
Letter, no claims with respect to the Company Intellectual Property Rights have
been asserted or, to the knowledge of the Company or the Subsidiary, are
threatened by any person nor, to the knowledge of the Company or the Subsidiary,
is there any valid grounds for any bona fide claims (i) to the effect that the
manufacture, sale, licensing or use of any product as now used, sold or licensed
or proposed for use, sale or license by the Company infringes on any copyright,
patent, trade mark, service mark or trade secret, (ii) against the use by the
Company of any trademarks, trade names, trade secrets,
-16-
<PAGE>
copyrights, patents, technology, know-how or computer software programs and
applications used in the Company's business as currently conducted or as
proposed to be conducted, or (iii) challenging the ownership, validity or
effectiveness of any of the Company Intellectual Property Rights.
(f) All registered trademarks, service marks and copyrights held by
the Company and the Subsidiary are valid and subsisting.
(g) Neither the Company nor the Subsidiary is aware of any
unauthorized use, infringement or misappropriation of any of the Company
Intellectual Property Rights by any third party, including any employee or
former employee of the Company or the Subsidiary.
(h) Except as set forth in Section 2.11(h) of the Company Disclosure
Letter, neither the Company nor the Subsidiary has been sued or charged as a
defendant in any claim, suit, action or proceeding which involves a claim of
infringement of any patents, trademarks, service marks, copyrights or violation
of any trade secret or other proprietary right of any third party and which has
not been finally terminated prior to the date hereof, nor does either have any
knowledge of any such charge or claim, and there is not any infringement
liability with respect to, or infringement or violation by, the Company or the
Subsidiary of any patent, trademark, service mark, copyright, trade secret or
other proprietary right of another. No Company Intellectual Property Right or
product of the Company or the Subsidiary is subject to any outstanding order,
judgment, decree, stipulation or agreement restricting in any manner the
licensing thereof by the Company or the Subsidiary.
(i) There is no outstanding order, judgment, decree or stipulation on
the Company or the Subsidiary, and the Company or the Subsidiary is not party to
any agreement, restricting in any manner the licensing of the Company's products
by the Company or the Subsidiary, as the case may be.
(j) Neither the Company nor the Subsidiary has not entered into any
agreement to indemnify any other person against any charge of infringement of
any Company Intellectual Property Right other than pursuant to standard non-
exclusive end user and non-exclusive distributor software license agreements (in
each case, substantially in the Company's standard form, a copy of which has
been provided to the Parent or its counsel) entered into in the ordinary course
of business.
(k) Each current and former employee of and consultant to the Company
and each former employee of or consultant to the Subsidiary has signed the
Company's standard form of Employment Confidential Information and Invention
Assignment, a copy of which has been provided to the Parent and its counsel.
(l) "Commercial Software Rights" means packaged commercially
available software programs generally available to the public through retail
dealers in computer software which have been licensed to the Company pursuant to
end-user licenses and which are used in the Company's business but are in no way
a component of or incorporated in any of the Company's products and related
trademarks, technology and know-how. Neither the Company nor the Subsidiary has
breached or violated the terms of its license, sublicense or other agreement
relating to any Commercial Software Rights or License Rights and has a valid
right to use such Commercial Software Rights and License Rights under such
license and agreements. Neither the Company nor
-17-
<PAGE>
the Subsidiary is, nor will either be as a result of the execution and delivery
of this Agreement or the performance of its obligations hereunder, in violation
of any license, sublicense or agreement relating to Commercial Software Rights
or License Rights. No claims with respect to the Commercial Software Rights or
License Rights have been asserted or, to the knowledge of the Company or the
Subsidiary, are threatened by any person against the Company or the Subsidiary,
nor is there any valid grounds for any bona fide claims (i) to the effect that
the manufacture, sale, licensing or use of any product as now used, sold or
licensed or proposed for use, sale or license by the Company or the Subsidiary
infringes on any copyright, patent, trade mark, service mark or trade secret,
(ii) against the use by the Company or the Subsidiary of any trademarks, trade
names, trade secrets, copyrights, patents, technology, know-how or computer
software programs and applications used in the Company's business or the
Subsidiary's business, each as currently conducted or as proposed to be
conducted, or (iii) challenging the validity or effectiveness of any of the
Company's or the Subsidiary's rights to use Commercial Software Rights or
License Rights. There is no material unauthorized use, infringement or
misappropriation of any of the Commercial Software Rights or License Rights by
the Company or the Subsidiary or any employee or former employee of the Company
or the Subsidiary during the period of their employment. No Commercial Software
Right or License Right is subject to any outstanding order, judgment, decree,
stipulation or agreement restricting in any manner the use thereof by the
Company or the Subsidiary.
2.12 Agreements, Contracts and Commitments. Except as disclosed in
-------------------------------------
Section 2.12 to the Company Disclosure Letter, neither the Company nor the
Subsidiary has and neither is a party to:
(a) any collective bargaining agreements;
(b) any employment, severance or other agreement pursuant to which
the Company or the Subsidiary has or may under any circumstances have an
obligation to make severance payments in an aggregate amount of in excess of
$25,000;
(c) any bonus, deferred compensation, incentive compensation,
pension, profit-sharing or retirement plans, or any other employee benefit plans
or arrangements;
(d) any employment or consulting agreement, contract or commitment
with an employee or individual consultant or salesperson or consulting or sales
agreement, contract or commitment with a firm or other organization, not
terminable by the Company or the Subsidiary, as the case may be, on 30 days' or
less notice without liability, except to the extent general principles of
wrongful termination law may limit the Company's or the Subsidiary's ability to
terminate employees at will;
(e) agreement or plan, including, without limitation, any stock
option plan, stock appreciation right plan or stock purchase plan, any of the
benefits of which will be increased, or the vesting of benefits of which will be
accelerated (including the lapsing of repurchase rights under restricted stock
purchase agreements), by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement;
(f) any fidelity or surety bond or completion bond;
-18-
<PAGE>
(g) any lease of personal property having a value individually in
excess of $50,000;
(h) any agreement of indemnification or guaranty not entered into in
the ordinary course of business;
(i) except to the extent that non-disclosure agreements entered into
in the ordinary course of business prohibit the use of information deemed to be
confidential, any agreement, contract or commitment containing any covenant
limiting the freedom of the Company or the Subsidiary to engage in any line of
business or compete with any person;
(j) any agreement, contract or commitment relating to capital
expenditures and involving future obligations in excess of $50,000;
(k) any agreement, contract or commitment providing for the
disposition or acquisition of assets not in the ordinary course of business or
any ownership interest in any corporation, partnership, joint venture or other
business enterprise;
(l) any mortgages, indentures, loans or credit agreements, security
agreements or other agreements or instruments relating to the borrowing of money
or extension of credit, including guaranties referred to in clause (h) hereof;
(m) any purchase order or contract for the purchase of raw materials
or acquisition of assets involving $50,000 or more;
(n) any construction contracts;
(o) any distribution, joint marketing or development agreement, other
than non-exclusive end user, distributor and reseller software license
agreements entered into in the ordinary course of business and substantially in
the Company's (or the Subsidiary's) standard form previously provided to the
Parent;
(p) any other agreement, contract or commitment pursuant to which the
aggregate payments to become due from or to the Company equal or exceeds $50,000
and is not cancelable without penalty upon 30 days' or less notice or
(q) any agreement which is otherwise material to the Company's
business.
Neither the Company nor the Subsidiary has breached, or received any claim
or threat that it has breached, any of the terms or conditions of any material
agreement, contract or commitment listed or identified in Section 2.12 to the
Company Disclosure Letter in such manner as would permit any other party to
cancel or terminate the same. Each agreement, contract or commitment listed or
identified in the Company Disclosure Letter (under any section or subsection
thereof) is in full force and effect and, to the best of the Company's or the
Subsidiary's knowledge, as the case may be, is a legal, binding and enforceable
obligation for or against the Company or the Subsidiary and, except as otherwise
disclosed or defaults fully remedied or resolved, is not subject to any material
default thereunder of which the Company or the Subsidiary has knowledge by any
party obligated to the Company or the Subsidiary pursuant thereto.
-19-
<PAGE>
2.13 Interested Party Transactions. Except as disclosed in Section 2.13
-----------------------------
of the Company Disclosure Letter, no Affiliate (as defined in Section 5.8) of
the Company or the Subsidiary has or has had, directly or indirectly, (i) an
interest in any entity which furnished or sold, or furnishes or sells, services
or products which the Company or the Subsidiary furnishes or sells, or proposes
to furnish or sell, or (ii) any interest in any entity which purchases from or
sells or furnishes to, the Company or the Subsidiary, any goods or services, or
(iii) a beneficial interest in any contract or agreement required to be set
forth in Section 2.12 of the Company Disclosure Letter; provided, that ownership
of no more than one percent (1%) of the outstanding voting stock of a publicly
traded corporation shall not be deemed an "interest in any entity" for purposes
of this Section 2.13.
2.14 Governmental Authorization. Section 2.14 of the Company Disclosure
--------------------------
Letter sets forth a true, correct and complete list of each material federal,
state, county, local or foreign governmental consent, license, permit, grant, or
other authorization issued to the Company or the Subsidiary (i) pursuant to
which the Company or the Subsidiary currently operates or holds any interest in
any of its properties or (ii) which is required for the operation of its
business as currently conducted or as proposed to be conducted or the holding of
any such interest (herein collectively referred to as "Company Authorizations").
The Company Authorizations are in full force and effect and constitute all
material authorizations required to permit the Company or the Subsidiary to
operate or conduct its business or hold any interest in its properties.
2.15 Litigation. Section 2.15 of the Company Disclosure Letter sets forth
----------
a true, correct and complete list of all suits, actions and legal,
administrative, arbitration or other proceedings and governmental investigations
and all other claims, pending or, to the Company's or the Subsidiary's
knowledge, threatened or which the Company or the Subsidiary reasonably expects
will ultimately be threatened or commenced against the Company or the
Subsidiary. None of such suits, actions, proceedings, investigations or claims
seeks to prevent the consummation of the Merger. There is no judgment, decree or
order enjoining the Company or the Subsidiary in respect of, or the effect of
which is to prohibit, any business practice or the acquisition of any property
or the conduct of business of the Company or the Subsidiary as currently
conducted or as proposed to be conducted. Section 2.15 of the Company Disclosure
Letter sets forth a true, correct and complete list of all suits and legal
actions initiated by the Company or the Subsidiary.
2.16 Accounts Receivable. All receivables of the Company and the
-------------------
Subsidiary arose in the ordinary course of business at the aggregate amounts
thereof, and are carried at values determined in accordance with generally
accepted accounting principles consistently applied. To the knowledge of the
Company and the Subsidiary, none of the receivables of the Company is subject to
any claim of offset, recoupment, setoff or counterclaim and, to the knowledge of
the Company and the Subsidiary, there are no facts or circumstances (whether
asserted or unasserted) that would give rise to any such claim. Except as set
forth in Section 2.16 of the Company Disclosure Letter, no receivables are
contingent upon the performance by the Company or the Subsidiary of any
obligation or contract. No person has any lien, charge, pledge, security
interest or other encumbrance on any of such receivables and no agreement for
deduction or discount has been made with respect to any of such receivables.
2.17 Minute Books. The minute books of the Company and the Subsidiary
------------
made available to counsel for Parent contain complete and accurate minutes of
all meetings of directors (and any
-20-
<PAGE>
committee thereof) and stockholders or actions by written consent since the time
of incorporation of the Company and the Subsidiary.
2.18 Environmental.
-------------
(a) Hazardous Material. No material amount of any substance that is
------------------
regulated by any Governmental Entity or that has been designated by any
Governmental Entity to be radioactive, toxic, hazardous or otherwise a danger to
health or the environment, including, without limitation, PCBs, asbestos, urea-
formaldehyde and all substances listed pursuant to the United States
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended from time to time, and the United States Resource Recovery and
Conservation Act of 1976, as amended from time to time, and the regulations and
publications promulgated pursuant to said laws (a "Hazardous Material"), is
present, as a direct result of the actions of the Company or the Subsidiary
(excluding failure of the Company or the Subsidiary to remediate the presence of
a Hazardous Material resulting from the actions of any previous owner or
occupier of Company Property (as hereinafter defined) of which presence the
Company or the Subsidiary does not have knowledge) in violation of any law in
effect on or before the Closing Date, in, on or under any property, including
the land and the improvements, ground water and surface water thereof, that the
Company or the Subsidiary has at any time owned, operated, occupied or leased
(collectively, "Company Property"). Neither the Company nor the Subsidiary knows
of the presence of any Hazardous Material in, on or under any Company Property.
(b) Hazardous Materials Activities. Neither the Company nor the
------------------------------
Subsidiary has transported, stored, used, manufactured, disposed of, released or
exposed its employees or others to Hazardous Materials in violation of any law
in effect on or before the Closing Date, nor has the Company or the Subsidiary
disposed of, transferred, sold or manufactured any product containing a
Hazardous Material (collectively "Hazardous Materials Activities") in violation
of the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, the Resource Recovery and Conservation Act of 1976, the Toxic
Substances Control Act of 1976, and other applicable state or federal acts
(including the rules and regulations thereunder) as in effect on or before the
Closing Date.
(c) Permits. The Company and the Subsidiary currently holds no
-------
environmental approvals, permits, licenses, clearances and consents and none are
necessary for the conduct of the Company's or the Subsidiary's Hazardous
Material Activities, if any, or other activity or business of the Company or the
Subsidiary as the same are currently being conducted.
2.19 Labor Matters. Neither the Company nor the Subsidiary has received
-------------
any notice from any Governmental Entity, and to the knowledge of the Company or
the Subsidiary, there has not been asserted before any Governmental Entity, any
claim, action or proceeding to which the Company or the Subsidiary is a party or
involving the Company or the Subsidiary, and there is neither pending nor, to
the knowledge of the Company or the Subsidiary, threatened any investigation or
hearing concerning the Company or the Subsidiary arising out of or based upon
any currently applicable laws and regulations respecting employment,
discrimination in employment, terms and conditions of employment and wages and
hours and occupational safety and health employment practices. There are no
pending claims against the Company or the Subsidiary under any workers
compensation plan or policy or for long term disability. Section 2.19 of the
Company
-21-
<PAGE>
Disclosure Letter sets forth a true, correct and complete list of all current
employees of the Company and the Subsidiary and their current salary and
vacation accruals.
2.20 Insurance. Section 2.20 of the Company Disclosure Letter sets forth
---------
a true, correct and complete list of all insurance policies and fidelity bonds
covering the assets, business, equipment, properties, operations, software
errors and omissions, employees, officers and directors of the Company and the
Subsidiary and all claims made under any insurance policy since the respective
date of incorporation of each. There is no claim by the Company or the
Subsidiary pending under any of such policies or bonds as to which coverage has
been questioned, denied or disputed by the underwriters of such policies or
bonds. All premiums payable under all such policies and bonds have been paid and
the Company and the Subsidiary is otherwise in compliance with the terms of such
policies and bonds (or other policies and bonds providing substantially similar
insurance coverage). Such policies of insurance and bonds are of the type and in
amounts customarily carried by persons conducting businesses similar to those of
the Company and the Subsidiary. Neither the Company nor the Subsidiary has
knowledge of any threatened termination of, or material premium increase with
respect to, any of such policies.
2.21 Compliance With Laws. The Company and the Subsidiary have complied
--------------------
in all material respects with, is not in violation in any material respect of,
and has not received any notices of violation with respect to, any federal,
state or local statute, law or regulation with respect to the conduct of its
business, or the ownership or operation of its business, assets or properties.
2.22 Complete Copies of Materials. The Company has delivered or made
----------------------------
available true and complete copies of each document concerning the Company and
the Subsidiary (or summaries of same that are accurate and complete in all
material respects) which has been requested by Parent or its counsel.
2.23 Employee Benefit Plans. Section 2.23(a) of the Company Disclosure
----------------------
Letter sets forth a true, correct and complete list of all employee benefit
plans (as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA")) and all bonus, stock option, stock purchase,
incentive, deferred compensation, supplemental retirement, severance and other
similar fringe or employee benefit plans, programs or arrangements, and any
current or former employment or executive compensation or severance agreements,
written or otherwise, for the benefit of, or relating to, any current or former
employee of the Company or the Subsidiary or any trade or business (whether or
not incorporated) which is a member or which is under common control with the
Company (an "ERISA Affiliate") within the meaning of Section 414 of the Code
(together, the "Employee Plans"), and a copy of each Employee Plan has been
provided to Parent.
(a) The Company has identified to Parent all employee benefit plans
(as defined in Section 3(3) of ERISA) and all bonus, stock option, stock
purchase, incentive, deferred compensation, supplemental retirement, severance
and other similar fringe or employee benefit plans, programs or arrangements,
and any current or former employment or executive compensation or severance
agreements, written or otherwise, for the benefit of, or relating to, any
current or former employee of the Company or the Subsidiary or any trade or
business (whether or not incorporated) which is a member or which is under
common control with the Company (an "ERISA Affiliate") within the meaning of
Section 414 of the Code, (together, the "Employee Plans").
-22-
<PAGE>
(i) (A) None of the Employee Plans promises or provides retiree
medical or other retiree welfare benefits to any person except as required by
applicable law, including but not limited to COBRA;
(B) All Employee Plans are in compliance in all material
respects with the requirements prescribed by any and all applicable statutes
(including ERISA and the Code), orders, or governmental rules and regulations
currently in effect with respect thereto (including all applicable requirements
for notification to participants or beneficiaries or the Department of Labor,
Internal Revenue Service (the "IRS") or Secretary of the Treasury), and each of
the Company and the Subsidiary has performed all obligations required to be
performed by it under, is not in default under or violation of, and has no
knowledge of any default or violation by any other party to, any of the Employee
Plans;
(C) Each Employee Plan intended to qualify under Section 401(a)
of the Code and each trust intended to qualify under Section 501(a) of the Code
either has received a favorable determination letter with respect to each such
Employee Plan from the IRS, has pending before the IRS an application for such
determination letter for each such Employee Plan or still has a remaining period
of time under applicable Treasury Regulations or IRS pronouncements in which to
apply for such a determination letter and to make any amendments necessary to
obtain a favorable determination;
(D) No Employee Plan is or within the prior six (6) years has
been subject to, and neither the Company nor the Subsidiary has incurred or
expects to incur any liability under, Title IV of ERISA or Section 412 of the
Code; and
(E) Nothing in any Employee Plan precludes or interferes with
Parent's ability to cause the Company nor the Subsidiary to terminate (or
consolidate, at Parent's option) any Employee Plan after the Closing.
(ii) None of the following now exists or has existed within the six-
year period ending on the date hereof with respect to any Employee Plan:
(A) Any act or omission by the Company nor the Subsidiary
constituting a violation of Section 402, 403, 404 or 405 of ERISA;
(B) Any act or omission by the Company nor the Subsidiary which
constitutes a violation of Sections 406 and 407 of ERISA and is not exempted by
Section 408 of ERISA or which constitutes a violation of Section 4975(c) of the
Code and is not exempted by Section 4975(d) of the Code;
(C) Any act or omission by the Company nor the Subsidiary
constituting a violation of Section 503, 510 or 511 of ERISA.
(D) Any act or omission by the Company or the Subsidiary which
could give rise to liability under Section 502 of ERISA or under Sections 4972
or 4975 through 4980 of the Code; or
-23-
<PAGE>
(E) Any failure to file any Forms 5500 in a timely manner.
(iii) Each Employee Plan has been maintained in substantial
compliance with its terms, and all contributions, premiums or other payments due
from the Company or the Subsidiary or any of its subsidiaries to (or under) any
such Employee Plan have been fully paid or adequately provided for on the
Financial Statements. All accruals thereon (including, where appropriate)
proportional accruals for partial periods) have been made in accordance with
generally accepted accounting principles consistently applied on a reasonable
basis. There has been no amendment, written interpretation or announcement
(whether or not written) by the Company or the Subsidiary with respect to, or
change in employee participation or coverage under, any Employee Plan that would
increase materially the expense of maintaining such plans or arrangements,
individually or in the aggregate, above the level of expense incurred with
respect thereto for the nine month period ended September 30, 1999.
(iv) The Company and the Subsidiary has furnished to Parent or its
counsel complete, accurate and current copies of all Employee Plans and all
amendments, documents, correspondence and filings relating thereto, including
but not limited to any statements, filings, reports or returns filed with any
governmental agency with respect to the Employee Plans at any time within the
three-year period ending on the date hereof.
2.24 No Commitments Regarding Future Products. Neither the Company nor
----------------------------------------
the Subsidiary has made any legally binding commitments to any recipients of its
personal computers or to any of its advertisers regarding future enhancements to
the personal computers distributed by the Company or the Subsidiary or regarding
the software installed by the Company thereon. Neither the Company nor the
Subsidiary has received material complaints from customers about its services
and software that are currently outstanding. The only products of the Company
and the Subsidiary consist of software installed in computers distributed by the
Company and internet services provided by the Company.
2.25 Third Party Consents. Except as set forth in Section 2.25 to the
--------------------
Company Disclosure Letter, no consent or approval is needed from any third party
in order to effect the Merger, this Agreement or any of the transactions
contemplated hereby.
2.26 Brokers' and Finders' Fees. Neither the Company nor the Subsidiary
--------------------------
have incurred, nor will it incur, directly or indirectly, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with this Agreement or any transaction contemplated hereby.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
The Parent and Merger Sub represent and warrant to the Company, subject to
such qualifications and exceptions as are set forth in a disclosure letter
delivered prior to the date hereof (which disclosure letter shall specifically
identify the sections or subsections which are qualified by
-24-
<PAGE>
the information set forth therein) signed by the Parent and Merger Sub and
acknowledged by the Company (the "Parent Disclosure Letter"), as follows:
3.1 Organization, Standing and Power. Each of Parent and Merger Sub is a
--------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. Each of Parent and Merger Sub has the corporate power
to own its properties and to carry on its business as now being conducted and is
duly qualified to do business and is in good standing in each jurisdiction in
which the failure to be so qualified would have a Material Adverse Effect on
Parent. Parent has made available a true and correct copy of the Certificate of
Incorporation and Bylaws of each of Parent and Merger Sub, as amended to date,
to the Company or its counsel.
3.2 Capital Structure.
-----------------
(a) The authorized stock of Parent consists of 250,000,000 shares of
Parent Common Stock, with a par value of $0.0000125 per share, of which
78,019,538 shares were issued and outstanding as of the date hereof, and
50,000,000 shares of Preferred Stock with a par value of $0.01 per share,
25,000,000 of which are designated as Series A Preferred Shares, 24,279,369 of
which are issued or outstanding as of the date hereof The authorized capital
stock of Merger Sub consists of 1,000 shares of Common Stock, no par value,
1,000 shares of which, as of the date hereof, are issued and outstanding and are
held by Parent. All such shares (x) have been duly authorized, and all such
issued and outstanding shares have been validly issued, are fully paid and
nonassessable, (y) except as set forth in Section 3.2 of the Parent Disclosure
Letter, are not subject to any preemptive rights or rights of first refusal and
(z) and are free of any liens or encumbrances other than any liens or
encumbrances created by or imposed upon the holders thereof. All outstanding
shares of Parent Common Stock and all outstanding options or other rights to
purchase Parent Common Stock have been issued in compliance with all federal and
state securities laws. Parent has also reserved (i) 3,200,000 options to
purchase shares of Common Stock issuable to employees and consultants pursuant
to the Parent's 1998 Stock Option Plan, none of which have been exercised, and
457,097? shares are subject to outstanding unexercised options pursuant to such
plan. Except as set forth in Section 3.2 of the Parent Disclosure Letter, there
are no options, warrants, calls, rights, commitments or agreements of any
character to which Parent is a party or by which it is bound obligating Parent
to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered,
sold, repurchased or redeemed, any shares of the capital stock of Parent or
obligating Parent to grant, extend, accelerate the vesting of, change the price
of, or otherwise amend or enter into any such option, warrant, call, right,
commitment or agreement. Except as set forth in Section 3.2 of the Parent
Disclosure Letter, there are no registration rights and, to the Parent's
knowledge, there are no voting trusts, proxies or other agreements or
understandings with respect to any equity security of any class of stock of
Parent or with respect to any equity security or other ownership interest of any
of its subsidiaries.
(b) The shares of Parent Common Stock to be issued pursuant to the
Merger will be duly authorized, validly issued, fully paid, and nonassessable,
and free of, and not subject to any preemptive rights or rights of first refusal
created by statute or the Certificate of Incorporation or Bylaws of Parent or
any agreement to which Parent prior to the Merger is a party or by which prior
to the Merger it is bound.
-25-
<PAGE>
3.3 Authority. Parent and Merger Sub have all requisite corporate power
---------
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Parent and Merger Sub. This
Agreement has been duly executed and delivered by Parent and Merger Sub and
constitutes the valid and binding obligation of Parent and Merger Sub. The
execution and delivery of this Agreement do not, and the consummation of the
transactions contemplated hereby will not, (i) conflict with, or result in any
violation of, any provision of the Certificate of Incorporation or Bylaws of
Parent or Merger Sub, (ii) except as set forth in Section 3.3 of the Parent
Disclosure Letter, result in any breach of or constitute a default under (with
or without notice or lapse of time, or both), or give rise to a right of
termination, cancellation or acceleration of any obligation or to loss of any
benefit under any mortgage, indenture, lease, contract or other agreement or
instrument, to which Parent is a party or by which it or any of its properties
or assets are bound or (iii) conflict or violate any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Parent or Merger Sub
or the properties or assets of Parent, except, in the case of clauses (ii) and
(iii) for breaches, defaults, conflicts or violations which individually or in
the aggregate would not have a Material Adverse Effect on the Parent. No
consent, approval, order or authorization of, or registration, declaration or
filing with, any Governmental Entity, is required by or with respect to Parent
or Merger Sub in connection with the execution and delivery of this Agreement by
Parent and Merger Sub or the consummation by Parent and Merger Sub of the
transactions contemplated hereby, except for (i) the filing of the Merger
Agreement with the Secretary of State of the State of Delaware, (ii) such
consents, approvals, orders, authorizations, registrations, declarations and
filings as may be required under applicable state and federal securities laws
and the laws of any foreign country and the HSR Act and (iii) such other
consents, authorizations, filings, approvals and registrations which if not
obtained or made would not have a Material Adverse Effect on the Parent or
Merger Sub.
3.4 Parent Financial Statements. The Parent commenced operations in
---------------------------
September 1998. The Parent has furnished to the Company a true, correct and
complete copy of the Parent's audited financial statements (balance sheets,
income statements and statements of cash flow) as of and for the fiscal year
ending December 31, 1998 and the Parent's unaudited financial statements for the
nine months ended September 30, 1999 (collectively, the "Parent Financial
Statements"). The Parent Financial Statements have been prepared in accordance
with generally accepted accounting principles applied on a basis consistent
throughout the periods indicated and consistent with each other (except that the
unaudited financial statements for the nine months ended September 30, 1999 do
not contain the notes necessary to be in accordance with generally accepted
accounting principles). The Parent Financial Statements present fairly the
financial condition and operating results of the Parent as of the dates and
during the periods indicated therein, subject, in the case of the unaudited
financial statements, to normal year-end adjustments, which will not be material
in the aggregate. There has been no material change in Parent's accounting
policies except as described in the notes to the Parent Financial Statements.
3.5 Broker's and Finders' Fees. Parent has not incurred, and will not
--------------------------
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement,
the Merger or any transaction contemplated hereby.
3.6 No Material Adverse Change. Except as disclosed in Section 3.6 of the
--------------------------
Parent Disclosure Letter, since September 30, 1999, Parent has conducted its
business in the ordinary
-26-
<PAGE>
course and there has not occurred or arisen: (i) any material adverse change in
the business, assets (including intangible assets), liabilities, financial
condition, or results of operations of Parent and its subsidiaries, taken as a
whole; (ii) any amendments or changes in the Certificate of Incorporation or
Bylaws of Parent; (iii) any damage, destruction or loss, whether covered by
insurance or not, materially and adversely affecting the properties or business
of Parent; (iv) any declaration, setting aside or payment of any dividend or
distribution (other than in capital stock) in respect of any of its capital
stock; (v) any write-off of assets aggregating more than $5,000,000 in excess of
reserves; or (vi) except in the ordinary course of business, any sale of a
material amount of property of Parent.
3.7 Litigation. Except as set forth in Section 3.7 of the Parent
----------
Disclosure Letter, there is no action, suit, proceeding or investigation pending
or currently threatened against the Parent or the Merger Sub that seeks to
prevent the consummation of the Merger, or the right of the Company or the
Merger Sub to enter into any such agreement or to consummate the transactions
contemplated hereby or thereby, or that might result, either individually or in
the aggregate, in any Material Adverse Effect, or any change in the current
equity ownership of the Parent or Merger Sub. Except as set forth in Section 3.7
of the Parent Disclosure Letter, there is no action, suit, proceeding or
investigation by the Company currently pending or that the Company presently
intends to initiate. Except as set forth in Section 3.7 of the Parent Disclosure
Letter, neither the Parent nor Merger Sub is a party or subject to the
provisions of any order, writ, injunction, judgment or decree of any court or
government agency or instrumentality.
3.8 Title to Property and Assets. Each of the Parent and Merger Sub has
----------------------------
good and valid title to all property and assets owned by it and used in its
business, free and clear of all mortgages, liens, loans and other encumbrances,
except such encumbrances and liens that arise in the ordinary course of business
and do not materially impair ownership or use of such property or assets. Each
of the Parent and Merger Sub has, to the best of its knowledge good and valid
leasehold interests in all property and assets leased by it, free and clear of
material liens, claims or encumbrances, and is in compliance in all material
respects with all such leases.
3.9 Material Contracts and Other Commitments. Except as set forth in
----------------------------------------
Section 3.9 of the Parent Disclosure Letter and except for agreements explicitly
contemplated hereby (the "Contracts"), there are no agreements, instruments or
---------
contracts to which the Parent or Merger Sub is a party or by which it is bound
and which are material to the Parent's and Merger Sub's business, other than (i)
contracts for the purchase of supplies and services entered into in the ordinary
course of business and which do not extend for more than one (1) year beyond the
date hereof, (ii) sales contracts entered into in the ordinary course of
business and (iii) contracts terminable at will by the Parent or Merger Sub, as
the case may be, on no more than thirty (30) days notice without cost or
liability to the Parent or Merger Sub, as the case may be, and that are not
material to the conduct of the Company's or Merger Sub's business. All of the
Contracts are valid, binding and in full force and effect in all material
respects and enforceable by the Parent or Merger Sub, as the case may be, in
accordance with their respective terms in all material respects, subject to the
effect of applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium, usury or other laws of general application relating to
or affecting enforcement of creditors' rights and rules or laws concerning
equitable remedies.
3.10 Proprietary Rights. Except as set forth in Section 3.10 of the
------------------
Parent Disclosure Letter, the Parent owns, has exclusively licensed or otherwise
possesses all trademarks, trade names,
-27-
<PAGE>
patents, copyrights and other intellectual property rights material to its
business and necessary to conduct its business as now being conducted and as
planned to be conducted, without any known conflict with or infringement upon
any valid patent rights or any conflict with any other intellectual property
rights of others. Each of the Parent's registered patents, trademarks, and
copyrights is listed in Section 3.10 of the Parent Disclosure Letter. Except as
set forth in Section 3.10 of the Parent Disclosure Letter, the Parent has not
received any notice of any claims, nor, to the knowledge of Parent, are there
any threatened claims, alleging that the Parent has infringed upon or is in
conflict with the asserted rights of others. The Parent has certain trade
secrets, including know-how, computer software programs and other proprietary
data (the "Proprietary Information") used, or proposed to be used, in the
development, manufacture and sale of its products. The Parent has the right to
use the Proprietary Information, except that the possibility exists that other
persons may have independently developed trade secrets or technical information
similar or identical to those of the Company.
3.11 No Conflict of Interest. The Parent is not indebted, directly or
-----------------------
indirectly, to any of its officers or directors or to their respective spouses
or children, in any amount whatsoever other than in connection with expenses or
advances of expenses incurred in the ordinary course of business or relocation
expenses of employees. To the Parent's knowledge, none of the Parent's officers
or directors, or any members of their immediate families, are, directly or
indirectly, indebted to the Parent (other than in connection with purchases of
the Parent's stock) or, except as set forth in Section 3.11 of the Parent
Disclosure Letter, have any direct or indirect ownership interest in any firm or
corporation with which the Parent is affiliated or with which the Parent has a
business relationship, or any firm or corporation which competes with the Parent
except that officers, directors and/or stockholders of the Parent may own stock
in (but not exceeding two percent of the outstanding capital stock of) any
publicly traded company that may compete with the Parent. To the Parent's
knowledge, except as set forth in Section 3.11 of the Parent Disclosure Letter,
none of the Parent's officers or directors or any members of their immediate
families are, directly or indirectly, interested in any material contract with
the Parent. The Parent is not a guarantor or indemnitor of any indebtedness of
any other person, firm or corporation.
3.12 Employee Benefit Plans. The Parent has the "Employee Benefit Plans"
----------------------
(as such term is defined in the Employee Retirement Income Security Act of 1974)
listed in Section 3.12 of the Parent Disclosure Letter. Merger Sub has no
Employee Benefit Plans. To the knowledge of Parent, all of its Employee Benefit
Plans are in compliance with applicable laws in all material respects.
3.13 Tax Returns and Payments. The Parent has filed all Returns as required
-------------------------
by law. These Returns are true and correct in all material respects and were
filed within the applicable periods for such filings, taking into account
extensions. The Parent has paid all material Taxes due. The Parent has
established adequate reserves in accordance with US generally accepted
accounting principles (net of estimated tax payments already made) for the
payment of all material Taxes payable in respect of the period subsequent to the
last periods covered by such Returns. There is no pending dispute with any
taxing authority relating to any of such Returns and the Parent has not received
notice of any proposed liability for any material Taxes to be imposed upon the
properties or assets of the Parent. No deficiencies for any material Taxes are
currently assessed against the Parent, and no Returns of the Parent have ever
been audited, and, to the knowledge of the Parent, there is no such audit
pending or threatened. There is no tax lien, whether imposed by any federal,
state or local taxing authority, outstanding against the assets, properties or
business of the Parent
-28-
<PAGE>
other than for Taxes not yet due and payable. The Parent has sought an extension
on its federal income tax return for the most recently ended fiscal year and
pursuant to such extension, no Taxes are presently due thereunder.
3.14 Labor Agreements and Actions. The Parent is not bound by or subject to
----------------------------
(and none of its assets or properties is bound by or subject to) any written or
oral, express or implied, contract, commitment or arrangement with any labor
union, and no labor union has requested or, to the knowledge of the Parent, has
sought to represent any of the employees, representatives or agents of the
Parent. There is no strike or other labor dispute involving the Parent pending,
or to the knowledge of the Parent threatened, which could have a Material
Adverse Effect on the Parent, nor is the Parent aware of any labor organization
activity involving its employees. To its knowledge, the Parent is in compliance
in all material respects with all applicable state and federal equal employment
opportunity laws and regulations and with other laws and regulations related to
employment, labor, terms and conditions of employment, and wages and hours
3.15 Permits. To the Parent's knowledge, the Parent has all franchises,
-------
permits, licenses and any similar authority necessary for the conduct of its
business, the lack of which could have a Material Adverse Effect on the Parent.
The Parent is not in default in any material respect under any of such
franchises, permits, licenses or other similar authority and, to the knowledge
of the Parent, no suspension or cancellation of any of them is threatened.
3.16 Corporate Documents. The Certificate of Incorporation and Bylaws of
-------------------
each of Parent and Merger Sub are in the form provided to counsel for the
Company. The copy of the minute books of the Parent provided to the Company's
counsel contains minutes of all meetings of directors and stockholders and all
actions by written consent without a meeting by the directors and stockholders
since the date of incorporation and reflects all actions by the directors (and
any committee of directors) and stockholders with respect to all transactions
referred to in such minutes accurately in all material respects.
3.17 Insurance. The Parent has obtained and will maintain, fire and
---------
casualty insurance policies with coverage sufficient in amount (subject to
reasonable deductibles) to allow it to repair or replace its properties that
might be damaged or destroyed.
3.18 Year 2000 Compatibility. To the knowledge of the Parent, all of the
-----------------------
Parent's products and all of the Parent's equipment necessary for the operation
of the business as conducted and as proposed to be conducted, that record,
store, process and calculate and present calendar dates, or calculate any
information dependent on or relating to such dates, will operate on and after
January 1, 2000 without error caused by date data that represents or references
different centuries or more than one century (collectively "Year 2000
Compliant"). To the knowledge of the Parent, all of such Parent products and
equipment will lose no functionality with respect to the introduction of records
containing dates falling on or after January 1, 2000. Except as set forth in
Section 3.18 of the Parent Disclosure Letter, to the knowledge of the Parent,
all of the Parent's internal computer systems, including without limitation, its
accounting systems, are Year 2000 Compliant.
3.19 Customers and Suppliers. No customer or supplier that was significant
-----------------------
to the Parent during the period covered by the Financial Statements or that has
been significant to the Parent
-29-
<PAGE>
thereafter, has terminated, materially reduced or threatened to terminate or
materially reduce its purchases from, or provision of such products or services
to, the Parent.
3.20 Complete Copies of Materials. The Parent has delivered or made
----------------------------
available true and complete copies of each document concerning the Parent (or
summaries of such documents that are accurate and complete in all material
respects) that have been requested by the Company or its counsel.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of the Company. During the period from the date of
----------------------------------
this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, the Company shall, and shall cause the
Subsidiary to, (except to the extent that Parent shall otherwise consent in
writing) carry on its business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, and, to the extent
consistent with such business, use all reasonable efforts consistent with past
practice and policies to preserve intact the Company's and the Subsidiary's
present business organizations, keep available the services of its present
officers and key employees and preserve their relationships with customers,
suppliers, distributors, licensors, licensees, and others having business
dealings with it. The Company and the Subsidiary shall promptly notify Parent of
any event or occurrence or emergency not in the ordinary course of business of
the Company which could have a Material Adverse Effect on the Company or the
Subsidiary. Without limiting the generality of the foregoing, except as
expressly contemplated by this Agreement, neither the Company nor the Subsidiary
shall, without the prior written consent of Parent (which shall not be
unreasonably withheld):
(a) Do any act or thing which will or could reasonably be expected to
have the effect of accelerating, amending or changing the period of
exercisability of options or restricted stock granted under the employee stock
plans of the Company or the Subsidiary (including restricted stock purchase
agreements);
(b) Enter into any agreement, letter of intent, commitment or
transaction to be performed over a period longer than six months in duration or
to purchase or agree to purchase capital assets aggregating in excess of
$50,000;
(c) Grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee except (x) payments made pursuant to
standard written agreements in effect on the date hereof and as disclosed in
Section 2.12(b) of the Company Disclosure Letter or (y) in the case of employees
who do not have standard written agreements, payments of up to one month's
salary;
(d) Except for licenses granted to end-users pursuant to the Company's
standard license agreements, transfer to any person or entity any rights to the
Company's Intellectual Property Rights;
-30-
<PAGE>
(e) Except for agreements (or amendments thereof) with advertisers
entered into in the ordinary course of business consistent with practice, enter
into or amend any agreements pursuant to which any other party is granted
marketing or other rights of any type or scope with respect to any products of
the Company;
(f) Violate in any respect that might adversely affect the Company's
rights or obligations under, or amend or otherwise modify the terms of any of
the contracts or agreements required to be listed in the Company Disclosure
Letter;
(g) Commence any litigation;
(h) Declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any of its capital stock or
options to acquire capital stock, or split, combine or reclassify any of its
capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of capital stock of the
Company or the Subsidiary, or repurchase or otherwise acquire, directly or
indirectly, any shares of its capital stock or options to acquire capital stock
except repurchases of stock from former employees, directors and consultants in
accordance with agreements in effect on the date of the Agreement providing for
the repurchase of shares at cost in connection with any termination of service
to the Company or the Subsidiary;
(i) Issue, deliver or sell or authorize or propose the issuance,
delivery or sale of, or purchase or propose the purchase of, any shares of its
capital stock or securities convertible into, or subscriptions, rights, warrants
or options to acquire, or other agreements or commitments of any character
obligating it to issue any such shares or other convertible securities, other
than the issuance of shares of the Company Common Stock upon the exercise of
options disclosed in Section 2.2 of the Company Disclosure Letter pursuant to
the conversion of Company Preferred Stock;
(j) Cause or permit any amendments to the Certificate of Incorporation
or Bylaws of either, other than as contemplated in Section 2.2;
(k) Acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial portion of the assets of, or by any other manner,
any business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to the business of
the Company or the Subsidiary;
(l) Sell, lease, license or otherwise dispose of any of its properties
or assets which are material, individually or in the aggregate, to the business
of the Company or the Subsidiary, other than in the ordinary course of business
and consistent with past practice;
(m) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities of the Company or guarantee
any debt securities of others, except with respect to an existing lease line in
an amount not more than $25,000;
(n) Adopt or amend any employee benefit plan, or enter into any
employment contract, pay any special bonus or special remuneration to any
director or employee, or increase the salaries or wage rates of its employees;
-31-
<PAGE>
(o) Revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business consistent with past business practices;
(p) Pay, discharge or satisfy in an amount in excess of $25,000 in any
one case any claim, liability or obligation (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge or
satisfaction in the ordinary course of business of liabilities reflected or
reserved against in the Company Financial Statements (or the notes thereto) or
constituting a trade payable or operating expense incurred in the ordinary
course of business consistent with past practices since the last date of the
Company Financial Statements or otherwise permitted to be incurred pursuant to
this Section 4.1;
(q) Make or change any election in respect of Taxes which would have a
Material Adverse Effect on the Company, adopt or change any accounting method in
respect of Taxes, file any material Return or any amendment to a material Return
other than as may be required by law (provided that the Parent is given at least
five business days prior written notice of such filing), enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(r) Take or permit any action which would result in any share of
Company Preferred Series A Stock or Company Preferred Series B Stock being
convertible into more or less than one share of Company Common Stock; or
(s) Take, or agree in writing (whether by agreement, letter of intent
or otherwise) to take, any of the actions described in Sections 4.1(a) through
(r) above, or any action which would make any of the representations, warranties
or covenants of the Company or the Subsidiary contained in this Agreement untrue
or incorrect or prevent the Company or the Subsidiary from performing or cause
the Company or the Subsidiary not to perform its covenants hereunder.
4.2 No Solicitation. Prior to the Effective Time, neither the Company nor
---------------
the Subsidiary will (nor will the Company or the Subsidiary permit any of the
Company's officers, directors, stockholders affiliated with any officer or
director or the Company's or the Subsidiary's agents, representatives or
affiliates to) directly or indirectly, take any of the following actions with
any party other than Parent and its designees:
(a) solicit, encourage, initiate or participate in any negotiations or
discussions with respect to, any offer or proposal to acquire all or
substantially all of the Company's or the Subsidiary's business and properties
or to purchase or acquire any capital stock of the Company or the Subsidiary
whether by merger, purchase of assets, tender offer or otherwise (an
"Acquisition");
(b) except as required by law, disclose any information not
customarily disclosed to any person other than its attorneys or financial
advisors or existing lenders, lessors or customers under existing contractual
arrangements concerning the Company's business and properties or afford to any
person or entity access to its properties, books or records, or
-32-
<PAGE>
(c) assist or cooperate with any person to make any proposal to
purchase more than ten percent (10%) of the Company's capital stock or assets,
other than licensing of software or sale of products or services in the ordinary
course of business.
In the event the Company or the Subsidiary shall receive any such offer or
proposal, directly or indirectly, of the type referred to in clause (a) or (c)
above, or any request for disclosure or access pursuant to clause (b) above, the
Company shall immediately inform Parent as to all material facts relating to any
such offer or proposal (including the identity of the party making such offer or
proposal and the specific terms thereof) and will cooperate with Parent by
furnishing any information with respect to such offer or proposal it may
reasonably request.
4.3 Conduct of Business of Parent. During the period from the date of
-----------------------------
this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, the Parent agrees (except to the extent that
the Company shall otherwise consent in writing), that Parent shall promptly
notify the Company of any event or occurrence or emergency which is not in the
ordinary course of business of Parent and which is material and adverse to the
business of Parent. Without limiting the generality of the foregoing, Parent
shall not without the prior consent of the Company (i) amend its Certificate of
Incorporation in any manner which would materially adversely affect the rights
of holders of Parent Common Stock, except as contemplated with respect to the
Parent Preferred Stock, (ii) issue, deliver or sell or authorize or propose the
issuance, delivery or sale of, or purchase or propose the purchase of, any
shares of its capital stock of any class or securities convertible into, or
subscriptions, rights, warrants or options to acquire, or other agreements or
commitments of any character obligating it to issue any such shares or other
convertible securities, except for the issuance or proposed issuance of shares
of its capital stock or options to purchase shares of its capital stock (A) in
connection with a proposed business combination involving consideration having a
value not in excess of $10,000,000, (B) in connection with privately negotiated
sales of stock having a value of not in excess of $10,000,000 pursuant to
corporate partnering arrangements or (C) pursuant to stock option grants or
exercises or other employee stock benefit plans, (iii) declare or pay any cash
dividends or make any other cash distributions in respect of any of its capital
stock, or repurchase or otherwise acquire, directly or indirectly any shares of
its capital stock (other than in connection with the repurchase of stock at cost
from terminated employees in accordance with Restricted Stock Purchase (or like)
Agreements in effect on the date hereof), (iv) write-off any of its assets
aggregating more than $5,000,000 in excess of reserves, or (v) enter into any
agreement requiring the Parent to do any of the foregoing (other than as
contemplated by this Agreement).
-33-
<PAGE>
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Stockholder Approval. The Company will duly call and hold a meeting
--------------------
of, or obtain a written consent from, its stockholders for the purpose of
approving the Merger and the other matters and transactions contemplated by this
Agreement on the terms and conditions set forth in this Agreement and the Merger
Agreement, and in connection therewith will comply fully with the pertinent
provisions of the applicable state laws relating to the calling and holding of
such meetings of stockholders for such purpose. The Company shall use its best
efforts to solicit from stockholders of the Company proxies or a written consent
in favor of the Merger and such other matters and transactions and shall take
all other action necessary or advisable to secure the vote or consent of its
stockholders required by Delaware Law to effect the Merger and such other
matters and transactions.
(a) The Company shall cause to be prepared and filed with the
Secretary of State of the State of Delaware prior to the Effective Time an
amendment to the Amended and Restated Certificate of Incorporation of the
Company filed on March 30, 1999 (the "Amended and Restated Certificate") to
provide that the Merger and the other transactions contemplated hereby shall not
constitute a liquidating event, as discussed in Section 2(c) of Article Four of
the Amended and Restated Certificate, giving rise to liquidating distributions
under Section 2(a) thereof. The Stockholder approval obtained under Section
5.1(a) hereof shall include stockholder approval of such amendment to the
Restated Certificate (the "Company Charter Amendment").
5.2 Access to Information.
---------------------
(a) The Company and Subsidiary shall afford Parent and its
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (a) all of the
Company's and the Subsidiary's properties, books, contracts, commitments and
records, and (b) all other information concerning the business, properties and
personnel of the Company and the Subsidiary as Parent may reasonably request;
provided, however, that such access and disclosure will not be afforded if it
would violate the terms of any agreement to which the Company or the Subsidiary
is bound. The Company agrees to provide to Parent and its accountants, counsel
and other representatives copies of internal financial statements of the Company
and the Subsidiary promptly upon request. No information or knowledge obtained
in any investigation pursuant to this Section 5.2 (a) shall affect or be deemed
to modify any representation or warranty contained herein or the conditions to
the obligations of the parties to consummate the Merger.
(b) The Parent shall afford the Company and its accountants, counsel
and other representatives reasonable access during normal business hours during
the period prior to the Effective Time to (a) all of the Parent's properties,
books, contracts, commitments and records and (b) all other information
concerning business, properties and personnel as the Parent may reasonably
-34-
<PAGE>
request; provided, however that such access and disclosure will not be afforded
if it would violate the terms of any agreement to which the Parent is bound. No
information or knowledge obtained in any investigation pursuant to this Section
5.2(b) shall affect or be deemed to modify any representation or warranty
contained herein or the conditions to the obligations of the parties to
consummate the Merger.
5.3 Confidentiality. The parties acknowledge that Parent and the Company
---------------
have previously executed a letter agreement regarding confidential information
dated October 18, 1999, between the Parent and the Company (the "Confidentiality
Agreement") which agreement shall continue in effect in accordance with its
terms. Parent and Merger Sub will hold and will cause their consultants and
advisers to hold in confidence all documents and information furnished to them
by or on behalf of the Company or the Subsidiary in connection with the
transactions contemplated by this Agreement pursuant to the terms of the
Confidentiality Agreement. The Company will hold and will cause its consultants
and advisers to hold in confidence all documents and information furnished to it
by or on behalf of Parent or Merger Sub in connection with the transactions
contemplated by this Agreement pursuant to the terms of Confidentiality
Agreement.
(a) Notwithstanding anything to the contrary contained in such
Agreement, the Company shall not disclose any information concerning Parent to
any of its stockholders unless it shall have first obtained the written consent
of Parent to such disclosure, which consent shall not be unreasonably withheld
but shall be withheld: (i) if the shareholder recipient shall not sign a
Nondisclosure Agreement with Parent prior to any such disclosure; or (ii) with
respect to any Company shareholder who, in Parent's sole discretion, has a
conflict of interest or interest competing with that of Parent. Without limiting
the generality of the foregoing, a Company shareholder shall be deemed to have a
conflict of interest with Parent if it (or any Affiliate of it) is involved in
litigation with Parent (or any Affiliate) or if one of its major businesses (or
one of the major businesses of any of its Affiliates) competes with a major
business of Parent, the Company or the Subsidiary.
5.4 Expenses. In the event the Merger is not consummated, and except as
--------
otherwise provided in this Section, all costs and expenses incurred in
connection with this Agreement and the Merger shall be paid by the party
incurring such cost or expense. In the event the Merger is consummated, the
Parent shall pay the reasonable costs and expenses of the Company and the
Subsidiary incurred in connection with this Agreement.
5.5 Public Disclosure. Parent and Merger Sub, on the one hand, and the
-----------------
Company (on behalf of it and the Subsidiary on the other, each agree to consult
with the other before issuing any press release or otherwise making any public
statements with respect to the transactions contemplated by this Agreement,
including the Merger, and agree that they shall not issue any press release or
make any such public statement prior to such consultation except as may be
required by applicable law.
5.6 Consents. The Company shall promptly apply for or otherwise seek, and
--------
use its best efforts to obtain, all consents and approvals required to be
obtained by it or its shareholders for the consummation of the Merger, and the
Company shall use its best efforts to obtain all consents, waivers and approvals
under any of the Company's agreements, contracts, licenses or leases in order to
preserve the benefits thereunder for the Surviving Corporation and otherwise in
connection with
-35-
<PAGE>
the Merger. The Company Disclosure letter lists in Section 5.6 all such
agreements, contracts, licenses or leases which terminate by their terms, or
provide for termination at the election of the other party thereto, upon the
Merger or the consummation of the transactions contemplated hereby.
5.7 FIRPTA Compliance. On the Closing Date, the Company shall deliver to
-----------------
Parent a properly executed statement in a form reasonably acceptable to Parent
for purposes of satisfying Parent's obligations under Treasury Regulation
Section 1.1445-2(c)(3).
5.8 Blue Sky Laws. Parent shall use its best efforts to comply with the
-------------
securities and blue sky laws of all jurisdictions which are applicable to the
issuance of the Parent Stock and Warrants pursuant hereto. The Company shall use
its best efforts to assist Parent as may be necessary to comply with the
securities and blue sky laws of all jurisdictions which are applicable in
connection with the issuance of Parent Stock and Warrants pursuant hereto.
5.9 Best Efforts; Additional Documents and Further Assurances. Each of
---------------------------------------------------------
the parties to this Agreement shall use its best efforts to effectuate the
transactions contemplated hereby and to fulfill and cause to be fulfilled the
conditions to closing under this Agreement. Each party hereto, at the request of
another party hereto, shall execute and deliver such other instruments and do
and perform such other acts and things as may be reasonably necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
5.10 Stock Options
-------------
(a) At the Effective Time, each outstanding option to purchase shares
of Company Common Stock (each a "Company Option") under the Company's Stock
Option Plans, whether vested or unvested, will be assumed by Parent. Each
Company Option so assumed by Parent under this Agreement shall continue to have,
and be subject to, the same terms and conditions set forth in the Company's
Stock Option Plans pursuant to which such Company Option was issued and as
provided in the respective option agreements immediately prior to the Effective
Time, except that:
(i) such Company Option will be exercisable for (x) that number
of whole shares of Parent Common Stock (rounded down to the nearest whole number
of shares of Parent Common Stock) equal to the product of (1) 0.7 multiplied by
the number of shares of Company Common Stock that were issuable upon exercise of
such Company Option immediately prior to the Effective Time multiplied by (2)
the Exchange Ratio, and (y) a Warrant to purchase a number of Whole Shares of
Parent Common Stock (rounded down to the nearest whole number of shares of
Parent Common Stock) equal to the product of (1) 0.3 multiplied by the number of
shares of Company Common Stock that were issuable upon exercise of such Company
Option immediately prior to the Effective Time multiplied by (2) the Exchange
Ratio; and
(ii) the per share exercise price for the shares of Parent
Common Stock issuable upon exercise of such assumed Company Option will be equal
to the quotient determined by dividing the exercise price per share of Company
Common Stock at which such Company Option was exercisable immediately prior to
the Effective Time by the Exchange Ratio, rounded up to the nearest whole cent,
all in accordance with the rules of Section 424(a) of the Code, and the
-36-
<PAGE>
regulations promulgated thereunder, and such rules shall apply even with respect
to options that are not "incentive stock options" (within the meaning of Section
424 of the Code).
(b) As soon as practicable after the Effective Time, Parent shall
deliver to the holders of Company Stock Options, appropriate notices regarding
the assumption of the Company Stock Options by Parent and stating that (x) the
agreements evidencing the grants of such Company Options shall continue in
effect on the same terms and conditions (subject to the adjustments required by
this Section 5.10 after giving effect to the Merger); and (y) the expiration
date of the Warrants to be issued upon exercise of such holder's Company Stock
Options shall be extended, if such optionee so elects, to the dates which are,
in the case of each Warrant or portion thereof, one month following the vesting
date of each Company Stock Option exchanged therefore.
(c) Parent shall comply with the terms of the Company Stock Option
Plans (subject to the adjustments required by this Section 5.10 after giving
effect to the Merger and to the amendments in employment agreements to be
agreed, as set forth below) and shall use its reasonable efforts to ensure, to
the extent required by and subject to the provisions of such plans, that Company
Stock Options which qualified as incentive stock options prior to the Effective
Time continue to qualify as incentive stock options of Parent after the
Effective Time.
(d) Parent shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Parent Common Stock for delivery upon
exercise of Company Stock Options assumed in accordance with this Agreement.
Parent shall use reasonable efforts to amend each option agreement under the
Company's Stock Option Plans as promptly as practicable after the Effective Time
in accordance with the foregoing.
5.11 Employment Contracts with Key Employees. The Parent and the Company
---------------------------------------
shall use reasonable efforts to mutually agree on or before December 3, 1999 as
to the titles, compensation, benefits, option and other employment terms to be
offered by the Parent to each Key Employee of the Company listed on Schedule
--------
5.11 hereto (the "Key Employees"). Promptly after signature of this Agreement,
- ----
Parent shall negotiate with each Key Employee as to the terms of such Key
Employee's employment by the Parent or the Company after the Effective Time so
as to be able to enter into an employment agreement with each such Key Employee
(each, an "Employment Agreement") on or prior to the Effective Time. Without
limiting the generality of the foregoing, each Employment Agreement shall
address the number, exercise price and vesting schedule of Parent stock options
issuable to the Key Employee party thereto at the same time as the waiver, to
the extent agreed, of the acceleration upon a change of control currently
characterizing such Key Employee's options in the Company.
5.12 Rights Agreement. The holders of at least 90% of Company Common
----------------
Stock, 100% of Company Series A Preferred Stock and 80% of Company Series B
Preferred Stock shall enter into the Rights Agreement and, pursuant thereto,
will be granted registration rights with respect to the Parent Common Stock
issued in connection with the Merger, or issuable upon conversion of Company
Preferred Stock. The Rights Agreement shall include a voting agreement in form
and substance reasonably satisfactory to Parent.
5.13 Severance Policies; Benefit Plans. The employees of the Company
---------------------------------
shall be covered by the severance policies of Parent, as amended from time to
time (but only to the extent that such
-37-
<PAGE>
employees agree that such policies will be in lieu of any such policies or
agreements providing for severance payments of the Company existing prior to the
Effective Time). For purposes of such severance policies and, to the extent
permitted by law and Parent's employee benefit plans, under such plans,
employees will be credited for years of service with the Company for periods
prior to the Effective Time. In addition, for purposes of Parent's severance
policies, to the extent applicable in accordance with the first sentence of this
Section 5.13, in the event any Company employee terminates employment as a
consequence of being required by the Surviving Corporation or Parent to change
his place of residence as a condition to continued employment, such termination
shall be treated as termination by the Company without cause.
5.14 Updated Information Regarding the Company and the Subsidiary.
------------------------------------------------------------
Immediately prior to the Effective Time, the Company shall furnish to Parent
true, correct and complete information (the "Company Update") with respect to
all of the matters covered by Article II of this Agreement and by the Company
Disclosure Letter updated through the delivery of such information, which
information shall be certified by the President and Chief Financial Officer of
the Company on behalf of the Company, and shall be in such detail as Parent
shall reasonably request. The certificate and information delivered pursuant to
this Section 5.14 shall be deemed for all purposes of this Agreement to be
representations and warranties made pursuant to this Agreement to the same
extent as if set forth herein.
5.15 Updated Information Regarding Parent. Immediately prior to the
------------------------------------
Effective Time, the Parent shall furnish to the Company true, correct and
complete information (the "Parent Update") with respect to all of the matters
covered by Article III of this Agreement and the Parent Disclosure Letter
updated through the delivery of such information, which information shall be
certified by the President and Chief Financial Officer of Parent on behalf of
Parent, and shall be in such detail as the Company shall reasonably request. The
certificate and information delivered pursuant to this Section 5.15 shall be
deemed for all purposes of this Agreement to be representations and warranties
made pursuant to this Agreement to the same extent as if set forth herein.
5.16 Amendment to Parent's Charter. The Parent shall cause to be prepared
-----------------------------
and filed with the Secretary of State of the State of Delaware prior to the
Effective Time an amendment to the Parent's Certificate of Incorporation
providing for the creation of the Parent Preferred Series B Stock and the Parent
Preferred Series C Stock in accordance with the terms set forth on Exhibit E
attached hereto (the "Parent Charter Amendment").
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
------------------------------------------------------------
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
-38-
<PAGE>
(a) Stockholder Approval. This Agreement and the Merger and other
--------------------
transactions contemplated hereby, taken together, shall have been approved and
adopted by the requisite votes of the stockholders of the Company.
(b) No Injunctions or Restraints; Illegality. No temporary
----------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger or limiting or restricting the
operation of the business of the Company or the Subsidiary following the Merger
shall be in effect; nor shall any proceeding brought by an administrative agency
or commission or other governmental authority or instrumentality, domestic or
foreign, seeking any of the foregoing be pending; nor shall there be any action
taken, or any statute, rule, regulation or order enacted, entered, enforced or
deemed applicable to the Merger, which makes the consummation of the Merger
illegal.
(c) Approval. Any waiting period applicable to the Merger under the
--------
HSR Act shall have terminated or expired and any other governmental or
regulatory notices or approvals required with respect to the transactions
contemplated hereby shall have been either filed or received.
(d) Securities Laws. Parent shall have secured all necessary permits
---------------
or qualifications under, or be satisfied as to the availability of exemptions
from, all applicable securities laws. In connection therewith, Parent shall have
received such representation letters from the holders of Company Stock as Parent
shall reasonably request.
6.2 Additional Conditions to Obligations of Company. The obligations of
-----------------------------------------------
the Company to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, exclusively by the Company (provided, that unless the Parent
otherwise consents, the condition set forth in Section 6.2(d) may only be waived
with the consent of the holders of at least 75% of the shares of the Company
Common Stock and Company Preferred Stock, voting together as a single class):
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of Parent and Merger Sub in this Agreement shall be true and
correct in all material respects on and as of the Effective Time as though such
representations and warranties were made on and as of such time (except to the
extent such representations specifically related to an earlier date, in which
case such representations shall be true and correct as of such earlier date),
and Parent and Merger Sub shall have performed and complied in all material
respects with all covenants, obligations and conditions of this Agreement
required to be performed and complied with by it as of the Effective Time.
(b) Rights Agreement. The Rights Agreement shall have been executed
----------------
on behalf of Parent by Parent's Chief Executive Officer or its Chief Financial
Officer.
(c) Parent Charter Amendment. The Parent Charter Amendment shall have
------------------------
been filed with the Secretary of State of the State of Delaware.
(d) Tax Opinions. The Company shall have received a written opinion
------------
of Gibson, Dunn & Crutcher LLP, to the effect that (i) the Merger will be
treated for Federal income tax
-39-
<PAGE>
purposes as a reorganization with the meaning of Section 368(a) of the Code; and
(ii) each of Parent, Merger Sub and the Company will be a party to the
reorganization within the meaning of Section 368(b) of the Code. In rendering
such opinion counsel shall be entitled to rely on reasonable assumptions and
representations of Parent and the Company and certain stockholders of the
Company in the form set forth as Exhibits F-A, F-B and F-C hereto, respectively.
(e) No Material Adverse Changes. There shall not have occurred (and
---------------------------
the Parent Update shall not disclose) any material adverse change in the
business, properties, liabilities, results of operations or financial condition
of Parent and its subsidiaries, taken as a whole.
(f) Certificate of Parent. The Company shall have received from the
---------------------
Parent a certificate executed on behalf of Parent by its Chief Executive Officer
and Chief Financial Officer to the effect that, as of the Effective Time, the
conditions set forth in Sections 6.3 (a) and (f) have been satisfied.
(g) Employment Agreements. Parent shall have entered into an
---------------------
Employment Agreement with each Key Employee on terms consistent with those
identified pursuant to Section 5.11.
6.3 Additional Conditions to the Obligations of Parent and Merger Sub. The
-----------------------------------------------------------------
obligations of Parent and Merger Sub to consummate and effect this Agreement and
the transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by Parent:
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of the Company in this Agreement shall be true and correct in all
material respects on and as of the Effective Time as though such representations
and warranties were made on and as of such time (except to the extent such
representations specifically related to an earlier date, in which case such
representations shall be true and correct as of such earlier date), and the
Company shall have performed and complied in all material respects with all
covenants, obligations and conditions of this Agreement required to be performed
and complied with by it as of the Effective Time.
(b) Employee Agreements. Each Key Employee shall have entered into an
-------------------
Employment Agreement on terms consistent with those identified pursuant to
Section 5.11.
(c) Third Party Consents. The Company shall have obtained the
--------------------
consents listed in Section 6.3(c) of the Company Disclosure Letter.
(d) Rights Agreements. The holders of at least 90% of Company Common
-----------------
Stock, 100% of Company Series A Preferred Stock and 80% of Company Series B
Preferred Stock shall have executed a counterpart of the Rights Agreement. The
FreePC, Inc. Amended and Restated Investor Rights Agreement effective as of
March 31, 1999 shall have been terminated in all respects in accordance with its
terms by the Company and substantially all of the other parties thereto.
(e) Company Charter Amendment. The Company Charter Amendment shall
-------------------------
have been filed with the Secretary of State for the State of Delaware.
-40-
<PAGE>
(f) No Material Adverse Changes. There shall not have occurred (and
---------------------------
the Company Update shall not disclose) any material adverse change in the
business, properties, liabilities, results of operations or financial condition
of the Company or the Subsidiary, taken as a whole.
(g) Certificate of the Company. The Parent shall have received from
--------------------------
the Company a certificate executed on behalf of the Company by its Chief
Executive Officer and Chief Financial Officer to the effect that, as of the
Effective Time, the conditions set forth in Sections 6.2 (a) and (e) have been
satisfied.
(h) Dissenters. Holders of not more than 8% of the outstanding
----------
Company Common Stock and Company Preferred Stock (calculated on an as converted
into Company Common Stock basis) in the aggregate shall have exercised, or shall
continue to have the right to exercise, appraisal rights with respect to the
transactions contemplated by this Agreement.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated and the Merger
-----------
abandoned at any time prior to the Effective Time:
(a) by mutual written consent of the Company, Parent and Merger Sub;
(b) by Parent if (i) there has been a material breach of any
representation, warranty, covenant or agreement contained in this Agreement on
the part of the Company and such breach has not been cured within ten (10)
business days after written notice to the Company or (ii) there shall be any
final action taken, or any statute, rule, regulation or order enacted,
promulgated or issued or deemed applicable to the Merger by any Governmental
Entity, which would prohibit Parent's, the Company's or the Surviving
Corporation's ownership or operation of all or a material portion of the
business of the Company, or compel Parent, the Company or the Surviving
Corporation to dispose of or hold separate all or a material portion of the
business or assets of the Company or Parent as a result of the Merger;
(c) by the Company if there has been a material breach of any
representation, warranty, covenant or agreement contained in this Agreement on
the part of Parent or Merger Sub and such breach has not been cured within ten
(10) days after written notice to Parent;
(d) by any party hereto if (i) the Closing has not occurred by
February 15, 2000; (ii) there shall be a final, non-appealable order of a
federal or state court in effect preventing consummation of the Merger; (iii)
there shall be any final action taken, or any statute, rule, regulation or order
enacted, promulgated or issued or deemed applicable to the Merger by any
Governmental Entity which would make consummation of the Merger illegal; or (iv)
if the Company's stockholders do not approve the Merger as contemplated by
Section 5.1.
-41-
<PAGE>
Where action is taken to terminate this Agreement pursuant to this Section
7.1, it shall be sufficient for such action to be authorized by the Board of
Directors (as applicable) of the party taking such action.
7.2 Effect of Termination. In the event of termination of this Agreement
---------------------
as provided in Section 7.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Parent, Merger Sub, the
Company or their respective officers, directors or stockholders, except to the
extent that such termination results from the breach by a party hereto of any of
its representations, warranties, covenants or agreements set forth in this
Agreement.
7.3 Amendment. This Agreement may be amended by the parties hereto at any
---------
time by execution of an instrument in writing signed on behalf of each of the
parties hereto; provided that following approval of the Merger by the
stockholders of the Company, no amendment shall be made that by law requires the
further approval of such stockholders without obtaining such approval.
7.4 Extension; Waiver. At any time prior to the Effective Time any party
-----------------
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via telecopy to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice) provided,
however, that notices sent by mail will not be deemed given until received.
(a) if to Parent or Merger Sub, to:
eMachines, Inc.
14350 Myford Road, Suite 100
Irvine, California 92606
Attention: Chief Executive Officer
Fax: (714) 505-5065
-42-
<PAGE>
with a copy at the same address to the attention of the General
Counsel and with a copy to:
Wilson, Sonsini, Goodrich & Rosati PC
650 Page Mill Road
Palo Alto, California 94304
Attention: John A. Fore, Esq.
Fax: (650)-493-6811
(b) if to the Company, to:
FreePC, Inc.
74 N. Pasadena Avenue, 8/th/ Floor
Pasadena, California 91103
Attention: Chief Executive Officer
Fax: (626) 396-6301
with a copy to:
Gibson Dunn & Crutcher, LLP
333 South Grand Avenue
Los Angeles, CA 90071
Attention: Kenneth M. Doran, Esq.
Fax: (213)-229-7520
8.2 Interpretation. When a reference is made in this Agreement to
--------------
Exhibits, such reference shall be to an Exhibit to this Agreement unless
otherwise indicated. The words "include," "includes" and "including" when used
herein shall be deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
8.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
8.4 Miscellaneous. This Agreement and the documents and instruments and
-------------
other agreements among the parties hereto including all lists and statements
separately certified in writing by the Company or Parent (a) constitute the
entire agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter hereof, except for the
Confidentiality Agreement between Parent and the Company, which shall continue
in full force and effect until the Closing and shall survive any termination of
this Agreement; (b) are not intended to confer upon any other person any rights
or remedies hereunder; and (c) shall not be assigned by operation of law or
otherwise except as otherwise specifically provided.
-43-
<PAGE>
8.5 Governing Law. This Agreement shall be governed in all respects,
-------------
including validity, interpretation and effect, by the laws of the State of
California. All parties hereto agree to submit to the jurisdiction of the
federal and state courts of the State of California, and further agree that
service of documents commencing any suit therein may be made as provided in
Section 8.1.
8.6 Rules of Construction. The parties hereto agree that they have been
---------------------
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
8.7 Nonsurvival of Representations and Warranties. The representations
---------------------------------------------
and warranties of Parent, Acquisition Sub and Company contained in this
Agreement shall terminate at the Effective Time and only the covenants that by
their terms survive the Effective Time shall survive.
8.8 Validity. If any provision of this Agreement or the application
--------
thereof to any person or circumstance is held invalid or unenforceable, the
remainder of this Agreement and the application of such provision to other
persons or circumstances shall not be affected thereby and to such end the
provisions of this Agreement are agreed to be severable.
8.9 Descriptive Headings. The descriptive headings herein are inserted
--------------------
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
8.10 Specific Performance. The parties hereby acknowledge and agree that
--------------------
the failure of any party to perform its agreements and covenants hereunder,
including its failure to take all actions necessary on its part to consummate
the Merger, will cause irreparable injury to the other parties, for which
damages, even if available, will not be an adequate remedy. Accordingly, each
party hereby consents to the issuance of injunctive relief by any court of
competent jurisdiction to compel performance of such party's obligations and to
the granting by any court of the remedy of specific performance of its
obligations hereunder.
-44-
<PAGE>
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Agreement to be signed by themselves or their duly authorized respective
officers, all as of the date first written above.
eMACHINES, INC.
By: /s/ Stephen Dukker
------------------------------------
Chief Executive Officer
FREEPC, INC.
By: /s/ Donald La Vigne
------------------------------------
Chief Executive Officer
eMACHINES ACQUISITION CORP.
By: /s/ Stephen Dukker
------------------------------------
Chief Executive Officer
-45-
<PAGE>
EXHIBIT 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF EMACHINES, INC.
a Delaware corporation
(Originally incorporated on September 18, 1998)
The undersigned, Stephen A. Dukker, does hereby certify that:
1. He is the duly elected and acting President and Chief Executive
Officer of eMachines, Inc., a Delaware corporation (the "Corporation").
2. The Certificate of Incorporation of the Corporation, originally
filed September 18,1998 under the name emachines, Inc., amended on August 13,
1999 changing its name to eMachines, Inc. and further amended on August 17,
1999, with the Secretary of State of the State of Delaware, is hereby amended
and restated to read in its entirety as follows:
ARTICLE I
The name of this Corporation is eMachines, Inc.
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is the Corporation Trust
Corporation.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
A. Classes of Stock. This Corporation is authorized to issue two classes
----------------
of stock, to be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares which the corporation is authorized to issue is three
hundred million (300,000,000) shares. Two hundred fifty million (250,000,000)
shares shall be Common Stock, par value $0.0000125 per share, and fifty million
(50,000,000) shares shall be Preferred Stock, par value $0.01 per share. Of the
authorized shares of Preferred Stock, a total of (i) twenty five million
(25,000,000) shares shall be designated Series A Preferred Stock ("Series A
Preferred"), (ii) fourteen million (14,000,000), shall be designated Series B
Preferred Stock ("Series B Preferred"), and (iii) eleven million (11,000,000),
shall be designated Series C Preferred Stock ("Series C Preferred").
B. Rights, Preferences, Privileges and Restrictions of Series A Preferred
----------------------------------------------------------------------
Stock. The rights, preferences, privileges and restrictions granted to and
- -----
imposed on the Series A Preferred are as set forth below in this Article IV(B).
1. Dividend Provisions. The holders of shares of Series A
-------------------
Preferred shall be entitled to receive dividends, out of any assets legally
available therefor, prior and in preference to any declaration or
<PAGE>
payment of any dividend (payable other than in Common Stock) on the Series B
Preferred, Series C Preferred or Common Stock of this Corporation, at the rate
of $0.44688 per share per annum with respect to the shares of Series A Preferred
held by them (as adjusted for any stock dividends, combinations or splits with
respect thereto). Such dividends shall be payable as, if and when declared by
the Board of Directors, and shall not be cumulative, except as and to the extent
set forth in Section 4 of this Article IV. No dividend shall be paid on shares
of Series B Preferred, Series C Preferred or Common Stock in any fiscal year
unless the aforementioned preferential dividends of the Series A Preferred shall
have been paid in full and the aggregate dividends paid on each share of Series
A Preferred during such fiscal year equals or exceeds the dividends per share
(compared on an as-converted basis) paid during such fiscal year on the Series B
Preferred, Series C Preferred or Common Stock.
2. Liquidation Preference.
----------------------
a. In the event of any liquidation, dissolution or winding
up of this Corporation, either voluntary or involuntary, the holders of Series A
Preferred shall be entitled to receive, prior and in preference to any
distribution of any of the assets of this Corporation to the holders of Series B
Preferred, Series C Preferred or Common Stock by reason of their ownership
thereof, the amount of $6.384 (the "Original Series A Issue Price") for each
share of Series A Preferred then held by them (as adjusted for any stock
dividends, combinations or splits with respect to such shares), plus an amount
equal to all declared but unpaid dividends on such shares (the total of the
Original Series A Issue Price and such dividends, the "Series A Base Liquidation
Amount"); provided, however, that if the amount payable to the holders of Series
A Preferred in the event of any liquidation, dissolution or winding up of this
Corporation after conversion of such Preferred Stock into Common Stock as set
forth herein and distribution of assets and funds as set forth in subparagraph
(b) of this Section 2 (and without making any distribution under this
subparagraph (a)) shall exceed the Series A Base Liquidation Amount, then the
holders of Series A Preferred shall be entitled to receive that greater amount
and no distribution under this subparagraph (a) shall occur. If, upon the
occurrence of any event of liquidation, dissolution or winding up of this
Corporation, the assets and funds of the Corporation legally available for
distribution shall be insufficient to permit the payment to the holders of the
then outstanding shares of Series A Preferred of the full Series A Base
Liquidation Amount, then the entire assets and funds of the Corporation legally
available for distribution shall be distributed ratably among the holders of
Series A Preferred in a manner such that the amount distributed to each holder
of Series A Preferred shall equal the amount obtained by multiplying the entire
assets and funds of the Corporation legally available for distribution hereunder
by a fraction, the numerator of which shall be the number of shares of Series A
Preferred then held by the holder and the denominator of which shall be the
total then outstanding number of shares of Series A Preferred.
b. Upon the completion of the distribution required by
subparagraph (a) of this Section 2 (or if such distribution shall not occur as
provided in such subparagraph), the remaining (or, as applicable, all) assets
and funds of the Corporation available for distribution to stockholders shall be
distributed (i) first, among the holders of shares of Series C Preferred in
accordance with subparagraph D.1(a); (ii) second, among the holders of shares of
Series B Preferred in accordance with subparagraph C.1 (a); and (iii) third,
among the holders of Common Stock (including if the distribution provided in
subparagraph (a) shall not occur, the holders of Series A Preferred after
conversion into Common Stock as referred to in such subparagraph) pro rata in
proportion to the number of shares of Common Stock held by each such holder.
c. Definition of Liquidation Event; Notice.
---------------------------------------
(i) For purposes of this Section 2, Section C.1 and
Section D.1, a liquidation, dissolution or winding up of this Corporation shall
be deemed to be occasioned by, and to
-2-
<PAGE>
include, (A) the acquisition of the Corporation by another entity by means of
any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation); or (B) a sale of all
or substantially all of the assets of the Corporation (including, for purposes
of this section, intellectual property rights which, in the aggregate,
constitute substantially all of the Corporation's material assets); unless in
each case, the Corporation's stockholders of record as constituted immediately
prior to such acquisition or sale will, immediately after such acquisition or
sale (by virtue of securities issued as consideration for the Corporation's
acquisition or sale or otherwise) hold at least fifty percent (50%) of the
voting power of the surviving or successor entity to the business of the
Corporation.
(ii) In any of such events, if the consideration
received by the Corporation is other than cash, its value will be deemed its
fair market value. Any securities shall be valued as follows:
(A) Securities not subject to investment letter
or other similar restrictions on free marketability shall be valued as follows:
(1) if traded on a securities exchange or through the Nasdaq National Market,
the value shall be deemed to be the average of the closing prices of the
securities on such exchange over the thirty day period ending three days prior
to the closing; (2) if actively traded over-the-counter, the value shall be
deemed to be the average of the closing bid or sale prices (whichever is
applicable) over the thirty day period ending three days prior to the closing;
and (3) if there is no active public market, the value shall be the fair market
value thereof, as determined in good faith by the Board of Directors of the
Corporation.
(B) Securities subject to investment letter or
other restrictions on free marketability (other than restrictions arising solely
by virtue of a stockholder's status as an affiliate or former affiliate) shall
be valued in such a manner as to make an appropriate discount from the market
value determined as above in (A) (1), (2) or (3) to reflect the approximate fair
market value thereof, as determined in good faith after reasonable inquiry by
the Board of Directors of the Corporation.
(iii) In the event the requirements of this
subsection 2(c) are not complied with, this Corporation shall forthwith either:
(A) cause such closing to be postponed until
such time as the requirements of this Section 2 have been complied with; or
(B) cancel such transaction, in which event the
rights, preferences and privileges of the holders of Preferred Stock shall
revert to and be the same as such rights, preferences and privileges existing
immediately prior to the date of the first notice referred to in subsection
2(c)(iv) hereof.
(iv) The Corporation shall give each holder of
record of shares of Preferred Stock written notice of any such impending
transaction not later than ten (10) days prior to the stockholder meeting called
to approve such transaction, or twenty (20) days prior to the closing of such
transaction whichever notice date is earlier, and shall also notify such holders
in writing of the final approval of such transaction. The first of such notices
shall describe the material terms and conditions of the impending transaction,
the provisions of this Section 2, and the amounts anticipated to be distributed
to holders of each outstanding series and class of capital stock of the
Corporation pursuant to this Section 2, and the Corporation shall thereafter
give such holders prompt notice of any material changes. The transaction shall
in no event take place sooner than twenty (20) days after the Corporation has
given the first notice provided for herein or sooner than ten (10) days after
the Corporation has given notice of any material changes provided for herein;
provided, however, that such periods may be shortened upon the written consent
of the holders of Preferred Stock that are entitled to such notice rights or
similar notice rights and that
-3-
<PAGE>
represent at least a majority of the voting power of all then outstanding shares
of such Preferred Stock (on an as-converted basis).
3. Conversion. The holders of shares of Series A Preferred shall
----------
have conversion rights as follows (the "Conversion Rights" of the Series A
Preferred):
a. Right to Convert. Each share of Series A Preferred
----------------
shall be convertible, at the option of the holder thereof, at any time after the
date of issuance of such share at the office of this Corporation or any transfer
agent for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing the Original Series A Issue Price by
the Series A Conversion Price, determined as hereinafter provided, in effect on
the date the certificate is surrendered for conversion. The initial Conversion
Price per share for shares of Series A Preferred shall be the Original Series A
Issue Price; provided, however, that such Conversion Price shall be subject to
adjustment as set forth in subsection 3(d) hereof.
b. Automatic Conversion. Each share of Series A Preferred
--------------------
shall automatically be converted into shares of Common Stock at the Conversion
Price at the time in effect for such share of Series A Preferred immediately
upon the earlier of (i) except as provided below in subsection 3(c), the closing
of the Corporation's sale of its Common Stock in an underwritten public offering
on form S-1 (or successor form) under the Securities Act of 1933, as amended
(the "Act"), yielding gross proceeds to the Corporation (prior to expenses and
underwriting commissions) in excess of thirty million dollars ($30,000,000) (a
"Qualified Public Offering")and at an offering price per share greater than 133%
of the per share Original Series A Issue Price (as adjusted for any stock
dividends, combinations or splits with respect to such shares), and (ii) the
date specified upon the election to convert all Series A Preferred into Common
Stock by holders of at least a majority of the then outstanding shares of Series
A Preferred, voting together as a single class on an as-converted basis at a
duly held meeting or by written consent or other agreement.
c. Mechanics of Conversion. Before any holder of
-----------------------
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, such holder shall surrender the certificate or certificates therefor,
duly endorsed, at the office of this Corporation or of any transfer agent for
the Preferred Stock, and shall give written notice to this Corporation at its
principal corporate office, of the election to convert the same and shall state
therein the name or names in which the certificate or certificates for shares of
Common Stock are to be issued. This Corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of Preferred Stock,
or to the nominee or nominees of such holder, a certificate or certificates for
the number of shares of Common Stock to which such holder shall be entitled as
aforesaid. Such conversion shall be deemed to have been made immediately prior
to the close of business on the date of such surrender of the shares of
Preferred Stock to be converted, and the person or persons entitled to receive
the shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder or holders of such shares of Common Stock as
of such date. If the conversion is in connection with a Qualified Public
Offering or other underwritten offering of securities registered pursuant to the
Act, the conversion, unless otherwise designated by the holder, will be
conditioned upon the closing with the underwriters of the sale of securities
pursuant to such offering, in which event the person(s) entitled to receive
Common Stock upon conversion of the Preferred Stock shall not be deemed to have
converted such Preferred Stock until immediately prior to the closing of such
sale of securities.
d. Conversion Price Adjustments of Preferred Stock for
---------------------------------------------------
Certain Splits and Combinations and Certain Diluting Issues.
- -----------------------------------------------------------
(i) Special Definitions. For purposes of this
------------------
Section 3(d), Section C.2(d) and Section D.2(d), the following definitions
apply:
-4-
<PAGE>
(A) "Convertible Securities" shall mean any
evidences of indebtedness, shares or other securities convertible into or
exchangeable for Common Stock.
(B) "Options" shall mean rights, options, or
warrants to subscribe for purchase or otherwise acquire Common Stock, Preferred
Stock or Convertible Securities.
(C) "Original Issue Date" shall mean the date
on which a share of Series A Preferred, Series B Preferred or Series C
Preferred, as applicable, was first issued.
(D) "Additional Shares of Common" shall mean
all shares of Common Stock issued or deemed to be issued by the corporation
after the Original Issue Date, other than shares of Common Stock issued or
issuable:
i) upon conversion of shares of
Series A Preferred, Series B Preferred or Series C Preferred;
ii) to officers, directors, or
employees of, or consultants to, the corporation on terms approved by the Board
of Directors;
iii) to vendors, customers, lenders,
suppliers, or equipment lessors upon terms approved by the Board of Directors
(or, if any such entity is an affiliate of the Corporation, upon terms approved
by a majority of the disinterested members of the Board) and for property other
than cash; provided that, if any such vendor, customer, lender, supplier or
equipment lessor is Korea Data Systems Co., Ltd. or Trigem Computer, Inc., or
any person or entity in control thereof , under common control therewith or
controlled thereby, such shares of Common Stock issued or issuable shall have
been approved by the director nominated by the Series A Preferred;
iv) as a dividend or distribution on
Series A Preferred;
v) subject to Section 3(d)(iv), upon
exercise or conversion of options or warrants, respectively;
vi) in a Qualified Public Offering;
vii) for which adjustment of the
Series A Conversion Price is made pursuant to Section 3(d)(ii) or (iii); or
viii) in connection with a joint
venture agreement or acquisition agreement upon the terms approved by the Board
of Directors; provided that, if any joint venture involves Korea Data Systems
Co., Ltd. or Trigem Computer, Inc., or any person or entity in control thereof,
under common control therewith or controlled thereby, such shares of Common
Stock issued or issuable shall have been approved by the director nominated by
the Series A Preferred.
(ii) Stock Splits and Dividends. In the event that
--------------------------
the Corporation should at any time or from time to time after the effective date
of this Restated Certficate of Incorporation fix a record date for the
effectuation of a split or subdivision of the outstanding shares of Common Stock
or for the determination of the outstanding shares of Common Stock entitled to
receive a dividend or other distribution payable in Additional Shares of Common
Stock without payment of any consideration by such holder for the Additional
Shares of Common Stock, then, as of such record date (or the date of such
dividend, distribution, split or subdivision if no record date is fixed), the
Conversion Price of the Series A Preferred shall be
-5-
<PAGE>
appropriately decreased so that the number of shares of Common Stock issuable on
conversion of each share of such series shall be increased in proportion to such
increase of the aggregate of shares of Common Stock outstanding.
(iii) Reverse Stock Splits and Combinations. If the
-------------------------------------
number of shares of Common Stock outstanding at any time after the Original
Issue Date is decreased by a combination of the outstanding shares of Common
Stock or reverse stock split, then, following the record date of such
combination or reverse stock split, the Conversion Price of the Series A
Preferred shall be appropriately increased so that the number of shares of
Common Stock issuable on conversion of each share of such series shall be
decreased in proportion to such decrease in outstanding shares.
(iv) Deemed Issuance of Options and Convertible
------------------------------------------
Securities. If this corporation at any time or from time to time after the
- ----------
Original Issue Date issues any Options or Convertible Securities or fixes a
record date for the determination of holders of any class of securities entitled
to receive any Options or Convertible Securities, then the maximum number of
shares (as set forth in the instrument relating thereto without regard to any
provisions contained therein for a subsequent adjustment of such number and not
counting any shares subject to a material contingency) of Common Stock issuable
upon the exercise of such Options or, in the case of Convertible Securities and
Options therefor, the conversion or exchange of such Convertible Securities,
shall be deemed to be Additional Shares of Common Stock issued as of the time of
such issue or, in case a record date has been fixed, as of the close of business
on such record date.
(v) No Adjustment of Conversion Price. Any
---------------------------------
provision herein to the contrary notwithstanding, no adjustment to the Series A
Conversion Price shall be made in respect of the issuance of Additional Shares
of Common unless the consideration per share (determined pursuant to Section
3(d)(vii) hereof) for an Additional Share of Common issued by the corporation is
less than the Series A Conversion Price in effect on the date of, and
immediately prior to, such issue.
(vi) Adjustment of Series A Conversion Price Upon
--------------------------------------------
Issuance of Additional Shares of Common Stock. In the event this corporation
- ---------------------------------------------
issues or is deemed to have issued Additional Shares of Common without
consideration or for a consideration per share less than the Series A Conversion
Price, as last adjusted and then in effect on the date of and immediately prior
to such issue, then and in such event, the then applicable Series A Conversion
Price shall be reduced, concurrently with such issue, to a price (calculated to
the nearest cent) determined by multiplying such Series A Conversion Price by a
fraction, the numerator of which shall be (x) the number of shares of Common
Stock outstanding immediately prior to such issue or deemed issue plus the
number of shares of Common Stock which the aggregate consideration received by
the corporation for the total number of Additional Shares of Common so issued
would purchase at such Series A Conversion Price in effect immediately prior to
such issuance, and the denominator of which shall be (y) the number of shares of
Common Stock outstanding immediately prior to such issue or deemed issue plus
the number of such Additional Shares of Common so issued. For the purpose of the
above calculation, the number of shares of Common outstanding immediately prior
to such issue shall be calculated on a fully diluted basis, as if all shares of
Series A Preferred and all Convertible Securities had been fully converted into
shares of Common Stock immediately prior to such issuance and any outstanding
warrants, options or other rights for the purchase of shares of stock or
convertible securities had been fully exercised immediately prior to such
issuance (and the resulting securities fully converted into shares of Common, if
so convertible) as of such date, but not including in such calculation any
Additional Shares of Common issuable with respect to shares of Series A
Preferred, Convertible Securities, or outstanding options, warrants, or other
rights for the purchase of shares of stock or convertible securities, solely as
a result of the adjustment of the Series A Conversion Price (or other conversion
ratios) resulting from the issuance of the Additional Shares of Common causing
the adjustment in question.
-6-
<PAGE>
(vii) Determination of Consideration. For purposes
------------------------------
of the operation of Section 2(d), the consideration received (or deemed to have
been received in the case of Options and Convertible Securities) by the
corporation for the issue of any Additional Shares of Common Stock shall:
(A) to the extent it consists of cash, be
computed as the aggregate amount of cash paid before deducting any reasonable
brokerage or underwriting commissions or other expense paid or incurred by the
corporation for the issuance and sale of the securities;
(B) to the extent it consists of property other
than cash, be computed at the fair value thereof at the time of such issue or
deemed issuance, as determined in good faith following reasonable inquiry by the
Board of Directors;
(C) if Additional Shares of Common are issued
together with other shares or securities or other assets of the corporation for
consideration which covers both, be the proportion of such consideration so
received, computed as provided in clauses (1) and (2) above, as determined in
good faith following reasonable inquiry by the Board of Directors; and
(D) for Options and Convertible Securities, be
the sum of the values of (x) the cash and property to be paid to this
corporation for the issue of such Options and Convertible Securities, if any,
and (y) the cash and property payable to this corporation upon the exercise in
full of such Option or the full conversion of such Convertible Securities, if
any.
(viii) Calculation of Per Share Amount. The number of
-------------------------------
Additional Shares of Common deemed to be issued upon the issuance or deemed
issuance of a Convertible Security shall be the number of shares of Common Stock
issuable upon the exercise in full of such Option or the conversion in full of
such Convertible Security as set forth in the instrument relating thereto
without regard to any provisions contained therein for a subsequent increase in
the number of shares issuable or decrease in the amount of consideration payable
upon the exercise, conversion, or exchange thereof.
(ix) Recomputation of Adjustment as a Result of
------------------------------------------
Changes in Options or Convertible Securities. If an Option or Convertible
- --------------------------------------------
Security by its terms provides, with the passage of time or otherwise, for any
change in the consideration payable to this corporation or in the number of
shares of Common issuable upon the exercise, conversion, or exchange thereof,
the Series A Conversion Price computed upon the original issuance or deemed
issuance thereof, and any subsequent adjustments based thereon, shall each be
recomputed, upon any such change becoming effective, to reflect such change
insofar as it affects such Options or the rights of conversion or exchange under
such Convertible Securities (provided however that no such adjustment of the
Series A Conversion Price shall affect Common Stock previously issued upon
conversion of the Series A Preferred).
(x) Recomputation of Adjustment as a Result of
------------------------------------------
Expiration of Options or Conversion. Upon expiration of any Options or any
- -----------------------------------
rights of conversion or exchange under Convertible Securities that have not been
exercised or converted, the Series A Conversion Price computed upon the original
issuance or deemed issuance thereof, and any subsequent adjustments based
thereon, shall each be recomputed, upon such expiration, as if (a) in the case
of Convertible Securities or Options for Common Stock, the only Additional
Shares of Common issued were shares of Common Stock, if any, actually issued
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities and the consideration received therefor was the
consideration actually received by this corporation for the issuance of all such
Options, whether or not exercised, plus the consideration actually received by
this corporation upon such exercise, or for the issuance of all such Convertible
Securities that were actually received by this corporation upon such exercise,
or for the issuance of all such Convertible Securities that were actually
-7-
<PAGE>
converted or exchanged, plus the additional consideration, if any, actually
received by this corporation upon such conversion or exchange, and (b) in the
case of Options for Convertible Securities, only the Convertible Securities, if
any, actually issued upon the exercise thereof were issued at the time of
issuance or deemed issuance of such Options, and the consideration received by
this corporation for the Additional Shares of Common Stock deemed to have been
then issued was the consideration actually received by this corporation for the
issuance of all such Options, whether or not exercised, plus the consideration
deemed to have been received by this corporation upon the issuance of the
Convertible Securities with respect to which such Options were actually
exercised.
(xi) Limitation on Readjustments.
---------------------------
(A) Readjustment of Conversion Price. No
--------------------------------
readjustment pursuant to Section 3(d) hereof shall have the effect of increasing
the Series A Conversion Price to an amount that exceeds the lower of (a) the
applicable Conversion Price immediately before the issuance or deemed issuance
of such Options or Convertible Securities or (b) the applicable Conversion Price
that would have resulted from any issuance of Additional Shares of Common
between the date immediately before the issuance or deemed issuance of such
Options or Convertible Securities and such readjustment date.
(B) No Adjustment Upon Issuance of Shares
-------------------------------------
Deemed Outstanding. No adjustment in the Series A Conversion Price shall be
- ------------------
made upon the actual issuance of Additional Shares of Common if such shares are
already deemed issued at the time of issuance.
e. Other Distributions. In the event that this Corporation
-------------------
shall declare a distribution payable in securities of other persons, evidences
of indebtedness issued by this Corporation or other persons, assets (excluding
cash dividends) or options or rights not referred to in subsection 3(d), then,
in each such case for the purpose of this subSection 3(e), the holders of shares
of Series A Preferred shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of the Corporation into which their shares of Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the Corporation entitled to receive such distribution.
f. Recapitalizations. If at any time or from time to time
-----------------
there shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 3 or Section 2), provision shall be made so that each holder of
Series A Preferred shall thereafter be entitled to receive, upon conversion of
the shares of Series A Preferred held by such holder, the number of shares of
stock or other securities or property, of the Corporation or otherwise, to which
a holder of the number of shares of Common Stock into which the shares of Series
A Preferred held by such holder are convertible immediately prior to such
recapitalization would have been entitled upon such recapitalization. In any
such case, appropriate adjustment shall be made in the application of the
provisions of this Section 3 with respect to the rights of the holders of Series
A Preferred after the recapitalization to the extent that the provisions of this
Section 3 (including adjustment of the Conversion Price then in effect and the
number of shares purchasable upon conversion of Series A Preferred) shall be
applicable after that event as nearly equivalently as may be practicable.
g. No Impairment. This Corporation will not, by amendment
-------------
of its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by this corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 3 and in the taking of all
such
-8-
<PAGE>
action as may be necessary or appropriate in order to protect the Conversion
Rights of the holders of shares of Series A Preferred against impairment.
h. No Fractional Shares and Certificate as to Adjustment.
-----------------------------------------------------
(i) No fractional shares shall be issued upon the
conversion of any share or shares of any series of Preferred Stock, and the
number of shares of Common Stock to be issued shall be rounded to the nearest
whole share. Whether or not fractional shares are issuable upon such conversion
shall be determined on the basis of the total number of shares of such series of
Preferred Stock the holder is at the time converting into Common Stock and the
number of shares of Common Stock issuable upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or
readjustment of the Conversion Price of a series of Preferred Stock pursuant to
this Section 3, Section C.2 or Section D.2, this Corporation, at its expense,
shall promptly compute such adjustment or readjustment in accordance with the
terms of such applicable Section and prepare and furnish to each holder of such
series of Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. This Corporation shall, upon the reasonable written
request at any time of any holder of Preferred Stock, furnish or cause to be
furnished to such holder a like certificate setting forth (A) such adjustment
and readjustment, (B) the Conversion Price for each series of Preferred Stock at
the time in effect, and (C) the number of shares of Common Stock and the amount,
if any, of other property which at the time would be received upon the
conversion of a share of each series of Preferred Stock.
i. Notices of Record Date. In the event of any taking by
----------------------
this Corporation of a record date for determining the holders of any class of
securities who are entitled to receive (A) any dividend (other than a cash
dividend) or other distribution, (B) any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or (C) any other right, this Corporation shall mail to each holder of
Preferred Stock, at least ten (10) days prior to the record date specified
therein, a notice specifying the record date to be taken for the purpose of such
dividend, distribution or right, and the amount and character of such dividend,
distribution or right.
j. Reservation of Stock Issuable Upon Conversion. This
---------------------------------------------
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the then outstanding shares of Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of Preferred Stock, then
in addition to such other remedies as shall be available to the holder of such
Preferred Stock, this Corporation will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purposes, including, without limitation, engaging in best efforts to obtain the
requisite Board of Directors and stockholder approval of any necessary amendment
to this Certificate of Incorporation.
k. Notices. Any notice required by the provisions of this
-------
Section 3 to be given to the holders of shares of Preferred Stock shall be
deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his address appearing on the books of this
Corporation.
4. Redemption.
----------
-9-
<PAGE>
a. The Corporation shall offer to redeem 33.3% of the
unconverted shares of Series A Preferred outstanding on January 1, 2004 (such
offer to be reduced by the number of shares of Series A Preferred converted into
Common after January 1, 2004 and before the First Redemption Date, as hereafter
defined) on the fifth anniversary of the Original Issue Date (the "First
Redemption Date") by paying the holders thereof from funds legally available
therefor no later than the First Redemption Date a price (the "Redemption
Price") per share equal to the sum of (i) the Original Series A Issue Price, and
(ii) all declared but unpaid dividends on such share. The Corporation shall
offer to redeem a cumulative 66.7% of the unconverted shares of Series A
Preferred outstanding on January 1, 2004 (such offer to be reduced by the number
of shares of Series A Preferred converted into Common after January 1, 2004 and
before the Second Redemption Date) on the sixth anniversary of the Original
Issue Date (the "Second Redemption Date") by paying the holders thereof from
funds legally available therefor no later than the Second Redemption Date the
per share Redemption Price. The Corporation shall offer to redeem a cumulative
100% of the unconverted shares of Series A Preferred outstanding on January 1,
2004 (such offer to be reduced by the number of shares of Series A Preferred
converted into Common after January 1, 2004 and before the Third Redemption
Date) on the seventh anniversary of the Original Issue Date (the "Third
Redemption Date", and each of the First Redemption Date, Second Redemption Date
and Third Redemption Date, a "Redemption Date") by paying the holders thereof
from funds legally available therefor no later than the Third Redemption Date
the per share Redemption Price. The entire Redemption Price shall in each case
be paid in cash. If any portion of the Redemption Price shall not be paid by the
Corporation on any Redemption Date with respect to shares of Series A Preferred
tendered for redemption on such date, dividends shall thereafter accrue and
accumulate on such shares of Series A Preferred (thus increasing the Redemption
Price thereof), and late fees shall accrue on such increasing Redemption Price
at the rate of 15% per annum until the increased Redemption Price plus all such
late fees are paid in full (which amount shall be paid as liquidated damages and
not as a penalty).
b. A majority in interest of the shares of the Series A
Preferred then outstanding, voting together as a class, at a meeting called for
such purpose or by written consent as permitted by law and this Restated
Certficate of Incorporation and the By-laws of the Corporation, shall have the
right and option to waive any of the aforesaid requirements that the Corporation
redeem all or a portion of the Series A Preferred on any Redemption Date at the
applicable Redemption Price calculated as set forth above.
c. At least 35 but no more than 45 days prior to each Redemption
Date, written notice shall be mailed, first class postage prepaid, to each
holder of record (at the close of business on the Business Day next preceding
the day on which notice is given) of the Series A Preferred at the address last
shown on the records of the Corporation for such holder, notifying such holder
of the Corporation's offer to redeem as aforesaid, specifying the number of
shares offered to be redeemed from such holder, the Redemption Date, the
Redemption Price, the place at which payment may be obtained and calling upon
such holder to surrender to the Corporation, in the manner and at the place
designated, his certificate or certificates representing the shares to be
redeemed (the "Redemption Notice"). Each holder of Series A Preferred shall
notify the Corporation within ten days of the date of the Redemption Notice
(effecting the "Exercise Notice") of whether it shall exercise its option to
redeem on the Redemption Date set forth in the Redemption Notice. No later than
20 days prior to each Redemption Date, the Corporation shall mail, first class
postage prepaid, to each holder of record to which the Redemption Notice shall
have been addressed at the address to which such Notice was sent, notifying such
holder of the number of holders of Series A Preferred who shall then have sent
Exercise Notices to the Corporation. Any holder of Series A Preferred that shall
desire to exercise its option to redeem as aforesaid but shall not have sent an
Exercise Notice may notify the Corporation no later than 10 days prior to the
Redemption Date of its intention to exercise its option to redeem on the
Redemption Date set forth in the Redemption Notice. Except as provided in
paragraph (d) of this Section 4, on or after each Redemption Date, each holder
of Series A Preferred that shall have exercised its option to redeem as
aforesaid shall surrender to this Corporation the certificate or certificates
representing such shares, in the manner and at the place designated in the
Redemption Notice, and thereupon the Redemption Price of
-10-
<PAGE>
such shares shall be payable to the order of the person whose name appears on
the records of the Corporation as the record holder on the record date, and each
surrendered certificate shall be canceled. In the event less than all the shares
represented by any such certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares.
d. From and after each Redemption Date, all rights of the
holders of shares of Series A Preferred redeemed on such date (except the right
to receive the Redemption Price without interest upon surrender of their
certificate or certificates) shall cease with respect to such shares, and such
shares shall not thereafter be transferred on the books of the Corporation or be
deemed to be outstanding for any purpose whatsoever. Upon each Redemption Date,
the Corporation shall redeem Series A Preferred ratably among the holders
thereof that shall exercise their respective options to so redeem based upon
their holdings of Series A Preferred. If the funds of the Corporation legally
available for redemption of shares of Series A Preferred on any Redemption Date
are insufficient to redeem the total number of shares of Series A Preferred to
be redeemed in the exercise of such options on such date, those funds which are
legally available will be used to redeem the maximum possible number of such
shares ratably among the holders of such shares to be redeemed based upon their
holdings of Series A Preferred. The shares of Series A Preferred not redeemed
shall remain outstanding and entitled to all the rights and preferences provided
herein. At any time thereafter when additional funds of the Corporation are
legally available for the redemption of shares of Series A Preferred such funds
will immediately be used to redeem the balance of the shares which the
Corporation has become obliged to redeem on the Redemption Date, but which it
has not redeemed, ratably among the holders thereof based upon their holdings of
Series A Preferred.
5. Voting Rights.
-------------
a. Each holder of shares of Preferred Stock shall be entitled to
notice of any stockholder meeting in accordance with the Bylaws of the
Corporation, shall be entitled to a number of votes equal to the number of
shares of Common Stock into which the shares of Preferred Stock held by such
holder could then be converted, shall have voting rights and powers equal to the
voting rights and powers of the holders of Common Stock, and shall vote together
as a single class with holders of Common Stock and all series of Preferred Stock
on all matters except as otherwise provided herein or as expressly required by
law. Fractional votes shall not be permitted, and any fractional voting rights
resulting from the right of any holder of Preferred Stock to vote on an as
converted basis (after aggregating the shares into which all shares of Preferred
Stock held such holder could be converted) shall be rounded to the nearest whole
number (with one-half being rounded upward). The holders of Preferred Stock
shall have no separate class or Series vote on any matter except as otherwise
provided herein or as expressly required by law.
b. Pursuant to Section 141(a) of the Delaware General
Corporation Law, the Corporation shall be governed by a board of directors
consisting of eight (8) individuals, as provided herein (the "Board of
Directors"). For so long as TriGem Corporation shall hold at least Eight Million
(8,000,000) shares of Common Stock (as adjusted for stock dividends,
combinations or splits with respect to such shares), TriGem Corporation shall be
entitled to appoint and elect two directors. For so long as Korea Data Systems
America, Inc. shall hold at least Eight Million (8,000,000) shares of Common
Stock (as adjusted for stock dividends, combinations or splits with respect to
such shares), Korea Data Systems America, Inc. shall be entitled to appoint and
elect two directors. For so long as Stephen A. Dukker shall hold at least Four
Million (4,000,000) shares of Common Stock (as adjusted for stock dividends,
combinations or splits with respect to such shares), Stephen A. Dukker shall be
entitled to appoint and elect one director. For so long as at least Four Million
(4,000,000) shares of Series A Preferred shall be outstanding (as adjusted for
stock dividends, combinations or splits with respect to such shares), the
holders of shares of Series A Preferred, voting together as a separate class,
shall be entitled to appoint and elect one director. For so long as at least
Four Million (4,000,000) shares of Series B Preferred and Series C Preferred
shall be outstanding (as adjusted for
-11-
<PAGE>
stock dividends, combinations or splits with respect to such shares), the
holders of shares of Series B Preferred and shares of Series C Preferred, voting
together as a separate class, shall be entitled to appoint and elect one
director. Directors not elected by a particular class or series of capital stock
of the Corporation as aforesaid shall be appointed and elected by the holders of
the outstanding shares of Series A Preferred and shares of Common Stock, voting
together as a class. Any vacancy in the Board of Directors occurring because of
the death, resignation or removal of a director shall be filled by the vote or
written consent of the holders of a majority of such class or classes which
elected such director or of the person or entity which elected such director, as
applicable. A director may be removed from the Board of Directors with or
without cause only by the vote or consent of the holders of the outstanding
class or classes with voting power entitled to elect him or her or by the entity
which elected such Director, as applicable, in either case in accordance with
Delaware law and the vacancy created thereby may be filled only by the vote or
consent of such holders. Notwithstanding the foregoing, the consent of the
holders of the outstanding class or classes with voting power entitled to elect
any Director or by the entity which elected such Director, as applicable, shall
not be required to remove such Director for cause involving gross and willful
misconduct that is injurious to the Corporation.
6. Protective Provisions. So long as at least 4,000,000 shares
---------------------
(subject to adjustment for stock dividends, stock distributions, stock splits or
reverse stock splits, combination of shares, subdivision of shares or
reclassification of shares) of Series A Preferred shall be outstanding, the
Corporation shall not, without first obtaining the affirmative vote or written
consent of holders of greater than fifty percent (50%) of all outstanding shares
of Series A Preferred voting together as a class:
a. amend or repeal any provision of, or add any provision to,
the Corporation's Certificate of Incorporation if such action would create or
issue any new Series of Preferred Stock or other capital stock of the
Corporation or reclassify any shares of Common Stock, in either case into shares
(i) having any preference or priority as to redemption rights, dividends or
liquidation preferences superior to or on a parity with such preference or
priority of the Series A Preferred, or (ii) having more votes per share on an as
converted basis than the Series A Preferred;
b. except in the exercise of any first refusal right statutorily
or contractually available to the Corporation or to the redemption of shares of
Preferred Stock in accordance herewith, apply any of its assets to the
redemption, retirement, purchase or other acquisition of any shares of capital
stock except at cost from employees or directors of, or consultants to, the
Corporation upon termination of employment or consultancy; provided however, in
the case of any such redemptions to be made at the election of this Corporation,
such redemptions have been approved by the Board of Directors;
c. merge or consolidate with or into any other corporation or
corporations, or sell or otherwise transfer in a single transaction or a series
of related transactions all or substantially all of the assets of the
Corporation, if in any case (i) the Corporation's shareholders of record as
constituted immediately prior to such merger, consolidation, sale or other
transfer will, immediately after such merger, consolidation, sale or transfer
hold less than fifty percent (50%) of the voting power of the surviving or
acquiring entity, and (ii) the per share valuation of the shares of Common Stock
of the Corporation calculated on a fully diluted basis (after giving effect to
stock splits, recombinations and the like) shall equal 133% or less of the
Original Series A Issue Price. Calculation of the number of shares outstanding
on a fully diluted basis on the date of such transaction means assuming that all
shares of Series A Preferred and all Convertible Securities had been fully
converted into shares of Common Stock immediately prior to such transaction, and
that any outstanding warrants, options or other rights for the purchase of
shares of stock or convertible securities had been fully exercised immediately
prior to such transaction and the resulting securities fully converted into
shares of Common Stock, if so convertible, as of such date of such transaction;
or
-12-
<PAGE>
d. increase or decrease the aggregate number of authorized
shares or par value of the Series A Preferred.
7. Status of Converted Preferred Stock. In the event any shares of
-----------------------------------
Preferred Stock shall be converted pursuant to Section 3 of this Article IV B,
Section 2 of Article IV C or Section 2 of Article IV D, the shares so converted
shall be canceled and shall not thereafter be issuable by the Corporation. The
Restated Certficate of Incorporation of this Corporation shall be appropriately
amended to effect the corresponding reduction in the Corporation's authorized
capital stock.
C. Rights, Preferences, Privileges and Restrictions of Series B Preferred
----------------------------------------------------------------------
Stock. The rights, preferences, privileges and restrictions granted to and
- -----
imposed on the Series B Preferred are as set forth below in this Article IV(C).
1. Liquidation Preference.
----------------------
a. In the event of any liquidation, dissolution or winding up of
this Corporation, either voluntary or involuntary, the holders of Series B
Preferred shall be entitled to receive, subject to the prior rights of holders
of the Series A Preferred and Series C Preferred but prior and in preference to
any distribution of any of the assets of this Corporation to the holders of
Common Stock by reason of their ownership thereof, the amount of $.009 (the
"Original Series B Issue Price" and the "Series B Liquidation Amount") for each
share of Series B Preferred then held by them (as adjusted for any stock
dividends, combinations or splits with respect to such shares). If, upon the
occurrence of any event of liquidation, dissolution or winding up of this
Corporation, the assets and funds of the Corporation legally available for
distribution, after satisfaction of the prior rights of holders of the Series A
Preferred and Series C Preferred, shall be insufficient to permit the payment to
the holders of the then outstanding shares of Series B Preferred of the full
Series B Liquidation Amount, then the entire assets and funds of the Corporation
legally available for distribution, after satisfaction of the prior rights of
holders of the Series A Preferred and Series C Preferred, shall be distributed
ratably among the holders of Series B Preferred in a manner such that the amount
distributed to each holder of Series B Preferred shall equal the amount obtained
by multiplying the entire remaining assets and funds of the Corporation, after
satisfaction of the prior rights of holders of the Series A Preferred and Series
C Preferred, legally available for distribution hereunder by a fraction, the
numerator of which shall be the number of shares of Series B Preferred then held
by the holder and the denominator of which shall be the total then outstanding
number of shares of Series B Preferred.
b. Upon the completion of the distribution required by
subparagraph (a) of Section B.2, assets and funds of the Corporation available
for distribution to stockholders shall be distributed (i) first, among the
holders of shares of Series C Preferred in accordance with subparagraph (a) of
Section D.1, (ii) second, among the holders of Series B Preferred in accordance
with subparagraph (a) of this Section C.1 and (iii) third, among the holders of
Common Stock (including if the distribution provided in subparagraph B.2.(a)
shall not occur, the holders of Series A Preferred after conversion into Common
Stock as referred to in such subparagraph) pro rata in proportion to the number
of shares of Common Stock held by each such holder.
c. Definition of Liquidation Event; Consideration. For purposes
----------------------------------------------
of this Section 1, a liquidation, dissolution or winding up of this Corporation
shall be determined in accordance with paragraph B.2.(c).
2. Conversion. The holders of shares of Series B Preferred shall have
----------
Conversion Rights:
-13-
<PAGE>
a. Right to Convert. Each share of Series B Preferred shall be
----------------
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share at the office of this Corporation or any transfer agent
for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing the Original Series B Issue Price by
the Series B Conversion Price, determined as hereinafter provided, in effect on
the date the certificate is surrendered for conversion. The initial Conversion
Price per share for shares of Series B Preferred shall be the Original Series B
Issue Price; provided, however, that such Conversion Price shall be subject to
-------- -------
adjustment as set forth in subSection 2(d) hereof.
b. Automatic Conversion. Each share of Series B Preferred shall
--------------------
automatically be converted into shares of Common Stock at the Conversion Price
at the time in effect for such share of Series B Preferred immediately upon the
earlier of (i) except as provided below in subsection 2(c), the closing of a
Qualified Public Offering at an offering price per share greater than 133% of
the per share Original Series B Issue Price (as adjusted for any stock
dividends, combinations or splits with respect to such shares), and (ii) the
date specified upon the election to convert all Series B Preferred into Common
Stock by holders of at least a majority of the then outstanding shares of Series
B Preferred, voting together as a single class on an as-converted basis at a
duly held meeting or by written consent or other agreement.
c. Mechanics of Conversion. Any holder of shares of Series B
-----------------------
Preferred shall be entitled to convert the same into shares of Common Stock in
accordance with the procedure set forth in subparagraph B.3(c).
d. Conversion Price Adjustments of Preferred Stock for Certain
-----------------------------------------------------------
Splits and Combinations and Certain Diluting Issues.
- ---------------------------------------------------
(i) Special Definitions. The definitions set forth in
-------------------
Section B.3(d) shall apply to this Section 2(d).
(ii) Stock Splits and Dividends. In the event that the
--------------------------
Corporation should at any time or from time to time after the effective date of
this Restated Certficate of Incorporation fix a record date for the effectuation
of a split or subdivision of the outstanding shares of Common Stock or for the
determination of the outstanding shares of Common Stock entitled to receive a
dividend or other distribution payable in Additional Shares of Common Stock
without payment of any consideration by such holder for the Additional Shares of
Common Stock, then, as of such record date (or the date of such dividend,
distribution, split or subdivision if no record date is fixed), the Conversion
Price of the Series B Preferred shall be appropriately decreased so that the
number of shares of Common Stock issuable on conversion of each share of such
Series shall be increased in proportion to such increase of the aggregate of
shares of Common Stock outstanding.
(iii) Reverse Stock Splits and Combinations. If the
-------------------------------------
number of shares of Common Stock outstanding at any time after the Original
Issue Date is decreased by a combination of the outstanding shares of Common
Stock or reverse stock split, then, following the record date of such
combination or reverse stock split, the Conversion Price of the Series B
Preferred shall be appropriately increased so that the number of shares of
Common Stock issuable on conversion of each share of such Series shall be
decreased in proportion to such decrease in outstanding shares.
e. Recapitalizations. If at any time or from time to time there
-----------------
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 2), provision shall be made so that each holder of shares of Series
B Preferred shall thereafter be entitled to receive, upon conversion of the
shares of Series B Preferred
-14-
<PAGE>
held by such holder, the number of shares of stock or other securities or
property, of the Corporation or otherwise, to which a holder of the number of
shares of Common Stock into which the shares of Series B Preferred held by such
holder are convertible immediately prior to such recapitalization would have
been entitled upon such recapitalization. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Section 2
with respect to the rights of the holders of shares of Series B Preferred after
the recapitalization to the extent that the provisions of this Section 2
(including adjustment of the Conversion Price then in effect and the number of
shares purchasable upon conversion of Series B Preferred) shall be applicable
after that event as nearly equivalently as may be practicable.
f. No Impairment. This Corporation will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by this
corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 2 and in the taking of all such action as may
be necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series B Preferred against impairment.
g. No Fractional Shares and Certificate as to Adjustment. The
-----------------------------------------------------
rights of holders of shares of Series B preferred with respect to fractional
shares and receipt of certificates of adjustment shall be as set forth in
Section B.3 (h).
h. Notices of Record Date. The rights of holders of shares of
----------------------
Series B preferred with respect to receipt of notices of record date shall be as
set forth in Section B.3 (i).
i. Reservation of Stock Issuable Upon Conversion. This
---------------------------------------------
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock such shares of Common Stock as are specified
in Section B.3(j).
j. Notices. Any notice required by the provisions of Section B.3
-------
to be given to the holders of shares of Series B Preferred shall be deemed given
if deposited in the United States mail, postage prepaid, and addressed to each
holder of record at his address appearing on the books of this Corporation.
3. Voting Rights. Each holder of shares of Series B Preferred Stock
-------------
shall be entitled to vote in accordance with the provisions set forth in Section
B.5.
4. Dividend Rights. Subject to the prior rights of holders of all
----------------
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Series B Preferred Stock shall be entitled to receive, when
and as declared by the Board of Directors, out of any assets of the Corporation
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors.
5. Restrictions on Transfer. No transfer of any share of Series B
-------------------------
Preferred, or of any share of Common Stock into which any share of Series B
Preferred has been converted, may be made other than in accordance with the
provisions of the Rights and Restrictions Agreement dated as of January 13, 2000
on file with the Secretary of the Company.
D. Rights, Preferences, Privileges and Restrictions of Series C Preferred
----------------------------------------------------------------------
Stock. The rights, preferences, privileges and restrictions granted to and
- -----
imposed on the Series C Preferred are as set forth below in this Article IV(C).
1. Liquidation Preference.
----------------------
-15-
<PAGE>
a. In the event of any liquidation, dissolution or winding up of
this Corporation, either voluntary or involuntary, the holders of Series C
Preferred shall be entitled to receive, subject to the prior rights of holders
of the Series A Preferred but prior and in preference to any distribution of any
of the assets of this Corporation to the holders of shares of Series B Preferred
or Common Stock by reason of their ownership thereof, the amount of $4.545 (the
"Original Series C Issue Price" and the "Series C Liquidation Amount") for each
share of Series C Preferred then held by them (as adjusted for any stock
dividends, combinations or splits with respect to such shares). If, upon the
occurrence of any event of liquidation, dissolution or winding up of this
Corporation, the assets and funds of the Corporation legally available for
distribution, after satisfaction of the prior rights of holders of the Series A
Preferred, shall be insufficient to permit the payment to the holders of the
then outstanding shares of Series C Preferred of the full Series C Liquidation
Amount, then the entire assets and funds of the Corporation legally available
for distribution, after satisfaction of the prior rights of holders of the
Series A Preferred, shall be distributed ratably among the holders of Series C
Preferred in a manner such that the amount distributed to each holder of Series
C Preferred shall equal the amount obtained by multiplying the entire remaining
assets and funds of the Corporation, after satisfaction of the prior rights of
holders of the Series A Preferred, legally available for distribution hereunder
by a fraction, the numerator of which shall be the number of shares of Series C
Preferred then held by the holder and the denominator of which shall be the
total then outstanding number of shares of Series C Preferred.
b. Upon the completion of the distribution required by
subparagraph (a) of Section B.2, assets and funds of the Corporation available
for distribution to stockholders shall be distributed (i) first, among the
holders of shares of Series C Preferred in accordance with subparagraph (a) of
this Section D.1, (ii) second, among the holders of Series B Preferred in
accordance with subparagraph (a) of Section C.1 and (iii) third, among the
holders of Common Stock (including if the distribution provided in subparagraph
B.2.(a) shall not occur, the holders of Series A Preferred after conversion into
Common Stock as referred to in such subparagraph) pro rata in proportion to the
number of shares of Common Stock held by each such holder.
c. Definition of Liquidation Event; Consideration. For purposes
----------------------------------------------
of this Section 1, a liquidation, dissolution or winding up of this Corporation
shall be determined in accordance with paragraph B.2.(c).
2. Conversion. The holders of shares of Series C Preferred shall have
----------
Conversion Rights:
a. Right to Convert. Each share of Series C Preferred shall be
----------------
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share at the office of this Corporation or any transfer agent
for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing the Original Series C Issue Price by
the Series C Conversion Price, determined as hereinafter provided, in effect on
the date the certificate is surrendered for conversion. The initial Conversion
Price per share for shares of Series C Preferred shall be the Original Series C
Issue Price; provided, however, that such Conversion Price shall be subject to
-------- -------
adjustment as set forth in subsection 2(d) hereof.
b. Automatic Conversion. Each share of Series C Preferred shall
--------------------
automatically be converted into shares of Common Stock at the Conversion Price
at the time in effect for such share of Series C Preferred immediately upon the
earlier of (i) except as provided below in subSection 2(c), the closing of a
Qualified Public Offering and at an offering price per share greater than 133%
of the per share Original Series C Issue Price (as adjusted for any stock
dividends, combinations or splits with respect to such shares), and (ii) the
date specified upon the election to convert all Series C Preferred into Common
Stock by
-16-
<PAGE>
holders of at least a majority of the then outstanding shares of Series C
Preferred, voting together as a single class on an as-converted basis at a duly
held meeting or by written consent or other agreement.
c. Mechanics of Conversion. Any holder of shares of Series C
-----------------------
Preferred shall be entitled to convert the same into shares of Common Stock in
accordance with the procedure set forth in subparagraph B.3(c).
d. Conversion Price Adjustments of Preferred Stock for Certain
-----------------------------------------------------------
Splits and Combinations and Certain Diluting Issues.
- ---------------------------------------------------
(i) Special Definitions. The definitions set forth in
-------------------
Section B.3(d) shall apply to this Section 2(d).
(ii) Stock Splits and Dividends. In the event that the
--------------------------
Corporation should at any time or from time to time after the effective date of
this Restated Certficate of Incorporation fix a record date for the effectuation
of a split or subdivision of the outstanding shares of Common Stock or for the
determination of the outstanding shares of Common Stock entitled to receive a
dividend or other distribution payable in Additional Shares of Common Stock
without payment of any consideration by such holder for the Additional of Common
Stock, then, as of such record date (or the date of such dividend, distribution,
split or subdivision if no record date is fixed), the Conversion Price of the
Series C Preferred shall be appropriately decreased so that the number of shares
of Common Stock issuable on conversion of each share of such Series shall be
increased in proportion to such increase of the aggregate of shares of Common
Stock outstanding.
(iii) Reverse Stock Splits and Combinations. If the
-------------------------------------
number of shares of Common Stock outstanding at any time after the Original
Issue Date is decreased by a combination of the outstanding shares of Common
Stock or reverse stock split, then, following the record date of such
combination or reverse stock split, the Conversion Price of the Series C
Preferred shall be appropriately increased so that the number of shares of
Common Stock issuable on conversion of each share of such Series shall be
decreased in proportion to such decrease in outstanding shares.
e. Recapitalizations. If at any time or from time to time there
-----------------
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 2), provision shall be made so that each holder of shares of Series
C Preferred shall thereafter be entitled to receive, upon conversion of the
shares of Series C Preferred held by such holder, the number of shares of stock
or other securities or property, of the Corporation or otherwise, to which a
holder of the number of shares of Common Stock into which the shares of Series C
Preferred held by such holder are convertible immediately prior to such
recapitalization would have been entitled upon such recapitalization. In any
such case, appropriate adjustment shall be made in the application of the
provisions of this Section 2 with respect to the rights of the holders of shares
of Series C Preferred after the recapitalization to the extent that the
provisions of this Section 2 (including adjustment of the Conversion Price then
in effect and the number of shares purchasable upon conversion of Series C
Preferred) shall be applicable after that event as nearly equivalently as may be
practicable.
f. No Impairment. This Corporation will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by this
corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 2 and in the taking of all such
-17-
<PAGE>
action as may be necessary or appropriate in order to protect the Conversion
Rights of the holders of the Series C Preferred against impairment.
g. No Fractional Shares and Certificate as to Adjustment. The
-----------------------------------------------------
rights of holders of shares of Series C preferred with respect to fractional
shares and receipt of certificates of adjustment shall be as set forth in
Section B.3 (h).
h. Notices of Record Date. The rights of holders of shares of
----------------------
Series C preferred with respect to receipt of notices of record date shall be as
set forth in Section B.3 (i).
i. Reservation of Stock Issuable Upon Conversion. This
---------------------------------------------
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock such shares of Common Stock as are specified
in Section B.3(j).
j. Notices. Any notice required by the provisions of Section
-------
B.3 to be given to the holders of shares of Series C Preferred shall be deemed
given if deposited in the United States mail, postage prepaid, and addressed to
each holder of record at his address appearing on the books of this Corporation.
3. Voting Rights. Each holder of shares of Series C Preferred
-------------
Stock shall be entitled to vote in accordance with the provisions set forth in
Section B.5.
4. Dividend Rights. Subject to the prior rights of holders of all
----------------
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Series C Preferred Stock shall be entitled to receive, when
and as declared by the Board of Directors, out of any assets of the Corporation
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors.
5. Restrictions on Transfer. No transfer of any share of Series C
------------------------
Preferred, or of any share of Common Stock into which any share of Series C
Preferred has been converted, may be made other than in accordance with the
provisions of the Rights and Restrictions Agreement dated January 13, 2000 on
file with the Secretary of the Company.
E. Common Stock.
------------
1. Dividend Rights. Subject to the prior rights of holders of all
----------------
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the Corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. Liquidation Rights. Upon the liquidation, dissolution or winding
------------------
up of the Corporation, the assets of the Corporation shall be distributed as
provided in Section 2 of Article IV(B) hereof.
3. Redemption. The Common Stock is not redeemable. Repurchases of
----------
Common Stock are not redemptions thereof unless so described in the applicable
governing instrument.
4. Voting Rights. The holder of each share of Common Stock shall have
-------------
the right to one (1) vote, shall be entitled to notice of any stockholder
meeting in accordance with the Bylaws of this Corporation,
-18-
<PAGE>
and shall be entitled to vote upon such matters and in such manner as is
otherwise provided herein or as may be provided by law.
ARTICLE V
Except as otherwise provided in this Restated Certficate of Incorporation,
in furtherance and not in limitation of the powers conferred by statute, the
Board of Directors is expressly authorized to make, repeal, alter, amend and
rescind any or all of the Bylaws of the Corporation.
ARTICLE VI
The number of directors of the Corporation shall be fixed from time to time
by, or in the manner provided in, the Bylaws or amendment thereof duly adopted
by the Board of Directors or by the stockholders.
ARTICLE VII
Elections of directors need not be by written ballot unless the Bylaws of
the Corporation shall so provide.
ARTICLE VIII
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE IX
To the fullest extent permitted by the General Corporation Law of Delaware,
as the same may be amended from time to time, a director of the Corporation
shall not be personally liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director. If the General
Corporation Law of Delaware is hereafter amended to authorize, with or without
the approval of a corporation's stockholders, further reductions in the
liability of the corporation's directors for breach of fiduciary duty, then a
director of the Corporation shall not be liable for any such breach to the
fullest extent permitted by the General Corporation Law of Delaware as so
amended.
Any repeal or modification of the foregoing provisions of this Article IX,
by amendment of this Article IX or by operation of law, shall not adversely
affect any right or protection of a director of the Corporation with respect to
any acts or omissions of such director occurring prior to such repeal or
modification.
ARTICLE X
To the fullest extent permitted by applicable law, the Corporation is
authorized to provide indemnification of (and advancement of expenses to)
directors, officers, employees and other agents of the Corporation (and any
other persons to which Delaware law permits the Corporation to provide
indemnification), through Bylaw provisions, agreements with any such director,
officer, employee or other agent or other person, vote of stockholders or
disinterested directors, or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the Delaware General
Corporation
-19-
<PAGE>
Law, subject only to limits created by applicable Delaware law (statutory or
nonstatutory), with respect to actions for breach of duty to a corporation, its
stockholders and others.
Any repeal or modification of any of the foregoing provisions of this
Article X, by amendment of this Article X or by operation of law, shall not
adversely affect any right or protection of a director, officer, employee or
other agent or other person existing at the time of, or increase the liability
of any director of the Corporation with respect to any acts or omissions of such
director, officer or agent occurring prior to such repeal or modification.
ARTICLE XI
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Restated Certficate of Incorporation, in the manner
now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
ARTICLE XII
The Corporation shall have perpetual existence.
* * *
-20-
<PAGE>
The foregoing Restated Certficate of Incorporation has been duly adopted by
the Corporation's directors and stockholders in accordance with the applicable
provisions of Sections 228, 242 and 245 of the General Corporation Law of the
State of Delaware.
IN WITNESS WHEREOF, the undersigned has executed this certificate on
January 13, 2000.
EMACHINES, INC.
/s/ Stephen A. Dukker
By:______________________________________
Stephen A. Dukker
President and Chief Executive Officer
/s/ Steven Miller
Attest:_________________________________
Steven Miller, Secretary
-21-
<PAGE>
EXHIBIT 3.3
AMENDED AND RESTATED
BYLAWS
OF
eMachines, Inc.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I CORPORATE OFFICES................................................ 1
1.1 REGISTERED OFFICE............................................... 1
1.2 OTHER OFFICES................................................... 1
ARTICLE II MEETINGS OF STOCKHOLDERS........................................ 1
2.1 PLACE OF MEETINGS............................................... 1
2.2 ANNUAL MEETING.................................................. 1
2.3 SPECIAL MEETING................................................. 1
2.4 NOTICE OF STOCKHOLDERS' MEETINGS................................ 2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.................... 2
2.6 QUORUM.......................................................... 2
2.7 ADJOURNED MEETING; NOTICE....................................... 2
2.8 VOTING.......................................................... 3
2.9 WAIVER OF NOTICE................................................ 3
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING......... 4
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS..... 4
2.12 PROXIES......................................................... 5
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE........................... 5
ARTICLE III DIRECTORS...................................................... 5
3.1 POWERS.......................................................... 5
3.2 NUMBER OF DIRECTORS............................................. 6
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS......... 6
3.4 RESIGNATION AND VACANCIES....................................... 6
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE........................ 7
3.6 FIRST MEETINGS.................................................. 7
3.7 REGULAR MEETINGS................................................ 7
3.8 SPECIAL MEETINGS; NOTICE........................................ 8
3.9 QUORUM.......................................................... 8
3.10 WAIVER OF NOTICE................................................ 8
3.11 ADJOURNED MEETING; NOTICE....................................... 9
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING............... 9
3.13 FEES AND COMPENSATION OF DIRECTORS.............................. 9
3.14 APPROVAL OF LOANS TO OFFICERS................................... 9
3.15 REMOVAL OF DIRECTORS............................................ 9
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE IV COMMITTEES...................................................... 10
4.1 COMMITTEES OF DIRECTORS......................................... 10
4.2 COMMITTEE MINUTES............................................... 10
4.3 MEETINGS AND ACTION OF COMMITTEES............................... 10
ARTICLE V OFFICERS......................................................... 11
5.1 OFFICERS........................................................ 11
5.2 ELECTION OF OFFICERS............................................ 11
5.3 SUBORDINATE OFFICERS............................................ 11
5.4 REMOVAL AND RESIGNATION OF OFFICERS............................. 11
5.5 VACANCIES IN OFFICES............................................ 12
5.6 CHAIRMAN OF THE BOARD........................................... 12
5.7 PRESIDENT....................................................... 12
5.8 VICE PRESIDENT.................................................. 12
5.9 SECRETARY....................................................... 12
5.10 TREASURER....................................................... 13
5.11 ASSISTANT SECRETARY............................................. 13
5.12 ASSISTANT TREASURER............................................. 13
5.13 AUTHORITY AND DUTIES OF OFFICERS................................ 14
ARTICLE VI INDEMNITY....................................................... 14
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS....................... 14
6.2 INDEMNIFICATION OF OTHERS....................................... 14
6.3 INSURANCE....................................................... 14
ARTICLE VII RECORDS AND REPORTS............................................ 15
7.1 MAINTENANCE AND INSPECTION OF RECORDS........................... 15
7.2 INSPECTION BY DIRECTORS......................................... 15
7.3 ANNUAL STATEMENT TO STOCKHOLDERS................................ 16
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.................. 16
ARTICLE VIII GENERAL MATTERS............................................... 16
8.1 CHECKS.......................................................... 16
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS................ 16
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES.......................... 16
8.4 SPECIAL DESIGNATION ON CERTIFICATES............................. 17
8.5 LOST CERTIFICATES............................................... 17
8.6 CONSTRUCTION; DEFINITIONS....................................... 18
8.7 DIVIDENDS....................................................... 18
8.8 FISCAL YEAR..................................................... 18
8.9 SEAL............................................................ 18
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
8.10 TRANSFER OF STOCK................................................ 18
8.11 STOCK TRANSFER AGREEMENTS........................................ 18
8.12 REGISTERED STOCKHOLDERS.......................................... 19
ARTICLE IX AMENDMENTS....................................................... 19
ARTICLE X DISSOLUTION....................................................... 19
ARTICLE XI CUSTODIAN........................................................ 20
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES...................... 20
11.2 DUTIES OF CUSTODIAN.............................................. 20
</TABLE>
-iii-
<PAGE>
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be at Corporation Trust
Center, 1209 Orange Street in the City of Wilmington, County of New Castle,
State of Delaware. The name of the registered agent of the corporation at such
location is The Corporation Trust Company.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such designation,
the annual meeting of stockholders shall be held on the first Monday of May in
each year at 10:00 a.m. However, if such day falls on a legal holiday, then the
meeting shall be held at the same time and place on the next succeeding full
business day. At the meeting, directors shall be elected and any other proper
business may be transacted.
2.3 SPECIAL MEETING
---------------
A special meeting of the stockholders may be called at any time for any
purpose or purposes by the board of directors, or by the chairman of the board,
or by the president, or by one or more stockholders holding shares in the
aggregate entitled to cast not less than ten percent (10%) of the votes at that
meeting.
If a special meeting is called by any person or persons other than the
board of directors or the president or the chairman of the board, then the
request shall be in writing, specifying the time of
<PAGE>
such meeting and the general nature of the business proposed to be transacted,
and shall be delivered personally or sent by registered mail or by telegraphic
or other facsimile transmission to the chairman of the board, the president or
the secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the stockholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will
be held at the time requested by the person or persons calling the meeting, so
long as that time is not less than ten (10) nor more than sixty (60) days after
the receipt of the request. If the notice is not given within twenty (20) days
after receipt of the request, then the person or persons requesting the meeting
may give the notice. Nothing contained in this paragraph of this Section 2.3
shall be construed as limiting, fixing or affecting the time when a meeting of
stockholders called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings with stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.5 of these bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 QUORUM
------
The holders of a majority of the stock issued and outstanding and entitled
to vote at a duly called meeting of the stockholders, present in person or
represented by proxy, shall constitute a quorum for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then the meeting may be adjourned from time to time by the vote of
a majority of the shares entitled to vote at such meeting, present in person or
represented by proxy, without notice other than announcement at the meeting,
until a quorum is present or represented.
2.7 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting at which a quorum is presented or represented,
the corporation may transact only such business that might have been transacted
at the original meeting. If the adjournment is for more than thirty (30) days
from the date
-2-
<PAGE>
set for the original meeting, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
The stockholders' vote may be by voice vote or by ballot; provided,
however, that any election for directors must be by ballot if demanded by any
stockholder at the meeting and before the voting has begun.
Except as provided in the last paragraph of this Section 2.8, or as may be
otherwise provided in the certificate of incorporation, each stockholder shall
be entitled to one vote on each matter submitted to a vote of the stockholders
for each share of capital stock held by such stockholder.
If a quorum is present, the affirmative vote of the majority of shares
present in person or represented by proxy at the meeting and entitled to vote on
the subject matter shall be the act of the stockholders, unless the vote of a
greater number or a vote by classes is required by the General Corporation Law
of Delaware or the Articles of Incorporation. Where a separate vote by class is
required, the affirmative vote of the majority of shares of such class present
in person or represented by proxy at the meeting shall be the act of such class.
At a stockholders' meeting at which directors are to be elected, or at
elections held under special circumstances, a stockholder shall be entitled to
cumulate votes (i.e., cast for any candidate a number of votes greater than the
number of votes which such stockholder normally is entitled to cast). Each
holder of stock, or of any class or classes or of a series or series thereof,
who elects to cumulate votes shall be entitled to as many votes as equals the
number of votes which (absent this provision as to cumulative voting) he
otherwise would be entitled to cast for the election of directors with respect
to his shares of stock multiplied by the number of directors to be elected by
him, and he may cast all of such votes for a single director or may distribute
them among the number to be voted for, or for any two or more of them, as he may
see fit.
2.9 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or
-3-
<PAGE>
special meeting of the stockholders need be specified in any written waiver of
notice unless so required by the certificate of incorporation or these bylaws.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
-----------------------------------------------------------
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held.
(ii) The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no prior
action by the board of directors is necessary, shall be the day on which the
first written consent is expressed.
-4-
<PAGE>
(iii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.12 PROXIES
-------
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(c) of the General Corporation Law of Delaware.
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
-5-
<PAGE>
3.2 NUMBER OF DIRECTORS
-------------------
The authorized number of directors shall be eight (8). This number may be
changed by a duly adopted amendment to the certificate of incorporation or by an
amendment to this bylaw adopted by the vote or written consent of the holders of
a majority of the stock issued and outstanding and entitled to vote or by
resolution of a majority of the board of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
-------------------------------------------------------
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stockholders unless so required by the
certificate of incorporation or these bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to fill
a vacancy, shall hold office until his successor is elected and qualified or
until his earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign at any time upon written notice to the corporation.
When one or more directors so resigns and the resignation is effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each director so chosen shall hold office as provided in this
section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created directorships of
such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or
-6-
<PAGE>
guardian of a stockholder, or other fiduciary entrusted with like responsibility
for the person or estate of a stockholder, may call a special meeting of
stockholders in accordance with the provisions of the certificate of
incorporation or these bylaws, or may apply to the Court of Chancery for a
decree summarily ordering an election as provided in Section 211 of the General
Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 FIRST MEETINGS
--------------
The first meeting of each newly elected board of directors shall be held at
such time and place as shall be fixed by the vote of the stockholders at the
annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
3.7 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
-7-
<PAGE>
3.8 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, the secretary
or any two (2) directors unless the board consists of only one (1) director, in
which case special meetings shall be called by the president or secretary in
like manner and on like notice on the written request of the sole director.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.9 QUORUM
------
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
3.10 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these bylaws.
-8-
<PAGE>
3.11 ADJOURNED MEETING; NOTICE
-------------------------
If a quorum is not present at any meeting of the board of directors, then
the directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.14 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.15 REMOVAL OF DIRECTORS
--------------------
Unless otherwise restricted by statute, by the certificate of incorporation
or by these bylaws, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of office.
-9-
<PAGE>
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the corporation. The board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the bylaws of the corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution of assets of
the corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, (iv)
recommend to the stockholders a dissolution of the corporation or a revocation
of a dissolution, or (v) amend the bylaws of the corporation; and, unless the
board resolution establishing the committee, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.7 (regular meetings),
Section 3.8 (special meetings and notice), Section 3.9
-10-
<PAGE>
(quorum), Section 3.10 (waiver of notice), Section 3.11 (adjournment and notice
of adjournment), and Section 3.12 (action without a meeting), with such changes
in the context of those bylaws as are necessary to substitute the committee and
its members for the board of directors and its members; provided, however, that
the time of regular meetings of committees may also be called by resolution of
the board of directors and that notice of special meetings of committees shall
also be given to all alternate members, who shall have the right to attend all
meetings of the committee. The board of directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
bylaws.
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, one or more vice
presidents, a secretary, and a treasurer. The corporation may also have, at the
discretion of the board of directors, a chairman of the board, one or more
assistant vice presidents, assistant secretaries, assistant treasurers, and any
such other officers as may be appointed in accordance with the provisions of
Section 5.3 of these bylaws. Any number of offices may be held by the same
person.
5.2 ELECTION OF OFFICERS
--------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall
be chosen by the board of directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or empower the president to appoint,
such other officers and agents as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in
-11-
<PAGE>
that notice; and, unless otherwise specified in that notice, the acceptance of
the resignation shall not be necessary to make it effective. Any resignation is
without prejudice to the rights, if any, of the corporation under any contract
to which the officer is a party.
5.5 VACANCIES IN OFFICES
--------------------
Any vacancy occurring in any office of the corporation shall be filled by
the board of directors.
5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
---------
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. He
shall preside at all meetings of the shareholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENT
--------------
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and shareholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at shareholders'
meetings, and the proceedings thereof.
-12-
<PAGE>
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these bylaws.
5.10 TREASURER
---------
The treasurer shall keep and maintain, or cause to be kept and maintained,
adequate and correct books and records of accounts of the properties and
business transactions of the corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, retained earnings,
and shares. The books of account shall at all reasonable times be open to
inspection by any director.
The treasurer shall deposit all money and other valuables in the name and
to the credit of the corporation with such depositaries as may be designated by
the board of directors. He shall disburse the funds of the corporation as may be
ordered by the board of directors, shall render to the president and directors,
whenever they request it, an account of all of his transactions as treasurer and
of the financial condition of the corporation, and shall have such other powers
and perform such other duties as may be prescribed by the board of directors or
these bylaws.
5.11 ASSISTANT SECRETARY
-------------------
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.12 ASSISTANT TREASURER
-------------------
The assistant treasurer, or, if there is more than one, the assistant
treasurers, in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the treasurer or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the treasurer
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
-13-
<PAGE>
5.13 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
----------
INDEMNITY
---------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware, indemnify each of its directors and
officers against expenses (including attorneys' fees), judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was an
agent of the corporation. For purposes of this Section 6.1, a "director" or
"officer" of the corporation includes any person (i) who is or was a director or
officer of the corporation, (ii) who is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the extent and in the manner
permitted by the General Corporation Law of Delaware, to indemnify each of its
employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 INSURANCE
---------
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the
-14-
<PAGE>
power to indemnify him against such liability under the provisions of the
General Corporation Law of Delaware.
ARTICLE VII
-----------
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
shareholders listing their names and addresses and the number and class of
shares held by each shareholder, a copy of these bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any
-15-
<PAGE>
limitations or conditions with reference to the inspection, or award such other
and further relief as the Court may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
--------------------------------
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, the president, any vice president, the
treasurer, the secretary or assistant secretary of this corporation, or any
other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VIII
------------
GENERAL MATTERS
---------------
8.1 CHECKS
------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
--------------------------------------
The shares of a corporation shall be represented by certificates, provided
that the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all
-16-
<PAGE>
classes or series of its stock shall be uncertificated shares. Any such
resolution shall not apply to shares represented by a certificate until such
certificate is surrendered to the corporation. Notwithstanding the adoption of
such a resolution by the board of directors, every holder of stock represented
by certificates and upon request every holder of uncertificated shares shall be
entitled to have a certificate signed by, or in the name of the corporation by
the chairman or vice-chairman of the board of directors, or the president or
vice-president, and by the treasurer or an assistant treasurer, or the secretary
or an assistant secretary of such corporation representing the number of shares
registered in certificate form. Any or all of the signatures on the certificate
may be a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate has
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the corporation with the same effect as if he
were such officer, transfer agent or registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim
-17-
<PAGE>
that may be made against it on account of the alleged loss, theft or destruction
of any such certificate or the issuance of such new certificate or
uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
8.7 DIVIDENDS
---------
The directors of the corporation, subject to any restrictions contained in
the certificate of incorporation, may declare and pay dividends upon the shares
of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the corporation's
capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
-----------
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.9 SEAL
----
The board shall have the power to adopt a corporate seal bearing the words
"eMachines, Inc." and "a Delaware Corporation" together with the date of
incorporation.
8.10 TRANSFER OF STOCK
-----------------
Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
-------------------------
The corporation shall have power to enter into and perform any agreement
with any number of shareholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
-18-
<PAGE>
8.12 REGISTERED STOCKHOLDERS
-----------------------
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
----------
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
ARTICLE X
DISSOLUTION
-----------
If it should be deemed advisable in the judgment of the board of directors
of the corporation that the corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's becoming
effective in accordance with Section 103 of the General Corporation Law of
Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be
-19-
<PAGE>
dissolved. If the consent is signed by an attorney, then the original power of
attorney or a photocopy thereof shall be attached to and filed with the consent.
The consent filed with the Secretary of State shall have attached to it the
affidavit of the secretary or some other officer of the corporation stating that
the consent has been signed by or on behalf of all the stockholders entitled to
vote on a dissolution; in addition, there shall be attached to the consent a
certification by the secretary or some other officer of the corporation setting
forth the names and residences of the directors and officers of the corporation.
ARTICLE XI
CUSTODIAN
---------
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
-------------------------------------------
The Court of Chancery, upon application of any stockholder, may appoint one
or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(i) at any meeting held for the election of directors the
stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification of
their successors; or
(ii) the business of the corporation is suffering or is threatened
with irreparable injury because the directors are so divided respecting the
management of the affairs of the corporation that the required vote for action
by the board of directors cannot be obtained and the stockholders are unable to
terminate this division; or
(iii) the corporation has abandoned its business and has failed
within a reasonable time to take steps to dissolve, liquidate or distribute its
assets.
11.2 DUTIES OF CUSTODIAN
-------------------
The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.
-20-
<PAGE>
EXHIBIT 4.2
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED
WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN OPINION
OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE
APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE
PROVISIONS OF SECTION 7 OF THIS WARRANT.
eMACHINES, INC.
WARRANT TO PURCHASE SHARES
OF COMMON STOCK
No. ______
THIS CERTIFIES THAT, for value received, [HOLDER] and its assignees are
entitled to subscribe for and purchase [number] shares of the fully paid and
nonassessable Common Stock (as adjusted pursuant to Section 4 hereof, the
"Shares") of eMACHINES, INC., a Delaware corporation (the "Company"), at the
price of $____ [$2.4 billion divided by number of eMachines shares outstanding
immediately after the Effective Time on an as-converted basis assuming the
exercise or conversion of all outstanding options, warrants, rights or
convertible securities] per share (such price and such other price as shall
result, from time to time, from the adjustments specified in Section 4 hereof is
herein referred to as the "Warrant Price"), subject to the provisions and upon
the terms and conditions hereinafter set forth. As used herein, (a) the term
"Date of Grant" shall mean [Closing Date]_________, 1999 and (b) the term "Other
Warrants" shall mean any other warrants issued by the Company in connection with
that certain Agreement and Plan of Reorganization dated as of November 24, 1999
by and among the Company, eMachines Acquisition Corp. and FreePC, Inc. (the
"Agreement and Plan of Reorganization"), and any warrant issued upon transfer or
partial exercise of this Warrant. The term "Warrant" as used herein shall be
deemed to include Other Warrants unless the context clearly requires otherwise.
1. Term. The purchase right represented by this Warrant is exercisable, in
----
whole at any time or in part, at any time and from time to time from the Date of
Grant on or before 5:00 P.M., Pacific Time on the date (the "Expiration Date")
that is the earlier of (i) ___________, 2001 [two years after Closing Date] or
(ii) one (1) year after the closing of the Company's initial public offering of
its Common Stock (the "IPO") effected pursuant to a Registration Statement on
form S-1 (or its successor) filed under the Securities Act of 1933, as amended
(the "Act"); provided that, notwithstanding the foregoing, (x) the purchase
-------- ----
right represented by this Warrant shall not be exercisable during the 120 day
period following the closing of the Company's IPO, (y) the purchase right
represented by this Warrant shall not be exercisable until the expiration or
early termination of any applicable waiting periods imposed by the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") and (z) if
on or before the Expiration Date, the holder of this
<PAGE>
Warrant has sent a notice of exercise to Company and holder has not been able to
complete the exercise of the purchase right represented by this Warrant prior to
the Expiration Date because of restrictions under the HSR Act or because the
Expiration Date is within the 120 day period following closing of the Company's
IPO, the holder shall be entitled to complete the process of exercising this
Warrant, for a period of ten (10) business days following termination of such
HSR Act restrictions and/or the 120 day period following the closing of the
Company's IPO, in accordance with the procedures contained herein,
notwithstanding the fact that completion of the exercise of this Warrant would
take place after the Expiration Date.
2. Method of Exercise; Payment; Issuance of New Warrant. Subject to Section
----------------------------------------------------
1 hereof, the purchase right represented by this Warrant may be exercised by the
holder hereof, in whole or in part and from time to time, at the election of the
holder hereof, by (a) the surrender of this Warrant (with the notice of exercise
substantially in the form attached hereto as Exhibit A-1 duly completed and
executed) at the principal office of the Company and by the payment to the
Company, by certified or bank check, or by wire transfer to an account
designated by the Company (a "Wire Transfer") of an amount equal to the then
applicable Warrant Price multiplied by the number of Shares then being purchased
(the "Exercise Amount"); (b) if in connection with a registered public offering
of the Company's securities, the surrender of this Warrant (with the notice of
exercise form attached hereto as Exhibit A-2 duly completed and executed) at the
principal office of the Company together with notice of arrangements reasonably
satisfactory to the Company for payment to the Company either by certified or
bank check or by Wire Transfer from the proceeds of the sale of shares to be
sold by the holder in such public offering of an amount equal to the Exercise
Amount; (c) exercise of the "net issuance" right provided for in Section 10.2
hereof; or (d) by means of any "easy sale" exercise pursuant to Section 10.3
hereof. The person or persons in whose name(s) any certificate(s) representing
the Shares shall be issuable upon exercise of this Warrant shall be deemed to
have become the holder(s) of record of, and shall be treated for all purposes as
the record holder(s) of, the shares represented thereby (and such shares shall
be deemed to have been issued) immediately prior to the close of business on the
date or dates upon which this Warrant is exercised. In the event of any exercise
of the rights represented by this Warrant, certificates for the shares of stock
so purchased shall be delivered to the holder hereof as soon as possible after
such exercise and, unless this Warrant has been fully exercised or expired, a
new Warrant representing the portion of the Shares, if any, with respect to
which this Warrant shall not then have been exercised shall also be issued to
the holder hereof as soon as possible.
3. Stock Fully Paid; Reservation of Shares. The Company hereby covenants
---------------------------------------
that at all times there shall be reserved for issuance and delivery upon
exercise of this Warrant such number of shares of Common Stock or other shares
of capital stock of the Company as are from time to time issuable upon exercise
of this Warrant and, from time to time, will take all steps necessary to amend
its Certificate of Incorporation to provide sufficient reserves of shares of
Common Stock issuable upon exercise of this Warrant. All such shares shall be
duly authorized, and when issued upon such exercise, shall be validly issued,
fully paid and non-assessable, free and clear of all liens, security interests,
charges and other encumbrances or restrictions on sale and free and clear of all
preemptive rights, except encumbrances or restrictions arising (i) under federal
or state securities laws or (ii) pursuant to the Rights and Restrictions
Agreement (as such term is defined in the Agreement and Plan of Reorganization),
if applicable.
-2-
<PAGE>
4. Adjustment of Warrant Price and Number of Shares. The number and kind of
------------------------------------------------
securities purchasable upon the exercise of this Warrant and the Warrant Price
shall be subject to adjustment from time to time upon the occurrence of certain
events, as follows:
(a) Reclassification or Merger. In case of any reclassification, conversion
--------------------------
or other change of securities of the class issuable upon exercise of this
Warrant (other than a change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a subdivision or combination),
or in case of any merger of the Company with or into another corporation (other
than a merger with another corporation in which the Company is the acquiring and
the surviving corporation and which does not result in any reclassification or
change of outstanding securities issuable upon exercise of this Warrant), or in
case of any sale of all or substantially all of the assets of the Company, the
Company, or such successor or purchasing corporation, as the case may be, shall
duly execute and deliver to the holder of this Warrant a new Warrant (in form
and substance satisfactory to the holder of this Warrant), so that the holder of
this Warrant shall have the right to receive, at a total purchase price not to
exceed that payable upon the exercise of the unexercised portion of this
Warrant, and in lieu of the shares of Common Stock theretofore issuable upon
exercise of this Warrant, (i) the kind and amount of shares of stock, other
securities, money and property receivable upon such reclassification,
conversion, change or merger by a holder of the number of shares of Common Stock
then purchasable under this Warrant, or (ii) in the case of such a merger or
sale of all or substantially all of the assets of the Company in which the
consideration paid consists all or in part of assets other than securities of
the successor or purchasing corporation, the securities of the successor or
purchasing corporation having a value at the time of the transaction equivalent
to the value of the Common Stock at the time of the transaction. In all events,
appropriate adjustment (as determined in good faith by the Company's Board of
Directors) shall be made in the application of the provisions of this Warrant
with respect to the rights and interests of the holder after the transaction, to
the end that the provisions of this Warrant shall be applicable after that
event, as near as reasonably may be, in relation to any shares or other property
deliverable after that event upon exercise of this Warrant. The provisions of
this subparagraph (a) shall similarly apply to successive reclassifications,
conversions, changes, mergers and transfers.
(b) Adjustment for Stock Splits, Stock Subdivisions or Combinations of
------------------------------------------------------------------
Shares. The Warrant Price shall be proportionally decreased and the number of
- ------
shares of Common Stock issuable upon exercise of this Warrant (or any shares of
stock or other securities at the time issuable upon exercise of this Warrant)
shall be proportionally increased to reflect any stock split or subdivision of
the Company's Common Stock. The Warrant Price shall be proportionally increased
and the number of shares of Common Stock issuable upon exercise of this Warrant
(or any shares of stock or other securities at the time issuable upon exercise
of this Warrant) shall be proportionally decreased to reflect any combination of
the Company's Common Stock.
(c) Stock Dividends and Other Distributions. If the Company at any time
---------------------------------------
while this Warrant is outstanding and unexpired shall (i) pay a dividend with
respect to Common Stock payable in Common Stock, then the Warrant Price shall be
adjusted, from and after the date of determination of shareholders entitled to
receive such dividend or distribution, to that price determined by multiplying
the Warrant Price in effect immediately prior to such date of determination by a
fraction (A) the numerator of which shall be the total number of shares of
Common Stock outstanding immediately prior to such dividend or distribution, and
(B) the
-3-
<PAGE>
denominator of which shall be the total number of shares of Common Stock
outstanding immediately after such dividend or distribution; or (ii) make any
other distribution with respect to Common Stock (except any distribution
specifically provided for in Sections 4(a) and 4(b)), then, in each such case,
provision shall be made by the Company such that the holder of this Warrant
shall receive upon exercise of this Warrant a proportionate share of any such
dividend or distribution as though it were the holder of the Common Stock as of
the record date fixed for the determination of the shareholders of the Company
entitled to receive such dividend or distribution.
(d) Adjustment of Number of Shares. Upon each adjustment in the Warrant
------------------------------
Price, the number of Shares purchasable hereunder shall be adjusted, to the
nearest whole share, to the product obtained by multiplying the number of Shares
purchasable immediately prior to such adjustment in the Warrant Price by a
fraction, the numerator of which shall be the Warrant Price immediately prior to
such adjustment and the denominator of which shall be the Warrant Price
immediately thereafter.
5. Notice of Adjustments. Whenever the Warrant Price or the number of
---------------------
Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof, the
Company shall give notice of the event requiring the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated, and the
Warrant Price and the number of Shares purchasable hereunder after giving effect
to such adjustment, and shall cause copies of such notice to be mailed, by first
class mail, postage prepaid (notwithstanding Section 13 hereof) to the holder of
this Warrant at such holder's last known address.
6. Fractional Shares. No fractional shares of Common Stock will be issued
-----------------
in connection with any exercise hereunder, but in lieu of such fractional shares
the Company shall make a cash payment therefor based on the fair market value of
the Common Stock on the date of exercise as determined in accordance with
Section 10.2(c)(ii) or 10.2(c)(iii), as applicable.
7. Compliance with Act; Disposition of Warrant or Shares of Common Stock.
---------------------------------------------------------------------
(a) Compliance with Act. The holder of this Warrant, by acceptance hereof,
-------------------
agrees that this Warrant, and the Shares to be issued upon exercise hereof are
being acquired for investment and that such holder will not offer, sell or
otherwise dispose of this Warrant, or any Shares except under circumstances
which will not result in a violation of the Act or any applicable state
securities laws. Upon exercise of this Warrant, unless the Shares being acquired
are registered under the Act and any applicable state securities laws or an
exemption from such registration is available, the holder hereof shall confirm
in writing that the Shares so purchased are being acquired for investment and
not with a view toward distribution or resale in violation of the Act and shall
confirm such other matters related thereto as may be reasonably requested by the
Company. This Warrant and all Shares issued upon exercise of this Warrant
(unless registered under the Act and any applicable state securities laws) shall
be stamped or imprinted with a legend in substantially the following form:
"THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE
OR DISPOSITION MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION
STATEMENTS RELATED THERETO, (ii) AN OPINION OF COUNSEL OR OTHER EVIDENCE,
-4-
<PAGE>
REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATIONS ARE NOT
REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE APPROPRIATE
GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS
OF SECTION 7 OF THE WARRANT UNDER WHICH THESE SECURITIES WERE ISSUED,
DIRECTLY OR INDIRECTLY."
Said legend shall be removed by the Company, upon the request of a holder, at
such time as the restrictions on the transfer of the applicable security shall
have terminated. In addition, in connection with the issuance of this Warrant,
the holder specifically represents to the Company by acceptance of this Warrant
as follows:
(1) The holder is aware of the Company's business affairs and financial
condition, and has acquired information about the Company sufficient to reach an
informed and knowledgeable decision to acquire this Warrant. The holder is
acquiring this Warrant for its own account for investment purposes only and not
with a view to, or for the resale in connection with, any "distribution" thereof
in violation of the Act.
(2) The holder understands that this Warrant has not been registered under
the Act or registered or qualified under any applicable state securities laws,
in reliance upon a specific exemption therefrom, which exemption depends upon,
among other things, the bona fide nature of the holder's investment intent as
expressed herein.
(3) The holder further understands that this Warrant must be held
indefinitely unless subsequently registered under the Act and qualified under
any applicable state securities laws, or unless exemptions from registration and
qualification are otherwise available. The holder is aware of the provisions of
Rule 144, promulgated under the Act.
(b) Disposition of Warrant or Shares. With respect to any offer, sale or
--------------------------------
other disposition of this Warrant or any Shares acquired pursuant to the
exercise of this Warrant prior to registration of such Warrant or Shares, the
holder hereof agrees to give written notice to the Company prior thereto,
describing briefly the manner thereof, together with a written opinion of such
holder's counsel, or other evidence, if reasonably satisfactory to the Company,
to the effect that such offer, sale or other disposition may be effected without
registration or qualification (under the Act as then in effect or any federal or
state securities law then in effect) of this Warrant or the Shares and
indicating whether or not under the Act certificates for this Warrant or the
Shares to be sold or otherwise disposed of require any restrictive legend as to
applicable restrictions on transferability in order to ensure compliance with
such law. Upon receiving such written notice and opinion or other reasonably
satisfactory evidence, the Company, as promptly as practicable, shall notify
such holder that such holder may sell or otherwise dispose of this Warrant or
such Shares, all in accordance with the terms of the notice delivered to the
Company. If the holder has not delivered an opinion of counsel to such effect
and a determination has been made pursuant to this Section 7(b) that such other
evidence is not reasonably satisfactory to the Company, the Company shall so
notify the holder promptly with details thereof after such determination has
been made. Notwithstanding the foregoing, this Warrant or such Shares may, as to
such federal laws, be offered, sold or otherwise disposed of in accordance with
Rule 144 or 144A (or any successor exemptions) under the Act,
-5-
<PAGE>
provided that the Company shall have been furnished with such information as the
Company may reasonably request to provide a reasonable assurance that the
provisions of Rule 144 or 144A (or any such successor exemption) have been
satisfied. Each certificate representing this Warrant or the Shares thus
transferred (except a transfer pursuant to Rule 144 or 144A (or any such
successor exemption)) shall bear a legend as to the applicable restrictions on
transferability in order to ensure compliance with such laws, unless in the
aforesaid opinion of counsel for the holder, such legend is not required in
order to ensure compliance with such laws. The Company may issue stop transfer
instructions to its transfer agent in connection with such restrictions.
(c) Applicability of Restrictions. Neither any restrictions of any legend
-----------------------------
described in this Warrant nor the requirements of Section 7(b) above shall apply
to any transfer or grant of a security interest in, this Warrant (or the Common
Stock obtainable upon exercise thereof) or any part hereof (i) to a partner of
the holder if the holder is a partnership or to a member of the holder if the
holder is a limited liability company, (ii) to a partnership of which the holder
is a partner or to a limited liability company of which the holder is a member,
or (iii) to any affiliate of the holder if the holder is a corporation;
provided, however, in any such transfer, if applicable, the transferee shall on
- -------- -------
the Company's request agree in writing to be bound by the terms of this Warrant
as if an original holder hereof.
8. Rights as Shareholders. No holder of this Warrant, as such, shall be
----------------------
entitled to vote or receive dividends or be deemed the holder of Shares, nor
shall anything contained herein be construed to confer upon the holder of this
Warrant, as such, any of the rights of a shareholder of the Company or any right
to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof, or (subject to (S) 10.1 below) to receive
notice of meetings, or to receive dividends or subscription rights or otherwise
until this Warrant shall have been exercised and the Shares purchasable upon the
exercise hereof shall have become deliverable, as provided herein.
9. Rights and Restrictions Agreement. In the case of holders who are
---------------------------------
Warrant Holders (as such term is defined in the Rights and Restrictions
Agreement), the Shares issuable upon the exercise of this Warrant are subject to
certain registration rights and restrictions as set forth in the Rights and
Restrictions Agreement.
10. Additional Rights.
------------------
10.1 Notices of Record Date. In case:
----------------------
(a) the Company shall take a record of the holders of its Common Stock
(or other stock or securities at the time receivable upon the exercise of this
Warrant), for the purpose of entitling them to receive any dividend or other
distribution, or any right to subscribe for or purchase any shares of stock of
any class or any other securities or to receive any other right; or
(b) of any consolidation or merger of the Company with or into another
corporation, any capital reorganization of the Company, any reclassification of
the Capital Stock of the Company, or any conveyance of all or substantially all
of the assets of the Company to another corporation in which holders of the
Company's stock are to receive stock, securities or property of another
corporation; or
-6-
<PAGE>
(c) of any voluntary dissolution, liquidation or winding-up of the
Company; or
(d) of any redemption or conversion of all outstanding Common Stock;
then, and in each such case, the Company will mail or cause to be mailed to the
Registered holder of this Warrant a notice specifying, as the case may be, (i)
the date on which a record is to be taken for the purpose of such dividend,
distribution or right, or (ii) the date on which such reorganization,
reclassification, consolidation, merger, conveyance, dissolution, liquidation,
winding-up, redemption or conversion is to take place, and the time, if any is
to be fixed, as of which the holders of record of Common Stock or (such stock or
securities as at the time are receivable upon the exercise of this Warrant),
shall be entitled to exchange their shares of Common Stock (or such other stock
or securities), for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation or winding-up. Such notice shall be delivered at least
thirty (30) days prior to the date therein specified.
10.2 Right to Convert Warrant into Stock: Net Issuance.
--------------------------------------------------
(a) Right to Convert. In addition to and without limiting the rights of the
----------------
holder under the terms of this Warrant, the holder shall have the right to
convert this Warrant or any portion thereof (the "Conversion Right") into shares
of Common Stock as provided in this Section 10.2 at any time or from time to
time during the term of this Warrant other than the 120 day period following the
closing of the Company's IPO. Upon exercise of the Conversion Right with respect
to a particular number of shares subject to this Warrant (the "Converted Warrant
Shares"), the Company shall deliver to the holder (without payment by the holder
of any exercise price or any cash or other consideration) that number of shares
of fully paid and nonassessable Common Stock as is determined according to the
following formula:
X = B - A
---------
Y
Where: X = the number of shares of Common Stock that shall be issued
to the holder
Y = the fair market value of one share of Common Stock
A = the aggregate Warrant Price of the specified number of
Converted Warrant Shares immediately prior to the exercise of the
Conversion Right (i.e., the number of Converted Warrant Shares
multiplied by the Warrant Price)
B = the aggregate fair market value of the specified number of
Converted Warrant Shares (i.e. the number of Converted Warrant Shares
multiplied by the fair market value of one Converted Warrant Share)
No fractional shares shall be issuable upon exercise of the Conversion Right,
and, if the number of shares to be issued determined in accordance with the
foregoing formula is other than a whole number, the Company shall pay to the
holder an amount in cash equal to the fair market value of the resulting
fractional share on the Conversion Date (as hereinafter defined). For purposes
of Section 9
-7-
<PAGE>
of this Warrant, shares issued pursuant to the Conversion Right
shall be treated as if they were issued upon the exercise of this Warrant.
(b) Method of Exercise. The Conversion Right may be exercised by the holder
------------------
by the surrender of this Warrant at the principal office of the Company together
with a written statement (which may be in the form of Exhibit A-1 or Exhibit A-2
hereto) specifying that the holder thereby intends to exercise the Conversion
Right and indicating the number of shares subject to this Warrant which are
being surrendered (referred to in Section 10.2(a) hereof as the Converted
Warrant Shares) in exercise of the Conversion Right. Such conversion shall be
effective upon receipt by the Company of this Warrant together with the
aforesaid written statement, or on such later date as is specified therein (the
"Conversion Date"), and, at the election of the holder hereof, may be made
contingent upon the closing of the sale of the Company's Common Stock to the
public in a public offering pursuant to a Registration Statement under the Act
(a "Public Offering"). Certificates for the shares issuable upon exercise of the
Conversion Right and, if applicable, a new warrant evidencing the balance of the
shares remaining subject to this Warrant, shall be issued as of the Conversion
Date and shall be delivered to the holder promptly following the Conversion
Date.
(c) Determination of Fair Market Value. For purposes of this Section 10.2,
"fair market value" of a share of Common Stock as of a particular date (the
"Determination Date") shall mean:
(i) If the Conversion Right is exercised in connection with and
contingent upon a Public Offering, and if the Company's Registration Statement
relating to such Public Offering ("Registration Statement") has been declared
effective by the Securities and Exchange Commission, then the initial "Price to
Public" specified in the final prospectus with respect to such offering.
(ii) If the Conversion Right is not exercised in connection with and
contingent upon a Public Offering, then as follows:
(A) If traded on a securities exchange, the fair market value of
the Common Stock shall be deemed to be the average of the closing prices of
the Common Stock on such exchange over the 30-day period ending five
business days prior to the Determination Date;
(B) If traded on the NASDAQ Stock Market or other over-the-
counter system, the fair market value of the Common Stock shall be deemed
to be the average of the closing bid prices of the Common Stock over the
30-day period ending five business days prior to the Determination Date;
and
(C) If there is no public market for the Common Stock, then fair
market value shall be determined by mutual agreement of the holder of this
Warrant and the Company provided, however, that if the Company and the
-------- -------
Holder cannot agree on such value, such value shall be determined by an
independent valuation firm experienced in valuing businesses such as the
Company and jointly selected in good faith by the Company and the Holder.
Fees and expenses of the valuation firm shall be paid for by the Company.
-8-
<PAGE>
10.3. "Easy Sale" Exercise. In lieu of the payment methods set forth
--------------------
in Section 10.2 above, when permitted by law and applicable regulations
(including Nasdaq and NASD rules), the holder hereof may pay the Exercise Amount
through a "same day sale" commitment from such holder (and if applicable a
broker-dealer that is a member of the National Association of Securities Dealers
(a "NASD Dealer")), whereby the holder irrevocably elects to exercise this
Warrant and to sell at least that number of shares so purchased to pay the
Exercise Amount (and up to all of the shares so purchased) and the Holder (or,
if applicable, the NASD Dealer) commits upon sale (or, in the case of the NASD
Dealer, upon receipt) of such shares to forward the Exercise Amount directly to
the Company, with any sale proceeds in excess of the Exercise Amount being for
the benefit of the holder hereof.
11. Modification and Waiver. This Warrant and any provision hereof may be
-----------------------
changed, waived, discharged or terminated only by an instrument in writing
signed by either (i) the Company and the holders of warrants representing at
least fifty percent (50%) of the Common Stock issuable upon the exercise of all
Other Warrants, or (ii) the party against which enforcement of the same is
sought.
12. Notices. Any notice, request, communication or other document required
-------
or permitted to be given or delivered to the holder hereof or the Company shall
be delivered, or shall be sent by certified or registered mail, postage prepaid,
to each such holder (or its successors or assigns) at its address as shown on
the books of the Company or to the Company at the address indicated therefor on
the signature page of this Warrant.
13. Binding Effect on Successors. This Warrant shall be binding upon any
----------------------------
corporation succeeding the Company by merger, consolidation or acquisition of
all or substantially all of the Company's assets, and all of the obligations of
the Company relating to the Shares issuable upon the exercise or conversion of
this Warrant shall survive the exercise, conversion and termination of this
Warrant and all of the covenants and agreements of the Company shall inure to
the benefit of the successors and assigns of the holder hereof.
14. Lost Warrants or Stock Certificates. The Company covenants to the
-----------------------------------
holder hereof that, upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant or any
stock certificate and, in the case of any such loss, theft or destruction, upon
receipt of an indemnity reasonably satisfactory to the Company, or in the case
of any such mutilation upon surrender and cancellation of such Warrant or stock
certificate, the Company will make and deliver a new Warrant or stock
certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated
Warrant or stock certificate.
15. "Market Stand-Off" Agreement. By acceptance of this Warrant, the holder
----------------------------
hereof agrees that upon the request of the Company or the underwriters managing
any underwritten offering of the Company's securities, not to sell or otherwise
transfer or dispose of any Common Stock (or other securities) of the Company
acquired upon exercise of this Warrant held by the holder (other than those
included in the registration) during the 120 day period following the effective
date of a registration statement of the Company filed under the Act.
Notwithstanding the foregoing, to the extent the holder hereof is subject to the
market standoff agreement set forth in Section 12 of the
-9-
<PAGE>
Rights and Restrictions Agreement, as amended from time to time, the holder
shall have no obligation under this Section 15.
16. Descriptive Headings. The descriptive headings of the several
--------------------
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant. The language in this Warrant shall be
construed as to its fair meaning without regard to which party drafted this
Warrant.
17. Governing Law. This Warrant shall be construed and enforced in
-------------
accordance with, and the rights of the parties shall be governed by, the laws of
the State of Delaware.
18. Survival of Representations, Warranties and Agreements. All
------------------------------------------------------
representations and warranties of the Company and the holder hereof contained
herein shall survive the Date of Grant, the exercise or conversion of this
Warrant (or any part hereof) or the termination or expiration of rights
hereunder. All agreements of the Company and the holder hereof contained herein
shall survive indefinitely until, by their respective terms, they are no longer
operative.
19. Remedies. In case any one or more of the covenants and agreements
--------
contained in this Warrant shall have been breached, the holders hereof (in the
case of a breach by the Company), or the Company (in the case of a breach by a
holder), may proceed to protect and enforce their or its rights either by suit
in equity and/or by action at law, including, but not limited to, an action for
damages as a result of any such breach and/or an action for specific performance
of any such covenant or agreement contained in this Warrant.
20. No Impairment of Rights. The Company will not, by amendment of its
-----------------------
Charter or through any other means, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
holder of this Warrant against impairment.
21. Severability. The invalidity or unenforceability of any provision of
------------
this Warrant in any jurisdiction shall not affect the validity or enforceability
of such provision in any other jurisdiction, or affect any other provision of
this Warrant, which shall remain in full force and effect.
22. Recovery of Litigation Costs. If any legal action or other proceeding
----------------------------
is brought for the enforcement of this Warrant, or because of an alleged
dispute, breach, default, or misrepresentation in connection with any of the
provisions of this Warrant, the successful or prevailing party or parties shall
be entitled to recover reasonable attorneys' fees and other costs incurred in
that action or proceeding, in addition to any other relief to which it or they
may be entitled.
23. Entire Agreement; Modification. This Warrant constitutes the entire
------------------------------
agreement between the parties pertaining to the subject matter contained in it
and supersedes all prior and contemporaneous agreements, representations, and
undertakings of the parties, whether oral or written, with respect to such
subject matter. This Warrant and any provision hereof may only be
-10-
<PAGE>
amended, waived, discharged or terminated by an agreement in writing signed by
the party against which enforcement of the amendment, waiver, discharge or
termination is sought.
24. No Conflicting Agreements. The Company will not on or after the date of
-------------------------
this Warrant enter into any agreement with respect to its securities which
conflicts with the rights granted to the holders hereof or otherwise conflicts
with the provisions hereof. The rights granted to the holder hereunder do not in
any way conflict with the rights granted to holders of the Company's securities
under any other agreements, except rights that have been waived. Notwithstanding
the foregoing, the holders acknowledge that the Company may, from time to time,
issue warrants and other rights to purchase shares of stock of the Company,
including Common Stock
[The remainder of this page is intentionally left blank.]
-11-
<PAGE>
The Company has caused this Warrant to be duly executed and delivered as of
the Date of Grant specified above.
EMACHINES, INC.
By:
----------------------------------
STEPHEN DUKKER
CHIEF EXECUTIVE OFFICER
Address: 14350 Myford Road, Suite 100
Irvine, California 92606
-12-
<PAGE>
EXHIBIT A-1
NOTICE OF EXERCISE
To: eMACHINES, INC. (the "Company")
1. The undersigned hereby:
___ elects to purchase_______ shares of Common Stock of the Company
pursuant to the terms of the attached Warrant, and tenders herewith
payment of the purchase price of such shares in full, or
___ elects to exercise its net issuance rights pursuant to Section 10.2 of
the attached Warrant with respect to____ shares of Common Stock.
2. Please issue a certificate or certificates representing ____ shares in
the name of the undersigned or in such other name or names as are specified
below:
(Name)
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
(Address)
- -----------------------------------------------------------------------
3. The undersigned represents that the aforesaid shares are being acquired
for the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has
no present intention of distributing or reselling such shares, all except as in
compliance with applicable securities laws.
(Signature)
------------------------
Date:
---------------------
-13-
<PAGE>
EXHIBIT A-2
NOTICE OF EXERCISE
To: eMACHINES, INC. (the "Company")
1. Contingent upon and effective immediately prior to the closing (the
"Closing") of the Company's public offering contemplated by the Registration
Statement on Form S, filed, 19, the undersigned hereby:
___ elects to purchase ____ shares of Common Stock of the Company (or such
lesser number of shares as may be sold on behalf of the undersigned at
the Closing) pursuant to the terms of the attached Warrant, or
___ elects to exercise its net issuance rights pursuant to Section 10.2 of
the attached Warrant with respect to____ Shares of Common Stock.
2. Please deliver to the custodian for the selling shareholders a stock
certificate representing such _____________ shares.
3. The undersigned has instructed the custodian for the selling
shareholders to deliver to the Company $_________________ or, if less, the net
proceeds due the undersigned from the sale of shares in the aforesaid public
offering. If such net proceeds are less than the purchase price for such shares,
the undersigned agrees to deliver the difference to the Company prior to the
Closing.
(Signature)
---------------------------
Date:
------------------
-14-
<PAGE>
EXHIBIT B
CHARTER
-15-
<PAGE>
EXHIBIT 10.15
eMachines, Inc.
RIGHTS AND RESTRICTIONS AGREEMENT
This RIGHTS AND RESTRICTIONS AGREEMENT (the "Agreement") is entered into as
of January 14, 2000, by and among eMachines, Inc., a Delaware corporation (the
"Company"), the holders of shares of Common Stock of the Company ("Common
Stock") identified as such on Schedule A attached hereto (the "Common Stock
----------
Holders"), the holders of shares of Series B Preferred Stock of the Company
("Series B Preferred") identified as such on Schedule A attached hereto (the
----------
"Series B Holders"), the holders of shares of Series C Preferred Stock of the
Company ("Series C Preferred") identified as such on Schedule A attached hereto
----------
(the "Series C Holders") and the holders of warrants representing the right to
purchase shares of Common Stock (the "Warrants") identified as such on Schedule
--------
A attached hereto (the "Warrant Holders"). The Series B Holders, the Series C
- -
Holders, the Common Holders and the Warrant Holders are acquiring, respectively
their shares of Series B Preferred, Series C Preferred, Common Stock and
Warrants contemporaneously herewith, or at a later date, in each case pursuant
to an Agreement and Plan of Reorganization by and among the Company, eMachines
Acquisition Corp. ("Merger Sub.") and FreePC, Inc. ("FreePC") dated as of
November 24, 1999 (the "Plan of Reorganization").
R E C I T A L S
A. The Company was incorporated on September 18, 1998 as a corporation
under the laws of the State of Delaware, United States of America. The Company,
FreePC and Merger Sub entered into the Plan of Reorganization providing for (a)
the merger (the "Merger") of Merger Sub into FreePC, with FreePC being the
surviving corporation and (b) upon the effective time (the "Effective Time") of
the Merger, the conversion of all the outstanding shares of FreePC (i) common
stock into Common Stock and Warrants, (ii) series A preferred stock into Series
B Preferred and Warrants and (iii) series B preferred stock into Series C
Preferred and Warrants.
B. Each of the Holders (as defined below) that shall enter into this
Agreement owns that number of outstanding shares of Common Stock, Series B
Preferred, or Series C Preferred (collectively, the "Equity Securities") and
that number of Warrants, in each case as is set forth opposite his, her, or its
name on Schedule A hereto.
-----------------
C. Each of the Holders acknowledges and agrees that (i) as a condition to
the Merger and the conversion of their shares of capital stock of FreePC into
Equity Securities and Warrants they are subject to certain restrictions as
enumerated herein, and (ii) their rights enumerated herein are junior and
subordinate (except as explicitly set forth herein) to the prior rights of the
Investors, Founders and Additional Rightsholders (as such terms are defined in
the Amended and Restated Rights and Restrictions Agreement (the "Amended and
Restated Rights Agreement") dated as of
<PAGE>
August 18, 1999 by and among the Company, the Investors, the Founders and the
Additional Rightsholders, as such agreement may be amended, from time to time,
in accordance with its terms).
NOW, THEREFORE IT IS AGREED:
1. Definitions
1.1 Certain Definitions. As used in this Agreement, the following terms
-------------------
shall have the following meanings (such meanings to be equally applicable to
both singular and plural forms of the terms defined herein):
"Additional Rightsholders" has the meaning set forth in the recital of
parties set forth in the Amended and Restated Rights Agreement.
"Change in Control" shall mean the occurrence of (i) the sale of all or
substantially all the assets of the Company; or (ii) consummation of any
acquisition, consolidation or merger of the Company other than an acquisition,
consolidation or merger of the Company in which the holders of Common Stock
immediately prior to the acquisition, consolidation or merger have, directly or
indirectly, at least a majority of the total voting power in the aggregate of
all classes of capital stock of the continuing or surviving corporation
immediately after the acquisition, consolidation or merger.
"Commission" shall mean the Securities and Exchange Commission of the
United States or any other federal agency at the time administering the
Securities Act.
"Exchange Act" has the meaning set forth in Section 10(b) of this
Agreement.
"Excluded Registration Statement" shall mean a registration statement
relating to a Rule 145 transaction, an offering solely to employees or a
registration on any form which does not permit secondary sales or does not
include substantially the same information as would be required to be included
in a registration statement covering the sale of the Registrable Securities.
"Founders" has the meaning set forth in the recital of parties set forth in
the Amended and Restated Rights Agreement.
"Founder Registrable Securities" has the meaning set forth in Section 1.3
of the Amended and Restated Rights Agreement.
"First Refusal Notice" has the meaning set forth in Section 13.1 of this
Agreement.
"First Refusal Price" has the meaning set forth in Section 13.2 of this
Agreement.
"Holders" means, collectively, the Common Stock Holders, Series B Holders,
Series C Holders, Warrant Holders and any person holding Common Stock, Series B
Preferred, Series C Preferred or Warrants to whom the rights of the Common Stock
Holders, Series B Holders, Series C
-2-
<PAGE>
Holders or Warrant Holders, respectively, under this Agreement have been
transferred in compliance herewith.
"Holder Registrable Securities" means (i) any shares of Common Stock owned
of record by any Holder on the date of signature of this Agreement by such
Holder, (ii) any shares of Common Stock issued upon exercise or conversion (or
consecutive exercises or conversions) of any other Equity Securities or Warrants
owned of record by any such Holder on the date of signature of this Agreement by
such Holder, (iii) any shares of Common Stock issued in respect of such
securities (or in respect of any Shares of Common Stock issued upon single or
multiple exercise or conversion of such securities) upon any stock split, stock
dividend, recapitalization, or similar event, and (iv) any other Shares of
Common Stock held by persons to whom the rights of the Holders under this
Agreement have been transferred in accordance herewith and who hold securities
described in clauses (i), (ii) and (iii) of this paragraph; provided, however,
-------- -------
that Holder Registrable Securities shall not include (A) securities that have
been sold to or through a broker or dealer or underwriter in a public
distribution or a public securities transaction, (B) securities that have been
sold or made available for sale in the opinion of counsel to the Company in a
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act so that all transfer restrictions and restrictive legends
with respect thereto are or shall be removed upon the consummation of such sale,
or (C) any securities if such securities constitute all of the securities of a
Holder or its affiliate and all such securities may be sold by the Holder
thereof (or by such affiliate) within a three month period following the
Company's initial public offering pursuant to Rule 144 promulgated under the
Securities Act, or any successor rule. Without limiting the generality of the
foregoing, no Warrant shall constitute Holder Registrable Securities.
"Indemnified Party" has the meaning set forth in Section 8.3 of this
Agreement.
"Indemnifying Party" has the meaning set forth in Section 8.3 of this
Agreement.
"Initiating Holders" shall mean any Holder or Holders (other than Common
Stock Holders, Warrant Holders or transferees of the rights of either in
accordance herewith) of not less than fifty percent (50%) of the then
outstanding Holder Registrable Securities.
"Investors" has the meaning set forth in the recital of parties set forth
in the Amended and Restated Rights Agreement.
"Investor Registrable Securities" has the meaning set forth in Section 1.3
of the Amended and Restated Rights Agreement.
"IPO" shall mean the declaration of the Commission of the effectiveness of
a registration statement filed by the Company in connection with a firmly
underwritten public offering with an aggregate price to the public exceeding
$30,000,000.
"Other Shareholders" has the meaning set forth in Section 3.2 of this
Agreement.
"Proposed Transferee" has the meaning set forth in Section 13.1 of this
Agreement.
-3-
<PAGE>
"Registrable Securities" shall mean, collectively, the Investor Registrable
Securities, the Rightsholder Registrable Securities, the Founder Registrable
Securities and the Holder Registrable Securities.
The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses incurred by the Company in
complying with Sections 3 and 4 hereof, including, without limitation, all
registration, qualification and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for the Company, blue sky fees and expenses
and the expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of the
Company, which shall be paid in any event by the Company, and Selling Expenses).
"Restricted Securities" shall mean the securities of the Company required
to bear the legend set forth in Section 2 hereof.
"Right of First Refusal" has the meaning set forth in Section 13 of this
Agreement.
"Rightsholder Registrable Securities" has the meaning set forth in Section
1.3 of the Amended and Restated Rights Agreement.
"Securities" has the meaning set forth in Section 2.1 of this Agreement.
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities registered by
the Holders in accordance herewith and all reasonable fees and disbursements of
counsel for any Holder.
"Shareholders" has the meaning set forth in Section 3.1(a) of this
Agreement.
"Small Holder" has the meaning set forth in Section 12 of this Agreement.
Certain other defined terms used herein have the meanings set forth in the
recitals and the recital of parties to this Agreement.
2. Restrictions on Transferability; Restrictive Legend; Notice of Proposed
Transfers.
2.1 No Equity Securities, Warrants, shares of Common Stock issuable upon
conversion or exercise of the Warrants, or other warrants, options or other
rights with respect to Equity Securities (collectively, the "Securities") shall
be sold, assigned, transferred or pledged
-4-
<PAGE>
except upon satisfaction of the conditions specified in this Agreement, which
conditions are intended to ensure compliance with the provisions of the
Securities Act. Each Holder will cause any proposed purchaser, assignee,
transferee, or pledgee of any Securities held by such Holder to agree to take
and hold such Securities subject to the provisions and upon the conditions
specified in this Agreement.
2.2 Each certificate representing (i) the Securities and (ii) any other
securities issued in respect of the Securities upon any stock split, stock
dividend, recapitalization, merger, consolidation or similar event shall (unless
otherwise permitted by the provisions of Section 2.3 below) be stamped or
otherwise imprinted with the following legend (in addition to any legend
required by any other agreement or under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT") OR ANY STATE SECURITIES LAWS. SUCH SHARES MAY NOT BE
SOLD OR OFFERED FOR SALE IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION
OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE ACT. COPIES OF THE AGREEMENTS
COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE
OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS
CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE
OFFICE OF THE CORPORATION.
Each Holder consents to the Company making a notation on its records and
giving instructions to any transfer agent of the Securities in order to
implement the restrictions on transfer established in this Agreement.
2.3 The holder of each certificate representing Securities by acceptance
thereof agrees to comply in all respects with the provisions of this Agreement,
including, without limitation, Section 13 hereof. Prior to any proposed sale,
assignment, transfer or pledge of any Securities (other than a transfer not
involving a change in beneficial ownership or occurring after the IPO or the
dissolution of the Company), the holder thereof shall give written notice to the
Company of such holder's intention to effect such transfer, sale, assignment or
pledge. Each such notice shall describe the manner and circumstances of the
proposed transfer, sale, assignment or pledge in sufficient detail, including
the information required by Section 13.1 to the extent the provisions of Section
13 are still in effect, and shall be accompanied, at such holder's expense by
either (i) an unqualified written opinion of legal counsel who shall, and whose
legal opinion shall be, reasonably satisfactory to the Company addressed to the
Company, to the effect that the proposed transfer of the Restricted Securities
may be effected without registration under the Securities Act, or (ii) a "no
action" letter from the Commission to the effect that the transfer of such
securities without registration will not result in a recommendation by the staff
of the Commission that action be taken with respect thereto, whereupon the
holder of such Restricted Securities shall be entitled to transfer such
Restricted Securities in accordance with the terms of this Agreement and of the
notice delivered by the holder
-5-
<PAGE>
to the Company. Each certificate evidencing the Restricted Securities
transferred as above provided shall bear, except if such transfer is made
pursuant to Rule 144 under the Securities Act or pursuant to an effective
registration statement, the appropriate restrictive legend set forth in Section
2.2 above, except that such certificate shall not bear such restrictive legend
if in the opinion of counsel for such holder that is acceptable to the Company
such legend is not required in order to establish compliance with any provision
of the Securities Act.
3. Requested Registration.
3.1 Notice of Registration; Registration. In case the Company shall
receive from Initiating Holders a written request that the Company effect any
registration, qualification or compliance (other than a registration on Form S-3
or any successor form) that would result in an aggregate offering of at least
$15,000,000, the Company will:
(a) promptly give written notice of the proposed registration to all
other Holders (other than Warrant Holders) the Investors, the Founders and the
Additional Rightsholders (collectively, the "Shareholders"); and
(b) subject to Section 3.3, use its reasonable efforts to effect, as
soon as practicable, such registration, qualification or compliance (including,
without limitation, the execution of an undertaking to file post-effective
amendments, appropriate qualification under applicable blue sky or other state
securities laws and appropriate compliance with applicable regulations issued
under the Securities Act) as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Registrable
Securities as are specified in such request, together with (i) all or such
portion of the Registrable Securities of any Shareholder joining in such request
as are specified in a written request given within ten (10) business days after
receipt of such written notice from the Company, and (ii) such additional
securities as the Company may desire to register, including, but not limited to,
securities of the Company which are held by officers or directors of the Company
or which are held by persons who, by virtue of agreements with the Company, are
entitled to include their securities in any such registration; provided that the
Company shall not be obligated to take any action to effect any such
registration, qualification or compliance pursuant to this Section 3:
(i) In any particular jurisdiction in which the Company would
be required to execute a general consent to service of process in effecting such
registration, qualification or compliance or subject the Company to taxation in
such jurisdiction unless the Company is already subject to service in such
jurisdiction or taxation in such jurisdiction, respectively, and except as may
be required by the Securities Act;
(ii) After the Company has effected one (1) registration
pursuant to this Section 3 and such registration has been declared or ordered
effective;
(iii) After the Company has effected one (1) registration
pursuant to Section 5 of the Amended and Restated Rights Agreement, if the
Holders have been afforded the
-6-
<PAGE>
opportunity to register their Registrable Securities pursuant to the terms
thereof and such registration has been declared or ordered effective;
(iv) If at the time of the request to register Registrable Securities
the Company gives notice within thirty (30) days of such request that it is
engaged or has fixed plans to engage within thirty (30) days of the time of the
request in a firmly underwritten registered public offering as to which the
Holders (other than Warrant Holders) may include Registrable Securities pursuant
to Section 4 or 5 hereof or Section 5 of the Amended and Restated Rights
Agreement; or
(v) Prior to twelve (12) months following the closing of the IPO.
Subject to the foregoing clauses (i) through (v) and to Section 3.3, the
Company shall file a registration statement covering the Registrable Securities
so requested to be registered as soon as practicable after receipt of the
request of the Initiating Holders.
3.2 Underwriting. If the Initiating Holders intend to distribute the
------------
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
Section 3 and the Company shall include such information in the written notice
referred to in Section 3.1. The right of any Shareholder to registration
pursuant to Section 3 shall be conditioned upon such Shareholder's participation
in such underwriting and the inclusion of such Shareholder's Registrable
Securities in the underwriting to the extent requested (unless otherwise
mutually agreed by a majority in interest of the Initiating Holders and such
Shareholder) to the extent provided herein. If officers or directors of the
Company shall request inclusion of securities of the Company other than
Registrable Securities in any registration pursuant to Section 3.1, or if
holders of securities of the Company who are entitled by contract with the
Company (other than this Agreement or the Amended and Restated Rights Agreement)
to have securities included in such a registration (such officers, directors,
and other shareholders being collectively referred to as the "Other
Shareholders") request such inclusion, such securities of the Other Shareholders
may be included in the underwriting, provided that such Other Shareholders
accept the further applicable provisions of this Agreement.
The Company shall (together with all Shareholders proposing to distribute
their securities through such underwriting) enter into an underwriting agreement
in customary form with the underwriter or underwriters selected for such
underwriting by a majority in interest of the Initiating Holders and consented
to by the Company, which consent shall not be unreasonably denied.
Notwithstanding any other provision of this Section 3, if the underwriter
determines that marketing factors require a limitation of the number of shares
to be underwritten and so advises the Initiating Holders in writing, then the
Company shall so advise all Shareholders and Other Shareholders who have
indicated to the Company their decision to distribute any of their Registrable
Securities through such underwriting and the number of shares of Registrable
Securities that may be included in the registration and underwriting shall be
allocated among all Shareholders and Other Shareholders as follows: first, an
equal aggregate number of shares of Registrable Securities of each of the
Investors (as a group), the Founders (as a group) and the Holders (as a group)
other than the Warrant Holders; second, an equal aggregate number of shares of
the Founders (as a group) and whichever of the Investors (as a group) or Holders
(as a group) other than the Warrant Holders holds Registrable
-7-
<PAGE>
Securities after application of the immediately preceding clause; third, any
remaining Registrable Securities of the Founders; fourth, among the Additional
Rightsholders (as a group); and fifth, among the Other Shareholders (as a
group). Registrable Securities are to be allocated within each group as
aforesaid in proportion, as nearly as practicable, to the respective amounts of
Registrable Securities held by the Investors, the Founders, the Additional
Rightsholders, the Holders or the Other Shareholders, as applicable, at the time
of filing the registration statement. To facilitate the allocation of shares in
accordance with the above provisions, the Company may round the number of shares
allocated to any Shareholder or Other Shareholder to the nearest 100 shares. No
Registrable Securities excluded from the underwriting by reason of the
underwriter's marketing limitation shall be included in such registration.
If any Shareholder disapproves of the terms of the underwriting, such person
may elect to withdraw therefrom by written notice to the Company, the
underwriter and the Initiating Holders. The Registrable Securities and/or other
securities so withdrawn from such underwriting shall also be withdrawn from such
registration; provided, however, that, if by the withdrawal of such Registrable
-------- -------
Securities a greater number of Registrable Securities held by other Shareholders
may be included in such registration (up to the maximum of any limitation
imposed by the underwriters), then the Company shall offer to all Shareholders
who have included Registrable Securities in the registration the right to
include additional Registrable Securities in the same proportions used above in
determining the underwriter limitation.
If the underwriter has not limited the number of Registrable Securities to be
underwritten, the Company may include securities for its own account or the
account of others in such registration if the underwriter so agrees and if the
number of Registrable Securities which would otherwise have been included in
such registration and underwriting will not thereby be limited.
3.3 Delay of Registration. If the Company shall furnish to the Initiating
---------------------
Holders a certificate signed by the President of the Company stating that, in
the good faith judgment of the Board of Directors of the Company, it would not
be in the best interests of the Company and its shareholders for such
registration statement to be filed on or before the date filing would be
required and it is therefore appropriate to defer the filing of such
registration statement, then the Company may direct that such request for
registration be delayed for a period not in excess of one hundred eighty (180)
days, such right to delay a request to be exercised by the Company not more than
once in any twelve month period.
4. Company Registration.
4.1 Notice of Registration. If at any time or from time to time the Company
----------------------
shall determine to register any of its Common Stock on Form S-1 or Form S-3 (or
any successor form under the Securities Act) (other than with respect to a shelf
registration statement), for its own account or for the account of the
Investors, Founders or Additional Rightsholders, in connection with the public
offering of such securities solely for cash, the Company will:
(a) promptly give to each Shareholder written notice thereof; and
-8-
<PAGE>
(b) include in such registration(and any related qualification under
blue sky laws or other compliance), and in any underwriting involved therein,
all the Registrable Securities specified in a written request or requests, made
within ten (10) business days after receipt of such written notice from the
Company, by any Shareholder.
Notwithstanding the foregoing, no registrations of securities by the
Company on an Excluded Registration Statement shall give rise to the rights of
the Shareholders set forth in this Section.
4.2 Underwriting. If the registration of which the Company gives notice is
------------
for a registered public offering involving an underwriting, the Company shall so
advise the Shareholder as a part of the written notice given pursuant to Section
4.1(a). In such event the right of any Shareholder to registration pursuant to
this Section 4 shall be conditioned upon such Shareholder's participation in
such underwriting and the inclusion of Registrable Securities in the
underwriting to the extent provided herein. All Shareholders proposing to
distribute their securities through such underwriting shall (together with the
Company and the Other Shareholders distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by the Company.
Notwithstanding any other provision of this Section 4, if the managing
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, the managing underwriter may limit all or any
portion of the Registrable Securities to be included in such registration. The
Company shall so advise all Shareholders and Other Shareholders distributing
their securities through such underwriting and the number of shares of
Registrable Securities that may be included in the registration and underwriting
shall be allocated as follows: first, an equal aggregate number of shares of
Registrable Securities of each of the Investors (as a group), the Founders (as a
group) and the Holders (as a group) other than the Warrant Holders; second, an
equal aggregate number of shares of the Founders (as a group) and whichever of
the Investors (as a group) or Holders (as a group) other than the Warrant
Holders holds Registrable Securities after application of the immediately
preceding clause; third, any remaining Registrable Securities of the Founders;
fourth, among the Additional Rightsholders (as a group), and fifth, among the
Other Shareholders (as a group). Registrable Securities are to be allocated
within each group as aforesaid in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities held by the Shareholders or the
Other Shareholders, as applicable, at the time of filing the registration
statement. To facilitate the allocation of shares in accordance with the above
provisions, the Company may round the number of shares allocated to any
Shareholder or Other Shareholder to the nearest 100 shares. If any Shareholder
or Other Shareholder disapproves of the terms of any such underwriting, he or
she may elect to withdraw therefrom by written notice to the Company and the
managing underwriter.
4.3 Right to Terminate Registration. The Company shall have the right to
-------------------------------
terminate or withdraw any registration initiated by it under this Section 4
prior to the effectiveness of such registration whether or not any Shareholder
has elected to include securities in such registration.
4.4 Termination of Rights. The rights to cause the Company to register
---------------------
Registrable Securities pursuant to this Section 4 shall terminate three (3)
years after the IPO.
-9-
<PAGE>
5. Registration on Form S-3.
5.1 If any Holder or Holders holding in the aggregate not less than 25% of
the then outstanding Registrable Securities request that the Company file a
registration statement on Form S-3 (or any successor form to Form S-3) for a
public offering of shares of Registrable Securities the reasonably anticipated
aggregate price to the public of which, net of underwriting discounts and
commissions, would exceed $2,500,000, and the Company is at the time of such
request a registrant entitled to use Form S-3 to register the Registrable
Securities for such an offering, the Company shall use its reasonable efforts to
cause such Registrable Securities to be registered for the offering on such form
and to cause such Registrable Securities to be qualified in such jurisdictions
as the Holder or Holders may reasonably request; provided, however, that the
Company shall not be required to effect more than two such registrations
pursuant to this Section 5 or pursuant to Section 7 of the Amended and Restated
Rights Agreement in any twelve (12) month period or more than a total of three
registrations under this Section 5 or pursuant to Section 7 of the Amended and
Restated Rights Agreement. The substantive provisions of Section 3.2 shall be
applicable to each registration initiated under this Section 5.
5.2 Notwithstanding the foregoing, the Company shall not be obligated to
take any action pursuant to this Section 5: (i) in any particular jurisdiction
in which the Company would be required to execute a general consent to service
of process in effecting such registration, qualification or compliance or
subject the Company to taxation in such jurisdiction unless the Company is
already subject to service in such jurisdiction or taxation in such
jurisdiction, respectively, and except as may be required by the Securities Act;
(ii) if the Company, within ten (10) days of the receipt of the request of the
Holders, gives notice of its bona fide intention to effect the filing of a
registration statement (other than an Excluded Registration Statement) with the
Commission within ninety (90) days of receipt of such request; (iii) during the
period starting with the date sixty (60) days prior to the Company's estimated
date of filing of, and ending on the date six (6) months immediately following,
the effective date of any registration statement pertaining to securities of the
Company (other than an Excluded Registration Statement), provided that the
Company is actively employing in good faith all reasonable efforts to cause such
registration statement to become effective; or (iv) if the Company shall furnish
to such Holder a certificate signed by the President of the Company stating that
in the good faith judgment of the Board of Directors it would be seriously
detrimental to the Company or its shareholders for registration statements to be
filed in the near future, then the Company's obligation to use its reasonable
efforts to file a registration statement shall be deferred for a period not to
exceed one hundred twenty (120) days from the receipt of the request to file
such registration by such Holder; provided, however, that such right to delay a
filing may not be exercised by the Company more than once in any twelve month
period.
6. Expenses of Registration.
6.1 All Registration Expenses and Selling Expenses incurred in connection
with a registration pursuant to Section 5 shall be borne pro rata by the Holder
or Holders requesting the registration according to the number of Registrable
Securities included in such registration.
-10-
<PAGE>
6.2 All Registration Expenses incurred in connection with all registrations
pursuant to Sections 3 or 4 shall be borne by the Company.
6.3 Except as set forth in the Amended and Restated Rights Agreement, all
Selling Expenses relating to securities registered on behalf of the Shareholders
shall be borne by such participating Shareholders, pro rata on the basis of the
number of shares so registered.
7. Registration Procedures. In the case of each registration, qualification
or compliance effected by the Company pursuant to this Agreement, the Company
will keep each Shareholder advised in writing as to the initiation of each
registration, qualification and compliance and as to the completion thereof. At
its expense the Company will:
(a) Prepare and file with the Commission a registration statement with
respect to such securities and use all reasonable efforts to cause such
registration statement to become and remain effective until the earlier of the
expiration of one hundred eighty (180) days or completion of the distribution
described in the Registration Statement;
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the 1933 Act with respect to the disposition of all Registrable
Securities covered by such registration statement
(c) Furnish to the Shareholders participating in such registration and
to the underwriters of the securities being registered such reasonable number of
copies of the registration statement, preliminary prospectus, final prospectus
and such other documents as such underwriters may reasonably request in order to
facilitate the public offering of such securities.
8. Indemnification.
8.1 The Company will indemnify each Shareholder, each of its officers and
directors and partners, and each person controlling such Shareholder within the
meaning of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Agreement, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
in which they were made, not misleading, or any violation by the Company of the
Securities Act or any rule or regulation promulgated under the Securities Act
applicable to the Company in connection with any such registration,
qualification or compliance, and the Company will reimburse each such
Shareholder, each of its officers and directors, and each person controlling
such Shareholder, each such underwriter and each person who
-11-
<PAGE>
controls any such underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating, preparing or defending any such
claim, loss, damage, liability or action, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission or alleged untrue statement or omission, made in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Shareholder, controlling person or underwriter and stated
to be for use therein.
8.2 Each Shareholder will, if Registrable Securities held by such
Shareholder are included in the securities as to which such registration,
qualification or compliance is being effected (as a condition to such
Shareholder's right to include securities in any such registration,
qualification or compliance), indemnify the Company, each of its directors and
officers, each underwriter, if any, of the Company's securities covered by such
a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, and each
other such Shareholder, each of its officers and directors and each person
controlling such Shareholder within the meaning of Section 15 of the Securities
Act, against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company, such Shareholders, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Shareholder and
stated to be specifically for use therein. Notwithstanding the foregoing, the
maximum liability of each Shareholder under this Section 8.2 shall be limited in
an amount equal to the net proceeds received by such Shareholder in such
offering, unless such liability arises out of or is based solely on willful
misconduct by such Shareholder.
8.3 Each party entitled to indemnification under this Section 8 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Agreement unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action
and provided further, that the Indemnifying Party shall not assume the defense
for matters as to which there is a conflict of interest or separate and
different defenses. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does
-12-
<PAGE>
not include the giving by the claimant or plaintiff to such Indemnified Party of
an unconditional release from all liability in respect to such claim or
litigation.
9. Information by Shareholder. The Shareholders holding Registrable
Securities included in any registration shall, as a condition to such
Shareholder's right to include securities in any such registration, furnish to
the Company such information regarding such Shareholder, the Registrable
Securities held by them and the distribution proposed by such Shareholder as the
Company may request in writing and as shall be required in connection with any
registration, qualification or compliance referred to in this Agreement. At any
time during the effectiveness of any registration statement covering Registrable
Securities offered by a Shareholder, if such Shareholder becomes aware of any
change materially affecting the accuracy of the information contained in such
registration statement or the prospectus (as then amended or supplemented)
relating to such Shareholder, it shall immediately notify the Company of such
change.
10. Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Securities to the public without registration, after such
time as a public market exists for the Common Stock of the Company, the Company
agrees to use its reasonable efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the date that the Company becomes subject to the reporting requirements of the
Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
(b) Use its reasonable efforts to file with the commission in a
timely manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements); and
(c) So long as a Holder owns any Restricted Securities, to furnish
to the Holder forthwith upon request a written statement by the Company as to
its compliance with the reporting requirements of said Rule 144 (at any time
after ninety (90) days after the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
so filed by the Company with the Commission on a non- confidential basis as a
Holder may reasonably request in availing itself of any rule or regulation of
the Commission allowing a Holder to sell any such securities without
registration; provided, however, that no such copies shall need to be provided
-------- -------
by the Company if such reports or documents are available from the Commission's
internet EDGAR database.
11. Transfer of Rights. The rights to cause the Company to register
securities granted to the respective Shareholders under Sections 3, 4 and 5 may
be assigned to any affiliate of a Shareholder granted such rights (including
without limitation any former partner in any such Shareholder that is a
partnership or former member in such a Shareholder that is a limited liability
company) or to a transferee or assignee reasonably acceptable to the Company in
connection in each
-13-
<PAGE>
case with any transfer or assignment of Registrable Securities by such a
Shareholder (but may not be otherwise assigned or transferred) provided that:
(i) such transfer complies with Section 2 hereof and otherwise with applicable
securities laws; (ii) in the case of an assignment of the rights granted under
Sections 3, 4 and 5 hereof, such assignee or transferee acquires an aggregate of
at least 150,000 Common Shares (as may be appropriately adjusted upon any stock
split, stock dividend, recapitalization, merger, consolidation or similar event)
or shares of other Equity Securities (counted on an as-converted into Common
Stock basis); and (iii) such assignee or transferee becomes a party to this
Agreement and assumes all of the obligations of the transferring Shareholder
hereunder.
12. Standoff Agreement. Each Holder agrees and each Other Shareholder shall
agree (as a condition to such Holder or Other Shareholder's right to include
securities in any registration, qualification or compliance pursuant to this
Agreement), upon request of the Company or the underwriters managing any
underwritten offering of the Company's securities, not to sell, make any short
sale of, loan, grant any option for the purchase of, or otherwise dispose of any
Registrable Securities (other than those included in the registration) without
the prior written consent of the Company or such underwriters, as the case may
be, for such period of time (not to exceed one hundred eighty (180) days) from
the date of the IPO or for such period of time (not to exceed ninety (90) days)
from the effective date of any subsequent registration statement after the IPO
(other than an Excluded Registration Statement) as may be requested by the
underwriters, and if so requested by the Company or such underwriters, to enter
into a lockup agreement to the foregoing effect and in a form satisfactory to
the Company and such underwriters provided however, that Holders shall not be so
-------- -------
obligated not to dispose of their Registrable Securities, and shall not be
required to enter into such a lock-up agreement with respect thereto, unless:
(A) in the case of the IPO, (i) all executive officers and 1% shareholders of
the Company agree to the same lock-up and (ii) such agreement shall provide that
any discretionary waiver or termination of the restrictions of any such lock-up
agreements by the Company or representatives of the underwriters shall apply to
all persons subject to such agreements pro rata based on the number of shares
subject to such agreements; and (B) in the case of a registration statement
subsequent to the IPO, (i) all executive officers agree to the same lock-up and
(ii) the Holders have the ability to sell not less than 25% of the Shares
registered in any such subsequent offering; and provided further that any Holder
-------- -------
who together with its affiliates shall hold less than 1% of the Registrable
Securities (any such Holder, a "Small Holder") shall only be locked up as
aforesaid after one offering completed subsequent to the IPO.
13. Right of First Refusal. Before any Equity Securities, Warrants or other
securities of the Company held by a Holder or any transferee of any of them (any
thereof, a "Selling Shareholder") may be sold or otherwise transferred
(including transfer by gift or operation of law), the Company shall have a right
of first refusal to purchase such securities on the terms and conditions set
forth in this Section 13 (the "Right of First Refusal").
13.1 First Refusal Notice. If a Selling Shareholder desires to transfer
--------------------
any Equity Securities, Warrants or other securities of the Company owned by it
(collectively, "Sale Shares"), then at least 60 days (10 days in the case of a
Small Holder) prior to such transfer, other than a transfer exempt pursuant to
Section 13.6, such Selling Shareholder must give notice (the "First Refusal
Notice") to the Company of its intention to effect such transfer. The First
Refusal Notice must set forth (a) the number and class of Sale Shares to be sold
by the Selling Shareholder, (b) the
-14-
<PAGE>
date or proposed date of such transfer and the name and address of the
transferee (the "Proposed Transferee"), and (c) the principal terms of such
transfer, including the cash or other property or consideration to be received
upon such transfer.
13.2 Purchase Price. The purchase price for the Sale Shares purchased by
--------------
the Company under this Section 13 ("First Refusal Price") shall be the bona fide
cash price or other consideration for which the Selling Shareholder proposes to
transfer the Sale Shares as set forth in the First Refusal Notice. If the First
Refusal Price includes consideration other than cash, the cash equivalent value
of the non-cash consideration shall be determined in good faith by the Board of
Directors of the Company.
13.3 Company's Option. The Company shall have the option, but not the
----------------
obligation, to purchase all, but not less than all, of the Sale Shares at the
First Refusal Price. Within 20 days (10 days in the case of a Small Holder)
after the date the First Refusal Notice is given, the Company shall give written
notice to the Selling Shareholder stating its intention to exercise such option,
and a date and time for consummation of the purchase not less than 60 days (10
days in the case of a Small Holder) nor more than 90 days (20 days in the case
of a Small Holder) after the date the First Refusal Notice was given. Failure by
the Company to give such notice within such time period shall be deemed an
election by it not to exercise its option.
13.4 Payment. Payment of the First Refusal Price shall be made in cash, by
-------
check, or, in the case of a sale to the Company, by cancellation of all or a
portion of any outstanding indebtedness of the Selling Shareholder to the
Company, or by any appropriate combination thereof.
13.5 Selling Shareholder's Right to Transfer. If all of the Sale Shares
---------------------------------------
proposed in the First Refusal Notice to be transferred to a given Proposed
Transferee are not purchased by the Company, then the Selling Shareholder may
sell or otherwise transfer such Sale Shares to that Proposed Transferee at the
First Refusal Price or at a higher price, provided that such sale or other
transfer is consummated within 120 days after the date of the First Refusal
Notice and provided further that any such sale or other transfer is effected in
accordance with any applicable securities laws and the Proposed Transferee
agrees in writing that the provisions of this Agreement shall continue to apply
to the Sale Shares if applicable in the hands of such Proposed Transferee. If
the Sale Shares described in the First Refusal Notice are not transferred to the
Proposed Transferee within such period, a new First Refusal Notice shall be
given to the Company, and the Company shall again be offered the Right of First
Refusal in accordance with this Section 13 before any Shares held by the Selling
Shareholder may be sold or otherwise transferred.
13.6 Exception for Certain Transfers. Anything to the contrary contained in
-------------------------------
this Section 16 notwithstanding, (i) in the case of a Selling Shareholder that
is an individual, the transfer of any or all of the Sale Shares during the
Selling Shareholder's lifetime or on the Selling Shareholder's death by will or
intestacy to the Selling Shareholder's immediate family or a trust for the
benefit of the Selling Shareholder's immediate family shall be exempt from the
provisions of this Section 13 and (ii) in the case of a Selling Shareholder that
is a corporation, partnership or other business entity, the transfer of any or
all of the Sale Shares to any controlled or controlling corporate, partnership
or other business entity of such Selling Shareholder (or any corporate,
-15-
<PAGE>
partnership or other business entity under common control with such Selling
Shareholder) shall be exempt from the provisions of this Section 10. "Immediate
Family" as used herein shall mean spouse, lineal descendant or antecedent,
father, mother, brother or sister. In such case, the transferee or other
recipient shall receive and hold the Sale Shares so transferred subject to the
provisions of this Section 13, and there shall be no further transfer of such
Sale Shares except in accordance with the terms of this Section 13.
13.7 Transfers Void. Any attempted transfer in violation of the terms of
--------------
this Section 13 shall be ineffective to vest in any Proposed Transferee any
interest held by the transferring Selling Shareholder in any Sale Shares.
Without limiting the foregoing, any purported transfer in violation hereof shall
be ineffective as against the Company, and the Company shall have a continuing
right and option (but not an obligation), until the restrictions contained in
this Section 13 terminate, to purchase the securities purported to be
transferred by the Selling Shareholder in violation of this Section 13 for a
price and on terms provided for herein.
13.8 Termination or Waiver of Right of First Refusal. The Right of First
-----------------------------------------------
Refusal shall terminate upon the earlier of (i) the IPO, (ii) the dissolution of
the Company, or (iii) the effective date of a Change in Control.
14. Board of Directors: Voting Agreement.
14.1 Agreement to Vote. Subject to Section 14.6 below, the Holders agree to
-----------------
vote the shares of Equity Securities then held by them at any regular or special
meeting of shareholders of the Company, or, in lieu of any such meeting, to give
their written consent, as provided in Section 14.2 below. Notwithstanding
anything to the contrary contained herein, no Warrant Holder shall have any
right to vote as a Shareholder of the Company unless and until the Warrants held
by such Warrant Holder shall have been exercised for shares of Common Stock, and
shall only have the right to vote thereafter with respect to the Warrants so
exercised for shares of Common Stock.
14.2 (a) Board of Directors. As is more fully elaborated in the Amended and
---------------
Restated Certificate of Incorporation of the Company, the Board of Directors
shall consist of eight (8) members, elected as set forth therein. During the
respective periods set forth in the Restated Certificate, two of the Directors
shall be elected by TriGem Corporation ("TriGem"), two shall be elected by Korea
Data Systems America, Inc. ("KDS"), one shall be elected by Stephen A. Dukker,
one shall be elected by the holders of shares of Series A Preferred, one shall
be elected by the holders of the outstanding shares of Series A Preferred and
Shares of Common Stock, voting together as a class and one shall be elected by
the Series B Holders and Series C Holders, voting together as a class. A
director may be removed from the Board of Directors, and any vacancy in the
Board of Directors shall be filled, in each case as set forth in the Restated
Certificate. With respect to any proposal concerning the election of either
director who is to be elected by TriGem, the Holders hereby covenant and agree
that each Holder shall vote its shares of Equity Securities to nominate, appoint
and elect as such director the nominee of TriGem. With respect to any proposal
concerning the election of either director who is to be elected by KDS, the
Holders hereby covenant and agree that each Holder shall vote its shares of
Equity Securities to nominate, appoint and elect as such director the nominee of
KDS. With respect to any proposal concerning the election of the director
-16-
<PAGE>
who is to be Stephen A. Dukker, the Holders and Common Holders hereby covenant
and agree that each Holder shall vote its shares of Equity Securities to
nominate, appoint and elect as such initial director Stephen A. Dukker. With
respect to any proposal concerning the election of the director who is to be
elected by the holders of a majority of the outstanding shares of the Series A
Preferred and Shares of Common Stock, voting together as a class, the Holders
hereby covenant and agree that each Holder shall vote its shares of Equity
Securities to nominate, appoint and elect as the initial such director Nathan
Morton. With respect to any proposal concerning the election of the director who
is to be elected by the holders of a majority of the outstanding shares of the
Series A Preferred, voting together as a class, the Holders hereby covenant and
agree that each Holder shall vote its shares of Equity Securities to nominate,
appoint and elect as such director the nominee of Technology Crossover
Management III, L.L.C., or its affiliates, and as such initial director to
nominate, appoint and elect C. Toms Newby III. With respect to any proposal
concerning the election of the director who is to be elected by the Series B
Holders and Series C Holders, the Holders hereby covenant and agree that each
Holder shall vote its shares of Equity Securities to nominate, appoint and elect
as such director, the nominee of Idealab!, and as such initial director to
nominate, appoint and elect Bill Gross.
(b) Significant Transactions. The Holders hereby covenant and agree
------------------------
that to the greatest extent permitted by applicable Delaware General Corporate
Law, and notwithstanding anything to the contrary contained herein, no vote of
any class or series of Holder Registrable Securities shall be required in
connection with respect to any proposed (i) merger or consolidation of the
Company with or into another corporation, or (ii) sale, lease or exchange of all
or substantially all of the property or assets of the Company.
14.3 No Revocation. The voting agreements contained herein are coupled with
-------------
an interest and may not be revoked during the term of this Section 14.
14.4 Stock Splits, Stock Dividends, etc. In the event of any stock split,
----------------------------------
stock dividend, recapitalization, reorganization, or the like, any securities
issued as a result thereof with respect to the Holders' Equity Securities shall
become Holders' Equity Securities for purposes of this Section 14 and shall be
endorsed with the legend set forth in Section 2 hereof.
14.5 Waivers. Any term hereof may be amended and the observance of any term
-------
hereof may be waived either generally or in a particular instance and either
retroactively or prospectively only with the written consent of the Company or
(with respect to provisions affecting the Holders) of a majority of the Holders
other than the Warrant Holders.
14.6 Board Observer Rights. Nothing in this Agreement shall be deemed to
---------------------
amend Section 18.6 of the Amended and Restated Rights Agreement, and the parties
hereto acknowledge the provisions thereof.
14.7 Termination. All parties' rights under this Section 14 will terminate
-----------
upon the earliest to occur of (i) the IPO, (ii) the dissolution of the Company,
or (iii) the effective date of a Change of Control.
-17-
<PAGE>
15. Miscellaneous.
15.1 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
-------------
WITH, AND GOVERNED IN ALL RESPECTS BY, THE LAWS OF THE STATE OF CALIFORNIA, AS
APPLIED TO AGREEMENTS ENTERED INTO, AND TO BE PERFORMED ENTIRELY IN SUCH STATE,
BETWEEN RESIDENTS OF SUCH STATE. THE PARTIES HERETO (I) AGREE TO SUBMIT TO THE
JURISDICTION OF THE FEDERAL AND STATE COURTS SITTING IN THE COUNTIES OF ORANGE,
SANTA CLARA OR SAN FRANCISCO OF THE STATE OF CALIFORNIA WITH RESPECT TO THE
BREACH OR INTERPRETATION OF THIS AGREEMENT OR THE ENFORCEMENT OF ANY AND ALL
RIGHTS, DUTIES, LIABILITIES, OBLIGATIONS, POWERS, AND OTHER RELATIONS BETWEEN
THE PARTIES ARISING UNDER THIS AGREEMENT, (II) WAIVE, TO THE FULLEST EXTENT EACH
MAY EFFECTIVELY DO SO, ANY OBJECTION EACH PARTY MAY NOW OR HEREAFTER HAVE TO THE
LAYING OF VENUE OF ANY SUCH PROCEEDING AND (III) SUBMIT TO THE EXCLUSIVE
JURISDICTION OF SUCH COURTS IN ANY SUCH SUIT, ACTION OR PROCEEDING. THE PARTIES
HERETO IRREVOCABLY WAIVE ANY IMMUNITY TO JURISDICTION TO WHICH THEY MAY
OTHERWISE BE ENTITLED OR BECOME ENTITLED (INCLUDING SOVEREIGN IMMUNITY, IMMUNITY
TO PRE-JUDGMENT ATTACHMENT, POST-JUDGMENT ATTACHMENT AND EXECUTION) IN ANY LEGAL
SUIT, ACTION OR PROCEEDING ARISING OUT OF OR BASED ON THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY WHICH IS INSTITUTED IN ANY CALIFORNIA COURT.
15.2 Non-Disclosure. No Holder by reason of this Agreement or its
--------------
ownership of Equity Securities or Warrants shall have access to any trade
secrets or classified information of the Company. Each Holder hereby agrees to
hold in confidence and trust and not to misuse or disclose any confidential or
proprietary information provided to such Holder pursuant to this Agreement or by
reason of its ownership of Equity Securities or Warrants. Each Holder further
acknowledges and understands that any information so obtained which may be
considered "inside" non-public information will not be utilized by such Holder
in connection with purchases and/or sales of the Company's securities except in
compliance with applicable state and federal anti-fraud statutes. The Company
shall not be required to comply with any statute or common law requirement in
respect of disclosure to any Holder whom the Company reasonably determines to be
a competitor of the Company or an officer, employee, director or greater than
ten percent (10%) stockholder of such competitor.
15.3 Successors and Assigns. Except as otherwise provided herein,
----------------------
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
15.4 Entire Agreement. This Agreement and the other agreements
----------------
referenced herein constitute the full and entire understanding and agreement
between the parties with regard to the subject matter hereof and thereof.
-18-
<PAGE>
15.5 Amendment. Except as expressly provided herein, neither this
---------
Agreement nor any provision hereof may be amended, waived, discharged or
terminated other than by written consent of the Company, or (with respect to
provisions affecting the Holders) of a majority in interest of the Holders other
than the Warrant Holders (voting on an as if converted basis). Notwithstanding
the foregoing: (i) any amendment hereto that under applicable Delaware law would
adversely affect the holders of a specific class or series of the Company's
capital stock in a manner different than the holders of other shares of capital
stock shall also require the consent of the holders of a majority of the shares
of such class or series so affected to the extent that Delaware General
Corporate Law so requires. Any amendment or waiver effected in accordance with
this paragraph shall be binding upon each party hereto or upon each Holder of
shares of the consenting class or series of capital stock, as the case may be.
15.6 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by messenger,
addressed (a) if to a Holder, at such person's address as set forth on Schedule
--------
A, or at such other address as such person shall have furnished to the Company
- -
in writing, or (b) if to the Company, one copy should be sent to its address set
forth below and addressed to the attention of the Corporate Secretary, or at
such other address as the Company shall have furnished to the Shareholders.
Each such notice or other communication shall for all purposes of
this Agreement be treated as effective or having been given when delivered if
delivered personally, or, if sent by mail, at the earlier of its receipt or 72
hours after the same has been deposited in a regularly maintained receptacle for
the deposit of the United States mail, addressed and mailed as aforesaid.
15.7 Delays or Omissions. Except as expressly provided herein, no
-------------------
delay or omission to exercise any right, power or remedy accruing to any Holder
upon any breach or default of the Company under this Agreement, shall impair any
such right, power or remedy of such Holder nor shall it be construed to be a
waiver of any such breach or default, or an acquiescence therein, or of or in
any similar breach or default thereafter occurring; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
theretofore or thereafter occurring. Any waiver, permit, consent or approval of
any kind or character on the part of any Holder of any breach or default under
this Agreement, or any waiver on the part of any Holder of any provisions or
conditions of this agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement or by law or otherwise afforded to any Holder shall be cumulative
and not alternative.
15.8 Expenses. Except as otherwise set forth herein, the Company
--------
and each Holder shall bear their own respective expenses incurred on their
behalf with respect to this Agreement and the transactions contemplated hereby.
15.9 Termination of Prior Rights. Execution of this Agreement by a
---------------------------
Series B Holder or a Series C Holder shall constitute the consent of such Holder
to the termination of the Amended and Restated Investor Rights Agreement, dated
March 31, 1999, by and among FreePC, the Series B Holders and the Series C
Holders (the "FreePC Rights Agreement"), as required
-19-
<PAGE>
pursuant to Section 13 of the FreePC Rights Agreement. Upon execution of this
Agreement by a majority of the Series B Holders and a majority of the Series C
Holders, the FreePC Rights Agreement shall be terminated in its entirety and
shall be of no further force or effect.
15.10 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which may be executed by less than all of the Holders,
each of which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
15.11 Severability. In the event that any provision of this
------------
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that no such severability shall be
effective if it materially changes the economic benefit of this Agreement to any
party.
15.12 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not considered in construing or
interpreting this Agreement.
-20-
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first set forth above.
eMachines, Inc.
By: /s/ Steven H. Miller
--------------------
Name: Steven H. Miller
Title: Vice President and Chief Financial
Officer
[SIGNATURE PAGE TO RIGHTS AND RESTRICTIONS AGREEMENT]
<PAGE>
COMMON STOCK HOLDERS:
- --------------------
IDEALAB! HOLDINGS, L.L.C.
/s/ Marcia Goodstein
- --------------------
By: Marcia Goodstein, Secretary
IDEALAB! CAPITAL PARTNERS, I-A, L.P.
/s/ William S. Elkus
- --------------------
William S. Elkus,
Managing member, idealab! Capital Management, I, LLC,
General Partner of idealab! Capital Partners I-A, L.P.
IDEALAB! CAPITAL PARTNERS, I-B, L.P.
/s/ William S. Elkus
- --------------------
William S. Elkus,
Managing member, idealab! Capital Management, I, LLC,
General Partner of idealab! Capital Partners I-B, L.P.
[SIGNATURE PAGE TO RIGHTS AND RESTRICTIONS AGREEMENT]
<PAGE>
CUISINE TO YOU
a __________________ corporation
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
DINE-IN DELIVERY, CA
a Sole Proprietor
By: /s/ Shawn Halverson
-----------------------------
Name: Shawn Halverson
----------------------------
Title: Owner
THE MEDIA EDGE
a __________________ corporation
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
[SIGNATURE PAGE TO RIGHTS AND RESTRICTIONS AGREEMENT]
<PAGE>
MIGHTY TIKKI MEDIA, INC.
a __________________ corporation
By: /s/ Andrew McElfresh
----------------------------
Name: Andrew McElfresh
--------------------------
Title: Secretary
-------------------------
WEBQUEST, INC.
a __________________ corporation
By: ----------------------------
Name: -------------------------
Title: -------------------------
/s/ Donald S. La Vigne
- --------------------------------
DONALD S. LA VIGNE
[SIGNATURE PAGE TO RIGHTS AND RESTRICTIONS AGREEMENT]
<PAGE>
/s/ Steve Chadima
- -----------------
STEVE CHADIMA
- -----------------
LEE HASIUK
- -----------------
BRIAN ALGRA
/s/ David Benson
- ------------------
DAVID BENSON
/s/ Lee Charnelle
- -------------------
LEE CHARNELLE
[SIGNATURE PAGE TO RIGHTS AND RESTRICTIONS AGREEMENT]
<PAGE>
/s/ Ilan Charnelle
- -------------------
ILAN CHARNELLE
/s/ Kirk Charnelle
- -------------------
KIRK CHARNELLE
/s/ Michael Dahn
- -------------------
MICHAEL DAHN
/s/ Kristen Ding
- -------------------
KRISTEN DING
/s/ JT Fenn
- -------------------
JT FENN
/s/ Matthew Goheen
- -------------------
MATTHEW GOHEEN
[SIGNATURE PAGE TO RIGHTS AND RESTRICTIONS AGREEMENT]
<PAGE>
- --------------------------------------
CHARLES GROSS
/s/ Owen Lee
- --------------------------------------
OWEN LEE
/s/ Gerald Longhurst
- --------------------------------------
GERALD LONGHURST
/s/ Khan Lowe
- --------------------------------------
KHAN LOWE
/s/ David Mangone
- --------------------------------------
DAVID MANGONE
[SIGNATURE PAGE TO RIGHTS AND RESTRICTIONS AGREEMENT]
<PAGE>
/s/ Charles & Sarah McElfresh
- --------------------------------------
CHARLES & SARAH MCELFRESH
/s/ Paul Miniero
- --------------------------------------
PAUL MINIERO
/s/ Roy Neilson
- --------------------------------------
ROY NEILSON
/s/ Miriam Neptune
- --------------------------------------
MIRIAM NEPTUNE
/s/ Michael Radford
- --------------------------------------
MICHAEL RADFORD
- --------------------------------------
DANIEL ROSEN
[SIGNATURE PAGE TO RIGHTS AND RESTRICTIONS AGREEMENT]
<PAGE>
- --------------------------------------
DONNA ROSEN
- --------------------------------------
JULIE ROSEN
/s/ Barbara Rosenberg
- --------------------------------------
BARBARA ROSENBERG
/s/ Stephen Stofflet
- --------------------------------------
STEPHEN STOFFLET
/s/ George Wu
- --------------------------------------
GEORGE WU
LYNNE MCELFRESH
- --------------------------------------
[SIGNATURE PAGE TO RIGHTS AND RESTRICTIONS AGREEMENT]
<PAGE>
/s/ Andrew McElfresh
- --------------------------------------
ANDREW MCELFRESH
OWEN LEE AND SANDRA LEE REVOCABLE TRUST
AGREEMENT DATED MARCH 4, 1991
By: /s/ Owen Lee and /s/ Sandra Lee
- --------------------------------------
Title: Trustees
A LA CARTE EXPRESS
By: /s/ Russell Winter
- --------------------------------------
Title: President
/s/ John Nicholas, Jr.
- --------------------------------------
JOHN NICHOLAS, JR.
GLOBAL INTERACTIVE MEDIA, LLC
[SIGNATURE PAGE TO RIGHTS AND RESTRICTIONS AGREEMENT]
<PAGE>
/s/ Boris Shimanousky
- --------------------------------------
By:Boris Shimanousky
Title:Managing Member
SERIES B HOLDERS:
- -----------------
IDEALAB! HOLDINGS, L.L.C.
/s/ Marcia Goodstein
- --------------------------------------
By: Marcia Goodstein, Secretary
SERIES C HOLDERS:
- -----------------
IDEALAB! HOLDINGS, L.L.C.
/s/ Marcia Goodstein
- --------------------------------------
By: Marcia Goodstein, Secretary
IDEALAB! CAPITAL PARTNERS, I-A, L.P.
/s/ William S. Elkus
- --------------------------------------
William S. Elkus,
Managing member, idealab! Capital Management, I, LLC,
General Partner of idealab! Capital Partners I-A, L.P.
[SIGNATURE PAGE TO RIGHTS AND RESTRICTIONS AGREEMENT]
<PAGE>
IDEALAB! CAPITAL PARTNERS, I-B, L.P.
/s/ William S. Elkus
- --------------------------------------
William S. Elkus,
Managing member, idealab! Capital Management, I, LLC,
General Partner of idealab! Capital Partners I-B, L.P.
USA NETWORKS, INC.
By: /s/ Thomas J. Kuhn
- --------------------------------------
Name: Thomas J. Kuhn
- --------------------------------------
Title:
- --------------------------------------
[SIGNATURE PAGE TO RIGHTS AND RESTRICTIONS AGREEMENT]
<PAGE>
MOORE GLOBAL INVESTMENTS, LTD.
/s/ Savvas Savvinidis
- --------------------------------------
Moore Capital Management, Inc., its trading adviser,
By Savvas Savvinidis, Director of Operations
MULTI-STRATEGIES FUND, LTD.
/s/ Savvas Savvinidis
- --------------------------------------
Moore Capital Management, Inc., its trading adviser,
By Savvas Savvinidis, Director of Operations
MULTI-STRATEGIES FUND, L.P.
/s/ Savvas Savvinidis
- --------------------------------------
Moore Capital Management, Inc., its trading adviser,
By Savvas Savvinidis, Director of Operations
REMINGTON INVESTMENT STRATEGIES, L.P.
/s/ Savvas Savvinidis
- --------------------------------------
Moore Capital Management, Inc., its trading adviser,
By Savvas Savvinidis, Director of Operations
[SIGNATURE PAGE TO RIGHTS AND RESTRICTIONS AGREEMENT]
<PAGE>
DBV INVESTMENTS LLC
By: /s/ Glenn Fuhrman
- --------------------------------------
Name: Glenn Fuhrman
- --------------------------------------
Title: Manager
- --------------------------------------
ALTA VISTA COMPANY
By: /s/ Stephanie Lucie
- --------------------------------------
Name: /s/ Stephanie Lucie
- --------------------------------------
Title:
- --------------------------------------
WS INVESTMENT COMPANY 99A
By:
- --------------------------------------
Name:
- --------------------------------------
Title:
- --------------------------------------
[SIGNATURE PAGE TO RIGHTS AND RESTRICTIONS AGREEMENT]
<PAGE>
THE GOLDMAN SACHS GROUP, L.P.
By: The Goldman Sachs Corporation,
its general partner
By: /s/ Joseph Gleberman, V.P.
- --------------------------------------
Name: Joseph Gleberman, V.P.
- --------------------------------------
Title:
- --------------------------------------
STONE STREET FUND 1999, L.P.
By: Stone Street 1999 Corp.,
its general partner
By: /s/ Katherine L. Nissenbaum
- --------------------------------------
Name: Katherine L. Nissenbaum
- --------------------------------------
Title: Vice President
- --------------------------------------
/s/ Philip M. Neches
- --------------------
PHILIP M. NECHES
- --------------------------------------
LARRY SONSINI
- --------------------------------------
MARTIN W. KORMAN
[SIGNATURE PAGE TO RIGHTS AND RESTRICTIONS AGREEMENT]
<PAGE>
EXHIBIT 10.16
AGREEMENT
---------
THIS AGREEMENT (this "Agreement") is dated as of June 29, 1999, and is made
by and between Bill Gross' idealab!, a California corporation ("idealab!") and
FreePC, Inc., a Delaware corporation ("FreePC"). idealab! and FreePC hereby
agree as follows:
1. Recitals: This Agreement is made with reference to the fact that
--------
Parsons Information & Technology, Group, Inc., as landlord ("Parsons"), and
idealab!, as tenant, entered into that certain lease, dated as of June 17, 1999
(the "Lease"), with respect to the entire eighth floor and a proportionate share
of the main lobby of such building measuring approximately 29,064 rentable
square feet of premises (the "Premises") located at 74 N. Pasadena Avenue,
Pasadena, California. A copy of the Lease is attached hereto as Exhibit A and
---------
incorporated by reference herein.
2. Premises: idealab! hereby agrees to rent to FreePC, and FreePC hereby
--------
agrees to rent from idealab!, approximately 12,406 rentable square feet of the
Premises, marked as "A" on Exhibit B hereto, as may be increased from time to
---------
time pursuant to Sections 25 and 26 hereof (hereinafter, the "Rented Premises").
This Agreement shall be at all times subject and subordinate to the Lease.
3. Term: The term of this Agreement (the "Term") shall commence on June
----
26, 1999 (the "Commencement Date") and terminate on June 26, 2000, as may be
extended pursuant to Section 24 (the "Expiration Date"), unless this Agreement
is sooner terminated pursuant to its terms.
4. Security Deposit. FreePC shall pay to idealab! the sum of $57,528.44
----------------
as a deposit (the "Security Deposit"), receipt of which is hereby acknowledged.
Additionally, FreePC shall pay to idealab! the additional amounts as follows:
(a) on the date that idealab! delivers to FreePC possession of the North Space
pursuant to Section 25, FreePC shall pay to idealab! an additional sum of
$25,252.48, (b) if FreePC rents additional space from idealab! pursuant to
Section 26, FreePC shall pay to idealab! an additional sum equal to two times
the Base Rent (as defined below) allocated to that portion of additional space
rented by FreePC.
5. Rent:
----
A. Base Rent. FreePC shall pay to idealab! as rent for the Rented
---------
Premises ("Base Rent") for each month during the Term, the following amounts:
(i) $1.50 per rentable square foot through December 31, 1999, and (ii) $1.87 per
rentable square foot for the balance of the Term. Base Rent for any period
during the Term hereof which is for less than one (1) month of the Term shall be
a pro rata portion of the monthly installment. Base Rent shall be payable on
the first day of each month without notice or demand and without any deduction,
offset, or abatement, in lawful money of the United States of America. Base
Rent and Additional Rent (as defined below) shall be paid directly to idealab!
at 130 W. Union Street, Pasadena, CA 91103, Attn.: Accounting, or such other
address as may be designated in writing by idealab!.
B. Monthly Costs. FreePC shall be responsible for its proportionate
-------------
share of any payment of any operating expenses, costs of maintenance, repair and
improvements, taxes, assessments, insurance costs, utility charges or any other
amounts in connection with the use or occupancy of the Rented
-1-
<PAGE>
Premises payable by idealab! under the Lease. Additionally, FreePC shall pay its
proportionate share of Excess Expenses paid by idealab! under Article 5.2 of the
Lease.
C. Parking Rent. FreePC shall pay in twelve (12) equal installments
------------
during the Term, the Parking Rent specified in Section 18. Parking Rent shall
be prorated and adjusted in the same manner as Base Rent under Section 5(A).
Notwithstanding the Parking Rent set forth herein, FreePC by written notice
delivered to idealab! at least fifteen (15) days in advance may, during the
first four (4) months of this Agreement, reduce the number of parking spaces
hired with a proportionate reduction in Parking Rent. Any such reduction shall
be effective only on the first day of the month following such notice.
D. Taxes. FreePC shall pay to idealab! its proportionate share of
-----
Taxes (as defined in the Lease) imposed on idealab! pursuant to Section 6.1 of
the Lease.
E. Additional Rent. All monies other than Base Rent required to be
---------------
paid by FreePC under this Agreement shall be deemed additional rent ("Additional
Rent"). Base Rent and Additional Rent are hereinafter collectively referred to
as "Rent."
6. Late Charge: If FreePC fails to pay to idealab! any amount due
-----------
hereunder within five (5) business days after the due date, FreePC shall pay
idealab! upon demand interest on all amounts due, at a rate equal to the lesser
of the prime rate quoted by the Bank of America plus two percent (2%) or the
maximum rate allowed by law (the "Interest Rate"), from the fifth (5th) business
day after the due date to and including the date of the payment.
7. Use: FreePC may use the Rented Premises only for the uses permitted
---
under the Lease. FreePC shall promptly and properly observe and comply with all
laws with respect to FreePC's use of the Rented Premises. Notwithstanding the
foregoing, FreePC shall not be required to comply, or pay the cost of complying,
with any laws requiring the construction of alterations or improvements to the
Rented Premises, unless due to FreePC's particular use of the Rented Premises.
FreePC shall comply with all restrictions set forth in the Lease and all rules
and regulations promulgated from time to time by Parsons.
8. Repairs: FreePC shall maintain in good order and condition the Rented
-------
Premises. This includes promptly reporting to idealab! all maintenance and
repairs needed for the Rented Premises. Should the need for repairs arise
directly or indirectly from FreePC's abuse or neglect, FreePC shall be solely
responsible for the cost of such repairs.
9. Improvements: idealab! shall make the improvements set forth on
------------
Exhibit C hereto. No other alterations or improvements shall be made to the
- ---------
Rented Premises, except in accordance with the Lease, and with the prior written
consent of idealab!.
10. Services: idealab! shall cause Parsons to provide the Premises (i)
--------
twenty-four (24) hours per day, seven (7) days per week, water, gas, electricity
and sewer service, (ii) Monday through Friday, janitorial service and waste
pick-up and (iii) heating, ventilating and air conditioning ("HVAC") (A) Monday
through Friday from 8:00 a.m. to 6:00 p.m. and on Saturdays from 8:00 a.m. to
1:00 p.m., except on holidays and (B) at all other times requested by FreePC,
whereupon FreePC shall pay its proportionate cost of such HVAC.
11. Indemnity:
---------
-2-
<PAGE>
A. Except to the extent caused by the gross negligence or willful
misconduct of idealab!, its agents, employees or invitees, FreePC shall
indemnify, defend with counsel reasonably acceptable to idealab!, protect and
hold idealab! harmless from and against any and all claims, liabilities,
judgments, causes of action, damages, costs and expenses (including reasonable
attorneys' and experts' fees), caused by or due to: (i) the use, condition,
operation or occupation by FreePC of the Rented Premises; (ii) any repairs,
alterations, additions or changes made by FreePC, or idealab! on behalf of
FreePC, to the Rented Premises (the "Alterations"), (iii) the negligence or
willful misconduct by FreePC, its employees, agents, sublessees, invitees or
licensees or (iv) any failure by FreePC to comply with the terms or conditions
of this Agreement. FreePC's indemnification of idealab! shall survive
termination of this Agreement.
B. Except to the extent caused by the gross negligence or willful
misconduct of FreePC, its agents, employees or invitees, idealab! shall
indemnify, defend with counsel reasonably acceptable to FreePC, protect and hold
FreePC harmless from and against any and all reasonable claims, liabilities,
judgments, causes of action, damages, costs and expenses (including reasonable
attorneys' and experts' fees) caused by or due to: (i) the negligence or willful
misconduct of idealab!, its employees, agents, sublessees, invitees or
licensees; or (ii) any failure by idealab! to comply with the terms or
conditions of this Agreement, unless such failure relates to an act that FreePC
is obligated to indemnify idealab! under Sections 11(A)(i) or 11(A)(ii).
idealab!'s indemnification of FreePC shall survive termination of this
Agreement.
12. Insurance: FreePC shall keep in full force and effect, at FreePC's
---------
sole cost and expense, a commercial general liability policy of insurance,
insuring coverage of idealab! and FreePC in the amounts set forth in Section
9.3.1 of the Lease. The liability policy shall name idealab! as an additional
insured.
13. Release and Waiver of Subrogation: idealab! and FreePC hereby release
---------------------------------
each other, and their respective agents, employees, subtenants, and contractors,
from all liability for damage to any property that is caused by or results from
a risk which is actually insured against or which would normally be covered by
"all risk" property insurance, without regard to the negligence or willful
misconduct of the entity so released. Each party shall use its best efforts to
cause each insurance policy it obtains to provide that the insurer thereunder
waives all right of recovery by way of subrogation as required herein in
connection with any injury or damage covered by the policy. If the insurance
policy cannot be obtained with the waiver of subrogation, or if the waiver of
subrogation is available only at additional cost and the party for whose benefit
the waiver is not obtained does not pay the additional cost, then the party
obtaining the insurance immediately shall notify the other party.
14. Damage: If the Premises, or any part thereof, are damaged due to any
------
peril, FreePC shall be entitled to an abatement of all Rent to the extent of the
interference with FreePC's use of the Rented Premises occasioned thereby. If
the Premises are damaged by any peril and the repair would reasonably be
expected to take more than one hundred eighty (180) days, then (i) FreePC shall
have the option to terminate this Agreement by delivery of written notice
thereof to idealab! and (ii) idealab! shall have the right to terminate this
Agreement if the Lease is terminated by Parsons
15. Assignment: Except to a subsidiary of FreePC or pursuant to a change
----------
of control in FreePC, FreePC may not assign this Agreement, rent a portion of
the Rented Premises or permit any use of the Rented Premises by another party,
without the prior written consent of idealab!.
16. Default: FreePC shall be in default of its obligations under this
-------
Agreement if any of the following events occur:
-3-
<PAGE>
A. FreePC fails to pay any Rent when due, when such failure continues
for ten (10) days after written notice;
B. The legal abandonment of the Rented Premises by FreePC;
C. The failure of FreePC to do, or cause to be done, any act required
by this Agreement, other than payment of Rent or other charges, which failure
continues for a period of ten (10) days after written notice or, if such breach
cannot reasonably be cured within said ten (10) day period, FreePC fails to
commence curative action within said ten (10) day period and diligently to
pursue the same to completion;
D. To the extent permitted by law, any act of bankruptcy caused,
suffered or permitted by FreePC. For purposes of this Agreement, "act of
bankruptcy" shall include any of the following:
(i) Any general assignment for the benefit of creditors;
(ii) The filing of any petition by or against FreePC to have
FreePC adjudged a bankrupt or a petition for reorganization or arrangement under
Title 11 of the United States Code relating to bankruptcy, as amended or
comparable law, unless such petition is filed against FreePC and dismissed
within ninety (90) days;
(iii) The appointment of a trustee or receiver to take possession
of substantially all of FreePC's assets located in the Rented Premises or
FreePC's interest in this Agreement; or
(iv) The attachment, execution or other judicial seizure of
substantially all of FreePC's assets located in the Rented Premises, or FreePC's
interest in this Agreement.
E. FreePC commits any other act or omission which constitutes a
default under the Lease, which has not been cured after delivery of written
notice and passage of the applicable grace period provided in the Lease.
17. Remedies: In the event of any default by FreePC, idealab! shall have
--------
all remedies provided under the Lease and by applicable law.
18. Parking: FreePC shall have the right to use, throughout the Term,
-------
parking spaces in the garage as provided in Article 18.4 of the Lease as
follows: (i) non-reserved spaces at a monthly rate of fifty-five dollars ($55)
per non-reserved parking space as follows: (a) from the date hereof until July
31, 1999, sixty (60) spaces, (b) from August 1st until August 31, 1999, seventy
(70) spaces, (c) from September 1st to September 30, 1999, eighty (80) spaces,
(d) from October 1st until October 31, 1999, ninety (90) spaces and (e)
thereafter, one hundred (100) spaces and (ii) one (1) reserved space at a
monthly rent of sixty-five dollars ($65) per reserved parking space
(collectively, the "Parking Rent"), each as such monthly rate may be adjusted
from time to time by Parson's Garage. idealab! hereby agrees, upon FreePC's
written request, to reasonably negotiate with the owner of Parson's Garage for
the use of additional parking spaces upon terms to be agreed upon by idealab!
and Parsons.
19. Signage: FreePC shall have the right to include its name and/or logo
-------
on the Premise directory, if such right is granted to idealab! under Article 12
of the Lease.
-4-
<PAGE>
20. Broker: idealab! and FreePC each represent to the other that they
------
have dealt with no real estate brokers, finders, agents or salesmen in
connection with this transaction.
21. Notices: Unless at least five (5) days' prior written notice is given
-------
in the manner set forth in this section, the address of each party shall be that
address set forth below their signatures at the end of this Agreement. All
notices, demands or communications in connection with this Agreement shall be
personally delivered or properly addressed and deposited in the mail (certified,
return receipt requested, and postage prepaid) or by a reputable courier.
Notices shall be deemed delivered (a) upon receipt, if personally delivered, (b)
three (3) business days after mailing, if mailed as set forth above or (c) the
number of days indicated by such courier, if by a reputable courier.
Notwithstanding the foregoing, all notices given to Parsons under the Lease
shall be considered delivered only when delivered in accordance with the Lease.
22. idealab!'s Obligations with Respect to the Lease: idealab! shall
------------------------------------------------
fully perform all of its obligations under the Lease to the extent FreePC has
not expressly agreed to perform such obligations under this Agreement. idealab!
shall not terminate the Lease, amend or waive any provisions under the Lease or
make any elections, exercise any right or remedy and give any consent or
approval under the Lease that would materially adversely affect FreePC's use of
the Rented Premises or materially increase FreePC's obligations or materially
decrease FreePC's rights under this Agreement, without FreePC's prior written
consent. idealab!, with respect to the obligations of Parsons under the Lease,
shall use idealab!'s diligent good faith efforts to cause Parsons to perform
such obligations for the benefit of FreePC. Such diligent good faith efforts
shall include, without limitation, upon FreePC's written request, immediately
notifying Parsons of its nonperformance under the Lease and requesting that
Parsons perform its obligations under the Lease.
23. Quiet Enjoyment: FreePC shall peacefully have, hold and enjoy the
---------------
Rented Premises, subject to the terms and conditions of this Agreement, provided
that there is not a default by FreePC. In the event, however, that idealab!
defaults in the performance or observance of any of idealab!'s remaining
obligations under the Lease or fails to perform idealab!'s stated obligations
under this Agreement, then FreePC shall give idealab! notice specifying in what
manner idealab! has defaulted, and if such default shall not be cured by
idealab! within thirty (30) days thereafter (except that if such default cannot
be cured within said thirty (30) day period, this period shall be extended for
an additional reasonable time, provided that idealab! commences to cure such
default within such thirty (30) day period and proceeds diligently thereafter to
effect such cure as quickly as commercially reasonable), then FreePC shall be
entitled to cure such default and promptly collect from idealab! FreePC's
reasonable expenses in so doing (including, without limitation, reasonable
attorneys' fees and court costs). FreePC shall not be required, however, to
wait the entire cure period described herein if earlier action is required to
comply with the Lease or with any applicable governmental law, regulation or
order.
24. Option to Extend: idealab! hereby grants to FreePC options (the
----------------
"Options") to extend the Term of this Agreement, each for an additional term of
one (1) year, commencing upon the expiration of the initial Term or an Option
term, as the case may be, upon the terms and conditions set forth in this
Section 24 as follows: (A) in the event that idealab! does not exercise its
option to extend under Section 4.2 of the Lease, FreePC shall have one (1)
Option or (B) in the event that idealab! exercises its option to extend under
Section 4.2 of the Lease, FreePC shall have four (4) Options. FreePC may
exercise each Option by giving idealab! written notice of its intention not less
than one hundred (100) days prior to the expiration of the initial Term, or
Option term, as the case may be, of this Agreement. If the Option is exercised,
the Base Rent for the Premises shall be the Fair Value per square foot of the
Rented Premises. For purposes of this Section 24, "Fair Value" means the Fair
Market Rent for the Base Rent and Parking
-5-
<PAGE>
Rent (each as defined in Article 5.1.4.2 of the Lease) per square foot or per
parking space, as the case may be, paid by idealab! for the Premises. All other
terms and conditions contained in this Agreement, as the same may be amended
from time to time by the parties in accordance with the provisions hereof, shall
remain in full force and effect and shall apply during each Option term.
25. Right to Expand. FreePC shall automatically have an option to rent
---------------
from idealab! the 6,752 square feet of rentable space marked as "B" on Exhibit B
---------
hereto (the "North Space"), commencing on October 1, 1999 and idealab! hereby
agrees to evict any tenant in the North Space no later than September 30, 1999.
If idealab! does not deliver possession of the North Space by November 1, 1999,
FreePC may elect to terminate this Agreement by giving written notice to
idealab! by November 10, 1999.
26. Right of First Offer. In the event that any portion of the area
--------------------
marked as "C" on Exhibit B hereto becomes available for rent (the "South
---------
Space"), before idealab! offers the South Space to a potential tenant, FreePC
shall have the right to rent all or any portion of the South Space on the same
terms and conditions as the Rented Premises.
27. Assignment of Tenant Improvement Allowance. In the event that Lessee
------------------------------------------
is reimbursed for any Tenant Improvement Allowance pursuant to Exhibit B,
Section VII(A) of the Lease, idealab! agrees to assign such reimbursement to
FreePC within five (5) business days of idealab!'s receipt of such
reimbursement.
28. Miscellaneous: This Agreement shall in all respects be governed by
-------------
and construed in accordance with the laws of the state of California. If any
term of this Agreement is held to be invalid or unenforceable by any court of
competent jurisdiction, then the remainder of this Agreement shall remain in
full force and effect to the fullest extent possible under the law, and shall
not be affected or impaired. This Agreement may not be amended except by the
written agreement of all parties hereto. Time is of the essence with respect to
the performance of every provision of this Agreement in which time of
performance is a factor. Any executed copy of this Agreement shall be deemed an
original for all purposes. This Agreement shall, subject to the provisions
regarding assignment, apply to and bind the respective heirs, successors,
executors, administrators and assigns of idealab! and FreePC. The language in
all parts of this Agreement shall in all cases be construed as a whole according
to its fair meaning, and not strictly for or against either idealab! or FreePC.
The captions used in this Agreement are for convenience only and shall not be
considered in the construction or interpretation of any provision hereof. When
a party is required to do something by this Agreement, it shall do so at its
sole cost and expense without right of reimbursement from the other party unless
specific provision is made therefor. Whenever one party's consent or approval
is required to be given as a condition to the other party's right to take any
action pursuant to this Agreement, then such consent or approval shall not be
unreasonably withheld or delayed. If either party brings any action or legal
proceeding with respect to this Agreement, the prevailing party shall be
entitled to recover reasonable attorneys' and experts' fees and court costs.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
first above written.
<TABLE>
<CAPTION>
IDEALAB!: FREEPC:
<S> <C>
BILL GROSS' IDEALAB!, FREEPC, INC.
a California corporation a Delaware corporation
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
By: /s/ Marcia Goodstein By: /s/ Donald La Vigne
------------------------ --------------------------
Name: Marcia Goodstein Name: Donald La Vigne
---------------------- ------------------------
Its: Chief Operating Officer Its: Chief Executive Officer
----------------------- -------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Address: 130 W. Union Street Address: 74 N. Pasadena Ave., 8th Floor
Pasadena, CA 91103 Pasadena, CA 91103
Attn.: Chief Operating Officer Attn.: Vice President, Finance
</TABLE>
-7-
<PAGE>
EXHIBIT A
---------
LEASE
-8-
<PAGE>
EXHIBIT B
---------
THE PREMISES
-9-
<PAGE>
EXHIBIT C
---------
TENANT IMPROVEMENTS
idealab! shall tear down walls, pull and install cable and electrical wire and
build walls in the Rented Premises.
-10-
<PAGE>
Exhibit 10.17
FREEPC, INC.
1999 STOCK PLAN
1. Purposes of the Plan. The purposes of this Stock Plan are to attract
--------------------
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants and to promote the success of the Company's business. Options
granted under the Plan may be Incentive Stock Options or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant. Stock Purchase
Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall
-------------
be administering the Plan in accordance with Section 4 hereof.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any other country or jurisdiction where Options or Stock Purchase Rights are
granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
in accordance with Section 4 hereof.
(f) "Common Stock" means the Common Stock of the Company.
------------
(g) "Company" means FreePC, Inc., a Delaware corporation.
-------
(h) "Consultant" means any person who is engaged by the Company or any
----------
Parent or Subsidiary to render consulting or advisory services to such entity.
(i) "Director" means a member of the Board of Directors of the
--------
Company.
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
<PAGE>
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code.
(o) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(p) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(q) "Option" means a stock option granted pursuant to the Plan.
------
(r) "Option Agreement" means a written or electronic agreement between
----------------
the Company and an Optionee evidencing the terms and conditions of an individual
Option grant. The Option Agreement is subject to the terms and conditions of the
Plan.
-2-
<PAGE>
(s) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are exchanged for Options with a lower exercise price.
(t) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(u) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(v) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(w) "Plan" means this 1998 Stock Plan.
----
(x) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 11 below.
(y) "Section 16(b)" means Section 16(b) of the Securities Exchange
-------------
Act of 1934, as amended.
(z) "Service Provider" means an Employee, Director or Consultant.
----------------
(aa) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 below.
(bb) "Stock Purchase Right" means a right to purchase Common Stock
--------------------
pursuant to Section 11 below.
(cc) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be subject to option
and sold under the Plan is 2,500,000 Shares. The Shares may be authorized but
unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated). However, Shares that have actually been issued under the Plan,
upon exercise of either an Option or Stock Purchase Right, shall not be returned
to the Plan and shall not become available for future distribution under the
Plan, except that if Shares of Restricted Stock are repurchased by the Company
at their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
--------------------------
-3-
<PAGE>
(a) Administrator. The Plan shall be administered by the Board or a
-------------
Committee appointed by the Board, which Committee shall be constituted to comply
with Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan
---------------------------
and, in the case of a Committee, the specific duties delegated by the Board to
such Committee, and subject to the approval of any relevant authorities, the
Administrator shall have the authority in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may from time to time be granted hereunder;
(iii) to determine the number of Shares to be covered by each
such award granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, of any Option or
Stock Purchase Right granted hereunder. Such terms and conditions include, but
are not limited to, the exercise price, the time or times when Options or Stock
Purchase Rights may be exercised (which may be based on performance criteria),
any vesting acceleration or waiver of forfeiture restrictions, and any
restriction or limitation regarding any Option or Stock Purchase Right or the
Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to determine whether and under what circumstances an Option
may be settled in cash under subsection 9(e) instead of Common Stock;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted;
(viii) to initiate an Option Exchange Program;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair Market
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined. All elections by Optionees to
have Shares withheld for this purpose shall be made in such form and under such
conditions as the Administrator may deem necessary or advisable; and
-4-
<PAGE>
(xi) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
(c) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees.
5. Eligibility.
-----------
(a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
(b) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 5(b), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(c) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon any Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall it interfere in
any way with his or her right or the Company's right to terminate such
relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon its adoption by the
------------
Board. It shall continue in effect for a term of ten (10) years unless sooner
terminated under Section 14 of the Plan.
7. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement; provided, however, that the term shall be no more than ten (10) years
from the date of grant thereof. In the case of an Incentive Stock Option
granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five (5) years from the date of grant or such shorter term as may be provided
in the Option Agreement.
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued upon
exercise of an Option shall be such price as is determined by the Administrator,
but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of grant of such
Option, owns stock representing more than ten percent (10%) of the voting power
of all classes of
-5-
<PAGE>
stock of the Company or any Parent or Subsidiary, the exercise price shall be no
less than 110% of the Fair Market Value per Share on the date of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a Service Provider who, at the time of grant
of such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the exercise price shall be no less than 110% of the Fair Market Value per Share
on the date of grant.
(B) granted to any other Service Provider, the per Share
exercise price shall be no less than 85% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with a
per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). Such consideration may consist of (1) cash,
(2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) consideration received by the Company
under a cashless exercise program implemented by the Company in connection with
the Plan, or (6) any combination of the foregoing methods of payment. In making
its determination as to the type of consideration to accept, the Administrator
shall consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms hereof at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. Except in the case of Options granted to Officers,
Directors and Consultants, Options shall become exercisable at a rate of no less
than 20% per year over five (5) years from the date the Options are granted.
Unless the Administrator provides otherwise, vesting of Options granted
hereunder shall be tolled during any unpaid leave of absence. An Option may not
be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of
-6-
<PAGE>
an Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse. Until the Shares
are issued (as evidenced by the appropriate entry on the books of the Company or
of a duly authorized transfer agent of the Company), no right to vote or receive
dividends or any other rights as a stockholder shall exist with respect to the
Shares, notwithstanding the exercise of the Option. The Company shall issue (or
cause to be issued) such Shares promptly after the Option is exercised. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the Shares are issued, except as provided in Section 12 of
the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, such Optionee may exercise his or her Option
within such period of time as is specified in the Option Agreement (of at least
thirty (30) days) to the extent that the Option is vested on the date of
termination (but in no event later than the expiration of the term of the Option
as set forth in the Option Agreement). In the absence of a specified time in the
Option Agreement, the Option shall remain exercisable for three (3) months
following the Optionee's termination. If, on the date of termination, the
Optionee is not vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan. If, after termination,
the Optionee does not exercise his or her Option within the time specified by
the Administrator, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service Provider
----------------------
as a result of the Optionee's Disability, the Optionee may exercise his or her
Option within such period of time as is specified in the Option Agreement (of at
least six (6) months) to the extent the Option is vested on the date of
termination (but in no event later than the expiration of the term of such
Option as set forth in the Option Agreement). In the absence of a specified time
in the Option Agreement, the Option shall remain exercisable for twelve (12)
months following the Optionee's termination. If, on the date of termination, the
Optionee is not vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan. If, after termination,
the Optionee does not exercise his or her Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider, the
-----------------
Option may be exercised within such period of time as is specified in the Option
Agreement (of at least six (6) months) to the extent that the Option is vested
on the date of death (but in no event later than the expiration of the term of
such Option as set forth in the Option Agreement) by the Optionee's estate or by
a person who acquires the right to exercise the Option by bequest or
inheritance. In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, at the time of death, the Optionee is not vested as to the
entire Option, the Shares covered by the unvested portion of the Option shall
immediately revert to the Plan. If the Option is not so exercised within the
time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
-7-
<PAGE>
(e) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
10. Non-Transferability of Options and Stock Purchase Rights. The Options
--------------------------------------------------------
and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically of the terms, conditions and restrictions
related to the offer, including the number of Shares that such person shall be
entitled to purchase, the price to be paid, and the time within which such
person must accept such offer. The offer shall be accepted by execution of a
Restricted Stock Purchase Agreement in the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock purchase agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine. Except with respect to Shares purchased by
Officers, Directors and Consultants, the repurchase option shall in no case
lapse at a rate of less than 20% per year over five (5) years from the date of
purchase.
(c) Other Provisions. The Restricted Stock purchase agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Stockholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have rights equivalent to those of a stockholder
and shall be a stockholder when his or her purchase is entered upon the records
of the duly authorized transfer agent of the Company. No adjustment shall be
made for a dividend or other right for which the record date is prior to the
date the Stock Purchase Right is exercised, except as provided in Section 12 of
the Plan.
12. Adjustments Upon Changes in Capitalization, Merger or Asset Sale.
----------------------------------------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted
-8-
<PAGE>
or which have been returned to the Plan upon cancellation or expiration of an
Option or Stock Purchase Right, as well as the price per share of Common Stock
covered by each such outstanding Option or Stock Purchase Right, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the Company. The conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option or Stock Purchase Right until
fifteen (15) days prior to such transaction as to all of the Optioned Stock
covered thereby, including Shares as to which the Option or Stock Purchase Right
would not otherwise be exercisable. In addition, the Administrator may provide
that any Company repurchase option applicable to any Shares purchased upon
exercise of an Option or Stock Purchase Right shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option or Stock Purchase Right will terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company with
--------------------
or into another corporation, or the sale of substantially all of the assets of
the Company, each outstanding Option and Stock Purchase Right shall be assumed
or an equivalent option or right substituted by the successor corporation or a
Parent or Subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute for the Option or Stock
Purchase Right, the Optionee shall fully vest in and have the right to exercise
the Option or Stock Purchase Right as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an Option
or Stock Purchase Right becomes fully vested and exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully exercisable for a period of
fifteen (15) days from the date of such notice, and the Option or Stock Purchase
Right shall terminate upon the expiration of such period. For the purposes of
this paragraph, the Option or Stock Purchase Right shall be considered assumed
if, following the merger or sale of assets, the option or right confers the
right to purchase or receive, for each Share of Optioned Stock subject to the
Option or Stock Purchase Right immediately prior to the merger or sale of
assets, the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for each
Share held on the effective date of the transaction (and if holders were offered
a choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration
-9-
<PAGE>
received in the merger or sale of assets is not solely common stock of the
successor corporation or its Parent, the Administrator may, with the consent of
the successor corporation, provide for the consideration to be received upon the
exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
13. Time of Granting Options and Stock Purchase Rights. The date of grant
--------------------------------------------------
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator. Notice
of the determination shall be given to each Service Provider to whom an Option
or Stock Purchase Right is so granted within a reasonable time after the date of
such grant.
14. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Stockholder Approval. The Board shall obtain stockholder approval
--------------------
of any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
15. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option, the Administrator may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.
16. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
-10-
<PAGE>
17. Reservation of Shares. The Company, during the term of this Plan,
---------------------
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
18. Stockholder Approval. The Plan shall be subject to approval by the
--------------------
stockholders of the Company within twelve (12) months after the date the Plan is
adopted. Such stockholder approval shall be obtained in the degree and manner
required under Applicable Laws.
19. Information to Optionees and Purchasers. The Company shall provide to
---------------------------------------
each Optionee and to each individual who acquires Shares pursuant to the Plan,
not less frequently than annually during the period such Optionee or purchaser
has one or more Options or Stock Purchase Rights outstanding, and, in the case
of an individual who acquires Shares pursuant to the Plan, during the period
such individual owns such Shares, copies of annual financial statements. The
Company shall not be required to provide such statements to key employees whose
duties in connection with the Company assure their access to equivalent
information.
-11-
<PAGE>
FREEPC, INC.
1999 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
----------------------------
____________________________
____________________________
____________________________
The undersigned Optionee has been granted an Option to purchase Common
Stock of the Company, subject to the terms and conditions of the Plan and this
Option Agreement, as follows:
Grant Number ___________________
Date of Grant ___________________
Vesting Commencement Date ___________________
Exercise Price per Share ___________________
Total Number of Shares Granted ___________________
Total Exercise Price ___________________
Type of Option: _____________ Incentive Stock Option
_____________ Nonstatutory Stock Option
Term/Expiration Date: ___________________
Vesting Schedule.
----------------
This Option shall be exercisable, in whole or in part, according to the
following vesting schedule:
a. [20% of the Shares subject to this Option shall vest upon the
six (6) month anniversary of this Option's Vesting Commencement Date; provided,
however, that if Optionee
<PAGE>
ceases to be a Service Provider prior to the six (6) month anniversary of this
Option's Vesting Commencement Date then the initial 20% vesting of this Option's
shares shall occur on Optionee's termination date provided that Optionee's
termination is other than a voluntary termination by the Optionee.]
b. [The remaining Shares subject to this Option shall vest annually
on the anniversary of Optionee's Vesting Commencement Date for four (4) years
after such Vesting Commencement Date, with 20% of the total Shares subject to
this Option vesting upon each such anniversary.]
c. Except as otherwise provided above, all vesting is subject to
Optionee's continuing to be a Service Provider on the above provided vesting
dates.
Termination Period.
------------------
This Option shall be exercisable for three (3) months after Optionee ceases
to be a Service Provider. Upon Optionee's death or Disability, this Option may
be exercised for twelve (12) months after Optionee ceases to be a Service
Provider. In no event may Optionee exercise this Option after the
Term/Expiration Date as provided above.
II. AGREEMENT
- --- ---------
1. Grant of Option. The Plan Administrator of the Company hereby grants
---------------
to the Optionee named in the Notice of Grant (the "Optionee"), an option (the
"Option") to purchase the number of Shares set forth in the Notice of Grant, at
the exercise price per Share set forth in the Notice of Grant (the "Exercise
Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference. Subject to Section 14(c) of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Agreement, the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option ("ISO"),
this Option is intended to qualify as an Incentive Stock Option as defined in
Section 422 of the Code. Nevertheless, to the extent that it exceeds the
$100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").
2. Exercise of Option.
------------------
a. Right to Exercise. This Option shall be exercisable during its
-----------------
term in accordance with the Vesting Schedule set out in the Notice of Grant and
with the applicable provisions of the Plan and this Option Agreement.
b. Method of Exercise. This Option shall be exercisable by delivery
------------------
of an exercise notice in the form attached as Exhibit A (the "Exercise Notice")
---------
which shall state the election to exercise the Option, the number of Shares with
respect to which the Option is being exercised, and such other representations
and agreements as may be required by the Company. The
-2-
<PAGE>
Exercise Notice shall be accompanied by payment of the aggregate Exercise Price
as to all Exercised Shares. This Option shall be deemed to be exercised upon
receipt by the Company of such fully executed Exercise Notice accompanied by the
aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of an Option unless such
issuance and such exercise complies with Applicable laws. Assuming such
compliance, for income tax purposes the Shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such Shares.
3. Optionee's Representations. In the event the Shares have not been
--------------------------
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver to the Company his or
her Investment Representation Statement in the form attached hereto as Exhibit
-------
B.
- -
4. Lock-Up Period. Optionee hereby agrees that, if so requested by the
--------------
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply only to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.
5. Method of Payment. Payment of the aggregate Exercise Price shall be
-----------------
by any of the following, or a combination thereof, at the election of the
Optionee:
a. cash or check;
b. consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan; or
c. surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.
6. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any Applicable
Law.
-3-
<PAGE>
7. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
8. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.
9. Tax Consequences. Set forth below is a brief summary as of the date
----------------
of this Option of some of the federal tax consequences of exercise of this
Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE,
AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD
CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
a. Exercise of ISO. If this Option qualifies as an ISO, there will
---------------
be no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.
b. Exercise of Nonstatutory Stock Option. There may be a regular
-------------------------------------
federal income tax liability upon the exercise of a Nonstatutory Stock Option.
The Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Shares on the date of exercise over the Exercise Price. If Optionee is
an Employee or a former Employee, the Company will be required to withhold from
Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount in cash equal to a percentage of this compensation
income at the time of exercise, and may refuse to honor the exercise and refuse
to deliver Shares if such withholding amounts are not delivered at the time of
exercise.
c. Disposition of Shares. In the case of an NSO, if Shares are held
---------------------
for at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes. In the case
of an ISO, if Shares transferred pursuant to the Option are held for at least
one year after exercise and of at least two years after the Date of Grant, any
gain realized on disposition of the Shares will also be treated as long-term
capital gain for federal income tax purposes. If Shares purchased under an ISO
are disposed of within one year after exercise or two years after the Date of
Grant, any gain realized on such disposition will be treated as compensation
income (taxable at ordinary income rates) to the extent of the difference
between the Exercise Price and the lesser of (1) the Fair Market Value of the
Shares on the date of exercise, or (2) the sale price of the Shares. Any
additional gain will be taxed as capital gain, short-term or long-term depending
on the period that the ISO Shares were held.
-4-
<PAGE>
d. Notice of Disqualifying Disposition of ISO Shares. If the Option
-------------------------------------------------
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant, or (2) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.
10. Entire Agreement; Governing Law. The Plan is incorporated herein by
-------------------------------
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws but not
the choice of law rules of California.
11. No Guarantee of Continued Service. OPTIONEE ACKNOWLEDGES AND AGREES
---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH
THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.
[Signatures appear on next page.]
-5-
<PAGE>
Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
OPTIONEE FREEPC, INC.
____________________________ ___________________________________
By:
___________________________________
Title:
____________________________
____________________________
Residence Address
<PAGE>
EXHIBIT A
---------
1999 STOCK PLAN
EXERCISE NOTICE
FreePC, Inc.
74 N. Pasadena Avenue, 8/th/ Floor
Pasadena, CA 91103
Attention: President
1. Exercise of Option. Effective as of today, ______________, 19__, the
------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
_________ shares of the Common Stock (the "Shares") of FreePC, Inc. (the
"Company") under and pursuant to the 1999 Stock Plan (the "Plan") and the Stock
Option Agreement dated ____________, 19__ (the "Option Agreement").
2. Delivery of Payment. Purchaser herewith delivers to the Company the
-------------------
full purchase price of the Shares, as set forth in the Option Agreement.
3. Representations of Optionee. Optionee acknowledges that Optionee has
---------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance of the Shares (as evidenced
---------------------
by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Shares shall be issued to the
Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 12 of the Plan.
5. Company's Right of First Refusal. Before any Shares held by Optionee
--------------------------------
or any transferee (either being sometimes referred to herein as the "Holder")
may be sold or otherwise transferred (including transfer by gift or operation of
law), the Company or its assignee(s) shall have a right of first refusal to
purchase the Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").
a. Notice of Proposed Transfer. The Holder of the Shares shall
---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the
Holder's bona fide intention to sell or otherwise transfer such Shares; (ii) the
name of each proposed purchaser or other transferee ("Proposed Transferee");
(iii) the number of Shares to be transferred to each Proposed Transferee; and
(iv) the bona fide cash price or other consideration for which the Holder
proposes to transfer the Shares (the "Offered Price"), and the Holder shall
offer the Shares at the Offered Price to the Company or its assignee(s).
<PAGE>
b. Exercise of Right of First Refusal. At any time within thirty
----------------------------------
(30) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.
c. Purchase Price. The purchase price ("Purchase Price") for the
--------------
Shares purchased by the Company or its assignee(s) under this Section shall be
the Offered Price. If the Offered Price includes consideration other than cash,
the cash equivalent value of the non-cash consideration shall be determined by
the Board of Directors of the Company in good faith.
d. Payment. Payment of the Purchase Price shall be made, at the
-------
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.
e. Holder's Right to Transfer. If all of the Shares proposed in the
--------------------------
Notice to be transferred to a given Proposed Transferee are not purchased by the
Company and/or its assignee(s) as provided in this Section, then the Holder may
sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice, that any such sale or
other transfer is effected in accordance with any applicable securities laws and
that the Proposed Transferee agrees in writing that the provisions of this
Section shall continue to apply to the Shares in the hands of such Proposed
Transferee. If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.
f. Exception for Certain Family Transfers. Anything to the contrary
--------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Optionee's lifetime or on the Optionee's death by will or
intestacy to the Optionee's immediate family or a trust for the benefit of the
Optionee's immediate family shall be exempt from the provisions of this Section.
"Immediate Family" as used herein shall mean spouse, lineal descendant or
antecedent, father, mother, brother or sister. In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.
g. Termination of Right of First Refusal. The Right of First
-------------------------------------
Refusal shall terminate as to any Shares upon the first sale of Common Stock of
the Company to the general public pursuant to a registration statement filed
with and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
-2-
<PAGE>
6. Tax Consultation. Optionee understands that Optionee may suffer
----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
7. Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
a. Legends. Optionee understands and agrees that the Company shall
-------
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by the Company or by state or
federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT")
AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED,
PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED
UNDER THE ACT OR, IN THE OPINION OF COMPANY COUNSEL
SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH
OFFER, SALE OR TRANSFER, PLEDGE OR HYPO-THECATION IS IN
COMPLIANCE THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND A RIGHT
OF FIRST REFUSAL HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS
SET FORTH IN THE EXERCISE NOTICE BETWEEN THE ISSUER AND
THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH
MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER.
SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL
ARE BINDING ON TRANSFEREES OF THESE SHARE S.
b. Stop-Transfer Notices. Optionee agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
c. Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
8. Successors and Assigns. The Company may assign any of its rights
----------------------
under this Agreement to single or multiple assignees, and this Agreement shall
inure to the benefit of the successors and assigns of the Company. Subject to
the restrictions on transfer herein set forth, this
-3-
<PAGE>
Agreement shall be binding upon Optionee and his or her heirs, executors,
administrators, successors and assigns.
9. Interpretation. Any dispute regarding the interpretation of this
--------------
Agreement shall be submitted by Optionee or by the Company forthwith to the
Administrator which shall review such dispute at its next regular meeting. The
resolution of such a dispute by the Administrator shall be final and binding on
all parties.
10. Governing Law; Severability. This Agreement is governed by the
---------------------------
internal substantive laws but not the choice of law rules, of California.
11. Entire Agreement. The Plan and Option Agreement are incorporated
----------------
herein by reference. This Agreement, the Plan, the Option Agreement and the
Investment Representation Statement constitute the entire agreement of the
parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee.
[Signatures appear on next page.]
-4-
<PAGE>
Submitted by: Accepted by:
OPTIONEE: FREEPC, INC.
___________________________ _____________________________________
By
_____________________________________
Its
Address: Address:
- ------- -------
___________________________ 74 N. Pasadena Avenue, 8/th/ Floor
___________________________ Pasadena, CA 91103
_____________________________________
Date Received
<PAGE>
EXHIBIT B
---------
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE:
COMPANY: FREEPC, INC.
SECURITY: COMMON STOCK
AMOUNT:
DATE:
In connection with the purchase of the above-listed Securities, the
undersigned Optionee represents to the Company the following:
a. Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
b. Optionee acknowledges and understands that the Securities constitute
"restricted securities" under the Securities Act and have not been registered
under the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of Optionee's
investment intent as expressed herein. In this connection, Optionee understands
that, in the view of the Securities and Exchange Commission, the statutory basis
for such exemption may be unavailable if Optionee's representation was
predicated solely upon a present intention to hold these Securities for the
minimum capital gains period specified under tax statutes, for a deferred sale,
for or until an increase or decrease in the market price of the Securities, or
for a period of one year or any other fixed period in the future. Optionee
further understands that the Securities must be held indefinitely unless they
are subsequently registered under the Securities Act or an exemption from such
registration is available. Optionee further acknowledges and understands that
the Company is under no obligation to register the Securities. Optionee
understands that the certificate evidencing the Securities will be imprinted
with a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel
satisfactory to the Company, a legend prohibiting their transfer without the
consent of the Commissioner of Corporations of the State of California and any
other legend required under applicable state securities laws.
c. Optionee is familiar with the provisions of Rule 701 and Rule 144,
each promulgated under the Securities Act, which, in substance, permit limited
public resale of "restricted securities"
<PAGE>
acquired, directly or indirectly from the issuer thereof, in a non-public
offering subject to the satisfaction of certain conditions. Rule 701 provides
that if the issuer qualifies under Rule 701 at the time of the grant of the
Option to the Optionee, the exercise will be exempt from registration under the
Securities Act. In the event the Company becomes subject to the reporting
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
ninety (90) days thereafter (or such longer period as any market stand-off
agreement may require) the Securities exempt under Rule 701 may be resold,
subject to the satisfaction of certain of the conditions specified by Rule 144,
including: (1) the resale being made through a broker in an unsolicited
"broker's transaction" or in transactions directly with a market maker (as said
term is defined under the Securities Exchange Act of 1934); and, in the case of
an affiliate, (2) the availability of certain public information about the
Company, (3) the amount of Securities being sold during any three month period
not exceeding the limitations specified in Rule 144(e), and (4) the timely
filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the time
of grant of the Option, then the Securities may be resold in certain limited
circumstances subject to the provisions of Rule 144, which requires the resale
to occur not less than one year after the later of the date the Securities were
sold by the Company or the date the Securities were sold by an affiliate of the
Company, within the meaning of Rule 144; and, in the case of acquisition of the
Securities by an affiliate, or by a non-affiliate who subsequently holds the
Securities less than two years, the satisfaction of the conditions set forth in
sections (1), (2), (3) and (4) of the paragraph immediately above.
d. Optionee further understands that in the event all of the applicable
requirements of Rule 701 or 144 are not satisfied, registration under the
Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk. Optionee understands that no assurances can be given that
any such other registration exemption will be available in such event.
Signature of Optionee:
______________________________________
Date: _______________________, 19__
-2-
<PAGE>
EXHIBIT 22.1
eMACHINES, INC.
SUBSIDIARIES OF THE REGISTRANT
Name Jurisdiction of Incorporation
- ---- -----------------------------
1. FreePC, Inc. Delaware
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Board of Directors and Stockholders of
eMachines, Inc.
Irvine, California
We consent to the use in this Registration Statement of eMachines, Inc. on Form
S-1 of our report dated January 28, 2000, appearing in the Prospectus, which is
a part of this Registration Statement, and to the reference to us under the
heading "Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned report
also included the financial statement schedule of eMachines, Inc., listed in
Item 16. The financial statement schedule is the responsibility of the
Corporation's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Los Angeles, California
January 28, 2000
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 14, 2000 in the Registration Statement on Form
S-1 and related Prospectus, as amended, of eMachines, Inc. dated January 28,
2000 for the registration of its shares of common stock.
/s/ Ernst & Young LLP
Los Angeles, California
January 27, 2000
