<PAGE>
As filed with the Securities and Exchange Commission on February 28, 2000
Registration No. 333-93487
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
Amendment No. 2 to
FORM S-1
REGISTRATION STATEMENT
Under The Securities Act of 1933
---------------
SNOWBALL.COM, INC.
(Exact name of Registrant as specified in its charter)
---------------
<TABLE>
<S> <C> <C>
Delaware 7375 94-3316902
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) Identification no.)
250 Executive Park Boulevard,
Suite 4000
San Francisco, CA 94134
(415) 508-2000
</TABLE>
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
James R. Tolonen
Chief Financial Officer
Snowball.com, Inc.
250 Executive Park Boulevard, Suite 4000
San Francisco, CA 94134
(415) 508-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
Laird H. Simons III, Esq. John T. Sheridan, Esq.
Robert B. Dellenbach, Esq. Anthony Kikuta, Esq.
Darren L. Nunn, Esq. WILSON SONSINI GOODRICH & ROSATI
William L. Hughes, Esq. Professional Corporation
FENWICK & WEST LLP 650 Page Mill Road
275 Battery Street Palo Alto, California 94304
San Francisco, California 94111 (650) 493-9300
(415) 875-2300
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
---------------
If 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, as amended (the "Securities Act"), please check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated February 28, 2000.
6,250,000 Shares
[SNOWBALL LOGO APPEARS HERE]
Common Stock
----------
This is an initial public offering of shares of common stock of Snowball.com,
Inc. All of the 6,250,000 shares of common stock are being sold by Snowball.
Prior to this offering, there has been no public market for the common stock.
Snowball anticipates that the initial public offering price will be between
$10.00 and $12.00 per share. Snowball has applied for quotation of the common
stock on the Nasdaq National Market under the symbol "SNOW".
See "Risk Factors" beginning on page 7 to read about risks you should
consider before buying shares of the common stock.
----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price................................... $ $
Underwriting discount........................................... $ $
Proceeds, before expenses, to Snowball.......................... $ $
</TABLE>
To the extent that the underwriters sell more than 6,250,000 shares of common
stock, the underwriters have the option to purchase up to an additional
937,500 shares from Snowball at the initial public offering price less the
underwriting discount.
----------
The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.
Goldman, Sachs & Co.
Chase H&Q
Robertson Stephens
----------
Prospectus dated , 2000.
<PAGE>
[The Snowball logo is displayed on the top left corner of the inside front
cover, with the phrase "We are i" under the logo. The logos of the four
Snowball networks, and a short description of each network, are staggered
vertically down the right side of the page. The ChickClick network logo is at
the top of the page, with the phrase "Girl Sites That Don't Fake It" to the
right of the logo. The IGN network logo is beneath the ChickClick logo, with
the phrase "Entertainment & Games Network" to the left of the logo. The
InsideGuide network logo is beneath the IGN logo, with the phrase "For Students
By Students" to the right of the logo. The PowerStudents network logo is
beneath the InsideGuide logo, with the phrase "Maximize Your Student
Experience" to the left of the logo.]
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our consolidated financial statements and the notes to those
statements appearing elsewhere in this prospectus. Unless otherwise indicated,
all information contained in this prospectus assumes no exercise by the
underwriters of their option to purchase additional shares of our common stock
in the offering, reflects a three-for-two stock split of our common stock
completed in October 1999, and reflects the conversion of all outstanding
shares of preferred stock into common stock upon completion of this offering.
Snowball.com, Inc.
Snowball operates a network of destination web sites that offer content,
community and commerce to the Internet generation, or Generation i. We view
Generation i as individuals between the ages of 13 and 30 who consider the
Internet to be an integral part of their daily lives. The United States Census
Bureau estimates that there were 67.9 million individuals in this age group in
1999, and those individuals between the ages of 15 and 24 had an aggregate mean
income of $302.4 billion in 1998. We serve this group by providing its members
with current content, relevant services, a forum for interacting with one
another and carefully selected merchandise.
In addition to creating original content, we continuously work to expand the
breadth and depth of our content offerings by selectively adding affiliated web
sites to our network. Our network and affiliate business model enables us to
add content and traffic to our network rapidly and cost-effectively, while
keeping the content fresh and, we believe, compatible with the evolving tastes
of Generation i. To attract and retain affiliates, we provide an integrated
package of sales and marketing services, technical support and audience
development opportunities. As of December 31, 1999, we were affiliated with
more than 150 web sites and over 100 partner college destinations organized
under four networks, each targeting a specific segment of Generation i:
. ChickClick, which provides content, community and commerce features to
Generation i women;
. IGN, which provides information and entertainment to Generation i men;
. InsideGuide, which offers student-generated information concerning
individual colleges; and
. PowerStudents, which provides students at all levels with information
concerning college admissions, jobs and careers.
Our networks attract a large and segmented audience by providing extensive
information on a variety of narrowly focused subjects. By offering targeted
access to a large audience with attractive demographic characteristics, we are
able to generate marketing and advertising revenue in a variety of forms. These
include promotions and sponsorships, fees for special placement of
advertisements on our web sites (slotting) and lead-generation, and sales of
various forms of banner, button and textlink advertising. We also generate
merchandising revenue from the sale of carefully selected items within our
online store, ChickShops.
According to Media Metrix, our networks attracted over 5.9 million unique
visitors in January 2000, making us one of the 30 highest-trafficked
properties, or networks of affiliated web sites, on the Internet and, we
believe, one of the leading online destinations for Generation i. Additionally,
based on the same Media Metrix data, visitors spent more time per day during
that period on our network than on all but 20 other properties among the top 50
properties. As of January 31, 2000, we had over three million registered users.
3
<PAGE>
The Snowball Strategy
Our goal is to be the preeminent network of content, community and commerce
sites on the Internet by, for and about Generation i, by:
. Building and developing our existing networks, while selectively adding
new networks;
. Continuing to leverage our network and affiliate business model to
achieve cost-effective and viral growth of content and traffic;
. Offering a range of value-added services to attract, retain and develop
affiliated web sites;
. Promoting affinity and community across all networks and affiliates to
increase the amount of time that visitors spend on our Networks;
. Being the premier partner for marketing, advertising and commerce
directed at Generation i; and
. Pursuing strategic alliances and acquisitions that increase content,
traffic and revenue opportunities.
Corporate Information
From our inception in January 1997 through December 1998, we operated as a
division of Imagine Media, Inc., a California corporation. We were incorporated
as an independent company in Delaware in January 1999 as Affiliation, Inc. and
changed our name to Affiliation Networks, Inc. in February 1999. We then
changed our name to Snowball.com, Inc. in September 1999. References in this
prospectus to "Snowball," "we," "our" and "us" collectively refer to
Snowball.com, Inc., a Delaware corporation, and its predecessors and
subsidiaries, and not to the underwriters. Our principal executive offices are
located at 250 Executive Park Boulevard, Suite 4000, San Francisco, California
94134 and our telephone number is (415) 508-2000. Our World Wide Web address is
"www.snowball.com." The information on our web site is not part of this
prospectus.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by Snowball................ 6,250,000 shares
Common stock to be outstanding after the
offering....................................... 37,245,442 shares
Use of proceeds................................. To promote our brand, expand
sales and marketing, repay
any debt that may be incurred
under our credit facility and
for working capital and
general corporate purposes,
including network expansion
and content development,
relocation of our offices and
possible acquisitions of
affiliates. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.......... "SNOW"
</TABLE>
The number of shares of common stock to be outstanding after the offering
includes:
. 5,585,547 shares outstanding as of December 31, 1999; and
. 25,409,895 shares of common stock to be issued upon the automatic
conversion of all outstanding shares of preferred stock upon completion
of this offering.
The shares of common stock to be outstanding exclude:
. 10,252,737 shares of common stock reserved for issuance under our stock
option plans and a stock option agreement, including 5,500,000 shares of
common stock available for future issuance under our 2000 Equity
Incentive Plan and 2000 Employee Stock Purchase Plan, each adopted in
February 2000, of which 2,358,368 shares at a weighted-average exercise
price of $2.02 per share were subject to outstanding options as of
December 31, 1999;
. 322,688 shares of common stock issuable upon exercise of outstanding
warrants and conversion of the shares of preferred stock underlying
those warrants as of December 31, 1999 at a weighted-average exercise
price of $7.84 per share; and
. 150,000 shares of Series C preferred stock issued in January 2000.
5
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Consolidated Statements of Operations Data:
Revenue........................................... $ 927 $ 3,256 $ 6,674
Cost of revenue................................... 171 1,322 4,316
------- ------- --------
Gross margin...................................... 756 1,934 2,358
Total operating expenses.......................... 2,035 5,594 37,565
------- ------- --------
Loss from operations.............................. (1,279) (3,660) (35,207)
Interest and other income, net.................... -- -- 385
------- ------- --------
Net loss.......................................... $(1,279) $(3,660) $(34,822)
======= ======= ========
Basic and diluted net loss per share.............. $(186.69)
========
Shares used in per share calculation.............. 187
========
Pro forma basic and diluted net loss per share
(unaudited)...................................... $ (1.93)
========
Shares used in pro forma per share calculation
(unaudited)...................................... 18,022
========
</TABLE>
See Note 1 of our Notes to Consolidated Financial Statements for a
description of the method that we used to compute our basic and diluted net
loss per share.
The following table presents a summary of our consolidated balance sheet data
as of December 31, 1999:
. on an actual basis;
. on a pro forma basis to reflect the automatic conversion of all shares
of preferred stock into common stock immediately prior to the closing of
this offering and the issuance of 150,000 shares of Series C preferred
stock in January 2000 at $10.00 per share; and
. on a pro forma as adjusted basis to reflect our receipt of the estimated
net proceeds from the sale of 6,250,000 shares of common stock in this
offering at an assumed initial public offering price of $11.00 per
share, after deducting the estimated underwriting discount and estimated
offering expenses payable by us. See "Capitalization."
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments.................................... $33,489 $34,989 $ 97,627
Working capital................................. 28,263 29,763 92,401
Total assets.................................... 46,718 48,218 110,856
Long-term obligations, less current portion..... 2,036 2,036 2,036
Stockholders' equity............................ 34,661 36,161 98,799
</TABLE>
6
<PAGE>
RISK FACTORS
You should carefully consider the risks and uncertainties described below and
the other information in this prospectus before deciding whether to invest in
shares of our common stock. The risks and uncertainties described below are not
the only risks we face. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial may impair our business operations.
If any of the following risks actually occurs, our business, our financial
condition and the results of our operations could be seriously harmed, the
trading price of our common stock could decline and you might lose all or part
of your investment.
Risks Related to Our Business
Our business model is unproven and may fail.
We have a limited operating history upon which you can evaluate our business
model and prospects and the merits of investing in our stock. If our business
model proves to be unsuccessful, the trading price of our stock will fall.
Our IGN, ChickClick and PowerStudents networks began operating as divisions
of Imagine Media in March 1997, February 1998 and August 1998, respectively. We
were incorporated in January 1999, and Imagine Media contributed the IGN,
ChickClick and PowerStudents assets to us in February 1999. We launched our
InsideGuide network in September 1999. Accordingly, our prospects and the
merits of investing in our stock must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving
markets such as Internet content and services. In particular, we are
implementing an evolving and unpredictable business model. Our business model
is unproven and may fail, which could harm our business and diminish the value
of your investment. See "Business -- The Snowball Strategy" for more
information about our business model.
Our quarterly revenue and operating results may fluctuate in future periods and
we may fail to meet expectations, which may reduce the trading price of our
common stock.
We cannot forecast our revenue and operating results with precision,
particularly because our products and services are relatively new and our
prospects uncertain. If revenue in a particular period does not meet
expectations, it is likely that we will be unable to adjust our level of
expenditures significantly for the period. If our operating results fail to
meet expectations, the trading price of our common stock would decline.
We believe that period-to-period comparisons are not meaningful and are not
indicative of future performance. We anticipate that the results of our
operations will fluctuate significantly in the future as a result of a variety
of factors, including the long sales cycle we face selling advertising and
promotions, seasonal trends in Internet usage, advertising placements and e-
commerce and other factors discussed in this section. As a result, it is likely
that in some future quarters or years our results of operations will fall below
the expectations of securities analysts or investors, which would cause the
trading price of our common stock to decline.
We have a history of losses and expect to incur substantial net losses for the
foreseeable future.
We have incurred net losses since the formation of our business in January
1997. At December 31, 1999, we had an accumulated deficit of approximately
$39.8 million. We plan to increase our operating expenses significantly to
expand our affiliate base, develop additional networks, expand our sales and
marketing operations, hire more salespersons, increase our marketing and
promotional activities, develop and upgrade our technology and purchase
equipment for our operations and network infrastructure. We also may incur
costs relating to the acquisition of
7
<PAGE>
content, other businesses or technologies. We may not generate sufficient
revenue to offset these expenditures. As a result, we expect to incur
significant operating losses on a quarterly basis for the foreseeable future,
and may never be profitable. Even if we do achieve profitability, we might not
be able to sustain profitability on a quarterly or annual basis in the future.
If we fail to maintain our relationships with affiliates, or incorporate new
affiliates into our networks on a timely basis, our revenue will decline.
We derive revenue primarily from advertisers who pay us to advertise on our
networks because our networks attract a large number of visitors. We rely upon
our affiliates to generate a significant portion of the content that attracts
visitors to our networks. If we lose these affiliates and cannot replace them
with affiliates having comparable traffic patterns and user demographics, or if
we fail to add new affiliates to our networks on a timely basis, we will lose
revenue.
We could lose an affiliate if it were to:
. terminate or fail to renew its affiliate agreement with us;
. be acquired by or otherwise form a relationship with one of our
competitors;
. demand from us a greater portion of revenue derived from advertisements
placed on its web sites; or
. seek to require us to make payments for access to its web sites.
We lost 46 affiliates in 1999. Twenty-nine of these losses resulted from the
expiration and nonrenewal of affiliate agreements. Seventeen losses resulted
from the early termination of affiliate agreements--13 by mutual consent, two
because we acquired the affiliate, one because the affiliate was acquired by a
third party and one because the affiliate breached the agreement. The loss of
these affiliates did not have a significant impact on our revenue because
during the same period we entered into agreements with 102 new affiliates and
renewed agreements with 44 existing affiliates. We cannot assure you, however,
that we will not lose a major affiliate in the near future, which could cause
our revenue to decline.
We also must continue to identify potential new affiliates to ensure that we
keep pace with the changing interests, styles, trends and preferences of
Generation i. Web sites targeting Generation i might not continue to emerge at
their current pace or at all. Moreover, we may be unable to identify potential
new affiliates as they emerge or to negotiate affiliate agreements with
potential new affiliates on a timely basis. In addition, we will likely face
increasing competition for the content and services provided by possible
affiliates. If we fail to continue to identify and enter agreements with
potential new affiliates on a timely basis, our networks may lose their
relevance to Generation i, we will lose advertising and promotional
opportunities and our revenue will decline.
We also must continue to identify potential new affiliates to ensure that we
keep pace with the changing interests, styles, trends and preferences of
Generation i. Web sites targeting Generation i might not continue to emerge at
their current pace or at all. Moreover, we may be unable to identify potential
new affiliates as they emerge or to negotiate affiliate agreements with
potential new affiliates on a timely basis. In addition, we will likely face
increasing competition for the content and services provided by possible
affiliates. If we fail to continue to identify and enter agreements with
potential new affiliates on a timely basis, our networks may lose their
relevance to Generation i, we will lose advertising and promotional
opportunities and our revenue will decline.
If our IGN network is unsuccessful, our revenue will decline substantially.
We rely upon IGN for a substantial portion of our traffic and advertising
revenue. IGN is a network of web sites that provide information and
entertainment to Generation i men. IGN accounted
8
<PAGE>
for approximately 70% of our consolidated page views in January 2000,
approximately 13% of our registered users as of January 31, 2000 and a
substantial portion of our revenue for the year ended December 31, 1999. If we
are unable to anticipate changes in the interests, styles, trends or
preferences of the audience targeted by IGN, if we are unable to maintain our
relationship with affiliates of IGN or incorporate new affiliates into the IGN
network on a timely basis or if IGN otherwise loses traffic, our ability to
generate advertising revenue would be impeded to an even greater extent than if
any of those events occurred with respect to any of our other networks.
If our advertising and marketing arrangements are terminated or are not
renewed, our revenue will decline.
To date, we have derived a substantial portion of our revenue from a small
number of advertising and marketing customers. We expect that this will
continue during the early stages of our development and may continue
indefinitely. If our arrangements with these customers are terminated or are
not renewed, our revenue will decline.
In addition, many of our advertising and marketing customers enter into
agreements with us that have a term of less than six months. As a result, our
customers could cancel these agreements, change their advertising expenditures
or buy advertising from our competitors on relatively short notice and without
penalty. Because we expect to derive a large portion of our future revenue from
advertising and marketing arrangements, these short-term agreements expose us
to competitive pressures and potentially severe fluctuations in our financial
results.
If we fail to perform in accordance with the terms of our advertising
agreements, we will lose revenue.
Our advertising agreements typically provide for minimum performance levels,
such as click-throughs by web users or impressions. If we fail to perform in
accordance with these terms, we typically have to provide free advertising to
the customer until the minimum level is met, causing us to lose revenue. In
addition, we occasionally guarantee the availability of advertising space in
connection with promotion arrangements and content agreements and agree with
certain advertisers that we will not accept advertising from any other customer
within a particular subject matter. If we cannot fulfill the guarantees we make
to our customers, or if we lose potential customers whose advertisements,
sponsorships and promotions conflict with those of other customers, we will
lose revenue.
If we do not continue to attract and retain users we may not be able to compete
successfully for advertisers, which would cause our revenue to decline.
We currently derive substantially all of our revenue from advertisers who pay
us to advertise on our networks, and our business model depends in part on
increasing the amount of this revenue. The market for advertising revenue is
highly competitive. We must continue to attract and retain users to compete
successfully for advertising revenue. If we fail to attract and retain more
users, our revenue will decline.
Many of our current competitors, as well as a number of potential new
competitors, have significantly greater editorial, financial, technical,
marketing, sales and other resources than we do. Our competitors may develop
content and service offerings that are superior to ours or achieve greater
market acceptance than ours. Moreover, if our content and service offerings
fail to achieve success in the short term, we could suffer an insurmountable
loss in market share and brand acceptance. See "Business--Competition" for more
detailed information about our competitors.
9
<PAGE>
Technical problems with either our internal or our outsourced computer and
communications systems could interrupt our service, resulting in decreased
customer satisfaction, the possible loss of users and advertisers and a decline
in revenue.
Our operations depend on our ability to maintain our computer systems and
equipment in effective working order. Our web sites must accommodate a high
volume of traffic and deliver frequently updated information. Any sustained or
repeated system failure or interruption would reduce the attractiveness of our
web sites to customers and advertisers and could cause us to lose users and
advertisers to our competitors. This would cause our revenue to decline. In
addition, interruptions in our systems could result from the failure of our
telecommunications providers to provide the necessary data communications
capacity in the time frame we require. Unanticipated problems affecting our
systems have caused from time to time in the past, and could cause in the
future, slower response times and interruptions in our services.
Our web sites reside on computer systems located in the San Francisco Bay
area and in Columbia, South Carolina. Fire, earthquakes, hurricanes, power
loss, water damage, telecommunications failures, vandalism and other malicious
acts, and similar unexpected adverse events, may damage our computer systems
and interrupt service. Our computer system's continuing and uninterrupted
performance is critical to our success. Our insurance policies may not
adequately compensate us for any losses that may occur due to any failures or
interruptions in our systems.
If we lose key personnel or are unable to hire additional qualified personnel,
or if our management team is unable to perform effectively, we will not be able
to implement our business strategy or operate our business effectively.
Our success depends upon the continued services of our senior management and
other key personnel, many of whom would be difficult to replace. The loss of
any of these individuals would adversely affect our ability to implement our
business strategy and to operate our business effectively. In particular, the
services of Mark Jung, our chief executive officer, would be difficult to
replace. None of our officers or key employees is bound by an employment
agreement, nor do we have "key person" life insurance policies covering any of
these individuals.
Our success also depends upon our ability to continue to attract, retain and
motivate skilled employees. Competition for employees in our industry is
intense, especially in the San Francisco Bay area. We believe that there are
only a limited number of persons with the requisite skills to serve in many key
positions and it is becoming increasingly difficult to hire, retain and
motivate these persons. We have in the past experienced, and we expect to
continue to experience, difficulty in hiring and retaining skilled employees
with appropriate qualifications. Competitors and others have in the past
attempted, and may in the future attempt, to recruit our employees. We believe
that we will incur increasing salaries, benefits and recruiting expenses
because of the difficulty in hiring and retaining employees.
Finally, our success depends on the ability of our management to perform
effectively, both individually and as a group. Our management team has been
working together for less than one year. Moreover, James Tolonen, who was hired
as our Chief Operating Officer and Chief Financial Officer in October 1999, and
certain other members of our management team have only recently joined us. If
our management is unable to operate effectively in their respective roles or as
a team, we will not be able to implement our business strategy or operate our
business effectively.
Our failure to manage growth effectively could result in our inability to
operate our business effectively.
We have rapidly and significantly expanded our operations and anticipate that
further expansion will be required to address potential market opportunities.
If we fail to manage this expansion
10
<PAGE>
effectively, we will be unable to operate our business effectively. During the
year ended December 31, 1999, our business grew from 38 employees to 260
employees. This rapid growth has placed, and we expect it to continue to place,
a significant strain on our management, operational and financial resources. As
part of this growth, we will have to implement new operational and financial
systems, procedures and controls.
Our prospects for obtaining additional financing, if required, are uncertain
and failure to obtain needed financing would limit our operations and might
cause our business to fail.
Our operating history is too brief for us to know with certainty whether our
cash reserves and any cash flows from operations will be sufficient to finance
our anticipated growth. We may need to raise additional funds if our estimates
of revenue or our working capital and/or capital expenditure requirements
change or prove inaccurate, if we are required to respond to unforeseen
technological or marketing hurdles or if we choose to take advantage of
unanticipated opportunities. If adequate funds are not available to satisfy
either short- or long-term capital requirements, we might be required to limit
our operations significantly and our business might fail. Additional financing
might not be available when required. Our future capital requirements are
dependent upon many factors, including:
. the rate at which we expand our sales and marketing operations;
. the amount and timing of fees paid to affiliates;
. the extent to which we expand our content and service offerings;
. the extent to which we develop and upgrade our technology and data
network infrastructure; and
. the response of competitors to our content and service offerings.
Additional financings could disadvantage our existing stockholders and
purchasers in this offering.
If additional funds are raised through the issuance of equity securities, the
percentage ownership of our then current stockholders would be reduced and the
value of their investments might decline. In addition, any new securities
issued might have rights, preferences or privileges senior to those securities
held by our stockholders. If we raise additional funds through the issuance of
debt, we might become subject to restrictive covenants.
If we are unable to identify or successfully integrate potential acquisitions
and investments, we may not grow as planned, our expenses may increase and our
management's attention may be diverted from the operation of our business.
Since our incorporation, we have acquired three businesses and the selected
assets of two other businesses and our growth strategy includes acquiring or
making investments in complementary businesses, products, services or
technologies in the future. If we are unable to identify suitable acquisition
or investment candidates we will not grow as planned. Even if we do identify
suitable candidates, we might not be able to make acquisitions or investments
on commercially acceptable terms and on a timely basis. If we buy a business,
we could have difficulty in assimilating that company's personnel, operations,
products, services or technologies into ours.
We may have to litigate to protect our intellectual property rights, or to
defend claims that we have infringed the rights of others, which could subject
us to significant liability and be time consuming and expensive.
Our success depends significantly upon our copyrights, trademarks, service
marks, trade secrets, technology and other intellectual property rights. The
steps we have taken to protect our
11
<PAGE>
intellectual property may not be adequate and third parties may infringe or
misappropriate our intellectual property. If this occurs, we may have to
litigate to protect our intellectual property rights. These difficulties could
disrupt our ongoing business, increase our expenses and distract our
management's attention from the operation of our business.
We have not applied for the registration of all of our trademarks and service
marks, and effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our content, services
and products are made available online. If we were prevented from using our
trademarks, we would need to reimplement our web sites and rebuild our brand
identity with our customers, users and affiliates. This would increase our
operating expenses substantially.
Companies frequently resort to litigation regarding intellectual property
rights. From time to time, we have received, and we may in the future receive,
notices of claims of infringement of other parties' proprietary rights. We may
have to litigate to defend claims that we have infringed the intellectual
properly rights of others. Any claims of this type could subject us to
significant liability, be time-consuming and expensive, divert management's
attention, require the change of our trademarks and the alteration of content,
require us to redesign our web sites or services or require us to pay damages
or enter into royalty or licensing agreements. These royalty or licensing
agreements, if required, might not be available on acceptable terms or at all.
If a successful claim of infringement were made against us and we could not
develop non-infringing intellectual property or license the infringed or
similar intellectual property on a timely and cost-effective basis, we might be
unable to continue operating our business as planned. See "Business--
Proprietary Rights and Licensing" for more information about our intellectual
property.
We have adopted anti-takeover defenses that could delay or prevent an
acquisition of our company, even an acquisition that would be beneficial to our
stockholders.
After this offering, our board of directors will have the authority to issue
up to 5,000,000 shares of preferred stock. Issuance of the preferred stock
would make it more difficult for a third party to acquire a majority of our
outstanding voting stock, even if doing so would be beneficial to our
stockholders. Without any further vote or action on the part of the
stockholders, the board of directors will have the authority to determine the
price, rights, preferences, privileges and restrictions of the preferred stock.
This preferred stock, if issued, might have conversion rights and other
preferences that work to the disadvantage of the holders of common stock.
Our certificate of incorporation, bylaws and equity compensation plans
include provisions that may deter an unsolicited offer to purchase Snowball.
These provisions, coupled with the provisions of the Delaware General
Corporation Law, may delay or impede a merger, tender offer or proxy contest
involving Snowball. Furthermore, our board of directors will be divided into
three classes, only one of which will be elected each year. Directors will only
be removable by the affirmative vote of at least 66 2/3% of all classes of
voting stock. These factors may further delay or prevent a change of control of
Snowball and may be detrimental to our stockholders. See "Description of
Capital Stock--Anti-takeover Provisions of Our Certificate of Incorporation,
Bylaws and Delaware Law."
Risks Related to Our Industry
Since our revenue is derived primarily from selling advertisements, our revenue
might decline and we might not grow if advertisers do not continue or increase
their usage of the Internet as an advertising medium.
In the past, we have derived, and we expect to continue to derive in the
future, substantially all of our revenue from selling advertisements. However,
the prospects for continued demand and market acceptance for Internet marketing
solutions are uncertain. If advertisers do not continue or
12
<PAGE>
increase their usage of the Internet, our revenue might decline or we might not
grow. Most advertising agencies and potential advertisers, particularly local
advertisers, have only limited experience advertising on the Internet and may
not devote a significant portion of their advertising expenditures to Internet
advertising. Moreover, advertisers that have traditionally relied on other
advertising media may not advertise on the Internet. In addition, advertising
on the Internet is at a much earlier stage of development in international
markets than it is in the United States and may not fully develop in these
markets.
As the Internet evolves, advertisers may find Internet advertising to be a
less attractive or effective means of promoting their products and services
relative to traditional methods of advertising and may not continue to allocate
funds for Internet advertising. Many historical predictions by industry
analysts and others concerning the growth of the Internet as a commercial
medium have overstated the growth of the Internet and should not be relied
upon. This growth may not occur or may occur more slowly than estimated. In
addition, if a large number of Internet users use filter software programs that
limit or remove advertising from the user's monitor, advertisers may choose not
to advertise on the Internet. Moreover, there are no widely accepted standards
for the measurement of the effectiveness of Internet advertising, and standards
may not develop sufficiently to support Internet advertising as a significant
advertising medium.
Our ability to implement our business strategy and our ultimate success depend
on continued growth in the use of the Internet and the ability of the Internet
infrastructure to support this growth.
Our business strategy depends on continued growth in the use of the Internet
and increasing the number of users who visit our networks. A decrease in the
growth of web usage, particularly usage by Generation i, would impede our
ability to implement our business strategy and our ultimate success.
If the Internet continues to experience significant growth in the number of
users, frequency of use and amount of data transmitted, the Internet
infrastructure might not be able to support the demands placed on it or the
performance or reliability of the Internet might be adversely affected. Web
sites have experienced interruptions in service as a result of outages and
other delays occurring throughout the Internet network infrastructure. If these
outages or delays occur frequently in the future, Internet usage, as well as
the usage of our web sites, could grow more slowly than expected or decline.
Security and privacy concerns may also slow growth. Because our revenues
ultimately depend upon Internet usage generally as well as on our web sites,
our business may suffer as a result of retarded or declining growth.
We might have to expend significant capital or other resources to protect our
networks from unauthorized access, computer viruses and other disruptive
problems.
Internet and online service providers have in the past experienced, and may
in the future experience, interruptions in service as a result of the
accidental or intentional actions of Internet users, current and former
employees or others. We might be required to expend significant capital or
other resources to protect against the threat of security breaches or to
alleviate problems caused by such breaches. Nevertheless, security measures
that we implement might be circumvented. Eliminating computer viruses and
alleviating other security problems may also require interruptions, delays or
cessation of service to users accessing web pages that deliver our content and
services. In addition, a party who circumvents our security measures could
misappropriate proprietary information or cause interruptions in our
operations.
We may be sued regarding privacy concerns, subjecting us to significant
liability and expense.
If third parties were able to penetrate our network security or otherwise
misappropriate our users' personal information or credit card information, we
could be subject to significant liability and
13
<PAGE>
expense. We may be liable for claims based on unauthorized purchases with
credit card information, impersonation or other similar fraud claims. Claims
could also be based on other misuses of personal information, such as
unauthorized marketing purposes. These claims could result in costly
litigation.
The Federal Trade Commission and state agencies have been investigating
various Internet companies regarding their use of personal information. In
1998, the United States Congress enacted the Children's Online Privacy
Protection Act of 1998. We depend upon collecting personal information from our
customers and the regulations promulgated under this act have made it more
difficult for us to collect personal information from some of our customers. We
could incur additional expenses if new regulations regarding the use of
personal information are introduced or if our privacy practices are
investigated. Furthermore, the European Union recently adopted a directive
addressing data privacy that may limit the collection and use of information
regarding Internet users. This directive and regulations enacted by other
countries may limit our ability to target advertising or to collect and use
information internationally.
Information displayed on and communication through our networks could expose us
to significant liability and expense.
We face possible liability for defamation, negligence, copyright, patent or
trademark infringement and other claims, such as product or service liability,
based on the nature and content of the materials published on or downloaded
from our web sites. These types of claims have been brought, sometimes
successfully, against Internet companies and print publications in the past,
and the potential liability associated with these claims is significant. We
could also be subjected to claims based upon the online content that is
accessible from our web sites through links to other web sites or through
content and materials that may be posted in chat rooms or bulletin boards. We
do not verify the accuracy of the information supplied by third-party content
providers, including affiliates. We also offer email services which may subject
us to potential risks, such as liabilities or claims resulting from unsolicited
email, lost or misdirected messages, illegal or fraudulent use of email or
interruptions or delays in email service. The law in these areas is unclear.
Accordingly, we are unable to predict the potential extent of our liability.
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.
Changes in regulation of domain names may result in the loss or change of our
domain names, a reduction in brand awareness among our customers and a
diminished ability to attract advertisers and generate revenue.
We hold various domain names relating to our networks and brands. In the
United States, the National Science Foundation has appointed a limited number
of entities as the current exclusive registrars for the ".com," ".net" and
".org" generic top level domains. We expect future changes in the United States
to include a transition from the current system to a system controlled by a
non-profit corporation and the creation of additional top level domains.
Requirements for holding domain names also are expected to be affected. These
changes may result in the loss or change of our domain names, a reduction in
brand awareness among our customers and a diminished ability to attract
advertisers and generate revenue.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear.
Therefore, we may be unable to prevent third parties from acquiring domain
names that are similar to, infringe upon or otherwise decrease the value of our
trademarks and other proprietary rights. In addition, we may lose our domain
names to third parties with trademarks or other proprietary rights in those
names or similar names.
14
<PAGE>
Future regulation of the Internet may slow its growth, resulting in decreased
demand for our services and increased costs of doing business.
Although we are subject to regulations applicable to businesses generally,
few laws or regulations exist that specifically regulate communications and
commerce over the Internet. We expect more stringent laws and regulations
relating to the Internet to be enacted due to the increasing popularity and use
of the Internet and other online services. Future regulation of the Internet
may slow its growth, resulting in decreased demand for our services and
increased costs of doing business.
New and existing laws and regulations are likely to address a variety of
issues, including:
. user privacy and expression;
. taxation and pricing;
. the rights and safety of children;
. intellectual property; and
. information security.
Currently we may be subject to Sections 5 and 12 of the Federal Trade
Commission Act, which regulate advertising in all media, including the
Internet, and require advertisers to have substantiation for advertising claims
before disseminating advertisements. The Federal Trade Commission recently
brought several actions charging deceptive advertising via the Internet, and is
actively seeking new cases involving advertising via the Internet.
We also may be subject to the provisions of the recently enacted
Communications Decency Act which, among other things, imposes substantial
monetary fines and/or criminal penalties on anyone who distributes or displays
certain prohibited material over the Internet or knowingly permits a
telecommunications device under its control to be used for this purpose.
In addition, several telecommunications companies and local telephone
carriers have petitioned the Federal Communications Commission to regulate
Internet service providers and online service providers in a manner similar to
long distance telephone carriers and to impose access fees. If this were to
occur, the cost of communicating on the Internet could increase substantially,
potentially decreasing the use of the Internet.
Finally, the applicability to the Internet and other online services 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. Any new legislation or regulation, the application
of laws and regulations from jurisdictions whose laws do not currently apply to
our business, or the application of existing laws and regulations to the
Internet and other online services could also increase our costs of doing
business, discourage Internet communications and reduce demand for our
services.
We may be subject to significant liability for products sold through our web
sites.
We introduced ChickShops, our first e-commerce initiative, in December 1999
and plan to develop a range of e-commerce activities. Consumers may sue us if
any of the products sold through our web sites are defective, fail to perform
properly or injure the user. Liability claims resulting from our sale of
products could require us to spend significant time and money in litigation or
to pay significant damages.
15
<PAGE>
Risks Related to this Offering
We expect to experience volatility in our stock price, which could negatively
affect your investment.
Our common stock has never been sold in a public market and an active trading
market for our stock may not develop or be sustained. If you purchase shares of
our common stock in this offering, you will pay a price that was not
established in a competitive market. Rather, you will pay a price that we
negotiated with the representatives of the underwriters. The price of our
common stock that will prevail in the market after this offering may be higher
or lower than the price you pay. See "Underwriting." The trading price of our
common stock is likely to be highly volatile in response to a number of
factors, such as:
. actual or anticipated variations in our quarterly results of operations;
. the addition or loss of affiliates;
. changes in the market valuations of other Internet content and service
companies;
. announcements by us of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
. changes in financial estimates or recommendations by securities
analysts; and
. additions or departures of key personnel.
In addition, broad market and industry factors may materially and adversely
affect the market price of our common stock, regardless of our operating
performance. The Nasdaq National Market, and the market for Internet and
technology companies in particular, has experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the
operating performance of these companies. Further, the trading prices of the
stocks of many Internet and technology companies are at or near historical
highs and reflect price-earnings ratios substantially above those in other
industries. If these trading prices and price earnings ratios are not sustained
or if our stock does not trade at the same levels as other Internet or
Internet-related company stock your investment will suffer.
Class action litigation resulting from volatility of the trading price of our
common stock would likely result in substantial costs and a diversion of
management's attention and resources.
Volatility in the trading price of our common stock could result in
securities class action litigation. Any litigation would likely result in
substantial costs and a diversion of management's attention and resources.
We may apply the proceeds of this offering to uses that do not increase our
operating results or the value of your investment.
We will have broad discretion in how we use the proceeds from this offering,
and we may spend these proceeds in ways that do not increase our operating
results or the value of your investment. You will not have the opportunity to
evaluate the economic, financial or other information on which we base our
decisions regarding how to use the proceeds from this offering. See "Use of
Proceeds" for more detailed information about how we intend to use the proceeds
of this offering.
Pending any of these uses, we plan to invest the proceeds of this offering in
short-term, investment-grade, interest-bearing securities. These investments
may not yield a favorable return.
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<PAGE>
Should our stockholders sell a substantial number of shares of common stock in
the public market, the price of our common stock could fall.
Our current stockholders hold a substantial number of shares which they will
be able to sell in the public market in the near future. Sales of a substantial
number of shares after this offering could reduce the market price of our
common stock. Even the perception that our current stockholders might sell
shares of common stock could depress the trading price of the common stock.
These sales, and the possibility of these sales, could make it more difficult
for us to sell equity or equity-related securities in the future at a time and
price that we deem appropriate. See "Shares Available for Future Sale."
Holders of 25,559,895 shares of our common stock, which will represent
approximately 68% of our outstanding stock after completion of this offering,
have the right to require us to register their shares of common stock with the
Securities and Exchange Commission. In addition, after this offering, we intend
to register all shares of our common stock that we may issue under our stock
option plans and employee stock purchase plan. Once we register these shares,
they can be freely sold in the public market upon issuance, in some instances
subject to the lock-up agreements described above. If these holders cause a
large number of securities to be sold in the public market, the sales could
reduce the trading price of our common stock. These sales also could impede our
ability to raise needed capital.
Our officers and directors and their affiliates will exercise significant
control over us, which could disadvantage other stockholders.
Upon completion of this offering, our executive officers and directors and
their affiliates together will own approximately 63% of our outstanding common
stock. Christopher Anderson, the chairman of our board of directors, will own
approximately 41% of our outstanding common stock alone. As a result, these
stockholders will exercise significant control over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. This concentration of control could
disadvantage other stockholders with interests different from those of our
officers, directors and their affiliates. For example our officers, directors
and their affiliates could delay or prevent someone from acquiring or merging
with us even if the transaction would benefit other stockholders. See
"Principal Stockholders."
Investors will experience immediate and substantial dilution in the book value
of their investment.
The initial public offering price of our common stock will be substantially
higher than the net tangible book value per share of our common stock
immediately after this offering. Therefore, if you purchase our common stock in
this offering, you will incur an immediate dilution of $8.45 in net tangible
book value per share from the price you paid, based on an assumed initial
public offering price of $11.00 per share. The exercise of outstanding options
and warrants may result in further dilution. See "Dilution."
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<PAGE>
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are not historical
facts but rather are based on current expectations, estimates and projections
about our industry, our beliefs and our assumptions. All statements, other than
statements of historical fact, included in this prospectus, regarding our
strategy, future operations, financial position, estimated revenue, projected
costs, prospects, plans and objectives of management are forward-looking
statements. Words such as "may," "will," "should," "anticipates," "projects,"
"predicts," "expects," "intends," "plans," "believes," "seeks" and "estimates,"
and variations of these words and similar expressions, are intended to identify
forward-looking statements, although not all forward-looking statements contain
these identifying words. These statements are only predictions and are subject
to risks, uncertainties and other factors, many of which are beyond our
control, are difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the forward-looking
statements. These risks and uncertainties include those described in "Risk
Factors" and elsewhere in this prospectus.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect our management's view only as of the date of this
prospectus. Although we believe that the expectations reflected in the forward-
looking statements are reasonable, we cannot guarantee future results, levels
of activity, performance or achievements. Except as required by law, we
undertake no obligation to update any forward-looking statement after the date
of this prospectus, whether as a result of new information, future events or
otherwise, or to conform these statements to actual results.
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<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the shares of common stock in this
offering are estimated to be $62,637,500 million, after deducting the estimated
underwriting discount and estimated offering expenses payable by us. If the
underwriters' over-allotment option is exercised in full, we estimate that net
proceeds will be $72,228,125. We presently intend to use approximately 25% of
the net proceeds from this offering to advertise and promote our brands, 25% to
expand our sales and marketing workforce and 5% to repay any debt that may be
incurred under our credit facility. The balance of the net proceeds of this
offering will be used for working capital and general corporate purposes,
including network expansion and content development, relocation of our offices
and possible acquisitions of affiliates. Pending such uses, we will invest the
net proceeds of this offering in short-term, interest-bearing, investment-grade
securities.
We believe opportunities may exist to expand our business through
acquisitions of other businesses and technologies, and we may use a portion of
the proceeds for this purpose. We are not currently a party to any contracts or
letters of intent with respect to any acquisitions for which we will use the
net proceeds from this offering. We cannot assure you that any of our expansion
plans will be realized or, if realized, will prove profitable.
DIVIDEND POLICY
We have never declared or paid dividends on our capital stock and do not
anticipate declaring or paying cash dividends in the foreseeable future.
Payments of future dividends, if any, will be at the discretion of our board of
directors after taking into account various factors, including our financial
condition, operating results, current and anticipated cash needs and plans for
expansion.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
. on an actual basis;
. on a pro forma basis to reflect the automatic conversion of all
outstanding shares of preferred stock into common stock immediately
prior to the closing of this offering and the sale of 150,000 shares of
Series C preferred stock in January 2000 at $10.00 per share; and
. on a pro forma as adjusted basis to reflect our receipt of the estimated
net proceeds from the sale of 6,250,000 shares of common stock in this
offering at an assumed initial public offering price of $11.00 per share
after deducting the estimated underwriting discount and estimated
offering expenses payable by us.
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except per
share data)
<S> <C> <C> <C>
Long-term obligations, less current portion.... $ 2,036 $ 2,036 $ 2,036
-------- -------- --------
Stockholders' equity:
Convertible preferred stock, $0.001 par
value, actual: 20,000 shares authorized,
18,066 shares outstanding; pro forma and pro
forma as adjusted: 5,000 shares authorized,
no shares outstanding....................... 18 -- --
Common stock, $0.001 par value, actual:
37,500 shares authorized, 5,586 shares
outstanding; pro forma: 100,000 shares
authorized, 31,145 shares outstanding; pro
forma as adjusted: 100,000 shares
authorized, 37,395 shares outstanding....... 6 31 37
Additional paid-in capital................... 88,662 90,155 152,787
Notes receivable from stockholders........... (1,301) (1,301) (1,301)
Deferred stock compensation.................. (10,868) (10,868) (10,868)
Prepaid marketing and distribution rights.... (2,095) (2,095) (2,095)
Accumulated deficit.......................... (39,761) (39,761) (39,761)
-------- -------- --------
Total stockholders' equity................. 34,661 36,161 98,799
-------- -------- --------
Total capitalization....................... $ 36,697 $ 38,197 $100,835
======== ======== ========
</TABLE>
The common stock information in the table above excludes the following
shares:
. 2,358,368 shares issuable upon exercise of outstanding options at a
weighted-average exercise price of $2.02 per share as of December 31,
1999;
. 322,688 shares issuable upon exercise and conversion of outstanding
warrants at a weighted-average exercise price of $7.84 per share as of
December 31, 1999; and
. 7,894,369 shares available for future issuance under our stock plans,
including 5,500,000 shares of common stock available for future issuance
under our 2000 Equity Incentive Plan and 2000 Employee Stock Purchase
Plan, each adopted in February 2000, as of December 31, 1999.
Please read this capitalization table together with the sections of this
prospectus entitled "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
with the consolidated financial statements and related notes beginning on page
F-1.
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<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the initial public offering price per share of
our common stock and the pro forma as adjusted net tangible book value per
share of our common stock immediately after completion of this offering.
Investors participating in this offering will incur immediate, substantial
dilution. Our pro forma net tangible book value as of December 31, 1999 was
$32.8 million or $1.05 per share of common stock. Pro forma net tangible book
value per share represents total tangible assets less total liabilities,
divided by the total number of shares of common stock outstanding as of
December 31, 1999 after giving effect to the conversion of all outstanding
shares of preferred stock into 25,409,895 shares of common stock and the sale
of 150,000 shares of Series C preferred stock in January 2000 at $10 per share.
After giving effect to the issuance and sale of 6,250,000 shares of common
stock in this offering at an assumed initial public offering price of
$11.00 per share and after deducting the estimated underwriting discount and
estimated offering expenses payable by us, our pro forma as adjusted net
tangible book value as of December 31, 1999 would have been $95.4 million, or
$2.55 per share of common stock. This represents an immediate increase in pro
forma net tangible book value of $1.50 per share to existing stockholders and
an immediate dilution of $8.45 per share to new investors. The following table
illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $11.00
Pro forma net tangible book value per share as of December 31,
1999.......................................................... $1.05
Increase per share attributable to this offering............... 1.50
-----
Pro forma as adjusted net tangible book value per share after
this offering................................................... 2.55
------
Dilution per share to new investors.............................. $ 8.45
======
</TABLE>
The following table summarizes on a pro forma as adjusted basis, as of
December 31, 1999, after giving effect to the offering at an assumed initial
public offering price of $11.00 per share and the sale of 150,000 shares of
Series C preferred stock in January 2000 at $10 per share, the difference
between the existing stockholders and the purchasers of shares of common stock
in this offering with respect to the number of shares of common stock purchased
from us, the total consideration paid and the average price paid per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ -------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 31,145,442 83.3% $ 71,148,000 50.9% $ 2.28
New investors ................ 6,250,000 16.7 68,750,000 49.1 11.00
---------- ----- ------------ -----
Total....................... 37,395,442 100.0% $139,898,000 100.0%
========== ===== ============ =====
</TABLE>
In the preceding tables, the shares of common stock outstanding exclude:
. 2,358,368 shares issuable upon exercise of outstanding options at a
weighted-average exercise price of $2.02 per share as of December 31,
1999;
. 322,688 shares issuable upon exercise of outstanding warrants for
preferred stock at a weighted-average exercise price of $7.84 per share
as of December 31, 1999 and conversion of the preferred stock into
common stock; and
. 7,894,369 shares available for future issuance under our stock plans,
including 5,500,000 shares of common stock available for future issuance
under our 2000 Equity Incentive Plan and 2000 Employee Stock Purchase
Plan, each adopted in February 2000, as of December 31, 1999.
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<PAGE>
If the outstanding options were to be exercised in full for cash, the pro
forma net tangible book value per share after the offering would be $2.52, the
increase per share attributable to new investors would be $1.40, and the
dilution per share to new investors would be $8.48. See "Capitalization,"
"Management--Employee Benefit Plans," "Description of Capital Stock" and
Notes 7 and 10 of our Notes to Consolidated Financial Statements.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
related notes included elsewhere in this prospectus. The consolidated statement
of operations data set forth below for the three years in the period ended
December 31, 1999 and the balance sheet data as of December 31, 1998 and 1999
have been derived from our audited financial statements and those of our
predecessor division of Imagine Media, Inc. included elsewhere in this
prospectus, which have been audited by Ernst & Young LLP, independent auditors.
The consolidated balance sheet data as of December 31, 1997 has been derived
from audited financial statements of our predecessor division not included in
this prospectus. The historical results are not necessarily indicative of
results to be expected for any future period.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
(in thousands, except
per share data)
<S> <C> <C> <C>
Consolidated Statements of Operations Data:
Revenue........................................... $ 927 $ 3,256 $ 6,674
Cost of revenue................................... 171 1,322 4,316
------- ------- --------
Gross margin..................................... 756 1,934 2,358
Operating expenses:
Production and content........................... 628 1,599 6,610
Engineering and development...................... 65 329 5,084
Sales and marketing.............................. 836 2,592 20,393
General and administrative....................... 506 1,074 3,486
Stock-based compensation......................... -- -- 1,521
Amortization of goodwill and intangible assets... -- -- 471
------- ------- --------
Total operating expenses...................... 2,035 5,594 37,565
------- ------- --------
Loss from operations.............................. (1,279) (3,660) (35,207)
Interest and other income, net.................... -- -- 385
------- ------- --------
Net loss.......................................... $(1,279) $(3,660) $(34,822)
======= ======= ========
Basic and diluted net loss per share.............. $(186.69)
========
Shares used in per share calculation.............. 187
========
Pro forma basic and diluted net loss per share
(unaudited)...................................... $ (1.93)
========
Shares used in pro forma per share calculation
(unaudited)...................................... 18,022
========
<CAPTION>
December 31,
--------------------------
1997 1998 1999
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments...................................... $ -- $ -- $ 33,489
Working capital................................... 474 669 28,263
Total assets...................................... 763 1,161 46,718
Long-term debt, less current portion.............. -- -- 2,036
Stockholders' / division equity................... 502 762 34,661
</TABLE>
See Note 1 of our Notes to Consolidated Financial Statements for a
description of the method that we used to compute our basic and diluted net
loss per share.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with "Selected Consolidated
Financial Data" and our consolidated financial statements and related notes
appearing elsewhere in this prospectus. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions.
Actual results may differ materially from those anticipated in these forward-
looking statements as a result of certain factors, including, but not limited
to, those under "Risk Factors" and elsewhere in this prospectus.
Overview
From our inception in January 1997 through December 1998, we operated as an
independent division of Imagine Media, Inc. During this period, we focused our
operating activities primarily on the creation of our IGN, ChickClick and
PowerStudents networks, the development of relationships with affiliates to
expand our content and community offerings and the generation of revenue from
advertising sales. Separate financial statements were maintained for the period
prior to our incorporation as a separate entity in January 1999.
In February 1999, we raised $3.3 million of initial capital, part of which
was paid by a promissory note for $2.0 million, which has been paid in full.
Imagine Media contributed the IGN, ChickClick and PowerStudents assets and
related intellectual property to us, and we hired approximately 40 Imagine
Media employees. During the summer and early fall of 1999, we raised
approximately $30 million of additional capital (including equipment financing
of $2.0 million) and began an aggressive expansion program, adding new
employees to develop additional content and web sites, to recruit more third-
party web sites into our networks and to expand our sales and marketing staff.
In December 1999, we raised $33.8 million of additional capital to continue
financing our expansion.
In addition to the creation of our own web site content, our relationships
with our affiliates are an important part of our business model. By adding new
affiliates to our networks, we are able to gain new content and to increase the
consolidated page views of our networks rapidly. We typically enter into
agreements with affiliates for periods of between six months and five years
under which we offer affiliates revenue opportunities and a package of
integrated marketing services and support in exchange for the integration of
their site into our network and the use of their site for advertising,
promotions and sponsorships. Typically, we pay affiliates a portion of the
revenue generated from advertising, promotions and sponsorships run on their
pages. During 1999, we acquired the assets of several affiliates. We anticipate
that we may acquire additional affiliates and selected assets of affiliates in
the future. See Note 5 of our Notes to Consolidated Financial Statements.
Our operating activities to date have been focused on developing the quality
of our content and services; expanding our audience and the usage of our
services; establishing relationships with our advertisers, users and
affiliates; building sales momentum and marketing our network and Snowball
brands; developing our computer software and hardware infrastructure;
recruiting personnel; and raising capital.
To date, we have derived revenue principally from short-term contracts for
banner advertisements, buttons and textlinks. Under these contracts, we
guarantee advertisers a minimum number of "impressions," or that a minimum
number of users will view their advertisements, for which we receive a fixed
fee. Advertising revenue is recognized at the lesser of the ratio of
impressions delivered over total guaranteed impressions or the straight-line
basis over the term of the contract, provided that we do not have any
significant remaining obligations and collection of the resulting receivable is
probable. To the extent that minimum guaranteed impression levels or other
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obligations are not met, we defer recognition of the corresponding revenue
until guaranteed levels are achieved.
Revenue also includes fees from sponsorship, slotting and other marketing
programs under contracts in which we commit to provide customers with
promotional opportunities in addition to traditional banner advertising. These
agreements typically provide for the delivery of advertising impressions on our
web sites, exclusive placement on our networks, special content and promotional
offers, the design and development of customized sites to enhance the
promotional objectives of the advertiser and a fixed fee plus incremental
payments for traffic driven to the advertiser's site. The portion of this
revenue related to the delivery of impressions is recognized in the period in
which the advertisement is displayed, provided that no significant obligations
remain and collection of the resulting receivable is probable, at the lesser of
the ratio of impressions delivered over total guaranteed impressions or the
straight-line basis over the term of the contract. The portion of any up-front
nonrefundable fee specified in the contract related to the up-front design work
is also recognized at the lesser of the ratio of impressions delivered over
total guaranteed impressions or the straight-line basis over the term of the
contract. We anticipate that revenue from sponsorship, slotting and other
marketing programs will represent an increasing percentage of our total revenue
in the future.
In December 1999, we introduced an online store through which we sell
carefully selected products that are pertinent to the content contained on web
sites within our ChickClick network. We recognize revenue from the sale of
these products when a product is delivered.
Revenue has increased each year since our inception, although we have never
been profitable. We cannot assure you that our revenue will continue to grow or
that we will ever achieve or maintain profitability. As of December 31, 1999,
we had an accumulated deficit of $39.8 million. We anticipate that we will
incur additional operating losses at least through the fourth quarter of 2000.
Results of Operations
Revenue
Our revenue of $6.7 million for the year ended December 31, 1999 increased
over revenue of $3.3 million recorded for the year ended December 31, 1998 and
revenue of $0.9 million recorded for the year ended December 31, 1997. The
increases in revenue reflect increases in advertising sold, due to both the
expansion of our sales force and marketing efforts, as well as to increases in
our available inventory of internal and affiliated page views. One customer
accounted for over 10% of revenue in 1997. No customer accounted for over 10%
of revenue for 1998 or 1999. Snowball derives the significant majority of its
revenues from operations in the United States.
Cost of Revenue
Cost of revenue consists primarily of expenses related to hosting web sites,
the costs and license fees of content and community tools and the portion of
revenue owed to affiliates for advertisements placed on their web sites. These
costs can vary depending upon a variety of factors, primarily the mix of
advertisements and marketing programs placed on our web sites compared to those
placed on affiliate web sites. These costs can also vary from period to period
as we acquire an affiliate or selected sites from an affiliate or as we expand
the portion of our total sites that are represented by affiliates versus those
that we own and operate directly. For example, after we acquire an affiliate,
our cost of revenue will typically decrease because we no longer have to pay
that affiliate the portion of revenue that otherwise would have been owed to
the affiliate for advertisements placed on its site.
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Cost of revenue of $4.3 million for the year ended December 31, 1999
increased over the cost of revenue of $1.3 million recorded for the year ended
December 31, 1998 and cost of revenue of $0.2 million recorded for the year
ended December 31, 1997. These increases reflect the increased hosting costs of
our expanding web site operations, expansion of our community tools, as well as
increases in costs owed to affiliates for increases in revenue from
advertisements placed on their web sites.
Operating Expenses
We categorize operating expenses into production and content, sales and
marketing, engineering and development, general and administrative, stock-based
compensation and amortization of intangible assets.
Production and Content. Production and content expenses consist primarily of
payroll and related expenses for editorial, artistic and production staff;
payments to freelance writers and artists; and telecommunications and computer-
related expenses for the creation of content for our web sites. These expenses
can vary from period to period as we acquire an affiliate or selected sites
from an affiliate or as we expand the portion of our total sites that are
represented by affiliates versus those that we own and operate directly. For
example, after we acquire an affiliate, our production and content expenses
typically increase because we incur costs for additional staff, services and
equipment associated with operating the new business.
Production and content expenses of $6.6 million for the year ended December
31, 1999 increased over expenses of $1.6 million recorded for the year ended
December 31, 1998 and expenses of $0.6 million recorded for the year ended
December 31, 1997. These increases reflect salary and related costs associated
with increases in personnel and freelance writers and artists for the creation
and production of additional content for our web sites.
Engineering and Development. Engineering and development expenses consist
primarily of personnel and related costs, consultant and outside contractor
costs, and software and hardware maintenance costs for our development and
programming efforts, including internal information services costs. To date,
all engineering and development expenses have been expensed as incurred.
Engineering and development expenses of $5.1 million for the year ended
December 31, 1999 increased over expenses of $0.3 million recorded for the year
ended December 31, 1998 and expenses of $65,000 recorded for the year ended
December 31, 1997. These increases resulted primarily from increases in salary
and related costs, consultant fees and related costs and recruiting fees
associated with expanding our development and programming efforts.
Sales and Marketing. Sales and marketing expenses consist primarily of
personnel and related costs for our direct sales force, affiliate development
group and marketing staff. In addition, these expenses include the costs of
marketing programs such as advertisements, trade shows, promotional activities
and media events.
Sales and marketing expenses of $20.4 million for the year ended December 31,
1999 increased over expenses of $2.6 million recorded for the year ended
December 31, 1998 and expenses of $0.8 million recorded for the year ended
December 31, 1997. These increases reflect increases in salary and related
costs for expansion of our sales, affiliate development and marketing
personnel, as well as increases in our advertising, marketing and branding
expenses.
General and Administrative. General and administrative expenses consist
primarily of personnel and related costs for corporate functions including
accounting and finance, human resources, facilities and legal.
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General and administrative expenses of $3.5 million for the year ended
December 31, 1999 increased over expenses of $1.1 million recorded for the year
ended December 31, 1998 and expenses of $0.5 million recorded for the year
ended December 31, 1997. These increases resulted primarily from increases in
salary and related costs associated with expansion of our accounting and
finance, human resources and other administrative efforts, as well as from
increased use of outside consulting services.
Stock-based Compensation. Stock-based compensation represents the aggregate
differences, at the dates of grant, between the respective exercise prices of
stock options and issuance prices of common and preferred stock and the deemed
fair values of the underlying stock. Stock-based compensation is amortized
using the graded amortization method over the vesting period of the related
options, which is generally four years. Through December 31, 1999, we recorded
stock-based compensation of $1.5 million. This amount relates to the following
cost and expense categories (in thousands): cost of revenue $7, production and
content $407, engineering and development $263, sales and marketing $777, and
general and administrative $67. The total unamortized deferred stock-based
compensation recorded through December 31, 1999 is $10.9 million. This amount
will be amortized as follows: $6.2 million for the year ending December 31,
2000; $2.9 million for the year ending December 31, 2001; $1.4 million for the
year ending December 31, 2002; and $0.4 million for the year ending
December 31, 2003. Subsequent terminations of stock and option holders may
reduce future stock-based compensation. We did not grant any shares of our
common stock prior to our incorporation in January 1999.
Amortization of Goodwill and Intangible Assets. Amortization of goodwill and
intangible assets represents the non-cash charges for the expensing, over the
anticipated useful life, of intangible assets and goodwill.
Amortization of goodwill and intangible assets was $0.5 million for the year
ended December 31, 1999. $1.8 million of goodwill and intangible assets arose
from the acquisition of Extreme Interactive Media, $2.3 million arose from the
purchase of prepaid marketing and distribution rights from New Line New Media
and $1.7 million arose from the acquisition of Ameritrack and various web site
assets that we purchased during 1999. See Note 5 of our Notes to Consolidated
Financial Statements. As of December 31, 1999, goodwill and intangible assets
of $5.5 million remained to be amortized. These assets are being amortized over
a two- or three-year life with amortization expense of approximately
$0.6 million per quarter through the third quarter of 2001 and $0.3 million per
quarter thereafter through the fourth quarter of 2002.
Interest and Other Income, Net
Interest and other income, net, of $0.4 million for the year ended December
31, 1999 consisted primarily of interest received from the proceeds of equity
financings completed during the year.
Provision for Income Taxes
No provision for federal and state income taxes was recorded through December
31, 1999 as we incurred net operating losses from inception through that date.
As of December 31, 1999, we had approximately $31.8 million of federal net
operating loss carry forwards which expire on various dates through 2019. Due
to the uncertainty regarding the ultimate use of the net operating loss carry
forwards, we have not recorded any benefit for losses and a valuation allowance
has been recorded for the entire amount of the net deferred tax asset. In
addition, certain future changes in our share ownership, as defined in the Tax
Reform Act of 1986, may further restrict our ability to use our net operating
loss carry forwards.
The net losses incurred for the years ended December 31, 1997 and 1998 are
attributable to our operations as a division of Imagine Media and were included
in the income tax returns filed by Imagine Media. Because the Company will not
receive any benefit for its historical
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operating losses incurred through December 31, 1998, no income tax benefit has
been reflected for those periods.
Liquidity and Capital Resources
During 1997 and 1998, we financed our operations through contributions from
Imagine Media. Since our incorporation in January 1999, we have financed our
operations primarily through private placements of preferred stock and
borrowings under equipment lease lines and a credit facility. Cash, cash
equivalents and short-term investments were $33.5 million at December 31, 1999.
We raised $65.2 million in equity financing during 1999. During that period,
we used $26.9 million in operating activities, and $5.6 million in acquiring
property and equipment.
In April and October 1999, we entered into lease lines of credit for $5.0
million. These credit facilities have terms of three years and bear interest at
the rate of 7.5% per annum. In connection with these credit facilities, we
issued warrants to the lessors to purchase 31,595 shares of our common stock at
$3.165 per share and 21,097 shares of our common stock at $7.11 per share.
These credit facilities do not include any financial covenants.
In November 1999, we entered into a term loan agreement for up to an
aggregate of $15.2 million. In connection with this loan agreement, we issued
promissory notes, which bear interest at the rate of 11.0% per annum, and
warrants to purchase 270,000 shares of our common stock at an exercise price of
$8.44 per share. In December 1999, $12.0 million of the loan was repaid and the
note holders cancelled $3.0 million of indebtedness under the notes in exchange
for shares of our Series C preferred stock at $10.00 per share. Any outstanding
balance under the notes will become due upon consummation of this offering. The
note holders maintain a first position lien on all of our assets, excluding
fixed assets. The loan agreement does not include any financial covenants.
During 1999, we entered into several leases for our San Francisco
headquarters and our sales offices, with terms ranging from month-to-month to
three years. In connection with these short-term leases, we will make payments
of approximately $350,000 in the year ending December 31, 2000. In November
1999, we entered into a lease for our new executive offices in Brisbane,
California, which expires in 2012. In connection with the lease, we will make
payments of $1.8 million in 2000, $4.4 million per year through 2004 and a
total of $29.2 million thereafter until the expiration of the lease. In
connection with this lease, we obtained a letter of credit for $4.4 million as
a deposit for the facilities. See Note 9 of our Notes to Consolidated Financial
Statements for more information on our lease commitments.
Our capital requirements depend on numerous factors, including market
acceptance of our services, the resources we allocate to developing our
networks, our marketing and selling capabilities and our brand. We have
experienced substantial increases in our expenditures since our inception
consistent with the growth in our operations and personnel, and we anticipate
that our expenditures will continue to increase significantly for the
foreseeable future. A significant percentage of the capital raised in this
offering will be expensed over the next two years to advertise and promote our
brands and to expand our sales and marketing workforce.
We will continue to evaluate possible acquisitions of, or investments in,
complementary businesses, technologies, services or products. We believe that
our available cash, cash equivalents and short-term investments and cash flows
from operations, combined with the net proceeds from this offering, will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for at least the next 12 months. We may need to raise additional
funds, however, to fund expansion, including significant increases in personnel
and office facilities, to develop new or
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enhance existing services or products, to respond to competitive pressures or
to acquire or invest in complementary businesses, technologies, services or
products. In addition, to meet our long term liquidity needs, we may need to
raise additional funds, establish additional credit facilities or seek other
financing arrangements. Additional funding may not be available on favorable
terms, on a timely basis or at all.
Year 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer
programs or hardware that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. Prior to January 1,
2000, many people were concerned that this could result in system failures or
miscalculations, causing disruptions of operations for any company using such
computer programs or hardware, including, among other things, a temporary
inability to process transactions, send invoices or engage in normal business
activities. Most reports to date indicate that computer systems are functioning
normally and that compliance and remediation work accomplished before the end
of 1999 was effective to prevent any problems. Computer experts have warned,
however, that there still may be residual consequences. We cannot assure you
that Year 2000 problems will not disrupt our service and thereby result in a
decrease in revenue, an increase in allocation of resources to address Year
2000 problems or an increase in litigation costs.
We designed our internal systems as well as our software, hardware and
network architecture to be Year 2000 compliant, and we believe, based on our
initial reports, that these systems are Year 2000 compliant. We have not
incurred any significant expenses, and we do not anticipate that the total
costs associated with Year 2000 remediation efforts, including both expenses
incurred and any to be incurred in the future, will be material. Furthermore,
we have not experienced any significant problems to date relating to the Year
2000 compliance of our major suppliers. It is impossible to determine with
complete certainty, however, that all Year 2000 problems that may affect us
have been identified or corrected. The number of devices that could be affected
and the interactions among these devices are simply too numerous. In addition,
no one can accurately predict how many Year 2000 problem-related failures will
occur or the severity, duration or financial consequences of these perhaps
inevitable failures. Should these failures occur, we might experience, among
other difficulties, operational inconveniences and inefficiencies that may
divert management's time and attention from ordinary business activities. Based
on our initial assessment of our Year 2000 readiness, we do not anticipate
being required to implement any material aspects of a contingency plan to
address Year 2000 readiness of our critical operations.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivatives and Hedging
Activities," or SFAS 133, as amended by SFAS 137, which establishes accounting
and reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. Because we
do not currently hold any derivative instruments and do not currently engage in
hedging activities, we expect that the adoption of SFAS 133, as amended, will
not have a material effect on our financial position or results of operations.
We will be required to implement SFAS 133, as amended, for fiscal year 2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101. SAB 101 summarizes certain areas of
the Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. We believe that our current
revenue recognition principles comply with SAB 101.
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Disclosures about Market Risk
Our exposure to market risk is limited to interest income sensitivity, which
is affected by changes in the general level of interest rates in the United
States, particularly since the majority of our investments are in short-term
debt securities issued by corporations or divisions of the United States
government. We place our investments with high quality issuers and limit the
amount of credit exposure to any one issuer. Due to the nature of our short-
term investments, we believe that we are not subject to any material market
risk exposure.
We do not have any foreign currency hedging or other derivative financial
instruments as of December 31, 1999.
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BUSINESS
Snowball is an Internet media company that operates a network of destination
web sites providing content, community and commerce to Generation i. We serve
this group by providing its members with current content, relevant services
such as email and instant messaging, a forum for interacting with one another
and carefully selected merchandise. In addition to creating original content,
we continuously work to expand the breadth and depth of our content offerings
by selectively adding affiliated web sites to our network. We had more than 150
affiliated web sites and over 100 partner college destinations as of December
31, 1999. This network and affiliate business model allows us to build our
traffic and brand rapidly and efficiently. To attract and retain affiliates, we
provide an integrated package of sales and marketing services, technical
support and audience development opportunities.
We organize both our own web sites and affiliated web sites around networks
that target different segments of the Generation i audience. Currently, our
networks are:
. ChickClick, which provides content, community and commerce features to
Generation i women;
. IGN, which provides information and entertainment to Generation i men;
. PowerStudents, which provides students at all levels with information
concerning college admissions, jobs and careers; and
. InsideGuide, which offers student-generated information concerning
individual colleges.
By offering targeted access to a large and growing audience with attractive
demographic characteristics, we are able to generate marketing and advertising
revenue in a variety of forms. These include promotions and sponsorships with
negotiated financial terms, slotting and lead-generation fees from merchants
that seek preferential placement on our sites and in our online store, and
sales of various forms of banner, button and textlink advertising, both
traditional and contextual. We also generate merchandising revenue from the
sale of carefully selected items within our online store, ChickShops.
Based upon the number of unique visitors who visited our web sites, Media
Metrix reported that we were the 29th highest-trafficked property on the
Internet in January 2000. Moreover, Media Metrix reported that these visitors
spent more time per day on our networks during that period than on all but 20
other properties among the top 50 properties.
Industry Background
The Internet has emerged as an important new medium for communication and
commerce, providing companies with an effective channel for marketing and
selling their products and services. International Data Corporation, or IDC,
estimates that consumer e-commerce in the United States will grow from $12.4
billion in 1998 to $75.0 billion in 2003, representing a compound annual growth
rate of 43%. Because the Internet enables companies to attract specific
demographic groups to their web sites by offering focused content, services and
products, it can be an effective medium for advertisers seeking targeted access
to these groups. Furthermore, as customers interact with a company's web site,
the company can gather valuable information on consumer preferences and buying
patterns, thereby allowing advertisers and marketers to segment their audience
further and increase the effectiveness of their spending. Jupiter
Communications LLC estimates that spending on Internet advertising in the
United States will grow from $2.1 billion in 1998 to $11.5 billion in 2003.
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Consistent with this growth in Internet commerce and advertising, Internet
content is growing at a rapid pace. A primary impetus behind the proliferation
of content and the growing number of web sites has been the increasing use of
the Internet for creating, sharing and searching for relevant information. IDC
estimates that the number of web sites will grow from 925 million in 1998 to
13.1 billion in 2003. Online communities are also growing rapidly as new user
groups migrate from traditional media onto the Internet. IDC estimates that the
number of Internet users in the United States will grow from approximately 63
million in 1998 to approximately 177 million by the end of 2003.
While older online users are generally accustomed to traditional media and
adapt to the Internet gradually, many individuals within the Generation i age
group have grown up using the Internet and view it as a primary source for
information and medium for communication. According to the United States Census
Bureau, individuals in this age group represented approximately 25% of the U.S.
population in 1999. We believe that advertisers target this age group because
its members have a large aggregate mean income and because advertisers
anticipate a high lifetime return on their advertising dollars.
Generation i is a large Internet audience that we believe desires community,
entertainment and content focused on their particular needs. Because this
generation is accustomed to numerous cable television channels and a wealth of
entertainment choices, we believe its members expect a wide range of
specialized content that is available on demand. In the context of the
Internet, this translates into demand for web sites containing extensive
information on a variety of specialized subjects. Major web sites offering
standard content and services often fail to reach Generation i because these
sites generally:
. are designed to appeal to a broad audience and therefore do not provide
an environment focused on the specific programming and service needs and
buying habits of Generation i;
. do not comprehensively address issues important to Generation i, such as
peer, parental and school-related pressures, or issues revolving around
friendship, sexuality and relationships;
. do not provide a targeted forum for members of Generation i to express
and share their views with one another; and
. do not provide the kind of interactivity and services that we believe
this group seeks, such as communication with their peers through instant
messaging, chat and email, as well as news, online games and
personalized home pages.
While the number of web sites that serve Generation i with targeted content
and community features continues to grow, these sites tend to be small,
independent sites in the early stages of commercial development, and the
individuals who operate these sites tend to have limited financial resources
and managerial experience. As a result, it is difficult for any one of these
sites to attract consistent traffic and premier advertisers. Furthermore,
because this group of web sites is large and fragmented, advertisers generally
have been unable to reach Generation i effectively through these individual
sites. We believe that companies must advertise and promote their products and
services in the context of demographically appropriate content rather than
through traditional broad-based advertising to market more effectively to
Generation i. Accordingly, we believe there is a need for a recognized online
destination consisting of an integrated network of content, community and
commerce targeting Generation i.
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The Snowball Solution
Snowball is a network of destination web sites providing fresh, up-to-date
content created by, for and about Generation i. In addition to offering
creative and current content, each of our networks provides an interactive
community for users who share similar interests and passions, such as video
games, college life or shopping. We believe this integrated package of content,
community and commerce has helped to make us one of the most popular networks
on the Internet. As a result, we believe we provide a compelling opportunity to
our affiliates and potential affiliates as well as a large, targeted audience
for advertisers.
We focus on Generation i
We provide content, community and commerce features focused on Generation i.
To address the multiple audiences and tastes of Generation i, we have developed
a network of company-owned web sites complemented by linked, third-party
affiliate web sites that provide additional content. We have organized these
sites within the overall Snowball network around individual networks targeting
specific groups within Generation i: ChickClick provides content, community and
commerce for Generation i women; IGN provides information and entertainment for
Generation i men; InsideGuide develops individual web sites and guides for
specific colleges; and PowerStudents provides high school, college and graduate
students with information on careers, college admissions and jobs. The
affiliate sites associated with these networks contribute to the amount of
information available to users on our networks and also extend the reach of the
networks to a broader audience. The content created by our editorial staff, our
affiliates and the network users is edited and organized into networks to
create a strong and consistent voice directed at Generation i.
We also seek to promote the community participation of Generation i by
encouraging members of this group to communicate with one another and with our
network editors through message boards, chat sessions, instant messaging and
email. The interactive features of our networks are designed to further enhance
the online experience, to encourage frequent visits to our web sites and to
lengthen the time users spend on our networks. For example, users can create
personalized home pages that feature, among other things, targeted content,
news feeds, horoscopes and information about television, movies and the
weather. Users also have access to special features such as calendars, diaries,
classifieds and trading services. Moreover, we have our own e-commerce
boutique, ChickShops, which is accessible from many pages on the ChickClick
network and offers hip fashion merchandise for young women. Collectively, the
content, community and commerce features of our networks are designed to
satisfy the many and varied interests of our multiple Generation i audiences.
We provide significant benefits to advertisers
Our network model of destination web sites attracts a large and segmented
audience by providing extensive information on a variety of narrowly focused
subjects. This allows advertisers and marketers to gain wide access to the
Generation i audience as well as to target narrow segments of this audience.
Additionally, the increased segmentation allows us to provide contextually
linked advertising and commerce opportunities to a variety of merchants that
want to advertise and gain preferential placement on our web sites and within
our online stores. For example, we provide EBWorld.com, a leading online game
store, with an integrated sponsorship package that includes preferential
placement on our IGN network, promotion to users within our game newsletters,
email marketing and targeted banner advertisements. In addition, we plan to
open stores across all of our networks that will offer products to our users
while providing a storefront that will attract promotional opportunities for
other merchants or advertisers targeting the hard to reach demographic sub-
groups of Generation i.
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Our model benefits us and our affiliates
Our network and affiliate business model allows us to benefit from the fresh
content and traffic of affiliated sites without the up-front costs and risks
associated with developing content for the rapidly changing tastes of
Generation i. Many members of this generation are prolific producers of content
and have a dynamic interest in sharing with the community. As a result, many of
our users create content web sites and contact us to become part of our
network. Our users also generate a stream of affiliation opportunities by
referring us to other popular web sites. A selective screening process allows
our editorial staff to identify affiliate content partners that appeal to the
changing tastes of Generation i. This enables us to add content and traffic to
our network while keeping the content fresh and, we believe, compatible with
the evolving tastes of Generation i. To attract and retain identified
affiliates, we offer them a package of integrated marketing services and
support. Affiliates who join our networks often experience immediate growth in
users and advertising revenue. Our network development strategy reinforces each
network's brand identity, attracts users to our owned web sites, refers these
users to affiliate sites and leads to viral growth as users of the network
share their interests and opinions with others.
The Snowball Strategy
Our goal is to be the preeminent network of content, community and commerce
sites on the Internet by, for and about Generation i, by:
. Building and developing our existing networks, while selectively adding
new networks. We will continue to develop our four existing networks by
increasing the depth of content, services and product offerings arranged
around the appropriate focus of each network. In addition, we intend to
add new networks to appeal specifically to additional segments of
Generation i. We intend to build each network's brand through online,
offline and affiliate marketing programs with the goal of making each
network the dominant destination within its targeted content segment. By
expanding our existing networks and increasing the number of networks
within the Snowball family, we intend to broaden our appeal to the
members of Generation i and to be the leading destination on the
Internet for this demographic group.
. Continuing to leverage our network and affiliate business model to
achieve cost-effective and viral growth of content and traffic. We will
continue proactively to identify sites that meet our criteria for target
demographics, quality of content and strategic fit with existing
networks. By expanding our networks, we intend to keep our existing
users engaged with extensive, up-to-date content while quickly and
efficiently attracting new users. In cases where affiliate web sites do
not exist around relevant content areas, we will selectively offer our
services to help incubate web sites that provide the appropriate
content. We believe our affiliate-driven network growth model and our
reliance on word-of-mouth publicity within our targeted demographic
group will allow us to build our traffic and brand rapidly and
efficiently.
. Offering a range of value-added services to attract, retain and develop
affiliated web sites. We intend to continue to attract and retain select
affiliates by identifying small and developing web sites early and by
offering them a mutually beneficial agreement to increase their
marketing capabilities and to expand their reach. To maximize affiliate
retention, we have developed an integrated affiliate loyalty program
that includes education and community tools and other support services.
Additionally, we will continue to solicit and respond to affiliate and
user feedback to refine the services we provide to affiliates. These
services will assist us in incubating new web sites and networks to
supplement our content and service offerings.
34
<PAGE>
. Promoting affinity and community across all networks and affiliates to
increase the amount of time that users spend on our networks. We intend
to continue to develop the community tools and services we provide to
increase the time that users spend on our sites, as well as increase the
frequency of their visits. We will continue to incorporate services into
our networks that appeal to Generation i, such as free email, instant
messaging, chat rooms, bulletin boards, personalized home pages and
polling, to keep them actively engaged in both content and
communication.
. Being the premier partner for marketing, advertising and commerce
directed at Generation i. By creating a set of branded networks that
focus on a variety of discrete subjects, and by remaining a premier
online destination for Generation i, we intend to offer potential
advertisers and vendors valuable opportunities to reach targeted
segments of Generation i. By providing advertising banners, buttons,
textlinks, promotions and sponsorships of specific categories and
slotting opportunities, we can offer customized marketing programs for
companies wanting to address this market. Additionally, we will continue
to develop opportunities for merchants to sell selected merchandise
through our own online stores.
. Pursuing strategic alliances and acquisitions that increase content,
traffic and revenue opportunities. We intend to selectively develop
strategic alliances to incorporate relevant content on our networks, to
derive additional traffic from the resulting co-branding effects and to
drive new methods of revenue generation. For example, we have entered
into a strategic relationship with New Line Media that will provide us
with offline marketing promotions in their products. In selecting our
partners, we will strive to ensure the integrity of our own brand
identities with Generation i. Additionally, where strategically
appropriate, we intend to acquire selected web sites and affiliates that
complement our existing networks. For example, we recently acquired High
School Alumni, a former affiliate that provides various services to
alumni of registered high schools.
Networks
Snowball is currently comprised of the following four networks of web sites:
[LOGO]
ChickClick is a destination for forward-thinking young women
seeking community, commerce and "life tools." The ChickClick
network consists of three channels that offer progressive
features representing the interests of three groups within the
female Generation i demographic. MissClick targets teenage girls
between the ages of 13 and 17, EstroClick targets women between
the ages of 18 and 26, and MamaClick targets Generation i
mothers. ChickClick offers content on relevant subjects such as
relationships, entertainment, style, news, sports, work and travel.
ChickClick's community features include personalized homepages, Chickmail, chat
rooms, message boards and auctions. In addition, ChickClick recently launched
ChickShops, an e-commerce area that offers online shoppers a specialty boutique
experience.
Together with its affiliated websites, ChickClick had approximately 34
million consolidated page views in January 2000 and over 800,000 registered
users as of January 31, 2000. According to the U.S. Census Bureau, women
between the ages of 13 and 30 numbered 33.5 million in 1999. Media Metrix
estimates that 14.5 million women between the ages of 12 and 34 used the
Internet in January 2000.
35
<PAGE>
The following table provides a brief description of ChickClick's affiliates
as of December 31, 1999:
<TABLE>
<CAPTION>
Web Site URL Description
- --------------------------------------------------------
<C> <C> <S>
Beatboxbetty beatboxbetty.com show business
news and reviews
BoHos flypaperpress.com BoHos comic site
Bust bust.com voice of the new
girl
Cherrysucker cherrysucker.com user-submitted
fiction
Crafty Lady getcrafty.com making art from
everyday life
Disgruntled disgruntledhousewife.com modern living
Housewife and intersex
relationships
Fametracker fametracker.com celebrity
almanac
Fashion Icon fashion-icon.com fashion news
Girlie Style girliestlye.com pertinent
female-driven
content
Greasergrrls greasergrrls.com women motor
enthusiasts
Grrlgamer grrlgamer.com news and reviews
from a girl's
point of view
Hellfire hellfire.com progressive
creative writing
Hipmama hipmama.com content and
advice for hip
moms
Hissyfit hissyfit.com political and
social essays
Lookenpeepers gmetropolis.com creative and
funny
information
<CAPTION>
Web Site URL Description
- --------------------------------------------------------
<C> <C> <S>
Maxi maximag.com empowerment and
information
Mighty Big TV mightybigtv.com popular TV shows
MissGirl missgirl.com teen advice and
issues
Out of order annie.newdream.net political and
social essays
Pencilbox pencilboxmag.com resource for
college women
Pop!sicle lickpopsicle.com political,
social and
comical essays
Razzberry razzberry.com teen community
Riotgrrl riotgrrl.com irreverant sassy
content
Rockrgrl rockrgrl.com women musicians
Smile and smileandactnice.com progressive
Act Nice women's content
Spacegirl spacegirl.org societal
commentary
Squiffy Ether ethernaut.com/zine irreverent
Jag fiction
Swanky swanky.com progressive
online community
Teengrrl teengrrl.com alternative teen
community
Wench wench.com feminism,
politics and
culture
Wired Woman wiredwoman.com women and
technology
Womengamers womengamers.com gaming for the
educated woman
</TABLE>
[LOGO]
IGN is a network of web sites focusing on games and entertainment
for Generation i men. IGN provides current editorial coverage of
games, science fiction, movies and television. IGN targets three
distinct interest groups through the following channels: IGN
Games, IGN Sci-Fi and IGN for Men. IGN Games provides reviews and
previews of games for personal computers and other video games;
IGN Sci-Fi provides editorial content on science fiction, movies,
television, books and toys; and IGN for Men offers content focusing on the
lifestyles of young men. IGN offers numerous features and services to keep its
users engaged, including free email, instant messaging, contests and
promotions, weather, horoscopes and search capabilities. IGN also offers slots
within branded commerce areas to partners seeking to sell products and services
online.
Together with its affiliated web sites, IGN had more than 198 million
consolidated page views in January 2000 and approximately 400,000 registered
users as of January 31, 2000. In July 1999, we acquired a popular former
affiliate, The Vault, which had approximately nine million consolidated page
views in January 2000. According to Media Metrix, males between the ages of 12
and 34 accounted for approximately 25% of all Internet users in the United
States in January 2000. Media Metrix estimates that approximately 12% of all 12
to 34 year old males on the Internet and approximately 19% of all 12 to 17 year
old males on the Internet visited our IGN network in January 2000.
36
<PAGE>
The following table provides a brief description of IGN's affiliates as of
December 31, 1999:
<TABLE>
<CAPTION>
Web Site URL Description
- -----------------------------------------------------------
<C> <C> <S>
3Dportal 3dportal.com coverage of 3D
games
Allprowrestling.com allprowrestling.com independent
wrestling
Anime Links animelinks.com links to anime
sites
Anime News animenewsnetwork.com Anime news
Network
Arrgh arrgh.demon.co.uk early video
games
CheatElite cheat-elite.com multi-platform
cheats and codes
CheatersGuild cheaters-guild.com cheats and codes
ComicFan comicfanmag.com comic portal
Coming Attractions corona.bc.ca coming
attractions and
reviews of
movies
Coming Soon comingsoon.net movie trailers
Daily Dementia dailydementia.com interviews with
game industry
specialists
Daily Radar dailyradar.com entertainment
and games
Dark Horizons darkhorizons.com film and TV
coverage
DC Mania dcmania.com Sega Dreamcast
coverage
DC Swirl dcswirl.com Sega Dreamcast
news and reviews
Desktop Starships desktopstarships.com sci-fi desktop
downloads
DiabloII.net diabloii.net Information on
the Diablo game
DMG Ice dmgice.com Gameboy
information
Doctor Dreamcast doctordreamcast.com Sega Dreamcast
news and reviews
Drew's script-o-rama.com movie and TV
Script-O-Rama scripts
Dukeworld dukeworld.com information on
Duke Nukem
EAGB gameboy.s-one.net.sg/ Gameboy user
information
Echostation echostation.com Star Wars
e-reality e-reality.com network of top
game specific
sites
Evergreen milpool.com The Simpsons
Terrace
EX ex.org Anime and Manga
FGN Online fgnonline.com news on the game
industry
Fusion Gaming fusion-gaming.com gaming forums
Futurama nnyc.com Futurama
Archive (animated show)
GameFAQS gamefaqs.com answers to
questions about
video games
Gamers Depot gamersdepot.com game hardware
reviews
GameSages gamesages.com codes for games
Gaming Age gaming-age.com game industry
news
<CAPTION>
Web Site URL Description
- -----------------------------------------------------------
<C> <C> <S>
Halflife.net halflife.net information,
news and
previews on
Halflife
IndyJones.net indyjones.net coverage on new
Indiana Jones
game
JediKnight.Net jediknight.net Star Wars
related games
LucasGames lucasgames.com coverage of all
LucasArts games
MacGameNews macgamenews.com Macintosh games
Magic Box come.to/magicbox console and
Japanese games
MeccaWorld meccaworld.com PC games
MovieBloopers moviebloopers.com movie bloopers
Moviefan Online moviefanonline.com movie news and
reviews
MovieSounds moviesounds.com movie sounds
Mr. Cranky mrcranky.com honest movie
reviews
Mr. Hats mrhatshellhole.com South Park
Hellhole
MTGnews.com mtgnews.com Magic: The
Gathering
N64 Shooters n64shooters.com reviews of
Nintendo 64
shooting games
N64-Cheats n64-cheats.com Nintendo 64
cheats and codes
NextGen Online next-generation.com new video games
Nintendo nintendoexpress.com Nintendo systems
Express
Nintendojo nintendojo.com Nintendo 64 news
and reviews
NintendojoFR nintendojofr.com French coverage
of Nintendo 64
Nintendorks nintendorks.com Nintendo 64 news
and reviews
Oh! The Humanity ohthehumanity.com coverage of bad
movies
Only Toons onlytoons.com cartoon news and
reviews
PC Accelerator pcxl.com action,
adventure and
sports games for
PCs
PC Gamer Online pcgamer.com gaming
information
PC Gameworld pcgameworld.com free demos
Playstation 2 Unicom psx2unicom.com Playstation 2
news and
information
Playstation vidgames.com Playstation
Galleria news, previews
and strategies
Pokegym pokegym.thedojo.com Pokemon
information
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Web Site URL Description
- ----------------------------------------------------
<C> <C> <S>
Pokemon411 pokemon411.com Pokemon
information
PokemonAdobe pokemonadobe.com everything
Pokemon
PSM psmonline.com unbiased
Playstation
coverage
PSX Nation psxnation.com Playstation
news, early
previews and
reviews
PSX2.com psx2.com Playstation 2
news
PSXNetwork psxnetwork.com Playstation
updates, news
and interviews
PSXtreme psxtreme.com Playstation
information
Psycomic psycomic.com comic book news
and information
RareNet rarenet.com coverage of rare
games
RivaZone rivazone.com 3D games and
hardware
Rogue Spear rsdatabase. comprehensive
Database gamenation.com Rogue Spear site
Scream-Trilogy scream-trilogy.com news and
information on
film trilogy
Segadojo segadojo.com Sega gaming
news, reviews,
cheats
SF Site analogsf.com printed sci-fi
site
SMG Fan smgfan.com Sarah Michelle
Gellar fan site
Spider-Man Hype spidermanhype.com news and
information on
upcoming
Spiderman
film(s)
Stay Tooned staytooned.com animated
entertainment
news
</TABLE>
<TABLE>
<CAPTION>
Web Site URL Description
- -----------------------------------------------------
<C> <C> <S>
Stomp Tokyo stomptokyo.com video reviews
Video Review
Stomped stomped.com gaming industry
information
Supercars supercars.net photos and
information
about powerful
cars
The Astounding bmonster.com B movies
B Monster
The Casual Otaku casualotaku.com Anime
The Digital Bits thedigitalbits.com DVD information
The Dojo thedojo.com Magic: The
Gathering
The Great RPG rpg-archive.com role playing
Archive game archive
The One Ring theonering.com J.R.R. Tolkien
The Turnbuckle theturnbuckle.com professional
wresting
TheForce.net jedicouncil.net Star Wars
Total RPG totalrpg.com role playing
game reviews
Total Video Games totalvideogames.com games
Yakfaces Realm yakface.com Star Wars
memorabilia
Zelda HQ zhq.com comprehensive
Zelda site
</TABLE>
PowerStudents provides students with targeted content, commerce
and community features through three channels: High School,
College and Jobs. PowerStudents provides editorial content on
academics, college admissions, entertainment and student life.
Community features and services include free email, instant
messaging, contests, weather, television listings, classifieds,
polls, forums, student diaries and expert Q&A.
[LOGO]
Together with its affiliated web sites, PowerStudents had approximately 42
million consolidated page views in January 2000 and approximately two million
registered users as of January 31, 2000. High School Alumni, one of our owned
sites within the PowerStudents network, accounted for approximately 30 million
consolidated page views in January 2000 and approximately 1.8 million
registered users as of the same date. According to eMarketer, 11.1 million
individuals in the United States between the ages of 13 and 17 currently use
the Internet. eMarketer also estimates that online spending by this group will
increase from $160 million in 1999 to $1.4 billion in 2002.
38
<PAGE>
The following table provides a brief description of PowerStudents' affiliates
as of December 31, 1999:
<TABLE>
<CAPTION>
Web Site URL Description
- -----------------------------------------------------------
<C> <C> <S>
4Tests.com 4tests.com practice exams
Back To College back2college.com resources for
reentry students
BrainLapse.com brainlapse.com games and movies
Bschool.com bschool.com business school
resources
CampusCareerCenter campuscareercenter.com information on
jobs
CampusTours campustours.com college campus
tours
CollegeGate.com collegegate.com editing for
admissions
essays
College Recruiter collegerecruiter.com jobs and
internships
CollegeTownUSA collegetownusa.com online college
community
CollegeView collegeview.com college
information and
virtual tours
CollegeXpress collegexpress.com information for
college bound
students
FastAid fastaid.com scholarships and
financial aid
Fishnet: jayi.com college guide
The College Guide
FreSch freschinfo.com scholarship
information
GoCollege gocollege.com information on
college,
scholarships and
tests
<CAPTION>
Web Site URL Description
- -----------------------------------------------------------
<C> <C> <S>
GradView gradview.com graduate school
resources
GreekCentral greekcentral.com fraternity and
sorority life
InternshipPrograms.com internshipprogram.com internships
Interview Feedback interviewfeedback.com interviews
The Job Resource thejobresource.com college career
center
MBAjob mbajob.com MBA job searches
MBA ZoNe mbazone.com MBA resources
Oilzine oilzine.com British humour
Planet Papers planetpapers.com essays and
creative writing
Quintessential quintcareers.com career and job
Careers hunting
RealCollegelife.com realcollegelife.com college life
RealWorld rwuniversity.com real world
University advice
Study 24/7 study24/7.com college
notetaking
SuperCollege supercollege.com information on
admissions and
financial aid
TestTutor testtutor.com standardized
test preparation
Versity versity.com college
notetaking
</TABLE>
[LOGO] InsideGuide is a national network of online college sites
created by students for students. InsideGuide offers an
insider's perspective on college life. Each site provides
students at a particular college with an independent forum for
expressing their opinions and sharing information relevant to
the community, such as classes, sports, activity groups and
entertainment. InsideGuide was launched in September 1999 and as
of December 31, 1999 offered guides centered around more than 100 individual
schools, including University of California at Berkeley, Harvard University,
Northwestern University and University of Pennsylvania.
Together with its affiliated web sites, InsideGuide had nearly nine million
consolidated page views in January 2000. According to Jupiter Communications,
as of January 1999, 10.6 million college students in the United States used the
Internet and online spending by this group will increase from $890 million in
1999 to $2.5 billion in 2002.
39
<PAGE>
Networks Under Development
We are continually expanding the content, community and commerce services
offered by our networks and evaluating opportunities for the development of new
networks to keep pace with the expanding interests of Generation i. For
example, our acquisition of High School Alumni in September 1999 will allow
each of our networks to offer its users a classmate finder tool. As of December
31, 1999, High School Alumni included over 20,000 high schools throughout the
United States. This site enables an alumnus of a registered high school to
register, update his or her information and search for an old classmate. This
database can then be used for personal communication as well as for organizing
and sponsoring group alumni activities such as reunions and fund-raising. High
School Alumni had approximately 22 million consolidated page views in January
2000 and over 1.8 million registered users, as of January 31, 2000. Due to its
strong following and potential, we are currently evaluating options to
establish this site as a separate network during the year 2000.
Affiliate Agreements
Our standard affiliate agreement provides for an initial term of two years
and renews at our option for three consecutive one-year terms. As of January 1,
2000, 52 of our affiliates were parties to affiliate agreements with an initial
term of one year, 98 were parties to agreements with an initial term of two
years, two were parties to agreements with an initial term of three years and
two were parties to agreements with an initial term of five years. The average
duration of our current affiliate agreements is 3.4 years and the average term
remaining on these agreements is 2.8 years.
We enter into affiliate agreements with new affiliates on a rolling basis.
Accordingly, our affiliate agreements do not generally terminate at or around
the same time. Approximately 20% of our affiliate agreements will expire within
the next twelve months.
Content
We believe that the large number of Generation i users who visit our networks
do so for the compelling content contained on the web sites that make up each
network. This content is derived from two sources: our in-house editorial staff
and our affiliates. As of December 31, 1999, our in-house editorial staff
consisted of 50 professional writers, and we had more than 150 affiliate
contributors. We view the development of new content as an interactive process
and encourage our users to offer suggestions for new subject areas. Once we
identify a new subject area, we typically hire an in-house editor to develop
content and to work with our affiliate development department to identify
potential affiliates.
Our affiliate model distinguishes us from many other Internet media
companies. This model allows us to recruit independent web sites to supplement
and broaden our in-house editorial content. Our affiliate agreements generally
require affiliates to display the logo of one or more of our networks and give
us the exclusive right to sell advertising on the affiliated site in exchange
for a percentage of the advertising revenue. In addition, our agreements
generally provide for joint development of e-commerce opportunities. We believe
that this model enhances our content, increases our audience reach, builds
advertising inventory and expands our distribution at a cost to us that is
lower than would be achievable through the development of in-house editorial
content alone.
We also believe that the affiliate model enables us to adapt quickly to
emerging Internet and media trends with reduced incremental costs. For example,
when Sega released its new Dreamcast game system in September 1999, we
recruited four Dreamcast-related web sites within one month. Because our
typical affiliate agreement requires us to pay affiliates only a portion of the
revenue that we earn from the affiliate's site, the new Dreamcast affiliates
expanded our editorial coverage of the
40
<PAGE>
Dreamcast subject area and added new inventory for advertising sales without
significantly increasing our expenses.
We invest in marketing and technical services to increase the value of
affiliate relationships. Our affiliate relations specialists work with our
affiliate content partners to promote their sites, build their traffic and
improve the technical performance of the sites.
Revenue Sources
Our business model is designed to provide for multiple revenue streams. Our
principal sources of revenue will be (1) advertising and sponsorships and (2)
e-commerce and merchandising. For the years ended December 31, 1997, 1998 and
1999, advertising and sponsorship revenue represented approximately 100% of our
revenue.
Advertising and sponsorships
Our strategy is focused in part on generating a majority of our advertising
revenue from sponsors and merchants seeking an integrated and cost-effective
means to reach Generation i on the Internet. Our sponsorship arrangements are
designed to achieve broad marketing objectives such as brand promotion, brand
awareness, product introductions and online research. To help sponsors achieve
these goals, we develop individually tailored sponsorship programs that may
include any combination of advertising banners, buttons, textlinks, promotions,
sponsorships of specific categories and direct merchandise slotting
opportunities. We also develop content to support the marketing initiatives of
advertisers. In addition, sponsors may communicate with their customers on our
message boards and through chats, and may gain insights into their customers'
preferences and buying habits through polls and special events. Sponsorships
allow us to cater to the specific goals of advertisers in the areas of
impressions, product research, market research, new product launches, list
development, product information, repositioning, new account openings, lead
generation and transactions. Our sponsorship agreements provide for revenue
independent from page views as the measure of value and generally have terms of
up to one year.
We also generate revenue by selling select placement of advertisements on our
web sites to merchants interested in targeting Generation i, such as
EBWorld.com, edu.com and Gloss.com. These arrangements provide merchants with
exclusive placement on our networks, exposure through banner advertising,
special content and promotional offers in exchange for which we collect a fixed
fee plus incremental payments for visitors forwarded to the advertiser's site.
In addition to helping merchants retain customers, these retailing
opportunities can be used to identify valuable purchasing trends, which in turn
can be used in future advertising and commerce and to develop additional
targeted content.
We derive a portion of our advertising revenue from banner advertisements,
buttons and textlinks that are displayed on pages throughout our networks. From
each of these, viewers can hyperlink directly to the advertiser's own web site,
thus providing the advertiser the opportunity to interact directly with an
interested customer. Under these contracts, we guarantee advertisers a minimum
number of impressions for which we receive a fixed fee.
During the year ended December 31, 1999, our five largest customers accounted
for 19% of our consolidated revenue. If we were to lose any one of these
customers, our revenue would decline.
E-commerce and merchandising
We have recently begun to generate e-commerce revenue by selling carefully
selected products. We intend to develop e-commerce stores across all of our
networks. In December 1999, we began merchandising directly to our users
through the launch of ChickShops within our ChickClick network.
41
<PAGE>
ChickShops offers more than 75 products, including clothes and accessories, and
was designed to offer online users the experience of shopping in a specialty
clothing boutique similar to those found in cities like New York or San
Francisco. Online orders are taken 24 hours a day, seven days per week and
products are shipped generally within 48 hours of placement of most orders. All
product orders and fulfillment are currently handled by ShopNow.com.
Sales
As of December 31, 1999, we had a direct sales organization of 32 sales
professionals. Our sales team consults regularly with advertisers and agencies
on design and placement of advertisements, sponsorships and promotions across
our networks. We also have a group of sales professionals who concentrate
primarily on strategic sponsorships and promotions, seeking to establish
relationships with senior level executives and to develop multi-million dollar
partnership packages linking our users with the partner's brand. As of December
31, 1999, this group consisted of 12 individuals.
We also had 25 sales support, market research and advertising operations
staff who focus on market research and provide advertisers with information and
expertise that will help them market their products and services more
effectively to Generation i. We regularly conduct surveys concerning purchasing
patterns, attitudes and brand preferences of Generation i.
We have sales offices in New York City, San Francisco and Los Angeles.
Corporate Marketing
As of December 31, 1999, we had 15 professionals in our corporate marketing
group who are complemented by marketing professionals within our four networks.
Through the efforts of these professionals, we pursue a variety of marketing
initiatives designed to build brand awareness for Snowball and its individual
networks among both the advertising community and members of Generation i. To
date, these marketing activities have included advertising in online and
offline media, attending trade shows, sponsoring events and engaging in ongoing
media relations campaigns.
We target potential advertising customers in a variety of online and offline
media, including newspapers such as The New York Times, The Wall Street
Journal, USA Today and over 200 college newspapers; print magazines such as
Advertising Age, Adweek, Wired, Industry Standard and Business 2.0; outdoor
locations such as commuter rail lines and bus tails; and online sites such as
Adage.com, Adweek.com, ClickZ and Channel 7.
Network marketing activities focus on increasing traffic to our networks and
the number of our registered users. We have engaged in major event
sponsorships, such as ChickClick's title sponsorship of the 1999 Lilith Fair
and IGN's sponsorship of Sega Dreamcast's 1999 Assault Tour. We have also
entered into a strategic relationship with New Line Cinema that will provide us
with offline marketing promotions in their products. In addition, all networks
have aggressively launched promotions and contests to increase user
registration and have entered into service agreements with Microsoft offering
free category-specific newsletters via MSN Hotmail.
We engage in an ongoing media relations campaigns with business and financial
contacts and key industry analysts. Our public relations efforts are a key
component of our overall marketing and brand awareness strategy. We plan to
continue to develop a media outreach program based on market research that we
organize and conduct with third parties. Each individual network also manages
public relations activities targeted to the consumer press to encourage
publicity on new channels, affiliates, services and partners. The primary
purpose of our public relations activities is to
42
<PAGE>
increase our share of each network's target audience and increase overall
visibility of the Snowball networks.
Technology
Our web site hosting infrastructure is co-located at our headquarters in San
Francisco and at Exodus Communications' Internet Data Center in Santa Clara,
California. Exodus is responsible for providing us with a high-speed, scalable,
fault-tolerant Internet connection, clean power and physical security. Packaged
software enables full text search, bulk email delivery, web serving and traffic
analysis. We developed our membership, personalization, advertising delivery
and community software using standard application servers and Oracle database
systems. Our advertising selection and management system is DoubleClick's
NetGravity. We have developed traffic analysis software to compute industry-
standard and advanced metrics. We also host a small number of our affiliates on
our servers. Our editorial infrastructure is located at our headquarters in San
Francisco. We developed our editorial and publishing software by using
Informix. We have started to migrate our editorial and publishing processes to
the same platform that we use for our dynamic services. Both our hosting and
editorial switched local area networks are fault-tolerant, scalable and
economical.
With respect to disaster recovery, all of our non-derivable data is presently
replicated between a storage array at our headquarters in San Francisco and a
storage array at Exodus Communications. We are currently studying the
advisability of locating a disaster recovery data center in New York City. Our
network operations center consists of monitoring software that is monitored by
our staff at all times.
Competition
The market for Internet users and online advertisers is highly fragmented,
rapidly changing and characterized by thousands of competitors. With no
substantial barriers to entry, we believe that the number of Internet companies
relying on web-based advertising revenue will increase greatly in the future.
Companies or sites that are primarily focused on targeting Generation i online
include MTV.com, Warner Bros. Online (Entertaindome), iTurf Inc. and Alloy
Online, Inc. In addition to these direct competitors, we will likely face
competition in the future from:
. developers of web directories;
. search engine providers;
. content sites;
. commercial online services;
. sites maintained by Internet service providers; and
. other entities that establish a community on the Internet by developing
their own or purchasing one of our competitors.
We also could face competition in the future from traditional media
companies, a number of which, including Time Warner, Disney, CBS and NBC, have
recently combined with, made acquisitions of or investments in significant
Internet companies. Finally, we compete with traditional forms of media, such
as newspapers, magazines, radio and television, for advertisers and advertising
revenue.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical and marketing resources,
greater name recognition and larger existing customer bases than we do. These
competitors are able to undertake more extensive marketing campaigns for their
brands and services, adopt more aggressive advertising pricing policies and
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<PAGE>
make more attractive offers to potential employees, distribution partners,
commerce companies, advertisers and third-party content providers. Further,
these competitors may develop communities that are equal or superior to ours or
that achieve greater market acceptance than ours. In addition, many of our
current advertising customers and strategic partners also have established
collaborative relationships with certain of our competitors or potential
competitors and other frequently visited web sites. Accordingly, we cannot
assure you that:
. we will be able to sustain our traffic levels or retain our advertising
customers;
. competitors will not experience greater growth in traffic as a result of
strategic collaborative relationships that make their web sites more
attractive to advertisers; or
. our affiliates and strategic partners will not sever or renew their
agreements with us.
We believe that the primary competitive factors in attracting and retaining
users are:
. quality of content and services;
. brand recognition;
. user affinity and loyalty;
. demographic focus;
. variety of value-added services; and
. critical mass.
We believe that the principal competitive factors in attracting and retaining
online advertisers are:
. the amount of traffic on a web site;
. brand recognition;
. the demographic characteristics of a site's users;
. the ability to offer targeted audiences;
. the average duration of user visits; and
. cost-effectiveness.
We cannot assure you that we will be able to compete successfully against our
current or future competitors. Competitive pressures faced by us may have a
material adverse effect on our business, our financial condition and the
results of our operations.
Proprietary Rights and Licensing
We regard our copyrights, trademarks, service marks, trade secrets,
technology and other intellectual property rights as important to our success.
In particular, we rely upon our domain names and trademarks to increase brand
awareness among our users and advertisers. We have registered approximately 300
domain names, including all names currently in use across our networks.
"Snowball," "ChickClick," "IGN," "PowerStudents" and "InsideGuide" are
trademarks of ours. Our trademarks will remain in effect indefinitely, but only
to the extent that we continue to use them in commerce. We have not applied for
the registration of all of our trademarks and service marks and may not be
successful in obtaining the trademarks and service marks that we have applied
for. We have not applied for any patents.
To protect our intellectual property rights, we rely on a combination of
copyright and trademark laws, trade secret protection, confidentiality
agreements with employees and third parties and
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protective contractual provisions. Prior to entering into discussions with
potential content providers and affiliates regarding our business and
technologies, we generally require that they enter into nondisclosure
agreements with us. If these discussions result in a license or other business
relationship, we also generally require that the agreement setting forth each
parties' rights and obligations include provisions for the protection of our
intellectual property rights. Licensees of these rights may take or fail to
take actions that would diminish the value of our rights or reputation.
Despite our efforts to protect our proprietary rights, unauthorized parties
may copy aspects of our products or services or obtain and use information that
we regard as proprietary. The laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the United States.
We do not currently have any patents or patent applications pending in any
foreign country. In addition, others may be able independently to develop
substantially equivalent intellectual property. If we do not effectively
protect our intellectual property, our business could suffer.
Employees
As of December 31, 1999, we had a total of 260 full-time employees, including
102 in sales and marketing, 35 in engineering, 100 in production and content
and 23 in administration and finance. Other than as described in "Management--
Employment Arrangements, Termination of Employment Arrangements and Change of
Control Arrangements," none of these individuals is bound by an employment
agreement. None of our employees is represented by a collective bargaining
agreement, nor have we experienced any work stoppage. We consider our relations
with our employees to be good.
Facilities
Our principal editorial, sales, marketing, research, development and
administrative office occupies approximately 26,000 square feet in San
Francisco, California, under a month-to-month lease. In addition, we also lease
sales and service offices in Los Angeles and New York City. We recently entered
into a long-term lease for approximately 180,000 square feet to be divided
among three buildings in Brisbane, California. We intend to relocate and expand
our principal offices to this site next year. This lease will expire with
respect to approximately 55,000 square feet, 61,000 square feet and 66,000
square feet 10 years, 11 years and 12 years, respectively, after we take
occupancy. We believe that this proposed new facility will be adequate for our
needs for the foreseeable future.
Legal Proceedings
We are not a party to any material legal proceedings.
Financial Information about Geographic Areas
See Note 1 of our Notes to Consolidated Financial Statements.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table presents information regarding our executive officers and
directors as of December 31, 1999.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Mark A. Jung............... 38 President, Chief Executive Officer and Director
James R. Tolonen........... 50 Chief Financial Officer, Chief Operating Officer and Director
Sandra Cavanah............. 39 Vice President, Affiliate Marketing
Janette S. Chock........... 33 Vice President, Controller and Chief Accounting Officer
Teresa M. Crummett......... 39 Vice President, Corporate Marketing and Product Management
Kenneth H. Keller.......... 42 Vice President, Engineering
Kathleen Z. Layendecker.... 38 Vice President, Affiliate Development
Elizabeth G. Murphy........ 41 Vice President, Sales and Marketing
Christopher Anderson....... 42 Chairman of the Board and Director
Richard A. LeFurgy......... 43 Director
Michael Orsak.............. 39 Director
Robert H. Reid............. 34 Director
</TABLE>
Mark A. Jung has served as our President and Chief Executive Officer since
February 1999 and as a director since our incorporation in January 1999. Prior
to joining us, from July 1997 to January 1999, he served as an independent
industry consultant to various companies. From February 1992 to July 1997, he
co-founded and served as Chief Executive Officer, a director and, from February
1996 to July 1997, Chairman of Worldtalk Communications Corporation, an
Internet security company. Mr. Jung holds a Bachelor of Science degree in
electrical engineering from Princeton University and a Master of Business
Administration from Stanford University.
James R. Tolonen has served as our Chief Financial Officer and Chief
Operating Officer since October 1999, and as a director since November 1999.
Prior to joining us, Mr. Tolonen was on sabbatical from November 1998 to
October 1999, during which time he served intermittently as an advisor and
board member to several private companies. From August 1996 to October 1998, he
served as a director of Cybermedia, Inc., a software product service and
support company, and as its President and Chief Operating Officer from May 1998
to October 1998. From June 1989 to April 1998, he served as Senior Vice
President and Chief Financial Officer of Novell, Inc., a computer network and
software company. Mr. Tolonen holds a Bachelor of Science degree in mechanical
engineering and a Master of Business Administration from the University of
Michigan. Mr. Tolonen is also a certified public accountant.
Sandra Cavanah has served as our Vice President, Affiliate Marketing since
June 1999. Ms. Cavanah shares responsibility for affiliate related matters with
Ms. Layendecker, focusing primarily on affiliate marketing. From February 1999
to June 1999, she served as our Co-Director of Affiliate Marketing and
Development, and from January 1999 to February 1999, she served as a consultant
to us. Prior to joining us, from December 1997 to February 1999, she served as
Chief Financial Officer of Genstar Capital, L.L.C., a private-equity investment
firm. From April 1995 to November 1997, she served as an analyst at Robertson
Stephens & Co., an investment banking firm, and from December 1993 to March
1995, she served as a consultant to Pacific Telesis Group, a holding company
whose subsidiaries are communication services companies. Ms. Cavanah holds a
Bachelor of Science degree in business administration from the University of
California at Berkeley and a Master of Business Administration from Harvard
University.
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<PAGE>
Janette S. Chock has served as our Vice President, Controller and Chief
Accounting Officer since October 1999. From February 1999 to October 1999, she
served as our Controller, and from January 1999 to February 1999, she served as
a consultant to us. Prior to joining us, from August 1998 to January 1999, she
served as Controller of Fujitsu Personal Systems, Inc., a mobile computer
hardware company. Ms. Chock was between occupations from July 1996 to October
1996. From October 1996 to July 1998, she served as Controller of Diffusion,
Inc., a corporate information delivery software company, and from November 1993
to July 1996, she served as Controller of Worldtalk Communications Corporation,
an Internet security company. Ms. Chock holds a Bachelor of Science degree in
business administration from the University of California at Berkeley. Ms.
Chock is also a certified public accountant.
Teresa M. Crummett has served as our Vice President, Corporate Marketing and
Product Management since March 1999. From January 1999 to March 1999, she
served as a consultant to us. Prior to joining us, from August 1997 to December
1998, she was a self-employed business consultant. She served as a Director of
Corporate Marketing at CyberCash, Inc., an electronic commerce company, from
January 1996 to August 1997. From July 1995 to December 1996, Ms. Crummett
again worked as a self-employed business consultant. From April 1994 to June
1995, she served as Vice President, Direct Marketing of Interactive Network,
Inc., an interactive television company, and from December 1993 to March 1994,
she served as a business consultant to Time Warner, a worldwide media company.
From March 1992 to November 1993, Ms. Crummett served as Director of Marketing
of Walt Disney Company, a diversified worldwide entertainment company. Ms.
Crummett holds a Bachelor of Arts degree in government from Harvard University
and a Master of Business Administration from Stanford University.
Kenneth H. Keller has served as our Vice President, Engineering since March
1999. From January 1999 to March 1999, he served as a consultant to us. Prior
to joining us, from May 1996 to December 1998, he was a self-employed business
consultant, entrepreneur and investor. From April 1995 to April 1996, he served
as Director of Development of Excite, Inc., an Internet media company. From
January 1995 to April 1995, Mr. Keller was between occupations. Mr. Keller
holds a Bachelor of Science degree in mathematics from Carnegie Mellon
University and a Master of Science degree and Ph.D. in computer science from
the University of California at Berkeley.
Kathleen Z. Layendecker has served as our Vice President, Affiliate
Development since June 1999. Ms. Layendecker shares responsibility for
affiliate related matters with Ms. Cavanah, focusing primarily on affiliate
development. From February 1999 to June 1999, she served as our Co-Director of
Affiliate Marketing and Development, and from January 1999 to February 1999,
she served as a consultant to us. Prior to joining us, from June 1998 to
January 1999, Ms. Layendecker was between occupations. From January 1997 to
June 1998, she served as an analyst for Bodri Capital Management, Inc., an
investment company, and from August 1996 to January 1997, as a consultant to
Bodri Capital Management. From May 1995 to August 1996, Ms. Layendecker was on
maternity leave. From October 1993 to May 1995, she served as Director of
Finance and Administration of Valentis Corp., a biotechnology company.
Ms. Layendecker holds a Bachelor of Arts degree in English from Stanford
University and a Master of Business Administration from the Yale School of
Management.
Elizabeth G. Murphy has served as our Vice President, Sales and Marketing
since March 1999. Prior to joining us, from April 1992 to March 1999, she was
employed by U.S. News and World Report, a publishing company, most recently as
Vice President, Associate Publisher. Ms. Murphy holds a Bachelor of Science
degree in zoology from the University of Michigan.
Christopher Anderson has served as our Chairman of the Board and a director
since our incorporation in January 1999. He founded Imagine Media, Inc., an
Internet media company, and has served as its President and as one of its
directors since October 1993. He has also served as
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Chairman of the Board of Future Network plc, an Internet media company, since
May 1998. Mr. Anderson holds a Bachelor of Arts degree in politics, philosophy
and economics from Oxford University.
Richard A. LeFurgy has served as a director since April 1999. He has been a
member of Walden Media, L.L.C., the general partner of the Walden Media &
Information Technology Fund, L.P., a venture capital firm, since August 1999.
He served as a consultant to the Walden Media & Information Technology Fund,
L.P. from October 1998 to August 1999. From June 1995 to October 1998, he
served as Senior Vice President, Advertising Sales of Starwave Corporation, an
Internet media company, and from June 1978 to May 1995, he served as Executive
Vice President, Senior Partner and a director at NW Ayer & Partners, an
advertising agency. Mr. LeFurgy holds a Bachelor of Science degree in
advertising from Syracuse University.
Michael Orsak has served as a director since May 1999. He is a founder of
Worldview Technology Partners, a venture capital firm, and has been a general
partner since September 1996. From January 1990 to September 1996, he served as
a co-manager of a fund of JAFCO America Ventures, a venture capital firm. Mr.
Orsak holds a Bachelor of Arts degree in economics and a Master of Business
Administration from Stanford University.
Robert H. Reid has served as a director since March 1999. He is a founder of
Listen.com, Inc., an Internet music company, and has served as its President
and Chief Executive Officer since February 1998. From January 1997 to December
1998, he was an associate of 21st Century Internet Venture Partners, a venture
capital firm. He authored a book from April 1996 to December 1996, and from
December 1994 to April 1996 he served as a Business Development Manager at
Silicon Graphics, Inc., a high-performance computer company. Mr. Reid holds a
Bachelor of Arts degree in international relations and a Master of Arts degree
in international policy studies from Stanford University and a Master of
Business Administration from Harvard University.
Each of our executive officers will serve in his or her office until he or
she resigns or is removed from office.
Board of Directors and Committees
We currently have six directors. We intend to amend our certificate of
incorporation immediately following the closing of this offering. The amended
certificate of incorporation will divide our board of directors 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 terms have expired will be elected to serve from the time of election and
qualification until the third annual meeting following election.
In addition, we have amended our bylaws, with an effective date immediately
following this offering, to provide that the authorized number of directors may
be changed only by resolution of the board of directors. 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 the board of directors may have the effect of delaying
or preventing changes in our control or management. See "Description of Capital
Stock--Anti-Takeover Provisions of the Certificate of Incorporation, Bylaws and
Delaware Law." There are no family relationships among any of our directors,
officers or key employees.
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Our board of directors has a compensation committee and an audit committee.
Compensation Committee. The current members of our compensation committee are
Messrs. Anderson and Orsak. The compensation committee reviews and makes
recommendations to our board concerning salaries and incentive compensation for
our officers and employees. The compensation committee also administers our
1999 Equity Incentive Plan, 2000 Equity Incentive Plan and 2000 Employee Stock
Purchase Plan.
Audit Committee. The current members of our audit committee are Messrs.
LeFurgy, Orsak and Reid. Our audit committee reviews and monitors our financial
statements and accounting practices, makes recommendations to our board
regarding the selection of independent auditors and reviews the results and
scope of the audit and other services provided by our independent auditors.
Compensation Committee Interlocks and Insider Participation
Before June 1999, our board of directors did not have a compensation
committee and all compensation decisions were made by the full board of
directors. In June 1999, we formed a compensation committee consisting of
Richard LeFurgy, Michael Orsak and Mark Jung. Mr. Jung served as our President
and Chief Executive Officer while he was a member of the compensation
committee. In December 1999, we replaced the membership of our compensation
committee with our current compensation committee membership. No interlocking
relationship exists between our board of directors or compensation committee
and the board of directors or compensation committee of any other company, nor
has an interlocking relationship existed in the past. Mr. Jung has not
participated in discussions by our board of directors or the compensation
committee with respect to his compensation. None of our executive officers
serves as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving as a member of our board
of directors.
Preferred Stock Financings. In February 1999, Christopher Anderson, our
Chairman of the Board and one of our directors, and Mark Jung, our President
and Chief Executive Officer and one of our directors, purchased 12,857,143 and
989,011 shares, respectively, of Series A preferred stock at $0.2333 per share
in February 1999. In May 1999, Richard LeFurgy, one of our directors, purchased
35,545 shares of Series B-1 preferred stock at $4.22 per share, and in October
1999, the James R. Tolonen and Ginger Tolonen Family Trust dated 9/26/96 and
the James R. Tolonen Grantor Retained Annuity Trust purchased 120,000 and
30,000 shares, respectively, of Series B-1 preferred stock at $4.22 per share.
In addition, entities associated with Worldview Technology Partners and Walden
Media & Information Technology Fund, L.P., purchased 1,540,284 and 1,220,378
shares, respectively, of Series B-1 preferred stock at $4.22 per share in May
1999. In December 1999, these same individuals and entities purchased shares of
Series C preferred stock at $10.00 per share in the following amounts: 700,000
shares by Mr. Anderson; 50,000 shares by Mr. Jung and 10,000 by the Jung-
Murdock Children's Trust U/A 11/23/93, Susan Murdock TTEE, a trust for the
benefit of Mr. Jung's children; 3,400 shares by Mr LeFurgy; 117,800 shares by
entities associated with Walden Media & Information Technology Fund, L.P.; and
148,700 shares by entities associated with Worldview Technology Partners.
Michael Orsak, one of our directors, is a general partner of Worldview
Technology Partners and Richard LeFurgy is a member of Walden Media, L.L.C.,
the general partner of Walden Media & Information Technology Fund, L.P., and
each may be deemed to own beneficially the shares held by the entities with
whom they are associated.
Loan to Christopher Anderson. In February 1999, we loaned an aggregate of
$2.0 million to Mr. Anderson, our Chairman of the Board and one of our
directors, in connection with his purchase of 12,857,143 shares of our Series A
preferred stock. The loan was secured by a full recourse promissory note and a
stock pledge agreement. The note accrued interest at a rate of 4.57% per
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year and was due and payable with respect to $1.0 million of principal, plus
interest, on or before March 1, 1999 and with respect to the remaining $1.0
million of principal, and any remaining interest, on or before April 1, 1999.
The note has been repaid in full.
Sale of Common Stock and Loan to Mark Jung. In February 1999, we loaned an
aggregate of $92,300 to Mark Jung, our President and Chief Executive Officer
and one of our directors, in connection with his purchase of 1,978,021 shares
of our common stock at $0.04667 per share. The loan is secured by a full
recourse promissory note and a stock pledge agreement. The note accrues
interest at a rate of 4.64% per year, payable annually, and is due and payable
on or before February 1, 2003. We are forgiving the principal and accrued
interest ratably over a 48-month period that began on December 1998. In the
event that Mr. Jung's employment with us is terminated for any reason, then all
remaining unpaid principal and interest will become due and payable within 90
days after termination, unless we agree to a longer period.
Sale of Preferred Stock and Loan to Trusts Associated with James Tolonen. In
October 1999, we loaned an aggregate of $333,000 to the James R. Tolonen and
Ginger Tolonen Family Trust dated 9/26/96 in connection with its purchase of
120,000 shares of our Series B-1 preferred stock at $4.22 per share. The loan
is secured by a full recourse promissory note and a stock pledge agreement. The
note accrues interest at a rate of 5.86% per year, payable annually, and is due
and payable in full on or before October 20, 2003. We will forgive the
principal and accrued interest ratably over a 48-month period that began in
October 1999. At this time, the James R. Tolonen 1999 Grantor Retained Annuity
Trust also purchased 30,000 shares of our Series B-1 preferred stock.
Sale of Common Stock and Loan to James Tolonen. In November 1999, we loaned
an aggregate of $600,000 to Mr. Tolonen, our Chief Financial Officer and Chief
Operating Officer and one of our directors, in connection with his purchase of
350,000 shares of our common stock at $2.00 per share. The loan is secured by a
full recourse promissory note and a stock pledge agreement. The note accrues
interest at a rate of 6.08% per year, payable annually, and is due and payable
in full on or before November 30, 2003. At this time, Mr. Tolonen purchased
another 50,000 shares of our common stock pursuant to an option exercise.
The promissory notes for Mr. Jung and the trust associated with Mr. Tolonen
provide that all remaining unpaid principal and interest will become due and
payable if the borrower's position as a director or officer is terminated.
Director Compensation
Our directors do not receive cash compensation for their services as
directors but are reimbursed for their reasonable expenses in attending board
and board committee meetings.
Each eligible director who is not our employee and who is or becomes a member
of our board on or after the effective date of the registration statement, of
which this prospectus forms a part, will be granted an option to purchase
20,000 shares of common stock under our 2000 Equity Incentive Plan, unless that
director has previously received an option grant in that amount before the
effective date. Immediately following each annual meeting of our stockholders,
each eligible director will automatically be granted an additional option to
purchase 5,000 shares under the plan if the director has served continuously as
a member of the board for at least one year. The options will have ten-year
terms and will terminate three months following the date the director ceases to
be one of our directors or consultants, 12 months if the termination is due to
death or disability, or one month if the termination is for cause. All options
granted under the plan will vest over four years from the date of grant, with
25% of the shares vesting on the first anniversary of the date of grant and the
remainder vesting ratably over a 36-month period thereafter.
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Executive Compensation
The following table presents compensation information for 1999 with regard to
compensation paid to or accrued for our chief executive officer and each of our
four other most highly compensated executive officers. None of our officers was
compensated in 1998. The restricted stock value is calculated based upon a
$0.04667 per share purchase price and assumes that the estimated fair market
value on the date of grant is equal to the assumed initial public offering
price of $11.00 per share. On December 31, 1999, Mr. Jung held 1,978,021 shares
of our common stock pursuant to a restricted stock award of $21,665,917 subject
to our right to repurchase these shares upon termination of his employment. Our
repurchase right expires ratably over a 48-month period that began in December
1998. If declared by the board, dividends will be paid on Mr. Jung's restricted
stock.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term Compensation
Compensation Awards
---------------- ----------------------
Securities
Name and Principal Restricted Underlying All Other
Positions Salary Bonus Stock Award Options Compensation
------------------ -------- ------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Mark A. Jung.............. $230,770 $ -- $21,665,917 -- $20,000
President and Chief
Executive Officer
Elizabeth G. Murphy....... 160,000 59,250 -- 300,000 --
Vice President, Sales and
Marketing
Kenneth H. Keller......... 148,077 -- -- 450,000 38,000
Vice President,
Engineering
Teresa M. Crummett........ 119,616 22,500 -- 198,000 48,500
Vice President, Corporate
Marketing and Product
Management
Janette S. Chock.......... 123,462 -- -- 147,500 5,000
Vice President,
Controller and Chief
Accounting Officer
</TABLE>
The amounts listed in the column captioned "All Other Compensation" represent
payments made on our behalf by Imagine Media in January and February 1999.
James Tolonen, our Chief Financial Officer and Chief Operating Officer, was
hired in October 1999 and, had he been employed for the entire year, would have
earned a salary of $225,000. Mr. Tolonen was granted two options to purchase an
aggregate of 600,000 shares of common stock and trusts associated with Mr.
Tolonen purchased an aggregate of 150,000 shares of Series B-1 preferred stock.
Option Grants in 1999
The following table presents the grants of stock options under our 1999
Equity Incentive Plan during 1999 to our chief executive officer, our chief
financial officer and each of our four other most highly compensated executive
officers in 1999.
Options granted under the 1999 Equity Incentive Plan are either incentive
stock options or nonqualified stock options and generally become exercisable
with respect to 25% of the shares subject to the option on the first
anniversary of the date of grant and with respect to an additional 2.0833% of
these shares each month thereafter, subject to acceleration in some instances
upon certain changes in our control. Stock option grants in excess of 25,000
shares are generally immediately exercisable and subject to acceleration in
some instances upon certain changes in our control or termination by us in
certain circumstances. We have a right to repurchase these shares upon
termination of the optionee's employment with us. This right generally lapses
as to 25% of the shares subject to the option on the first anniversary of the
date of grant and as to 2.083% of the
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shares each month thereafter. Options expire ten years from the date of grant.
Options were granted at an exercise price equal to the fair market value of our
common stock, as determined by our board on the date of grant. As of December
31, 1999, we had granted to our employees options to purchase a total of
3,907,437 shares of common stock under the 1999 Equity Incentive Plan and an
additional 550,000 shares of common stock outside the plan.
The 5% and 10% assumed annual rates of stock price appreciation are required
by the rules of the Securities and Exchange Commission and do not represent our
estimate or projection of future common stock prices. The potential realizable
values at 5% and 10% appreciation are calculated by assuming that the estimated
fair market value on the date of grant, based upon an assumed initial public
offering price of $11.00 per share, appreciates at the indicated rate for the
entire term of the option and that the option is exercised at the exercise
price and sold on the last day of its term at the appreciated price.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term
---------------------------------------- ----------------------
Percent
of
Total
Number of Options
Securities Granted Exercise
Underlying to Price
Options Employees Per Expiration
Name Granted in 1999 Share Date 5% 10%
---- ---------- --------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mark A. Jung............ -- --% $ -- -- $ -- $ --
Elizabeth G. Murphy..... 300,000 4.78 0.04667 3/15/09 5,361,351 8,545,349
Kenneth H. Keller....... 450,000 7.17 0.04667 3/15/09 8,042,027 12,818,024
Teresa M. Crummett...... 198,000 3.16 0.04667 3/15/09 3,538,492 5,639,930
Janette S. Chock........ 99,000 1.58 0.04667 2/24/09 1,769,246 2,819,965
13,500 0.22 0.04667 3/15/09 241,261 384,541
35,000 0.56 2.00 10/4/09 557,124 928,591
James R. Tolonen........ 600,000 9.56 2.00 10/20/09 9,550,705 15,918,700
</TABLE>
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Aggregated Option Exercises in 1999 and Values at December 31, 1999
The following table presents the number of shares acquired and the value
realized upon exercise of stock options for the year ended December 31, 1999
and the number of shares of common stock subject to "exercisable" and
"unexercisable" stock options held as of December 31, 1999 by our chief
executive officer, chief financial officer and each of our four other most
highly compensated executive officers. All options were granted under our 1999
Equity Incentive Plan. Each of these options was immediately exercisable upon
grant, but is subject to our right to repurchase the option shares at the
exercise price upon termination of the optionee's employment. Our right to
repurchase the shares lapses either (1) as to 25% of the shares subject to the
option on the first anniversary of the date of grant and the remainder ratably
over a 36-month period thereafter or (2) as to 12.5% of the shares subject to
the option on the six month anniversary of the date of grant and the remainder
ratably over a 42-month period thereafter. In the table below, the heading
"exercisable" refers to shares as to which our right of repurchase has lapsed.
The heading "unexercisable" refers to shares that we still have the right to
repurchase upon termination of the optionee's employment. Also presented are
values of "in-the-money" options, which represent the positive difference
between the exercise price of each outstanding stock option and an assumed
initial public offering price of $11.00 per share.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Number of Options at In-the-Money Options at
Shares December 31, 1999 December 31, 1999
Acquired on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark A. Jung............ -- $ -- -- -- $ -- $ --
Elizabeth G. Murphy..... -- -- -- 300,000 -- 3,285,999
Kenneth H. Keller....... -- -- 126,250 323,750 1,382,858 3,546,141
Teresa M. Crummett...... -- -- 45,375 152,625 497,007 1,671,752
Janette S. Chock........ -- -- 23,156 124,344 253,635 1,293,614
James R. Tolonen........ -- -- 25,000 575,000 225,000 5,175,000
</TABLE>
Benefit Plans
1999 Equity Incentive Plan
As of December 31, 1999, options to purchase 2,158,368 shares of common stock
were outstanding under the 1999 Equity Incentive Plan and 2,394,369 shares of
common stock remained available for issuance upon the exercise of options that
may be granted in the future. The options that were outstanding as of that date
had a weighted average exercise price of $2.03 per share. This plan will
terminate upon this offering and no options will be granted under this plan
after this offering. However, termination will not affect any outstanding
options, all of which will remain outstanding until exercise or until they
terminate or expire by their terms. Options granted under this plan are subject
to terms substantially similar to those described below with respect to options
granted under the 2000 Equity Incentive Plan.
2000 Equity Incentive Plan
On February 22, 2000, the Board adopted the 2000 Equity Incentive Plan and
reserved 5,000,000 shares of common stock to be issued under this plan. On each
January 1, beginning in 2001, the aggregate number of shares reserved for
issuance under this plan will increase automatically by a number of shares
equal to 5% of our outstanding shares of capital stock on December 31 of the
preceding year, provided that no more than 30,000,000 shares shall be issued as
incentive stock options.
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The following shares will be available for grant and issuance under the
equity incentive plan:
. shares under the 2000 Equity Incentive Plan not issued or subject to
outstanding grants on the date of this prospectus;
. shares that are subject to issuance upon exercise of an option granted
under the equity incentive plan that cease to be subject to the option
for any reason other than exercise of the option including by the
expiration of the option or the option's becoming unexercisable for any
reason without having been exercised in full;
. shares that have been issued upon the exercise of an option granted
under the equity incentive plan that are subsequently forfeited, or
repurchased by us at the original purchase price;
. shares that are subject to an award granted pursuant to a restricted
stock purchase agreement under the equity incentive plan that are
subsequently forfeited, or repurchased by us at the original issue
price; or
. shares that are subject to stock bonuses granted under the equity
incentive plan that terminate without shares being issued.
This plan will become effective on the consummation of this offering and will
terminate on February 21, 2010, unless it is terminated earlier by our board.
The plan authorizes the award of options, restricted stock awards and stock
bonuses. No person will be eligible to receive more than 1,500,000 shares in
any calendar year under the plan other than a new employee. A new employee will
be eligible to receive no more than 3,000,000 shares in the calendar year in
which the employee commences employment.
The plan will be administered by our compensation committee, all of the
members of which are "non-employee directors" under applicable federal
securities laws and "outside directors" as defined under applicable federal tax
laws. The compensation committee will have the authority to construe and
interpret the plan, grant awards and make all other determinations necessary or
advisable for the administration of the plan. Also, non-employee directors are
entitled to receive automatic annual grants of options to purchase shares of
our common stock, as described under "Management--Director Compensation."
The plan will provide for the grant of both incentive stock options that
qualify under Section 422 of the Internal Revenue Code and nonqualified stock
options. Incentive stock options may be granted only to our employees or
employees of our parent or subsidiary, if any. All awards other than incentive
stock options may be granted to employees, officers, directors, consultants,
independent contractors and advisors of ours or our parent or subsidiary, if
any, provided that, in the case of the consultants, independent contractors and
advisors, they render bona fide services not in connection with the offer and
sale of securities in a capital-raising transaction. The exercise price of
incentive stock options must be at least equal to the fair market value of our
common stock on the date of grant. The exercise price of incentive stock
options granted to 10% stockholders must be at least equal to 110% of that
value. The exercise price of non-qualified stock options must be at least equal
to 85% of the fair market value of our common stock on the date of grant.
Options may be exercisable only as they vest or may be immediately
exercisable with the shares issued subject to our right of repurchase that
lapses as the shares vest. In general, options and the shares issued pursuant
to immediately exercisable options will vest over a four-year period. The
maximum term of options granted under the plan is ten years.
Awards granted under the plan may not be transferred in any manner other than
by will or by the laws of descent and distribution. They may be exercised
during the lifetime of the optionee only by the optionee. The compensation
committee could determine otherwise and provide for these
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provisions in the award agreement, but only with respect to awards that are not
incentive stock options. Options granted under the plan generally may be
exercised for a period of time after the termination of the optionee's service
to us or to our parent or subsidiary, if any. Options will generally terminate
one month after termination of employment for cause.
The purchase price for restricted stock will be determined by our
compensation committee. Stock bonuses may be issued for past services or may be
awarded upon the completion of certain services or performance goals.
If we are dissolved or liquidated or have a "change in control" transaction,
outstanding awards may be assumed or substituted by the successor corporation,
if any. In the discretion of the compensation committee, the vesting of these
awards may accelerate upon one of these transactions.
2000 Employee Stock Purchase Plan
On February 22, 2000, the board adopted the 2000 Employee Stock Purchase Plan
and reserved 500,000 shares of common stock under this plan. The plan will
become effective on the first business day on which price quotations for our
common stock are available on the Nasdaq National Market. On each January 1,
beginning in 2001, the aggregate number of shares reserved for issuance under
this plan will increase automatically by a number of shares equal to 1% of our
outstanding shares on December 31 of the preceding year. The aggregate number
of shares reserved for issuance under the plan may not exceed 5,000,000 shares.
The plan will be administered by our compensation committee, which will have
the authority to construe and interpret the plan.
Employees generally will be eligible to participate in the plan if:
. they are employed before the beginning of an offering period;
. they are customarily employed by us, or our parent or any subsidiaries
that we designate, for more than 20 hours per week and more than five
months in a calendar year; and
. are not, and would not become as a result of being granted an option
under the plan, 5% stockholders of us or our designated parent or
subsidiaries.
Under the plan, eligible employees will be permitted to acquire shares of our
common stock through payroll deductions. Eligible employees may select a rate
of payroll deduction between 1% and 10% of their compensation, subject to
maximum purchase limitations. Participation in the plan will end automatically
upon termination of employment for any reason.
Each offering period under the plan will be for two years and will consist of
four six-month purchase periods. The first offering period is expected to begin
on the first business day on which price quotations for our common stock are
available on the Nasdaq National Market. Additional offering periods and
purchase periods will begin on May 1 and November 1 of each year. Because the
first day on which price quotations for our common stock may be available on
the Nasdaq National Market may not be May 1 or November 1, the length of the
first offering period will be more than two years, and the length of the first
purchase period may be more than six months.
The plan will provide that, in the event of our proposed dissolution or
liquidation, each offering period that commenced prior to the closing of the
proposed event will continue for the duration of the offering period, provided
that the compensation committee may fix a different date for termination of the
plan. The purchase price for our common stock purchased under the plan is 85%
of the lesser of the fair market value of our common stock on the first or last
day of the applicable offering period. The compensation committee will have the
power to change the offering dates, purchase dates and
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<PAGE>
duration of offering periods or purchase periods without stockholder approval,
if the change is announced prior to the relevant offering period, or prior to
such other time period as is specified by the compensation committee.
The plan is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code. Rights granted under the plan will
not be transferable by a participant other than by will or the laws of descent
and distribution.
The plan will terminate in February 21, 2010, unless it is terminated earlier
under its terms. The board will have the authority to amend, terminate or
extend the term of the plan, except that no action may adversely affect any
outstanding options previously granted under the plan. Except for the automatic
annual increase of shares described above, stockholder approval is required to
increase the number of shares that may be issued or to change the terms of
eligibility under the plan. The board may make amendments to the plan as it
determines to be advisable if the financial accounting treatment for the plan
is different from the financial accounting treatment in effect on the date the
plan was adopted by the board.
401(k) Plan
We sponsor a defined contribution plan intended to qualify under Section 401
of the Internal Revenue Code, or a 401(k) plan. Employees are generally
eligible to participate and may enter the plan as of the first day of the month
coinciding with or next following the date on which the employee met the
requirements. Participants may make pre-tax contributions to the plan of up to
20% of their eligible earnings, subject to a statutorily prescribed annual
limit. Each participant is fully vested in his or her contributions and the
investment earnings. Contributions to the plan by the participants or by us,
and the income earned on these contributions, are generally not taxable to the
participants until withdrawn. Participant and company contributions are held in
trust as required by law. Individual participants may direct the trustee to
invest their accounts in authorized investment alternatives.
Employment Arrangements, Termination of Employment Arrangements
and Change of Control Arrangements
Mark Jung's offer letter, dated February 1, 1999, provides for an initial
annual salary of $250,000 commencing on February 1, 1999. Pursuant to the offer
letter, Mr. Jung purchased 1,978,021 shares of our common stock at $0.04667 per
share. The shares purchased by him are subject to our right to repurchase these
shares upon termination of his employment. Our right to repurchase his shares
at the original price upon his termination lapses ratably over a 48-month
period that began in December 1998. The repurchase right will expire as to half
of the shares of common stock subject to repurchase if Mr. Jung is terminated
by us without cause or if he terminates his employment under some
circumstances. In connection with this stock purchase, we agreed to loan Mr.
Jung the entire purchase price. See "Management--Compensation Committee
Interlocks and Insider Participation."
James Tolonen's offer letter, dated October 18, 1999, provides for an initial
annual salary of $225,000 commencing on October 1, 1999. Pursuant to the offer
letter, the James R. Tolonen and Ginger Tolonen Family Trust dated 9/26/96 and
the James R. Tolonen Grantor Retained Annuity Trust purchased 120,000 and
30,000 shares, respectively, of our Series B-1 preferred stock at a purchase
price of $4.22 per share. In connection with this stock purchase, we loaned the
James R. Tolonen and Ginger Tolonen Family Trust dated 9/26/96 $333,000,
pursuant to a full recourse promissory note representing part of the purchase
price for its shares. The principal amount of the loan is due on October 20,
2003 or earlier in the event of Mr. Tolonen's termination for cause or if he
terminates his employment under some circumstances, and bears interest at the
rate of 5.86% per
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<PAGE>
year. Mr. Tolonen's offer letter provides that the note and any accrued
interest will be forgiven in full if he is terminated without cause or if he
terminates his employment under some circumstances. See "Management--
Compensation Committee Interlocks and Insider Participation." Pursuant to the
offer letter, Mr. Tolonen was granted options to purchase 600,000 shares of our
common stock at an exercise price of $2.00 per share, of which 50,000 shares
were granted under the 1999 Equity Incentive Plan and 550,000 shares were
granted outside the 1999 Equity Incentive Plan, which upon exercise will be
subject to our right to repurchase all of the shares of common stock for which
our repurchase right has not lapsed upon termination of his employment. In
November 1999, he exercised options to purchase 400,000 shares of our common
stock at an exercise price of $2.00 per share. Our right to repurchase these
shares lapses ratably over a 48-month period that began in October 1999. In
addition, our repurchase right lapses as to 75,000 shares of common stock if
Mr. Tolonen is terminated by us without cause or if he terminates his
employment under some circumstances, unless termination happens 60 days before,
or within one year after, we are acquired or merge with another company, in
which case our right to repurchase these shares lapses as to 150,000 shares.
Janette Chock's offer letter, dated January 18, 1999, provides for an initial
annual salary of $120,000 commencing on February 1, 1999. Pursuant to the offer
letter, Ms. Chock purchased 99,000 shares of our common stock at an exercise
price of $0.04667 per share under the 1999 Equity Incentive Plan. Upon
termination of her employment, we have the right to repurchase at the exercise
price all of the shares of common stock for which our repurchase right has not
lapsed. Our right to repurchase her shares at the original price upon
termination lapsed as to 12,375 shares on August 1, 1999 and lapses as to
approximately 2,062 shares each month thereafter.
Teresa Crummett's offer letter, dated March 15, 1999, provides for an initial
annual salary of $140,000 commencing on March 15, 1999, and an incentive bonus
of up to $7,500 per quarter commencing in the quarter ended June 30, 1999.
Pursuant to the offer letter, Ms. Crummett purchased 198,000 shares of our
common stock at an exercise price of $0.04667 per share under the 1999 Equity
Incentive Plan. Upon termination of her employment, we have the right to
repurchase at the exercise price all of the shares of common stock for which
our repurchase right has not lapsed. Our right to repurchase her shares lapsed
as to 24,750 shares on July 1, 1999 and lapses as to 4,125 shares each month
thereafter.
Kenneth Keller's offer letter, dated March 15, 1999, provides for an initial
annual salary of $175,000 commencing on March 15, 1999. Pursuant to the offer
letter, Mr. Keller purchased 450,000 shares of our common stock at an exercise
price of $0.04667 per share under the 1999 Equity Incentive Plan. Upon
termination of his employment, we have the right to repurchase at the exercise
price all of the shares of common stock for which our repurchase right has not
lapsed. Our right to repurchase his shares lapsed as to 28,125 shares on March
22, 1999 and lapses as to approximately 9,375 shares each month thereafter. The
repurchase right will expire as to 112,500 shares of the common stock subject
to repurchase if Mr. Keller is terminated by us without cause or if he
terminates his employment under some circumstances.
Elizabeth Murphy's offer letter, dated March 4, 1999, provides for an initial
annual salary of $200,000 commencing on March 17, 1999 and an incentive bonus
of up to $75,000, of which $36,500 is guaranteed in the first year of her
employment. In addition, her offer letter provides that we will pay her
$100,000 if she is terminated by us without cause, or if she terminates her
employment under some circumstances. Pursuant to the offer letter, Ms. Murphy
purchased 300,000 shares of our common stock, of which 75,000 shares will vest
on March 15, 2000 and the remainder will vest ratably over a 36-month period
thereafter, at an exercise price of $0.04667 per share under the 1999 Equity
Incentive Plan. Upon termination of her employment, we have the right to
repurchase at the exercise price all of the shares of common stock for which
our repurchase right has not lapsed. Our repurchase right will expire as to
75,000 shares of the common stock subject to
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repurchase if Ms. Murphy is terminated by us without cause or if she terminates
her employment under some circumstances.
Unless otherwise stated above, if we merge with or are acquired by another
company and the surviving company does not assume the employment contracts
between our executive officers and us, our executive officers may terminate
their employment at their own election and our repurchase right will expire as
to 25% of the number of shares purchased pursuant to the offer letter.
Limitation of Liability and Indemnification
Our amended and restated certificate of incorporation to be filed upon the
closing of this offering includes a provision that eliminates the personal
liability of our directors for monetary damages resulting from breach of
fiduciary duty as a director, except liability for:
. any breach of the director's duty of loyalty to us or our stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful dividends and stock repurchases or redemptions under section
174 of the Delaware General Corporation Law; or
. any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
Our bylaws, as amended, provide that:
. we must indemnify our directors and executive officers to the fullest
extent permitted by Delaware law or any other applicable law, subject to
very limited exceptions;
. we may indemnify our other employees and agents to the same extent that
we indemnify our directors and executive officers, unless otherwise
required by law, our certificate of incorporation, our bylaws or
agreements; and
. we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law, subject to very limited exceptions.
Prior to the completion of this offering, we intend to enter into
indemnification agreements with each of our current directors and executive
officers to give them additional contractual assurances regarding the scope of
the indemnification provided in our certificate of incorporation and bylaws and
to provide additional procedural protections. Presently, there is no pending
litigation or proceeding involving any of our directors, executive officers or
employees for which indemnification is sought, nor are we aware of any
threatened litigation that may result in claims for indemnification.
We have liability insurance for our directors and officers and intend to
obtain a rider to extend that coverage for public securities matters.
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RELATED PARTY TRANSACTIONS
Other than the employment agreements described in "Management," and the
transactions described below, since we were formed there has not been nor is
there currently proposed, any transaction or series of similar transactions to
which we were or will be a party:
. in which the amount involved exceeds or will exceed $60,000, and
. in which any director, executive officer, holder of more than 5% of our
common stock or any member of their immediate family had or will have a
direct or indirect material interest.
Sales of Securities
Christopher Anderson. On February 1, 1999, we sold 12,857,143 shares our
Series A preferred stock to Christopher Anderson, our Chairman of the Board and
a director, at a purchase price of $0.2333 per share. On December 20, 1999, we
sold 700,000 shares of Series C preferred stock to Mr. Anderson at a purchase
price of $10.00 per share. Mr. Anderson is the President and a director of
Imagine Media.
Imagine Media. On February 1, 1999, we issued to Imagine Media 989,011
shares of Series A preferred stock and 7,500,000 shares of Series B preferred
stock in exchange for certain of its assets. In connection with this issuance
of Series B preferred stock, we entered into a Services and Support Agreement
with Imagine Media dated as of January 1999. This agreement was intended to
assist us in our organizational and start-up phases by providing support
services to us and by permitting us to occupy space in Imagine Media's
premises. The agreement terminated on October 1, 1999 and we are currently
discussing its renewal. Imagine Media's shares of Series B preferred stock were
converted to 414,691 shares of Series B-1 preferred stock on May 11, 1999 for
no additional consideration. On June 14, 1999, we sold 260,664 shares of Series
B-1 preferred stock to Imagine Media at a purchase price of $4.22 per share. On
December 20, 1999, we sold 100,000 shares of Series C preferred stock to
Imagine Media at a purchase price of $10.00 per share.
Mark Jung. On February 1, 1999, we sold 989,011 shares our Series A
preferred stock to Mark Jung, our President and Chief Executive Officer and one
of our directors, at a purchase price of $0.2333 per share. Mr. Jung also
purchased 1,978,021 shares of common stock from us at a purchase price of
$0.04667 per share on February 1, 1999. On December 20, 1999, we sold 50,000
and 10,000 shares of Series C preferred stock to Mr. Jung and the Jung-Murdock
Children's Trust U/A 11/23/93 at a purchase price of $10.00 per share.
Michael Orsak. On May 11, 1999, we sold an aggregate of 1,540,284 shares of
Series B-1 preferred stock to entities associated with Worldview Technology
Partners at a purchase price of $4.22 per share. On December 20, 1999, we sold
148,700 shares of Series C preferred stock to entities associated with
Worldview Technology Partners at a purchase price of $10.00 per share.
Mr. Orsak, one of our directors, is a general partner of Worldview Technology
Partners and its affiliated entities.
Richard LeFurgy. On April 23, 1999, we sold 108,000 shares of common stock
to Richard LeFurgy, one of our directors, at a purchase price of $0.0467 per
share. Mr. LeFurgy also purchased 35,545 shares of Series B-1 preferred stock
from us at a purchase price of $4.22 per share on May 11, 1999. On December 20,
1999, he purchased 3,400 shares of our Series C preferred stock at a purchase
price of $10.00 per share.
On May 11, 1999, we sold an aggregate of 1,220,378 shares of Series B-1
preferred stock to entities associated with the Walden Media & Information
Technology Fund at a purchase price of $4.22 per share. On December 20, 1999,
we sold 117,800 shares of Series C preferred stock to entities associated with
the Walden Media & Information Technology Fund at a purchase price of
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$10.00 per share. Mr. LeFurgy is a member of Walden Media, L.L.C., the general
partner of the Walden Media & Information Technology Fund and its affiliated
entities.
Kenneth Keller. On March 15, 1999, we sold 150,000 shares of Series A
preferred stock to Kenneth Keller, our Vice President, Engineering, at a
purchase price of $0.2333 per share. On December 20, 1999, we sold 14,500
shares of Series C preferred stock to Mr. Keller at a purchase price of $10.00
per share.
Trusts Associated with James Tolonen. On October 22, 1999, we sold 120,000
and 30,000 shares of Series B-1 preferred stock to the James R. Tolonen and
Ginger Tolonen Family Trust dated 9/26/96 and the James R. Tolonen Grantor
Retained Annuity Trust, respectively, at a purchase price of $4.22 per share.
Mr. Tolonen, our Chief Financial Officer and Chief Operating Officer and one of
our directors, is a trustee of both these trusts.
Indemnification
We have entered into an indemnification agreement with Richard LeFurgy. Under
that agreement, we will indemnify Mr. LeFurgy for liabilities incurred by him
in connection with the possible recruitment of employees or consultants from a
particular company.
We intend to enter into indemnification agreements with each of our executive
officers and directors. Those indemnification agreements will require us to
indemnify our officers and directors to the fullest extent permitted by
Delaware law. See "Description of Capital Stock--Indemnification of Directors
and Executive Officers and Limitation of Liability."
Registration Rights
Holders of our preferred stock are entitled to registration rights with
respect to the shares of common stock that they will hold following this
offering. See "Description of Capital Stock--Registration Rights."
Loans to and other Arrangements with Officers and Directors
Loan to Christopher Anderson. We loaned $2.0 million to Christopher
Anderson, our Chairman of the Board and one of our directors, in connection
with his purchase of shares of our Series A preferred stock.
Loan to Mark Jung. We loaned $92,300 to Mark Jung, our President and Chief
Executive Officer, in connection with his purchase of our common stock.
Loan to James Tolonen. We loaned $600,000 to James Tolonen, our Chief
Financial Officer, Chief Operating Officer and director, in connection with his
purchase of 350,000 shares of our common stock.
Loan to Trust Associated with James Tolonen. We loaned $333,000 to the James
R. Tolonen and Ginger Tolonen Family Trust dated 9/26/96 in connection with its
purchase of our Series B-1 preferred stock.
Please refer to "Management--Compensation Committee Interlocks and Insider
Participation" for a description of the loans to Messrs. Anderson, Jung and
Tolonen and the trust associated with Mr. Tolonen, and "Management--Employment
Arrangements, Termination of Employment Arrangements and Change of Control
Arrangements" for a description of stock option grants to officers and
directors.
We believe that all transactions between us and our officers, directors,
principal stockholders and other affiliates have been and will be on terms no
less favorable to us than could be obtained from unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The following table presents information as to the beneficial ownership of
our common stock as of December 31, 1999 and as adjusted to reflect the sale of
the common stock in this offering by
. each stockholder known by us to be the beneficial owner of more than 5%
of our common stock;
. each of our directors;
. each executive officer listed in the Summary Compensation Table above;
and
. all directors and executive officers as a group.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
------------------------
Number of Shares Prior to After the
Name of Beneficial Owner Beneficially Owned Offering Offering
------------------------ ------------------ ---------- ----------
<S> <C> <C> <C>
Christopher Anderson(1)................................. 15,321,509 49.2% 41.0%
Mark A. Jung(2)......................................... 3,027,032 9.7 8.1
Imagine Media, Inc.(3)
150 North Hill Drive
Brisbane, California 94005............................. 1,764,366 5.7 4.7
Michael Orsak(4)
Worldview Technology Partners entities
435 Tasso Street, Suite 120
Palo Alto, California 94301............................ 1,688,984 5.4 4.5
Weiss Peck & Greer Venture Partners entities(5)
555 California Street, Suite 3130
San Francisco, California 94104
Attn: Christopher J. Schaepe........................... 1,688,983 5.4 4.5
Richard A. LeFurgy(6)
Walden Media & Information Technology Fund, L.P.
entities
750 Battery St., 7th Floor
San Francisco, California 94111........................ 1,485,123 4.8 4.0
James R. Tolonen(7)..................................... 750,000 2.4 2.0
Kenneth H. Keller(8).................................... 614,500 2.0 1.6
Elizabeth G. Murphy(9).................................. 300,000 * *
Teresa M. Crummett(10).................................. 198,000 * *
Robert H. Reid(11)...................................... 150,000 * *
Janette S. Chock(12).................................... 147,500 * *
All 12 directors and executive officers as a group(13).. 23,682,648 75.6% 63.0%
</TABLE>
- --------
* Less than 1% of the outstanding shares of common stock.
(1) Based on information provided to us by Mr. Anderson and Imagine Media,
Inc. indicating that Mr. Anderson has sole voting and dispositive power
with respect to 13,557,143 shares and shares voting and dispositive power
with respect to 1,764,366 shares held by Imagine Media, Inc. described in
footnote 3. Mr. Anderson disclaims beneficial ownership with respect to
the shares held by Imagine Media, Inc.
(2) Includes 10,000 shares of common stock held by the Jung-Murdock Children's
Trust U/A 11/23/93, Susan Murdock TTEE. Mr. Jung disclaims beneficial
ownership with respect to the shares held by the Jung-Murdock Children's
Trust. Includes 1,401,098 shares of common stock subject to our repurchase
right within 60 days of December 31, 1999.
(3) Mr. Anderson, one of our directors, is the President and a director of
Imagine Media, Inc. Based on information provided to us by Mr. Anderson
and Imagine Media, Inc., Mr. Anderson shares voting and dispositive power
with respect to the shares held by Imagine Media, Inc. Mr. Anderson
disclaims beneficial ownership with respect to the shares held by Imagine
Media, Inc.
(4) Represents 1,252,425 shares held by Worldview Technology Partners II,
L.P., 383,395 shares held by Worldview Technology International II, L.P.
and 53,164 shares held by Worldview Strategic Partners II, L.P. Mr. Orsak
is a general partner of the Worldview Technology Partner entities. Mr.
Orsak disclaims beneficial ownership of shares held by the Worldview
Technology Partner entities except to the extent of his pecuniary interest
in this venture capital firm.
(5) Represents 1,163,600 shares held by Weiss, Peck & Greer Venture Associates
V, L.L.C., 11,829 shares held by Weiss, Peck & Greer Venture Associates V-
A, L.L.C., 253,687 shares held by Weiss, Peck & Greer Venture Associates V
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Cayman, L.P. and 259,867 shares held by Discovery Ventures III, LLC.
Christopher J. Schaepe is a managing member of WPG VC Fund Adviser II,
L.L.C., the fund investment advisory member of Weiss, Peck & Greer Venture
Associates V, L.L.C. and Weiss, Peck & Greer Venture Associates V-A,
L.L.C., and the fund investment advisory partner of Weiss, Peck & Greer
Venture Associates V Cayman, L.P. Mr. Schaepe shares voting and
dispositive power with respect to the shares held by Weiss, Peck & Greer
Venture Associates V, L.L.C., Weiss, Peck & Greer Venture Associates V-A,
L.L.C. and Weiss, Peck & Greer Venture Associates V Cayman, L.P. Based on
information provided to us by Weiss, Peck & Greer, L.L.C., Weiss, Peck &
Greer, L.L.C. is a member of Discovery III Management, LLC, the fund
investment advisory member of Discovery Ventures III, LLC, and is a class
A non-managing member of WPG VC Fund Adviser II, L.L.C. Weiss, Peck &
Greer, L.L.C. and Mr. Schaepe disclaim beneficial ownership with respect
to the shares held by Weiss, Peck & Greer Venture Associates V, L.L.C.,
Weiss, Peck & Greer Venture Associates V-A, L.L.C., Weiss, Peck & Greer
Venture Associates V Cayman, L.P. and Discovery Ventures III, LLC, except
to the extent of their pecuniary interests in these entities.
(6) Includes 26,007 shares held by Infotech Ventures Ltd., 26,007 shares held
by Walden EDB Partners, L.P., 11,848 shares held by Walden Japan Partners,
L.P. and 1,274,316 shares held by Walden Media & Information Technology
Fund, L.P. Mr. LeFurgy, one of our directors, is a member of Walden Media,
L.L.C., the general partner of Walden Media & Information Technology Fund,
L.P., and an affiliate of Walden Japan Partners, L.P., Walden EDB
Partners, L.P. and Infotech Partners Ltd. Mr. LeFurgy disclaims beneficial
ownership of the shares held by Walden Media & Technology Fund, L.P.,
Walden Japan Partners, L.P., Walden EDB Partners, L.P. and Infotech
Partners Ltd., except to the extent of his proportionate ownership
therein. Includes 85,500 shares of common stock subject to our repurchase
right within 60 days of December 31, 1999.
(7) Includes 120,000 shares of common stock held by the James R. Tolonen and
Ginger Tolonen Family Trust dated 9/26/96, Ginger and James Tolonen
trustees, and 30,000 shares of common stock held by James R. Tolonen,
trustee of the James R. Tolonen 1999 Grantor Retained Annuity Trust.
Includes 550,000 shares of common stock subject to our repurchase right
within 60 days of December 31, 1999, 200,000 shares of which are issuable
upon exercise of options exercisable within 60 days of December 31, 1999.
(8) Includes 323,750 shares of common stock subject to our repurchase right
within 60 days of December 31, 1999.
(9) Includes 300,000 shares of common stock subject to our repurchase right
within 60 days of December 31, 1999.
(10) Includes 144,375 shares of common stock subject to our repurchase right
within 60 days of December 31, 1999.
(11) Includes 115,625 shares of common stock subject to our repurchase right
within 60 days of December 31, 1999.
(12) Includes 119,656 shares of common stock subject to our repurchase right
within 60 days of December 31, 1999.
(13) Includes 3,040,004 shares of common stock subject to our repurchase right
within 60 days of December 31, 1999 and 200,000 shares of common stock
issuable upon exercise of options exercisable within 60 days of
December 31, 1999.
The percentage of shares beneficially owned prior to the offering is based on
31,145,442 shares of common stock outstanding as of December 31, 1999 after
giving effect to the issuance of 150,000 shares of Series C preferred stock in
January 2000, assuming that all outstanding preferred stock has been converted
into common stock. The percentage of shares beneficially owned after this
offering is based on a denominator that includes the 6,250,000 shares of common
stock being offered but does not include the shares which are subject to the
underwriters' over-allotment option. Percentage ownership figures after the
offering do not include shares that may be purchased by each person in this
offering.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Unless indicated above, the persons and entities named
in the table have sole voting and sole investment power with respect to all
shares beneficially owned, subject to community property laws where applicable.
Shares of common stock subject to options and warrants that are currently
exercisable or exercisable within 60 days of December 31, 1999 are deemed to be
outstanding and to be beneficially owned by the person holding the options or
warrants for the purpose of computing the percentage ownership of that person
but are not treated as outstanding for the purpose of computing the percentage
ownership of any other person. Unless indicated above, the address for each
listed stockholder is c/o Snowball.com, Inc., 250 Executive Park Boulevard,
Suite 4000, San Francisco, California 94134.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, our authorized capital
stock will consist of 100,000,000 shares of common stock, $0.001 par value per
share, and 5,000,000 shares of preferred stock, $0.001 par value per share. As
of December 31, 1999, and assuming the conversion of all outstanding preferred
stock into common stock upon the closing of this offering, there were
outstanding 30,995,442 shares of common stock held of record by approximately
110 stockholders, options to purchase 2,358,368 shares of common stock and
warrants to purchase 322,688 shares of common stock.
We are incorporated in the state of Delaware. Following the closing of this
offering, we intend to amend and restate our certificate of incorporation. Our
amended and restated certificate of incorporation, restated bylaws and
investors' rights agreement, described below, are included as exhibits to the
registration statement of which this prospectus forms a part.
Common Stock
Status. 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.
Dividend Rights. Subject to preferences that may apply to shares of preferred
stock outstanding at the time, the holders of outstanding shares of common
stock are entitled to receive dividends out of assets legally available at the
times and in the amounts that our board may from time to time determine.
Voting Rights. Each common stockholder is entitled to one vote for each share
of common stock held on all matters submitted to a vote of stockholders.
Cumulative voting for the election of directors is not provided for in our
certificate of incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election.
No preemptive or similar rights. The common stock is not entitled to
preemptive rights and is not subject to conversion or redemption.
Right to receive liquidation distributions. Upon a liquidation, dissolution
or winding-up of Snowball, the assets legally available for distribution to
stockholders would be distributable ratably among the holders of the common
stock and any participating preferred stock outstanding at that time after
payment of liquidation preferences, if any, on any outstanding preferred stock
and payment of other claims of creditors.
Preferred Stock
Upon the closing of this offering, the outstanding shares of preferred stock,
including 150,000 shares of Series C preferred stock issued in January 2000,
will be converted into 25,559,895 shares of common stock. See note 8 of our
Notes to Consolidated Financial Statements for a description of this preferred
stock.
Following this offering, we will be authorized, subject to the limits imposed
by Delaware law, to issue preferred stock in one or more series, to establish
from time to time the number of shares to be included in each series and to fix
the rights, preferences and privileges of the shares of each wholly unissued
series and any of its qualifications, limitations or restrictions. The board
can also increase or decrease the number of shares of any series, but not below
the number of shares of that series then outstanding, without any further vote
or action by the stockholders.
The board may authorize the issuance of preferred stock with voting,
dividend, liquidation or conversion rights that could adversely affect the
voting power or other rights of the holders of the
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<PAGE>
common stock. 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 Snowball and might adversely affect the market price of
the common stock and the voting and other rights of the holders of common
stock. We have no current plan to issue any shares of preferred stock.
Warrants
As of December 31, 1999, we had outstanding the following warrants to
purchase our stock:
<TABLE>
<CAPTION>
Total number
of shares Exercise
subject to price
Type of stock Warrants per share Expiration date
-------------------------- ------------ --------- -------------------------
<C> <C> <C> <S>
Series B-1 preferred stock 154,804 $8.44 November 8, 2002
Series B-1 preferred stock 115,192 8.44 180 days following this
offering
Series B-1 preferred stock 31,595 3.165 Upon consummation of this
offering
Series B-1 preferred stock 21,097 7.11 Upon consummation of this
offering
</TABLE>
After the closing of this offering, the warrants that survive the
consummation of the offering will become exercisable for a like number of
shares of common stock.
Registration Rights
The holders of approximately 25,559,895 shares of common stock will have the
right to require us to register their shares with the Securities and Exchange
Commission so that those shares may be publicly resold or to include their
shares in any registration statement we file.
Right to demand registration
At any time more than six months after this offering, these stockholders can
request that we file a registration statement so they can publicly sell their
shares. The underwriters of any underwritten offering will have the right to
limit the number of shares to be so included in a registration statement.
Who may make a demand. The holders of at least 30% of the shares with
registration rights have the right to demand that we file a registration
statement on a form other than Form S-3 covering at least a majority of the
shares with registration rights (or a lesser amount if the offering price
exceeds $10,000,000 (net of underwriting discounts and commissions)). If we are
eligible to file a registration statement on Form S-3, the holders with the
registration rights above also have the right to demand that we file a
registration statement on Form S-3, so long as the amount of securities to be
sold in that registration exceeds $10,000,000.
Number of times holders can make demands. We will not be required to file
more than two registration statements on a form other than Form S-3. If we are
eligible to file a registration statement on Form S-3, we are not required to
file more than two registration statements during any 12-month period.
Postponement. We may postpone the filing of a registration statement for up
to 90 days once in a 12-month period if we determine that the filing would be
seriously detrimental to us or our stockholders.
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<PAGE>
Piggyback registration rights
If we register any securities for public sale, the stockholders with
registration rights above, as well as the holders of any shares issued upon
exercise of outstanding warrants to purchase 269,996 shares of our Series B-1
preferred stock, will have the right to include their shares in the
registration statement. The underwriters of any underwritten offering will have
the right to limit the number of shares to be so included in a registration
statement.
Expenses of registration
We will pay all of the expenses (other than underwriting discounts and
commissions) relating to any demand or piggyback registration. However, we will
not pay for any expenses of any demand registration if the request is
subsequently withdrawn by the holders of a majority of the shares having
registration rights, subject to very limited exceptions.
Expiration of registration rights
The registration rights described above will expire five years after this
offering is completed. The registration rights will terminate earlier with
respect to a particular stockholder if that holder can resell all of its
securities in a 90-day period under Rule 144 of the Securities Act.
Anti-Takeover Provisions of our Certificate of Incorporation, Bylaws and
Delaware Law
The provisions of Delaware law, our amended and restated certificate of
incorporation to be filed upon the closing of this offering, and our bylaws, as
amended, described below may have the effect of delaying, deferring or
discouraging another person from acquiring control of our company.
Delaware Law
We will be subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents certain
Delaware corporations from engaging, under limited circumstances, in a
"business combination," with an "interested stockholder" for a period of three
years following the date the person became an interested stockholder unless:
. the board approves either the business combination or the transaction
that resulted in the stockholder becoming an interested director prior
to the date the "interested stockholder" attained that status;
. upon the closing 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 the 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 "business combination" generally includes a merger, asset or stock sale or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to
determination of interested stockholder status did own, 15% or more of a
corporation's voting stock.
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 of incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
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<PAGE>
However, we have not "opted out" of this provision. Section 203 could prohibit
or delay mergers or other takeover or change-in-control attempts and,
accordingly, might discourage attempts to acquire us.
Charter and Bylaw Provisions
Our amended and restated certificate of incorporation to be filed upon the
closing of this offering will provide for a classified board divided into three
classes. The directors in each class will serve for a three-year term, with our
stockholders electing one class each year. The affirmative vote of at least 66
2/3% of all classes of voting stock is required to remove any director. For
more information on the classification of our board, please see "Management--
Board of Directors and Committees." This system of electing and removing
directors may tend to discourage a third party from making a tender offer or
otherwise attempting to obtain control of us, because it generally makes it
more difficult for stockholders to replace a majority of the directors.
Our bylaws, as amended, provide that any action required or permitted to be
taken by our stockholders at an annual meeting or a special meeting of the
stockholders may be taken only if it is properly brought before the meeting.
Our stockholders may not take any action by written consent. Our certificate of
incorporation, as we intend to amend it, provides that our board of directors
may issue preferred stock with voting or other rights without stockholder
action. Our bylaws and amended and restated certificate of incorporation to be
filed upon the closing of this offering, provide that special meetings of the
stockholders may only be called by our board, the chairman of our board, our
chief executive officer or our president.
Our bylaws, as amended, provide that we will 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 takeover defense measures. These provisions may have the effect of
preventing changes in our management.
Indemnification of Directors and Executive Officers and Limitation of Liability
Our amended and restated certificate of incorporation to be filed upon the
closing of this offering, limits the liability of directors to the fullest
extent permitted by Delaware law. In addition, our certificate of incorporation
and bylaws provide that we will indemnify our directors and officers to the
fullest extent permitted by Delaware law. We intend to enter into separate
indemnification agreements with our directors and executive officers that
provide them indemnification protection in the event the certificate of
incorporation is subsequently amended.
Our amended and restated certificate of incorporation to be filed upon the
closing of this offering and bylaws provide that we will indemnify our
directors and executive officers against losses that they may incur in
investigations and legal proceedings resulting from their services to us, which
may include services in connection with takeover defense measures. These
provisions may have the effect of preventing changes in our management.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C. The address of our transfer agent and registrar is
85 Challenger Road, Ridgefield Park, New Jersey 07660.
Listing
We have applied for our common stock to be quoted on the Nasdaq National
Market under the trading symbol "SNOW".
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<PAGE>
SHARES AVAILABLE FOR FUTURE SALE
Sales of substantial amounts of our common stock, including shares issued
upon exercise of outstanding warrants or options, in the public market after
this offering could adversely affect market prices prevailing from time to time
and could impair our ability to raise capital through the sale of our equity
securities. As described below, no shares currently outstanding will be
available for sale immediately after this offering due to limited contractual
restrictions on resale. Sales of substantial amounts of our common stock in the
public market after these restrictions lapse or are released could adversely
affect the prevailing market price and our ability to raise equity capital in
the future.
Upon completion of this offering, based on shares outstanding as of December
31, 1999 and giving effect to the issuance of 150,000 shares of Series C
preferred stock in January 2000, we will have outstanding 37,395,442 shares of
common stock, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options or warrants. Of these shares, the shares
sold in this offering plus any shares issued upon exercise of the underwriters'
over-allotment option will be freely tradable without restriction under the
Securities Act unless purchased by our "affiliates," as that term is defined in
Rule 144 under the Securities Act. In general, affiliates include officers,
directors and 10% stockholders. The remaining shares will become eligible for
public sale as follows:
<TABLE>
<CAPTION>
Number of
Shares Date
--------- ----
<C> <S>
21,182,467 After 180 days from the date of this prospectus, the 180 day lock-
up terminates and these shares are saleable under Rule 144 (subject
in some cases to volume limitations) or Rule 144(k)
1,654,464 After 180 days from the date of this prospectus, the 180 day lock-
up is released and these shares are saleable under Rule 701
(subject in some cases to a right of repurchase)
8,308,511 After 180 days from the date of this prospectus, restricted
securities that are held for less than one year and are not yet
saleable under Rule 144
</TABLE>
Lock-Up Agreements
All of our officers and directors and substantially all of our stockholders
have signed lock-up agreements under which they have agreed not to sell,
dispose of, loan, pledge or grant any rights with respect to any shares of
common stock or any securities convertible into or exercisable or exchangeable
for shares of common stock without the prior written consent of Goldman, Sachs
& Co. for a period of 180 days after the date of this prospectus.
Goldman, Sachs & Co. may choose to release some of these shares from these
restrictions prior to the expiration of this 180-day period, though it has no
current intention to do so.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately 373,954 shares immediately after this offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
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<PAGE>
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about us.
Rule 144(k)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, is entitled to sell those
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, these shares may be sold immediately upon the completion of this
offering.
Rule 701
Any of our employees, officers, directors or consultants who purchased his or
her shares under a written compensatory plan or contract may be entitled to
sell his or her shares in reliance on Rule 701. Rule 701 permits affiliates to
sell their Rule 701 shares under Rule 144 without complying with the holding
period requirements of Rule 144. Rule 701 further provides that non-affiliates
may sell these shares in reliance on Rule 144 without having to comply with the
holding period, public information, volume limitation or notice provisions of
Rule 144. All holders of Rule 701 shares are required to wait until 90 days
after the date of this prospectus before selling those shares. However, all
shares issued under Rule 701 are subject to lock-up agreements and will only
become eligible for sale when the 180-day lock-up agreements expire.
Registration Rights
Upon completion of this offering and assuming all warrants to purchase shares
of Series B-1 preferred stock are exercised, the holders of 25,882,583 shares
of common stock, or their transferees, will be entitled to certain rights with
respect to the registration of those shares under the Securities Act. For a
discussion of these rights please see "Description of Capital Stock--
Registration Rights." After these shares are registered, they will be freely
tradable without restriction under the Securities Act.
Stock Options
As of December 31, 1999, options to purchase 2,358,368 shares of common stock
were issued and outstanding. Upon the expiration of the lock-up agreements
described above, at least 941,585 shares of common stock will be subject to
vested options, based on options outstanding as of December 31, 1999.
Immediately after this offering, we intend to file a registration statement
under the Securities Act covering shares of common stock reserved for issuance
under our stock option and employee stock purchase plans. This registration
statement is expected to be filed and become effective as soon as practicable
after the effective date of this offering. Accordingly, shares registered under
this registration statement will, subject to vesting provisions and Rule 144
volume limitation manner of sale, notice and public information requirements
applicable to our affiliates, be available for sale in the open market
immediately after the 180-day lock-up agreements expire.
Warrants
As of December 31, 1999, we had outstanding warrants to purchase 322,688
shares of common stock. When these warrants are exercised and the exercise
price is paid in cash, the shares must be held for one year before they can be
sold under Rule 144. However, each of these warrants contains "net exercise
provisions." These provisions allow a holder to exercise the warrant for a
lesser number of shares of common stock in lieu of paying cash. The number of
shares that would be issued in this case would be based upon the market price
of the common stock at the time of the net exercise. If the warrant had been
held for at least one year, the shares of common stock could be publicly sold
under Rule 144. After the lock-up agreements described above expire, these
warrants will have expired or have been exercised.
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<PAGE>
UNDERWRITING
Snowball and the underwriters for the offering named below have entered into
an underwriting agreement with respect to the shares being offered. Subject to
certain conditions set forth in the underwriting agreement, each underwriter
has severally agreed to purchase the number of shares indicated in the
following table. Goldman, Sachs & Co., Chase Securities, Inc. and FleetBoston
Robertson Stephens Inc. are the representatives of the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co. ..............................................
Chase Securities, Inc. ............................................
FleetBoston Robertson Stephens Inc.................................
----
Total............................................................
====
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 937,500
shares from Snowball to cover such sales. They may exercise that option for 30
days. If any shares are purchased under this option, the underwriters will
severally purchase shares in approximately the same proportion as set forth in
the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by Snowball. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by Snowball
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............................................. $ $
Total................................................. $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters
to certain other brokers or dealers at a discount of up to $ per share
from the initial public offering price. If all of the shares are not sold at
the initial public offering price, the representatives may change the offering
price and the other selling terms.
Snowball and its officers, directors and substantially all of its
securityholders have agreed with the underwriters not to dispose of or hedge
any of their common stock or securities convertible into or exchangeable for
shares of common stock during the period from the date of this prospectus
continuing through the date 180 days after the date of this prospectus, except
with the prior written consent of Goldman, Sachs & Co. See "Shares Available
for Future Sale" for a discussion of certain transfer restrictions.
69
<PAGE>
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among Snowball and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be Snowball's historical performance, estimates of Snowball's
business potential and earnings prospects, an assessment of Snowball's
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.
We intend to apply to have our common stock listed on the Nasdaq National
Market under the symbol "SNOW".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of such underwriter in stabilizing or short-sale covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
A prospectus in electronic format may be made available on the web sites
maintained by one or more underwriters. The underwriters may agree to allocate
a number of shares to underwriters for sale to their online brokerage account
holders. Internet distributions will be allocated by the lead managers to
underwriters that may make Internet distributions on the same basis as other
distributions.
The underwriters do not expect sales to discretionary accounts to exceed five
percent of the total number of shares offered.
At our request, the underwriters have reserved up to 312,500 shares of common
stock for sale at the initial public offering price to directors, officers,
friends and family members of employees, and other friends of Snowball, through
a directed share program. The number of shares of common stock available for
sale to the general public in the public offering will be reduced to the extent
these persons purchase these reserved shares. There can be no assurance that
any of the reserved shares will be so purchased. Any reserved shares not so
purchased will be offered by the underwriters to the general public on the same
basis as other shares offered hereby.
Snowball estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$ .
Snowball has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
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<PAGE>
LEGAL MATTERS
Fenwick & West LLP, Palo Alto, California, will pass upon the validity of the
issuance of the shares of common stock offered by this prospectus. Wilson
Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California,
will pass upon certain legal matters in connection with this offering for the
underwriters. An investment fund associated with Fenwick & West LLP owns 12,948
shares of our common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1998 and 1999, and for each of the three
years in the period ended December 31, 1999, as set forth in their report. We
have included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
J.W. Hunt and Company, LLP, independent auditors, have audited the financial
statements of Ameritrack, Inc. (a development stage company) at August 31, 1999
and for the period from the commencement of operations on or about August 14,
1998 through August 31, 1998, as set forth in their report. We have included
the financial statements of Ameritrack, Inc. (a development stage company) in
the prospectus and elsewhere in the registration statement in reliance on J.W.
Hunt and Company, LLP's report, given on their authority as experts in
accounting and auditing.
Hamilton & Associates, Inc., independent auditors, have audited the financial
statements of Extreme Interactive Media, Inc. as of December 31, 1998 and
September 30, 1999, and for the year ended December 31, 1998 and the nine
months ended September 30, 1999 as set forth in their report. We have included
the financial statements of Extreme Interactive Media, Inc. in the prospectus
and elsewhere in the registration statement in reliance on Hamilton &
Associates, Inc.'s report, given on their authority as experts in accounting
and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common
stock. This prospectus does not contain all of the information set forth in the
registration statement and the exhibits to the registration statement. For
further information with respect to us and our common stock, we refer you to
the registration statement and the exhibits filed as a part of the registration
statement. Statements contained in this prospectus concerning the contents of
any contract or any other document are not necessarily complete. If a contract
or document has been filed as an exhibit to the registration statement, we
refer you to the copy of the contract or document that has been filed. Each
statement in this prospectus relating to a contract or document filed as an
exhibit is qualified in all respects by the filed exhibit. The registration
statement, including exhibits, may be inspected without charge at the
Securities and Exchange Commission's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549, and copies of all or any part of it may be
obtained from that office after payment of fees prescribed by the Securities
and Exchange Commission. The public may obtain information on the operation of
the Public Reference Room by calling 1-800-732-0330. The Securities and
Exchange Commission maintains a web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission at
http://www.sec.gov.
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<PAGE>
Snowball.com, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Snowball.com, Inc. Consolidated Financial Statements: Page
<S> <C>
Report of Ernst & Young LLP, Independent Auditors...................... F-2
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Operations.................................. F-4
Consolidated Statement of Stockholders'/Division Equity................ F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements............................. F-7
Ameritrack, Inc. (a development stage company) Financial Statements:
Independent Auditors' Report........................................... F-24
Balance Sheet.......................................................... F-25
Statement of Income and Expense........................................ F-26
Statement of Changes in Stockholders' Equity........................... F-27
Statement of Cash Flows................................................ F-28
Notes to Financial Statements.......................................... F-29
Extreme Interactive Media, Inc. Financial Statements:
Independent Auditors' Report........................................... F-31
Balance Sheets......................................................... F-32
Statements of Operations and Accumulated Deficit....................... F-33
Statements of Cash Flows............................................... F-34
Notes to Financial Statements.......................................... F-35
Unaudited Pro Forma Condensed Combined Financial Information:
Unaudited Pro Forma Condensed Combined Financial Information........... F-37
Pro Forma Condensed Combined Statement of Operations................... F-38
Notes to the Unaudited Pro Forma Condensed Combined Financial
Information........................................................... F-39
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Snowball.com, Inc.
We have audited the accompanying consolidated balance sheets of Snowball.com,
Inc. and its predecessor division of Imagine Media, Inc. at December 31, 1998
and 1999, and the related consolidated statements of operations,
stockholders'/division equity, and cash flows for each of the three years in
the period 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 auditing standards generally
accepted in the United States. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Snowball.com, Inc. and its predecessor division of Imagine Media, Inc. at
December 31, 1998 and 1999, and the results of operations and cash flows of
Snowball.com, Inc. and its predecessor division of Imagine Media, Inc. for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Palo Alto, California
January 28, 2000
F-2
<PAGE>
Snowball.com, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Pro forma
Stockholders'
December 31, Equity at
----------------- December 31,
1998(1) 1999(2) 1999
------- -------- -------------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................... $ -- $ 25,489
Short-term investments....................... -- 8,000
Accounts receivable, less allowance of $99
and $528 at December 31, 1998 and 1999,
respectively................................ 920 2,560
Prepaid expenses and other current assets.... 148 2,235
------- --------
Total current assets....................... 1,068 38,284
Goodwill and intangible assets, net........... -- 3,355
Fixed assets, net............................. 93 4,368
Other assets.................................. -- 711
------- --------
Total assets............................... $ 1,161 $ 46,718
======= ========
Liabilities and stockholders'/division equity
Current liabilities:
Accounts payable............................. $ 301 $ 4,757
Accrued liabilities.......................... 50 3,081
Deferred revenue............................. 48 702
Notes payable................................ -- 250
Current portion of term loan ................ -- 150
Current equipment financing obligations...... -- 1,081
------- --------
Total current liabilities.................. 399 10,021
Long-term equipment financing obligations..... -- 2,036
Commitments
Stockholders'/division equity:
Convertible preferred stock, $0.001 par
value, issuable in series: no shares
authorized at December 31, 1998;
20,000,000 shares authorized at December
31, 1999, 18,066,269 shares issued and
outstanding (5,000,000 shares authorized,
no shares outstanding pro forma)............ -- 18 $ --
Common stock, $0.001 par value: no shares
authorized at December 31, 1998; 37,500,000
shares authorized at December 31, 1999,
5,585,547 shares issued and outstanding
(100,000,000 shares authorized and
30,995,442 shares issued and outstanding
pro forma).................................. -- 6 31
Net contribution from Imagine
Media/Additional paid-in capital............ 5,701 88,662 88,655
Notes receivable from stockholders........... -- (1,301) (1,301)
Deferred stock compensation.................. -- (10,868) (10,868)
Prepaid marketing and distribution rights.... -- (2,095) (2,095)
Accumulated/division deficit................. (4,939) (39,761) (39,761)
------- -------- --------
Total stockholders'/division equity........ 762 34,661 $ 34,661
------- -------- ========
Total liabilities and stockholders'/division
equity....................................... $ 1,161 $ 46,718
======= ========
</TABLE>
- --------
(1) Through December 31, 1998, our activities were included in the operations
of Imagine Media, Inc. Our financial statements for these periods have been
prepared on a carve-out basis.
(2) From January 1999, we have operated as a separate legal entity.
See accompanying notes.
F-3
<PAGE>
Snowball.com, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1997(1) 1998(1) 1999(2)
------- ------- ---------
<S> <C> <C> <C>
Revenue.......................................... $ 927 $ 3,256 $ 6,674
Cost of revenue.................................. 171 1,322 4,316
------- ------- ---------
Gross margin..................................... 756 1,934 2,358
Operating expenses:
Production and content......................... 628 1,599 6,610
Engineering and development.................... 65 329 5,084
Sales and marketing............................ 836 2,592 20,393
General and administrative..................... 506 1,074 3,486
Stock-based compensation(3).................... -- -- 1,521
Amortization of goodwill and intangible
assets........................................ -- -- 471
------- ------- ---------
Total operating expenses..................... 2,035 5,594 37,565
------- ------- ---------
Loss from operations............................. (1,279) (3,660) (35,207)
Interest income, net............................. -- -- 265
Other income..................................... -- -- 120
------- ------- ---------
Net loss......................................... $(1,279) $(3,660) $ (34,822)
======= ======= =========
Basic and diluted net loss per share............. $ (186.69)
=========
Shares used in per share calculation............. 187
=========
Pro forma basic and diluted net loss per share
(unaudited)..................................... $ (1.93)
=========
Shares used in pro forma per share calculation
(unaudited)..................................... 18,022
=========
</TABLE>
- --------
(1) Through December 31, 1998, our activities were included in the operations
of Imagine Media, Inc. Our financial statements for these periods have been
prepared on a carve-out basis.
(2)From January 1999, we have operated as a separate legal entity.
(3)Stock-based compensation relates to the following in 1999:
<TABLE>
<S> <C>
Cost of revenue......................................................... $ 7
Production and content.................................................. 407
Engineering and development............................................. 263
Sales and marketing..................................................... 777
General and administrative.............................................. 67
------
Total................................................................. $1,521
======
</TABLE>
See accompanying notes.
F-4
<PAGE>
Snowball.com, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS'/DIVISION EQUITY
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Prepaid
Convertible Net Contribution Notes Marketing
Preferred Stock Common Stock From Imagine Receivable Deferred and Accumulated/
----------------- ---------------- Media/Additional From Stock Distribution Division
Shares Amount Shares Amount Paid-In Capital Stockholders Compensation Rights Deficit
---------- ------ --------- ------ ---------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1,
1997............ -- $ -- -- $ -- $ -- $ -- $ -- $ -- $ --
Net and
comprehensive
loss for the
period.......... -- -- -- -- -- -- -- -- (1,279)
Contribution
from Imagine
Media........... -- -- -- -- 1,781 -- -- -- --
--------------------------------------------------------------------------------------------------------
Balance at
December 31,
1997............ -- -- -- -- 1,781 -- -- -- (1,279)
Net and
comprehensive
loss for the
period.......... -- -- -- -- -- -- -- -- (3,660)
Contribution
from Imagine
Media........... -- -- -- -- 3,920 -- -- -- --
--------------------------------------------------------------------------------------------------------
Balance at
December 31,
1998............ -- -- -- -- 5,701 -- -- -- (4,939)
Issuance of
common stock to
founders and
employees for
cash and notes
receivable...... -- -- 3,812,297 4 377 (302) -- -- --
Issuance of
Series A
preferred stock
at $0.35 per
share for cash,
notes receivable
and assets
transferred from
Imagine Media... 9,990,111 10 -- -- 3,257 (2,000) -- -- --
Issuance of
Series B and B-1
preferred stock
for cash and
assets
transferred from
Imagine Media at
$6.33 per
share........... 4,028,437 4 -- -- 23,746 -- -- -- --
Issuance of
Series B-1
preferred stock
at $6.33 per
share to
strategic
partner and
officer for cash
and marketing
rights.......... 668,721 1 -- -- 6,571 -- -- (2,339) --
Issuance of
common stock to
employees upon
exercise of
stock options,
net of
repurchases..... -- -- 1,668,250 2 1,107 (1,044) -- -- --
Issuance of
warrants to
purchase Series
B-1 preferred
stock in
connection with
lease financing
and term loan... -- -- -- -- 948 -- -- -- --
Issuance of
Series C
preferred stock
at $10.00 per
share for cash
and conversion
of $3.0 million
term loan....... 3,379,000 3 -- -- 33,786 -- -- -- --
Payments
received on
promissory
notes........... -- -- -- -- -- 2,045 -- -- --
Issuance of
common stock in
connection with
Ameritrack and
Extreme
Interactive
Media
acquisitions.... -- -- 105,000 -- 780 -- -- -- --
Deferred
compensation.... -- -- -- -- 12,389 -- (12,389) -- --
Amortization of
deferred
compensation and
prepaid
marketing and
distribution
rights.......... -- -- -- -- -- -- 1,521 244 --
Net and
comprehensive
loss for the
period.......... -- -- -- -- -- -- -- -- (34,822)
--------------------------------------------------------------------------------------------------------
Balance at
December 31,
1999............ 18,066,269 $ 18 5,585,547 $ 6 $88,662 $(1,301) $(10,868) $(2,095) $(39,761)
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
<CAPTION>
Total
Stockholders'/
Division
Equity
--------------
<S> <C>
Balance at
January 1,
1997............ $ --
Net and
comprehensive
loss for the
period.......... (1,279)
Contribution
from Imagine
Media........... 1,781
--------------------------------------------------------------------------------------------------------
Balance at
December 31,
1997............ 502
Net and
comprehensive
loss for the
period.......... (3,660)
Contribution
from Imagine
Media........... 3,920
--------------------------------------------------------------------------------------------------------
Balance at
December 31,
1998............ 762
Issuance of
common stock to
founders and
employees for
cash and notes
receivable...... 79
Issuance of
Series A
preferred stock
at $0.35 per
share for cash,
notes receivable
and assets
transferred from
Imagine Media... 1,267
Issuance of
Series B and B-1
preferred stock
for cash and
assets
transferred from
Imagine Media at
$6.33 per
share........... 23,750
Issuance of
Series B-1
preferred stock
at $6.33 per
share to
strategic
partner and
officer for cash
and marketing
rights.......... 4,233
Issuance of
common stock to
employees upon
exercise of
stock options,
net of
repurchases..... 65
Issuance of
warrants to
purchase Series
B-1 preferred
stock in
connection with
lease financing
and term loan... 948
Issuance of
Series C
preferred stock
at $10.00 per
share for cash
and conversion
of $3.0 million
term loan....... 33,789
Payments
received on
promissory
notes........... 2,045
Issuance of
common stock in
connection with
Ameritrack and
Extreme
Interactive
Media
acquisitions.... 780
Deferred
compensation.... --
Amortization of
deferred
compensation and
prepaid
marketing and
distribution
rights.......... 1,765
Net and
comprehensive
loss for the
period.......... (34,822)
--------------------------------------------------------------------------------------------------------
Balance at
December 31,
1999............ $ 34,661
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
Snowball.com, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1997(1) 1998(1) 1999(2)
------- ------- --------
<S> <C> <C> <C>
Operating activities
Net loss.......................................... $(1,279) $(3,660) $(34,822)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................... 20 40 1,769
Stock-based compensation......................... -- -- 1,521
Other noncash expenses........................... -- -- 948
Changes in assets and liabilities:
Accounts receivable............................. (653) (272) (1,640)
Prepaid expenses and other assets............... (82) (61) (2,798)
Accounts payable and accrued liabilities........ 250 102 7,487
Deferred revenue................................ 11 37 654
------- ------- --------
Net cash used in operating activities.......... (1,733) (3,814) (26,881)
------- ------- --------
Investing activities
Purchases of short-term investments............... -- -- (8,000)
Purchases of intangible assets.................... -- -- (2,550)
Purchases of fixed assets......................... (48) (106) (5,575)
------- ------- --------
Net cash used in investing activities.......... (48) (106) (16,125)
------- ------- --------
Financing activities
Proceeds from equipment financing obligations..... -- -- 3,117
Proceeds from issuance of common and preferred
stock............................................ -- -- 62,228
Proceeds from borrowings under term loan.......... -- -- 15,150
Payment of borrowings under term loan............. -- -- (12,000)
Contributions from Imagine Media.................. 1,781 3,920 --
------- ------- --------
Net cash provided by financing activities...... 1,781 3,920 68,495
------- ------- --------
Net increase in cash and cash equivalents......... -- -- 25,489
Cash and cash equivalents at beginning of
period........................................... -- -- --
------- ------- --------
Cash and cash equivalents at end of period........ $ -- $ -- $ 25,489
======= ======= ========
Schedule of noncash investing and financing
activities
Conversion of term loan debt to Series C
preferred stock.................................. $ -- $ -- $ 3,000
======= ======= ========
Common and preferred stock issued for goodwill
and intangible assets and prepaid marketing and
distribution rights.............................. $ -- $ -- $ 3,119
======= ======= ========
Common stock issued for notes receivable.......... $ -- $ -- $ 3,346
======= ======= ========
Deferred stock compensation ...................... $ -- $ -- $ 12,389
======= ======= ========
</TABLE>
- --------
(1) Through December 31, 1998, our activities were included in the operations
of Imagine Media, Inc. Our financial statements for these periods have been
prepared on a carve-out basis.
(2) From January 1999, we have operated as a separate legal entity.
See accompanying notes.
F-6
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Company and Summary of Significant Accounting Policies
Description of Company
Snowball.com, Inc. ("Snowball") was incorporated as Affiliation, Inc. in the
state of Delaware on January 6, 1999, and commenced operations as a separate
legal entity at that time. From its inception in January 1997 through January
5, 1999, Snowball operated as a division of Imagine Media, Inc. ("Imagine
Media"). Snowball is an Internet media company that operates a network of
destination web sites providing content, community and commerce to the Internet
generation, or Generation i. Snowball views Generation i as individuals between
the ages of 13 and 30 who consider the Internet to be an integral part of their
daily lives. Snowball serves the members of this community by providing them
with opinionated, current content, relevant services such as email and instant
messaging, a forum for interacting with one another and carefully selected
merchandise within its online store. Snowball provides its advertisers with
targeted access to Generation i and supplies its content partners with an
integrated package of marketing services and audience-development
opportunities.
Snowball has sustained net losses and negative cash flows from operations
since inception. Snowball's ability to meet obligations in the ordinary course
of business is dependent upon its ability to establish profitable operations
and raise additional financing through public or private equity financings,
collaborative or other arrangements with corporate sources, or other sources of
financing. In the year ended December 31, 1999, Snowball has received financing
of approximately $65 million through the issuance of common stock and Series A,
B1 and C convertible preferred stock (see Notes 6 and 7). Management believes
that these funds will be sufficient to enable Snowball to meet planned
expenditures through at least December 31, 2000. If anticipated operating
results are not achieved, management intends to delay or reduce expenditures so
as not to require additional financial resources, if these resources are not
available on terms acceptable to Snowball.
The divisional statements of operations for each of the two years in the
period ended December 31, 1998 include all revenue and expenses directly
attributable to Snowball, including a corporate allocation of the costs of
facilities, salaries, and employee benefits based on relative headcount.
Additionally, incremental corporate administration, finance, and management
costs have been allocated to Snowball (see Note 4).
All of the allocations reflected in 1997 and 1998 in the financial statements
are based on assumptions that management believes are reasonable under the
circumstances. However, these allocations and estimates are not necessarily
indicative of the costs that would have resulted if Snowball had been operated
on a stand-alone basis in 1997 and 1998. From incorporation on January 6, 1999
through September 30, 1999, there was a service and support agreement in place
between Snowball and Imagine Media which specified the terms of certain
services to be provided by Imagine Media. Under that agreement, Imagine Media
provided certain management, personnel and technology and information services
support and rental space in return for cash payments based upon divisional
allocations and the actual costs of providing such services. The agreement
terminated on October 1, 1999 and Snowball is currently discussing its renewal.
Principles of Consolidation
The consolidated financial statements include the accounts of Snowball and
its wholly-owned subsidiaries. All significant inter-company balances and
transactions have been eliminated.
F-7
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Basis of Presentation
The accompanying financial statements include the operations of Snowball as
part of Imagine Media (on a carved-out basis as discussed below) from its
inception as a division of Imagine Media in January 1997 through December 31,
1998 (the "divisional statements") and as a separate legal entity from its
incorporation on January 6, 1999. The balance sheet at December 31, 1998
represents the assets, liabilities, and divisional equity of Snowball as a part
of Imagine Media and at December 31, 1999, represents the balance sheet of
Snowball as a separate legal entity. The divisional financial statements have
been derived from the historical books and records of Imagine Media. The
balance sheet at December 31, 1998 includes all assets and liabilities
specifically identifiable and directly attributable to Snowball, which are
derived from historical cost information of Imagine Media. Imagine Media's
corporate accounting systems were not designed to track cash receipts and
payments and liabilities on a division-specific basis.
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 disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reported period. Actual results
could differ materially from those estimates.
Certain Risks and Concentrations
Snowball has a limited operating history and its prospects are subject to the
risks, expenses, and difficulties frequently encountered by companies in their
early stages of development, particularly companies in new and rapidly evolving
markets such as Internet services. These risks include the failure to develop
and extend online service brands, the rejection of services by Web consumers,
vendors, and/or advertisers, the inability of Snowball to maintain and increase
the level of traffic to the Snowball networks from online services, as well as
other risks and uncertainties. In the event that Snowball does not successfully
implement its business plan, certain assets may not be recoverable.
Snowball's revenue is principally derived from the sale of online
advertising, the market for which is highly competitive and rapidly changing.
Significant changes in the industry or changes in customer buying behavior
could adversely affect operating results.
For the years ended December 31, 1997, 1998, and 1999, revenue from
Snowball's five largest advertisers accounted for approximately 36%, 31%, and
19%, respectively, of total revenue. One customer accounted for over 10% of
revenue in 1997. No customer accounted for over 10% of revenue for 1998 or
1999. Snowball generally does not require collateral and maintains allowances
for potential credit losses. These losses have been immaterial to date.
Revenue Recognition
Revenue is derived principally from short-term advertising contracts in which
Snowball guarantees a minimum number of impressions (a view of an advertisement
by a consumer), for a fixed fee. Advertising revenue is recognized at the
lesser of the ratio of impressions delivered over total guaranteed impressions
or the straight-line basis over the term of the contract, if specified,
provided that Snowball does not have any significant remaining obligations and
collection of the
F-8
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
resulting receivable is probable. To the extent that minimum guaranteed
impression levels or other obligations are not being met, Snowball defers
recognition of the corresponding revenue until guaranteed levels are being
achieved.
Revenue also includes sponsorship revenue under contracts in which Snowball
commits to provide sponsors with a variety of promotional opportunities in
addition to traditional banner advertising. Typically, sponsorship agreements
provide for the delivery of impressions on Snowball's Web sites through banner,
button or text link advertising, exclusive placement on Snowball's Web sites,
the licensing of trademarks and other copyrighted material and the design and
development of customized Web sites designed to enhance the promotional
objective of the sponsor. The portion of sponsorship revenue related to the
delivery of impressions is recognized in the period in which the advertisement
is displayed, provided that no significant obligations remain and the
collection of the resulting receivable is probable, at the lesser of the ratio
of impressions delivered over total guaranteed impressions or the straight-line
basis over the term of the contract. The portion of any up-front nonrefundable
fee specified in the contract related to the up-front customized design work
and the licensing of trademarks and other copyrighted material is also
recognized at the lesser of the ratio of impressions delivered over total
guaranteed impressions or the straight-line basis over the term of the
contract. Revenue from sales of product through Snowball's online store was
insignificant through December 31, 1999.
Snowball has not recognized any revenue related to the nonmonetary exchange
of advertising for advertising as such exchanges were not objectively
determinable based on the criteria set forth in Accounting Principles Board
Opinion No. 29, "Accounting for Nonmonetary Transactions."
Advertising Expenses
Advertising is expensed as incurred. The costs of producing advertising are
incurred and expensed during production. The costs of communicating advertising
are incurred and expensed as the advertisement is broadcast in accordance with
Statement of Position No. 93-7 "Reporting on Advertising Costs." Advertising
expenses were not significant for the years ended December 31, 1997 and 1998,
and were approximately $7,954,000 for the year ended December 31, 1999.
Cash Equivalents and Short-term Investments
Snowball considers all highly liquid investments with an original maturity
from the date of purchase of three months or less to be cash equivalents. As of
December 31, 1999, cash equivalents and short-term investments consist
primarily of investments in money market funds, certificates of deposit and
corporate commercial paper. To date, Snowball has not experienced losses on any
of its investments. Through December 31, 1998, Snowball's net cash requirements
were funded by Imagine Media.
Fixed Assets
Fixed assets are presented at cost less accumulated depreciation.
Depreciation and amortization of fixed assets is computed using the straight-
line method over the estimated useful lives of the assets (two to five years).
F-9
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Goodwill and Intangible Assets
Goodwill and intangible assets consist of the excess of purchase price paid
over identified tangible net assets and trademarks. Goodwill and intangible
assets are amortized using the straight-line method over the period of expected
benefit, generally three years. Management assesses the recoverability of
goodwill and intangible assets by determining whether the amortization of the
unamortized balance over its remaining life can be recovered through forecasted
cash flows. If undiscounted forecasted cash flows indicate that the unamortized
amounts will not be recovered, an adjustment will be made to reduce the net
amounts to an amount consistent with forecasted future cash flows discounted at
Snowball's incremental borrowing rate. Cash flow forecasts are based on trends
of historical performance and management's estimate of future performance,
giving consideration to existing and anticipated competitive and economic
conditions. Snowball has not identified any such impairment losses.
Fair Value of Financial Instruments
The carrying amounts of Snowball's financial instruments, including cash and
cash equivalents, short-term investments, accounts receivable, accounts
payable, and accrued liabilities approximate fair value because of their short
maturities. The carrying amounts of Snowball's capital lease obligations, notes
payable and term loan approximate the fair value of these instruments based
upon management's best estimate of interest rates that would be available for
similar debt obligations at December 31, 1999.
Net Loss Per Share
Basic net loss per share and diluted net loss per share is presented in
conformity with the Financial Accounting Standards Board's ("FASB") Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
Pursuant to Securities and Exchange Commission ("SEC") Accounting Bulletin No.
98, common stock and convertible preferred stock issued or granted for nominal
consideration prior to the anticipated effective date of the initial public
offering must be included in the calculation of basic and diluted net loss per
share as if they had been outstanding for all periods presented. To date,
Snowball has not had any issuances or grants for nominal consideration.
F-10
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In accordance with SFAS 128, basic and diluted net loss per share has been
computed using the weighted-average number of shares of common stock
outstanding during the period, less the weighted-average number of shares of
common stock issued to founders, investors, and employees that are subject to
repurchase as these shares must be returned to Snowball if specified conditions
are not met. Pro forma basic and diluted net loss per share, as presented in
the statements of operations, has been computed as described above and also
gives effect, under SEC guidance, to the conversion of the convertible
preferred stock (using the if-converted method) from the original date of
issuance. Snowball commenced operations as a separate legal entity in
January 1999 and issued common stock in February 1999. Accordingly, historical
earnings per share have been presented only for the year ended December 31,
1999. The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per share (in thousands, except share and per
share data):
<TABLE>
<CAPTION>
Year ended
December 31,
1999
------------
<S> <C>
Net loss....................................................... $ (34,822)
===========
Basic and diluted:
Weighted-average shares of common stock outstanding.......... 4,134,882
Less: weighted-average shares subject to repurchase.......... (3,948,354)
-----------
Weighted-average shares used in computing basic and diluted
net loss per share.......................................... 186,528
===========
Basic and diluted net loss per share........................... $ (186.69)
===========
Pro forma:
Shares used above............................................ 186,528
Pro forma adjustment to reflect weighted effect of assumed
conversion of convertible preferred stock (unaudited)....... 17,835,566
-----------
Shares used in computing pro forma basic and diluted net loss
per share (unaudited)....................................... 18,022,094
===========
Pro forma basic and diluted net loss per share (unaudited)..... $ (1.93)
===========
</TABLE>
Snowball has excluded all convertible preferred stock, warrants for
convertible preferred stock, outstanding stock options and shares subject to
repurchase from the calculation of diluted loss per share because all these
securities are antidilutive for all periods presented. If the offering
contemplated by this prospectus is consummated, all of the convertible
preferred stock outstanding will automatically be converted into common stock.
Unaudited pro forma stockholders' equity at December 31, 1999, as adjusted for
the assumed conversion of convertible preferred stock based on the shares of
convertible preferred stock outstanding at December 31, 1999, is disclosed on
the balance sheet.
F-11
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The total number of shares excluded from the calculation of diluted net loss
per share was as follows (on an as-converted-to-common basis as of December 31,
1999):
<TABLE>
<CAPTION>
Total
Shares
----------
<S> <C>
Common stock, subject to repurchase............................... 6,567,429
Preferred stock................................................... 25,409,895
Common stock options outstanding.................................. 2,358,368
Warrants to purchase preferred stock.............................. 322,688
</TABLE>
Income Taxes
Through December 31, 1998, Snowball was not a separate taxable entity for
federal, state, or local income tax purposes, and its operations were included
in the tax returns of Imagine Media.
Since incorporation, Snowball has recognized income taxes under the liability
method. Deferred income taxes are recognized for differences between the
financial statement and tax basis of assets and liabilities at enacted
statutory tax rates in effect for the years in which the differences are
expected to reverse. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. In
addition, valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
Stock-Based Compensation
As permitted by the FASB Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), Snowball accounts for
employee stock-based compensation in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"),
and related interpretations in accounting for its stock-based compensation
plans. Under APB 25, when the exercise price of Snowball's employee stock
options equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized. Stock compensation related to non-
employees is based on the fair value of the related stock or options in
accordance with SFAS 123 and its interpretations.
Comprehensive Loss
Snowball has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting
comprehensive loss and its components in the financial statements. To date,
Snowball's comprehensive loss has equaled its net loss.
Segment Information
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information,"
which established standards for reporting information about operating segments
in annual financial statements. Snowball identifies its operating segments
based on business activities, management responsibility, and geographical
location. Currently, Snowball has organized its operations into a single
operating segment, the development of programming content material for
distribution on the Internet. Snowball derives the significant majority of its
revenues from operations in the United States.
F-12
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent Accounting Pronouncements
In February 1998, the Accounting Standards Executive Committee ("AcSEC")
issued 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
establishes the accounting for costs of software products developed or
purchased for internal use, including when these costs should be capitalized.
The adoption of this pronouncement did not materially impact Snowball's results
of operations for the year ended December 31, 1999.
In April 1998, AcSEC issued Statement of Position No. 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires that the costs of
start-up activities, including organizational costs, be expensed as incurred.
The adoption of this pronouncement did not materially impact Snowball's results
of operations for the year ended December 31, 1999.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133, as amended by SFAS 137, requires Snowball to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through the Statement of Operations. If the
derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative are either offset against the change in fair value
of assets, liabilities, or firm commitments through the Statement of Operations
or recognized in other comprehensive income until the hedged item is recognized
in the Statement of Operations. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings. SFAS 133, as
amended, is effective for years beginning after June 15, 2000. Snowball does
not currently hold any derivatives and does not expect this pronouncement to
materially impact the results of its operations.
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes certain areas of
the Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. Snowball believes that its current
revenue recognition principles comply with SAB 101.
2. Cash and Cash Equivalents
Cash, cash equivalents, and short-term investments consist of the following
(in thousands):
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Cash and cash equivalents:
Cash.......................................................... $ 818
Money market funds............................................ 15,976
Corporate commercial paper.................................... 3,979
Certificate of deposit........................................ 4,716
-------
25,489
-------
Short-term investments:
Certificate of deposit........................................ 1,000
Municipal bonds............................................... 7,000
-------
8,000
-------
Cash, cash equivalents, and short-term
investments.................................................... $33,489
=======
</TABLE>
F-13
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Through December 31, 1999, the difference between the fair value and the
amortized cost of available-for-sale securities was not significant; therefore,
no unrealized gains or losses have been recorded in stockholders' equity. At
December 31, 1999, the contractual maturity of Snowball's short-term
investments was one year or less.
3. Balance Sheet Detail
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
---- -------
(in
thousands)
<S> <C> <C>
Fixed assets:
Computers and equipment..................................... $153 $ 3,762
Furniture and fixtures...................................... -- 602
Software.................................................... -- 1,364
---- -------
153 5,728
Less accumulated depreciation and amortization.............. (60) (1,360)
---- -------
$ 93 $ 4,368
==== =======
Accrued liabilities:
Accrued compensation........................................ $ 50 $ 957
Accrued legal and accounting................................ -- 502
Accrued marketing and advertising........................... -- 47
Other accrued expenses...................................... -- 1,575
---- -------
$ 50 $ 3,081
==== =======
</TABLE>
4. Related Party Transactions
Funding Prior to Incorporation
Through December 31, 1998, Snowball utilized Imagine Media's centralized cash
management services and processes related to receivables, payables, payroll,
and other activities. Through December 31, 1998, Snowball's net cash
requirements were funded by Imagine Media. Net financing provided by Imagine
Media to Snowball in 1997 and 1998 was approximately $1,781,000 and $3,920,000,
respectively, including funding related to expenditures for operations and
investing activities and corporate services provided, as described below. There
were no intercompany transfers and no amounts were paid to Imagine Media by
Snowball in repayment of the financing during these periods and through the
incorporation of Snowball. These amounts were included in division equity.
Amounts financed by Imagine Media did not bear interest.
Corporate Services
In accordance with the Staff Accounting Bulletin No. 55, prior to the
incorporation of Snowball, allocations have been reflected in these financial
statements for 1997 and 1998. These expenses include corporate communications,
management compensation and benefits administration, payroll, accounts payable,
income tax compliance, and other administration and finance overhead.
Allocations and charges were based on either a direct cost pass-through for
incremental corporate administration, finance and management costs and a
percentage allocation of costs for other services provided based on factors
such as headcount and relative expenditure levels. Such
F-14
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
allocations and charges totaled approximately $718,000, $1,851,000, and
$757,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
Management believes that the basis used for allocating corporate services is
reasonable. However, the terms of these transactions may differ from those that
would have resulted from transactions among unrelated parties.
Asset Contribution
Among the assets transferred to Snowball from Imagine Media, upon the
incorporation of Snowball on January 6, 1999, were a number of cohosting and
technology agreements to which Imagine Media was a party, revenue from
advertising agreements involving Snowball and ownership rights in patent
applications. The assets transferred from Imagine Media have been recorded at
historical cost. No liabilities were transferred to Snowball, except for those
directly resulting from the assets transferred.
The Chairman of Snowball's board of directors is a principal stockholder and
the Chief Executive Officer of Imagine Media. Accordingly, Imagine Media is
considered a related party for the period subsequent to incorporation. As of
December 31, 1999, Imagine Media owns approximately 5.6% of the outstanding
voting shares of Snowball.
5. Business and Asset Acquisitions
Ameritrack, Inc.
On September 28, 1999, Snowball acquired all of the outstanding stock of
Ameritrack, Inc., an Internet content provider doing business as High School
Alumni, in exchange for approximately $1,000,000 in cash and 30,000 shares of
common stock valued at $180,000. The cost of the acquisition was allocated to
the assets and liabilities assumed based upon their estimated fair values as
follows:
<TABLE>
<S> <C>
Working capital (deficit)....................................... $ (3,381)
Equipment....................................................... 21,060
Goodwill and purchased intangibles.............................. 1,162,321
----------
$1,180,000
==========
</TABLE>
The financial results of Ameritrack, Inc. were insignificant and, therefore,
no pro forma information reflecting the acquisition has been presented.
Asset Purchase
In July 1999, Snowball entered into an asset purchase agreement with Vault
Networks, an Internet content producer, under which Snowball acquired certain
intangible rights such as trademarks, intellectual property rights, certain
registered Internet locations, and a small amount of computer hardware. The
total purchase price for these assets was $550,000 in cash. This purchase price
has been included within goodwill and purchased intangibles.
F-15
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Extreme Interactive Media, Inc.
On December 17, 1999, Snowball completed the acquisition of Extreme
Interactive Media, Inc. ("Extreme"), an Internet community site. Snowball
acquired all of the outstanding capital stock of Extreme in exchange for 75,000
shares of Snowball common stock, valued at $600,000, $1.0 million in cash and
$250,000 in unsecured promissory notes. The purchase price may be increased by
up to $3.5 million of additional cash consideration based upon the attainment
of certain economic milestones by Extreme.
The cost of the acquisition was allocated to the assets and liabilities
assumed based upon their estimated fair values as follows:
<TABLE>
<S> <C>
Working capital.................................................. $ 1,885
Equipment........................................................ 27,361
Goodwill and purchased intangibles............................... 1,820,754
----------
$1,850,000
==========
</TABLE>
6. Term Loan
In November 1999, Snowball entered into a term loan agreement for up to $15.2
million. In connection with this loan agreement, Snowball issued a promissory
note, which bears interest at the rate of 11.0% per annum, and warrants to
purchase 180,000 shares of Series B-1 preferred stock. In November and December
of 1999, Snowball drew down $15.2 million under the term loan. On December 20,
1999, $3.0 million of this loan was converted into Series C preferred stock. An
additional $12.0 million was repaid in cash raised through the Series C
preferred stock issuance. At December 31, 1999, $150,000 remained payable under
the term loan. The note holder maintains a first position lien on all of
Snowball's assets, excluding fixed assets.
7. Stockholders' Equity
Convertible Preferred Stock
<TABLE>
<CAPTION>
Shares issued and
Shares outstanding at
authorized December 31, 1999
---------- -----------------
<S> <C> <C>
Series A........................................ 9,990,111 9,990,111
Series B-1...................................... 4,912,285 4,697,158
Series C........................................ 4,500,000 3,379,000
Undesignated.................................... 597,604 --
---------- ----------
Total convertible preferred stock............. 20,000,000 18,066,269
========== ==========
</TABLE>
Holders of Snowball's preferred stock are entitled to one vote for each share
of common stock into which the preferred stock is convertible. Holders of
Snowball's preferred stock are also entitled to vote separately as a class with
regard to customary protective provisions.
The holders of Series A, B-1 and C preferred stock are entitled to annual
noncumulative dividends per share of $0.028, $0.51 and $0.80, respectively,
when and if declared by the board of directors. Under the terms of certain
financing arrangements, Snowball is prohibited from declaring or paying any
dividends on its capital stock. In the event of any voluntary or involuntary
liquidation of Snowball,
F-16
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Series C stockholders are entitled to a liquidation preference of $10.00 per
share, plus any declared but unpaid dividends. After payment of the Series C
preference, Series A and B-1 stockholders are entitled to a liquidation
preference of $0.35 and $6.33 per share, respectively, plus any declared but
unpaid dividends, all in preference to the holders of the common stock. After
payment to the Series A, B-1 and C stockholders of these preferential amounts
in the event of a liquidation, the holders of the Series B-1 and C preferred
stock and the holders of the common stock will receive any and all remaining
assets of Snowball. However, the rights of the holders of Series B-1 and C
preferred stock terminates when the aggregate per share distribution to such
holders exceeds $0.70 and $12.66 per share, respectively.
The holders of Series A, B-1 and C preferred stock have the right at any time
to convert their shares into common stock. Each share of Series A and B-1
preferred stock is convertible into 1.5 shares of common stock. Each share of
Series C preferred stock is convertible into 1 share of common stock. Each
share of preferred stock will be automatically converted into common stock upon
the closing of the issuance of shares following the effectiveness of a
registration statement under the Securities Act of 1933, pursuant to a firm
commitment public offering of Snowball's common stock with aggregate proceeds
in excess of $20,000,000.
In January 2000, Snowball issued 150,000 shares of Series C preferred stock
at $10 per share.
Warrants
In April 1999 and October 1999 Snowball issued warrants to purchase 21,063
and 14,064 shares of Series B-1 preferred stock (52,692 shares of common stock
as converted) in connection with lease financing. In accordance with SFAS 123,
Snowball valued the warrants using the Black-Scholes option pricing model at
$2.48 and $6.03 per share respectively. The following assumptions were used in
the option pricing model: stock price of $4.22 and $10.00, exercise price of
$3.165 and $7.11, option term of five years, risk-free rate of interest of 6%,
50% volatility, and a dividend yield of 0%. The cost of the warrants
(approximately $206,000) is being expensed as additional interest expense over
the three-year life of the lease arrangement.
In November 1999, Snowball issued a series of warrants to purchase 180,000
shares of Series B-1 preferred stock (269,996 shares of common stock as
converted), in connection with entering into a term loan agreement. In
accordance with SFAS 123, Snowball valued the warrants using the Black-Scholes
option pricing model at $2.40-$3.01 per share. The following assumptions were
used in the option pricing model: stock price of $8.00, exercise price of
$8.44, option term of 2 to 3 years, risk free rate of interest of 6%, 50%
volatility and a dividend yield of 0%. The cost of the warrants (approximately
$742,000) is being expensed as additional interest over the one year life of
the debt agreement.
Notes Receivable from Stockholders
In February 1999, Snowball loaned an aggregate of $2,000,000 to its Chairman,
secured by a full recourse promissory note and a stock pledge agreement, in
connection with his purchase of 8,571,429 shares of Series A preferred stock at
$0.35 per share. The note accrued interest at a rate of 4.57% per year and was
due and payable with respect to $1,000,000 of principal, plus interest, on or
before March 1, 1999 and with respect to the remaining $1,000,000 of principal,
and any remaining interest, on or before April 1, 1999. The note has been
repaid in full.
F-17
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In February 1999, Snowball loaned an aggregate of $92,300 to an officer,
secured by a full recourse promissory note and a stock pledge agreement, in
connection with his purchase of 1,978,021 shares of common stock at $0.05 per
share. The note accrues interest at a rate of 4.64% per year, payable annually,
and the principal amount of the note is due and payable on or before February
1, 2003. Snowball is forgiving the principal and accrued interest at a rate of
$1,667 per month. In the event that the officer's employment is terminated for
any reason, then all remaining unpaid principal and interest will become due
and payable within 90 days after termination, unless Snowball agrees to a
longer period.
In March 1999, Snowball loaned an aggregate of $7,000 to one of its
directors, secured by a full recourse promissory note and a stock pledge
agreement, in connection with his purchase of 150,000 shares of common stock at
$0.05 per share. The note accrues interest at a rate of 4.67% per year, payable
annually, and is due and payable in full on or before March 11, 2001.
In October and November 1999, Snowball loaned an aggregate of $933,000 to an
officer secured by full recourse promissory notes and stock pledge agreements
in connection with his purchase of 100,000 shares of Series B-1 preferred stock
at $6.33 per share and the exercise of options for a total of 350,000 shares of
common stock at $2.00 per share. The notes accrue interest at 5.86% and 6.08%,
payable annually, and are due and payable on October 20, 2003 and November 20,
2003, respectively. The promissory note of $333,000 attributable to the
purchase of Series B-1 preferred stock is being forgiven at the rate of $6,938
per month.
In addition, the Company has issued full recourse promissory notes to
employees.
Common Stock
Outside of the Company's 1999 Equity Incentive Plan, Snowball issued shares
of common stock to founders and employees. Generally, these shares were sold
pursuant to restricted stock purchase or option agreements containing
provisions established by the board of directors. These provisions give
Snowball the right to repurchase the shares at the original sales price. The
rights generally expire at the rate of 25% of the shares after one year and
2.0833% per month thereafter or ratably over four years. A total of 2,614,272
shares or shares underlying options were granted in 1999 and, at December 31,
1999, 1,855,652 of these shares issued outside of the 1999 Equity Incentive
Plan remained subject to repurchase.
As of December 31, 1999 shares of common stock reserved for future issuance
consisted of the following:
<TABLE>
<S> <C>
Stock options..................................................... 4,552,737
Series B-1 warrants (assuming conversion)......................... 322,688
Series A, B-1 and C convertible preferred stock................... 25,409,895
----------
30,285,320
==========
</TABLE>
Equity Incentive Plan
In February 1999, the board of directors approved the 1999 Equity Incentive
Plan (the "Plan"). Under the Plan, Snowball reserved 7,815,812 shares for
issuance to eligible participants. The Plan provides for option grants at an
option price no less than 85% of the fair market value of the stock
F-18
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
subject to the option on the date the option is granted. The options must vest
at a rate of at least 20% per year over five years from the date the option was
granted. However, in the case of options granted to officers, directors, or
consultants, the options may vest at any time established by Snowball. All
options under the Plan expire ten years after their grant. The Plan also
provides for restricted stock awards. The purchase price of restricted stock
under these awards can not be less than 85% of the fair market value of the
stock on the date the award is made or at the time the purchase is consummated.
At December 31, 1999, 4,711,777 shares of stock issued under these awards
remained subject to repurchase.
Aggregate activity under the Plan is summarized as follows:
<TABLE>
<CAPTION>
Options outstanding
-------------------------------------
Shares Weighted-
available Number of Price per average
for grant shares share exercise price
---------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Authorized February
1999.................... 7,815,812 -- -- --
Restricted stock
granted................. (1,815,525) -- -- --
Options granted.......... (3,907,437) 3,907,437 $0.05-8.00 $1.28
Options canceled......... 301,519 (301,519) $0.05-2.00 $0.76
Options exercised........ -- (1,447,550) $0.05-3.00 $0.28
---------- ----------
Balance at December 31,
1999.................... 2,394,369 2,158,368 $0.05-8.00 $2.03
========== ==========
</TABLE>
The following table summarizes information regarding options outstanding and
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Weighted-
Number Weighted average
outstanding average remaining
and exercise contractual
Exercise Prices exercisable price age (years)
--------------- ----------- -------- -----------
<S> <C> <C> <C>
$0.05....................................... 495,267 $0.05 9.22
0.67....................................... 459,000 0.67 9.55
1.33....................................... 318,300 1.33 9.65
2.00....................................... 277,101 2.00 9.47
3.00....................................... 261,250 3.00 9.87
4.50....................................... 142,200 4.50 9.94
8.00....................................... 205,250 8.00 9.97
---------
2,158,368 $2.03 9.58
=========
</TABLE>
Stock-Based Compensation
In 1999, Snowball recorded deferred compensation expense of approximately
$12.0 million representing the difference between the exercise prices and the
deemed fair values of Snowball's common stock on the dates these shares and
stock options were granted. In October 1999 Snowball sold and issued 100,000
shares of Series B-1 preferred stock to an officer for $633,000 in cash.
Snowball has recorded compensation expense of approximately $417,000,
representing the difference between the price at which the stock was granted
and the deemed fair value of Snowball's common stock on the date the stock was
granted. The total deferred stock compensation of $12.4 million is included as
a reduction to stockholders' equity and is being amortized by charges to
operations on a graded vesting method over four years. Snowball recorded
amortization of deferred
F-19
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
compensation expense of approximately $1.5 million for the year ended December
31, 1999. At December 31, 1999, Snowball had a total of $10.9 million remaining
to be amortized over the corresponding vesting period of each respective
option, generally four years. In October 1999, Snowball issued 560,822 shares
of Series B-1 preferred stock in connection with a commercial transaction.
Snowball recorded approximately $2.3 million in prepaid marketing and
distribution rights representing the difference between the purchase price and
the deemed fair value of the shares at that date. The rights are being
amortized using the straight-line method over two years.
The remaining deferred stock compensation at December 31, 1999 will be
amortized as follows: $6.2 million for the year ending December 31, 2000, $2.9
million for the year ending December 31, 2001, $1.4 million for the year ending
December 31, 2002 and $0.4 million for the year ending December 31, 2003.
Subsequent terminations of stock and option holders may reduce future stock-
based compensation.
Snowball has elected to follow APB 25 and related interpretations in
accounting for its employee stock-based compensation plans. Because the
exercise price of Snowball's employee stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is generally
recognized. Pro forma information regarding net loss has been determined as if
Snowball had accounted for its employee stock options under the fair value
method prescribed by SFAS 123. The resulting effect on pro forma net loss
disclosed is not likely to be representative of the effects on net loss on a
pro forma basis in future years, due to additional grants and years of vesting
in subsequent years. The fair value of each option granted through December 31,
1999 was estimated on the date of grant using the minimum value method with the
following weighted-average assumptions:
<TABLE>
<S> <C>
Dividend yield...................................................... 0
Risk-free interest rate............................................. 6%
Volatility factor................................................... 50%
Expected life....................................................... 4 years
Weighted-average fair value of options granted...................... $ 0.585
</TABLE>
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma expense over the options' vesting period, and
results in a pro forma net loss of approximately $34,927,000 for the year ended
December 31, 1999 and pro forma basic and diluted net loss per share of
$(187.25).
Stock Split
On October 12, 1999, Snowball effected a three-for-two stock split of its
common stock. All share and per share information included in these financial
statements has been retroactively adjusted to reflect this stock split.
Snowball also changed the conversion rate of its Series A and B-1 preferred
stock. Preferred Series A and B-1 will convert at a rate of 1.5 shares of
common stock for each share of preferred stock.
8. Provision for Income Taxes
As of December 31, 1999, Snowball had federal net operating loss
carryforwards of approximately $31,800,000. The net operating loss
carryforwards will expire at various dates through 2019 if not utilized.
Utilization of the net operating loss and tax credit carryforwards may be
subject to substantial annual limitations due to the ownership change
limitations provided by the Internal Revenue Code of
F-20
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1986, as amended, and similar state provisions. The annual limitation may
result in the expiration of net operating loss and tax credit carryforwards
before utilization.
The net losses incurred for the years ended December 31, 1997 and 1998 are
attributable to the operations of the Company as a division of Imagine Media
and were included in the income tax returns filed by Imagine Media. Because the
Company will not receive any benefit for its historical operating losses
incurred through December 31, 1998, no income tax benefit has been reflected
for those periods.
Snowball has provided a full valuation allowance against its deferred tax
assets based on its history of losses.
Significant components of net deferred tax assets at December 31, 1999
consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Net operating loss carryforward................................. $ 12,700
Other........................................................... 500
--------
Total deferred tax assets....................................... 13,200
Valuation allowance............................................. (13,200)
--------
Net deferred tax assets......................................... $ --
========
</TABLE>
9. Commitments
At December 31, 1999, Snowball's aggregate commitments under noncancelable
lease arrangements for office space and computer equipment were as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
------- ---------
(in thousands)
<S> <C> <C>
Year ending December 31,
2000.................................................... $ 1,266 $ 2,169
2001.................................................... 1,266 4,399
2002.................................................... 903 4,399
2003.................................................... -- 4,399
2004.................................................... -- 4,399
Thereafter.............................................. -- 29,219
------- -------
Total minimum payments required........................... 3,435 $48,984
=======
Less amount representing interest......................... (318)
-------
Present value of future payments.......................... 3,117
Less current portion...................................... (1,081)
-------
Long-term portion......................................... $ 2,036
=======
</TABLE>
The cost of assets under capital lease arrangements was $3,413,000 at
December 31, 1999 (none at December 31, 1998) and the related accumulated
depreciation was $573,000 at December 31, 1999 (none at December 31, 1998).
F-21
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rent expense, principally for leased office space under operating lease
commitments, was approximately $514,000 for the year ended December 31, 1999
(approximately $73,000 and $176,000 for the years ended December 31, 1997 and
1998, respectively). Snowball has issued a letter of credit for approximately
$4,399,000 in conjunction with the operating lease.
10. Subsequent Events (unaudited)
Snowball anticipates that it will record additional deferred compensation
expense of approximately $1.4 million relating to the difference between the
exercise price and the deemed fair value of options awarded at prices between
$8.50 and $9.35 per share in January and February of 2000.
In February 2000, Snowball drew down $12 million under its term loan.
Acquisition
On February 16, 2000, Snowball signed an asset purchase agreement to acquire
all of the assets of one of its affiliates, an Internet content provider, in
exchange for approximately $4.8 million in cash (of which $500,000 will be
placed in escrow to secure certain obligations). The financial results of this
entity were insignificant and, therefore, no pro forma information reflecting
this proposed acquisition has been presented.
2000 Equity Incentive Plan
On February 22, 2000, the board of directors adopted the 2000 Equity
Incentive Plan and reserved 5,000,000 shares of common stock to be issued under
this plan. On each January 1, beginning in 2001, the aggregate number of shares
reserved for issuance under this plan will increase automatically by a number
of shares equal to 5% of the outstanding shares of capital stock on December 31
of the preceding year.
2000 Employee Stock Purchase Plan
On February 22, 2000, the board of directors adopted the 2000 Employee Stock
Purchase Plan and reserved 500,000 shares of common stock under this plan. The
plan will become effective on the first business day on which price quotations
for Snowball common stock are available on the Nasdaq National Market. On each
January 1, beginning in 2001, the aggregate number of shares reserved for
issuance under this plan will increase automatically by a number of shares
equal to 1% of the outstanding shares on December 31 of the preceding year. The
aggregate number of shares reserved for issuance under the plan may not exceed
5,000,000 shares.
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Ameritrack, Inc.
Columbia, South Carolina
We have audited the accompanying balance sheet of Ameritrack, Inc. (a
development stage company) as of August 31, 1999 and the related statement of
income and expense, changes in stockholders' equity and cash flows from the
commencement of operations on or about August 14, 1998 through August 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 audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ameritrack, Inc. (a
development stage company) as of August 31, 1999, and the results of its
operations and cash flows from the commencement of operations on or about
August 14, 1998 through August 31, 1999, in conformity with generally accepted
accounting principles.
/s/ J. W. Hunt and Company, L.L.P.
Columbia, South Carolina
October 8, 1999
F-23
<PAGE>
AMERITRACK, INC.
(a development stage company)
BALANCE SHEET
<TABLE>
<CAPTION>
August 31, 1999
---------------
<S> <C>
Assets
Current assets:
Cash......................................................... $ 5,075
Accounts receivable.......................................... 2,111
---------
Total current assets....................................... 7,186
Equipment--at cost, less accumulated depreciation of $2,162.... 21,060
---------
Total assets............................................... $ 28,246
=========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable............................................. $ 8,480
Loans from stockholders...................................... 2,087
---------
Total current liabilities.................................. 10,567
Stockholders' equity:
Common stock, no par value; 1,000,000 shares authorized,
580,100 shares issued and outstanding....................... 174,025
Additional paid in capital...................................
Deficit accumulated during the development stage............. (156,346)
---------
Total stockholders' equity................................. 17,679
---------
Total liabilities and stockholders' equity................. $ 28,246
=========
</TABLE>
See accompanying notes.
F-24
<PAGE>
AMERITRACK, INC.
(a development stage company)
STATEMENT OF INCOME AND EXPENSE
From the commencement of operations
on or about August 14, 1998 through August 31, 1999
<TABLE>
<S> <C>
Revenues:
Advertising income................................................ $ 8,349
Other income...................................................... 514
---------
Total income.................................................... 8,863
Expenses:
Operating expenses................................................ 17,761
Research and development costs.................................... 147,448
---------
Total expenses.................................................. 165,209
---------
Net loss............................................................ $(156,346)
=========
</TABLE>
See accompanying notes.
F-25
<PAGE>
AMERITRACK, INC.
(a development stage company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
From the commencement of operations
on or about August 14, 1998 through August 31, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Number of Development
Shares Common Stock Stage Total
--------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Common stock issued pursuant to:
Sales of stock:
August 14, 1998................ 5,000 $ 1,500 $ -- $ 1,500
February 23, 1999.............. 5,000 1,500 -- 1,500
April 19, 1999................. 5,000 1,500 -- 1,500
May 28, 1999................... 55,000 16,500 -- 16,500
June 16, 1999.................. 8,350 2,500 -- 2,500
July 6, 1999................... 16,750 5,025 -- 5,025
Stock-based compensation:
Initial issue.................. 325,000 97,500 -- 97,500
June 14, 1999.................. 160,000 48,000 -- 48,000
Net loss......................... -- -- (156,346) (156,346)
------- -------- --------- ---------
Ending balance................... 580,100 $174,025 $(156,346) $ 17,679
======= ======== ========= =========
</TABLE>
See accompanying notes.
F-26
<PAGE>
AMERITRACK, INC.
(a development stage company)
STATEMENT OF CASH FLOWS
From the commencement of operations
on or about August 14, 1998 through August 31, 1999
<TABLE>
<S> <C>
Operating activities
Net Loss .......................................................... $(156,346)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation expense............................................. 2,162
Increase in accounts receivable.................................. (2,111)
Increase in accounts payable..................................... 6,880
Stock-based compensation......................................... 145,500
---------
Net cash used by operating activities.............................. (3,915)
---------
Investing activities
Purchase of equipment.............................................. (21,621)
Financing activities
Proceeds from loans from stockholders.............................. 2,510
Repayment of loans from stockholders............................... (424)
Proceeds from issuance of stock.................................... 28,525
---------
Net cash provided by financing activities.......................... 30,611
---------
Net increase in cash............................................... 5,075
Cash at beginning of period........................................ --
---------
Cash at end of period.............................................. $ 5,075
=========
</TABLE>
See accompanying notes.
F-27
<PAGE>
AMERITRACK, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Operations
Ameritrack, Inc. (the "Company") was formed to develop an Internet web site
that would provide information to assist individuals in locating high school
classmates and provide web site development assistance. The web site is
available internationally.
Advertising
The Company expenses advertising costs as they are incurred. Advertising
expenses totaled $517 for the period.
Equipment and Depreciation
Computer equipment is valued at cost. Maintenance and repairs are charged to
expenses as incurred. Depreciation is computed on the straight-line method,
based on an estimated useful life of five years.
Income Taxes
The financial statements do not include a provision for income taxes because
the Company made an S Corporation election for federal and state income tax
purposes. The Company's earnings will be included in the stockholders' personal
income tax returns.
Research and Development Costs
Research and development costs related to both future and present web site
development are charged to expenses as incurred.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that directly affect the results of reported assets, liabilities,
revenue and expenses. Actual results may differ from those estimates.
2. Development Stage Operations
The Company was incorporated and began operations in mid August 1998.
Initially, there was one stockholder. Operations through August 31, 1999 were
devoted primarily to development of the web site, raising capital,
investigating other means of obtaining financing and administrative functions.
As of August 31, 1999, the Company had ten stockholders who acquired stock
through purchase and by providing services to the Company. The basis for
valuing the shares issued for services was determined by reference to the cash
price for the shares acquired by purchase.
These notes are an integral part of the accompanying financial statements.
F-28
<PAGE>
AMERITRACK, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Related Party Transactions
During the period, two stockholders advanced operating funds to the Company.
These loans were of a short-term nature and were noninterest bearing. The
highest amount outstanding during the period was $2,262.
4. Subsequent Events
Subsequent to August 31, 1999, the Company signed a letter of intent to sell
all of its outstanding stock for cash and shares of stock in Snowball.com,
Inc., unrelated privately held company. This sale closed on September 28, 1999
with 25% of the cash and 50% of stock being held in escrow pending the
completion of this audit and certain other matters.
The Company was assisted in negotiating this sale by an investment banking
firm. This firm agreed to take its fee for services by acquiring a stock
warrant entitling it to acquire 30,532 shares in the Company. This warrant was
exercised subsequent to August 31, 1999. Upon this exercise, the Company's S
Corporation status was automatically revoked and the Company became a
C Corporation.
These notes are an integral part of the accompanying financial statements.
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
of Extreme Interactive Media, Inc.
We have audited the accompanying balance sheets of Extreme Interactive Media,
Inc. (an Oklahoma "S" corporation) as of December 31, 1998 and September 30,
1999, and the related statements of operations and accumulated deficit, and
cash flows for the periods 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Extreme Interactive Media,
Inc. as of December 31, 1998 and September 30, 1999, and the results of its
operations and its cash flows for the periods then ended, in conformity with
generally accepted accounting principles.
/s/ Hamilton & Associates, Inc.
Oklahoma City, Oklahoma
December 9, 1999
F-30
<PAGE>
EXTREME INTERACTIVE MEDIA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents......................... $217,798 $ 20,032
Notes receivable.................................. 50,000 --
Accounts receivable............................... 31,675 75,856
Prepaid expenses.................................. 2,760 1,885
-------- --------
Total current assets............................ 302,233 97,773
Property and equipment:
Computer equipment................................ 56,682 70,441
Furniture......................................... 1,622 1,401
-------- --------
58,304 71,842
Less: accumulated depreciation.................... (3,288) (15,358)
-------- --------
Net property and equipment...................... 55,016 56,484
-------- --------
Other assets:
Intangible assets................................. 263,472 269,089
Organization cost................................. 458 383
Deposit........................................... 1,885 1,885
-------- --------
Total other assets.............................. 265,815 271,357
-------- --------
Total assets.................................. $623,064 $425,614
======== ========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable.................................. $ 20,165 $ 7,284
Other accrued taxes............................... 2,820 --
-------- --------
Total current liabilities....................... 22,985 7,284
Stockholders' equity:
Common stock, $.10 par value, 500,000 shares
authorized, 100,000 shares issued................ 10,000 10,000
Paid in capital in excess of par.................. 759,000 759,000
Accumulated deficit............................... (168,921) (350,670)
-------- --------
Total stockholders' equity...................... 600,079 418,330
Total liabilities and stockholders' equity.... $623,064 $425,614
======== ========
</TABLE>
See accompanying notes and auditor's report.
F-31
<PAGE>
EXTREME INTERACTIVE MEDIA, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Revenue:
Advertising income................................. $ -- $ 143,565
Other income....................................... 34,147 14,566
--------- ---------
Total revenue.................................... 34,147 158,131
--------- ---------
Operating expenses:
Amortization....................................... 7,570 14,458
Depreciation....................................... 3,288 12,071
Salaries........................................... 82,077 153,917
Professional services.............................. 32,175 48,258
Payroll taxes...................................... 10,513 12,677
Media.............................................. 9,792 1,260
Legal and accounting............................... 25,269 13,351
Rent............................................... 7,323 14,645
Office............................................. 2,994 12,293
Telephone.......................................... 3,052 13,438
Travel............................................. 8,351 6,972
Other.............................................. 14,752 26,867
Promotional........................................ -- 14,120
--------- ---------
Total operating expenses......................... 207,156 344,327
--------- ---------
Loss from operations................................. (173,009) (186,196)
Interest Income...................................... 4,088 4,447
--------- ---------
Net loss............................................. $(168,921) $(181,749)
Accumulated deficit, beginning of the period......... -- (168,921)
--------- ---------
Accumulated deficit, end of the period............... $(168,921) $(350,670)
========= =========
</TABLE>
See accompanying notes and auditor's report.
F-32
<PAGE>
EXTREME INTERACTIVE MEDIA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
1998 1999
------------ -------------
Cash flows from operating activities:
<S> <C> <C>
Net loss............................................ $(168,921) $(181,749)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation...................................... 3,288 12,070
Amortization...................................... 7,570 14,458
(Increase) decrease in:
Accounts receivable............................... (31,675) (44,181)
Notes receivable.................................. (50,000) 50,000
Prepaid expenses.................................. (2,760) 875
Other assets...................................... (273,385) (20,000)
Increase (decrease) in:
Accounts payable.................................. 20,165 (12,881)
Accrued taxes..................................... 2,820 (2,820)
--------- ---------
Net cash provided (used) by operating activities.... (492,898) (184,228)
Cash flows from investing activities:
Purchases of property and equipment............... (58,304) (13,538)
Cash flows from financing activities:
Increase from sale of stock....................... 769,000 --
--------- ---------
Net change in cash and cash equivalents............. 217,798 (197,766)
Cash and cash equivalents at beginning of period.... -- 217,798
--------- ---------
Cash and cash equivalents at end of period.......... $ 217,798 $ 20,032
========= =========
</TABLE>
See accompanying notes and auditor's report.
F-33
<PAGE>
EXTREME INTERACTIVE MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Property and Equipment
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets. Depreciation is computed on the declining balance
or straight-line method for financial reporting purposes and on the modified
accelerated cost recovery system method for income tax purposes. Depreciation
expense for the period ended September 30, 1999 was $12,071 and $3,288 for the
year ended December 31, 1998.
Income Taxes
Extreme Interactive Media, Inc., (the "Company"), with the consent of its
shareholders, has elected to be taxed as an S Corporation under Section 1372 of
the Internal Revenue Code, which provides that, in lieu of corporate income
taxes, the stockholders are taxed on their proportionate share of the Company
taxable income.
Cash Equivalents
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposit, and all highly liquid debt instruments with
original maturities of three months or less.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management must make estimates based on future events
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities as of the date of the financial statements,
and revenue and expenses during the reporting period. Actual results could
differ from these estimates.
Intangible Assets
Intangible assets associated with the purchase of websites and organizational
costs are being amortized on the straight-line method over a period of five to
15 years. Amortization expense for the period ended September 30, 1999, was
$14,458 and $7,570 for the year ended December 31, 1998.
2. Accumulated Depreciation
Accumulated depreciation and net book value of property and equipment is as
follows:
<TABLE>
<CAPTION>
September 30,
1999 December 31, 1998
----------------- -----------------
Amount Net Basis Amount Net Basis
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Computer equipment......................... $70,441 $55,389 $56,682 $53,475
Furniture and fixtures..................... 1,401 1,095 1,622 1,541
------- ------- ------- -------
$71,842 $56,484 $58,304 $55,016
======= ======= ======= =======
</TABLE>
3. Compensated Absences
Employees of the Company are entitled to paid vacation, paid sick days and
personal days off, depending on job classification, length of service, and
other factors. The Company does not account for the amount of compensation for
future absences and the amount would be immaterial, and
F-34
<PAGE>
EXTREME INTERACTIVE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
accordingly, no liability has been recorded in the accompanying financial
statements. The Company's policy is to recognize the costs of compensated
absences when actually paid to employees.
4. RELATED PARTY TRANSACTIONS
The Company paid legal fees of $6,653 (December 31, 1998 $23,895) to a law
firm in which two of its stockholders are partners.
The Company paid rent of $1,250 (December 31, 1998 $725) to a company owned
by one of its stockholders.
Extreme Interactive Media, Inc. paid accounting fees of $2,525 to a firm that
is owned by one of its stockholders.
F-35
<PAGE>
Snowball.com, Inc.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
gives effect to the acquisition of Extreme Interactive Media, Inc. using the
purchase accounting method, based on allocations of the purchase price. The
historical information has been derived from the respective historical
financial information of Snowball and Extreme Interactive Media and should be
read in conjunction with their financial statements and the related notes
included in this prospectus.
The unaudited pro forma condensed combined statement of operations combines
Snowball's and Extreme Interactive Media's historical statements of operations
and gives effect to the acquisition, including the amortization of goodwill and
other intangible assets resulting from the acquisition, as if the acquisition
occurred on January 1, 1999.
The total purchase price of Extreme Interactive Media has been allocated to
assets and liabilities based on management's estimates of their fair values
with the excess cost over the net assets acquired allocated to goodwill and
other intangible assets.
The unaudited pro forma condensed combined financial information is presented
for illustrative purposes only and is not necessarily indicative of the
operating results or financial position that would actually occur if the
acquisition had been consummated as of the date indicated, nor is it
necessarily indicative of the future operating results or financial position of
the combined company. The pro forma adjustments are based on the information
available at the time of the filing of this prospectus.
F-36
<PAGE>
Snowball.com, Inc.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(unaudited)
(in thousands except per share data)
For the year ended December 31, 1999(1)
<TABLE>
<CAPTION>
Extreme
Interactive
Media, Inc.
to
Snowball.com, December 17, Pro Forma Pro Forma
Inc. 1999 Adjustments Combined
------------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Revenue...................... $ 6,674 $ 203 $ -- $ 6,877
Cost of revenue.............. 4,316 -- -- 4,316
-------- ----- ----- --------
Gross margin................. 2,358 203 -- 2,561
Operating expenses
Production and content...... 6,610 -- -- 6,610
Engineering and develop-
ment....................... 5,084 -- -- 5,084
Sales and marketing......... 20,393 24 -- 20,417
General and administrative.. 3,486 442 -- 3,928
Stock-based compensation.... 1,521 -- -- 1,521
Amortization of goodwill and
intangible assets.......... 471 4 358 (A) 833
-------- ----- ----- --------
Total operating expenses... 37,565 470 358 38,393
-------- ----- ----- --------
Loss from operations......... (35,207) (267) (358) (35,832)
Interest income, net......... 265 13 -- 278
Other income................. 120 (49) -- 71
-------- ----- ----- --------
Net loss..................... $(34,822) $(303) $(358) $(35,483)
======== ===== ===== ========
Basic and diluted net loss
per share (B)............... $(186.69) $(135.43)
======== ========
Shares used in per share
calculation................. 187 75 262
======== ===== ========
Pro forma basic and diluted
net loss
per share (B)(unaudited).... $ (1.93) $ (1.96)
======== ========
Shares used in pro forma per
share calculation
(unaudited)................. 18,022 75 18,097
======== ===== ========
</TABLE>
- --------
(1) Extreme Interactive Media's results are for the period from January 1, 1999
through the date of acquisition (December 17, 1999).
See accompanying notes to the unaudited pro forma condensed consolidated
financial statements.
F-37
<PAGE>
Snowball.com, Inc.
NOTES TO THE UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
The total estimated purchase price of the transaction has been allocated to
assets and liabilities based on management's estimate of their fair values with
the excess cost over the net assets acquired allocated to goodwill and other
intangible assets.
The adjustments to the unaudited pro forma condensed combined statement of
operations for the year ended December 31, 1999, assumes the merger occurred as
of January 1, 1999, and are as follows:
(A) To reflect the amortization of goodwill and other intangible assets
resulting from the merger. The goodwill and other intangible assets are
being amortized over periods of approximately three years. Based upon the
nature of Extreme Interactive Media's operations, management does not
anticipate that any significant value will be attributed to purchased in-
process research and development.
(B) Pro forma basic and diluted net loss per share has been adjusted to
reflect the issuance of 75,000 shares of Snowball common stock, as if the
shares had been outstanding for the entire period presented.
These notes are an integral part of the accompanying financial statements.
F-38
<PAGE>
[The image of a hip, adolescent girl is displayed on the top half of the
inside back cover, with the phrase "Who am i?" positioned at the top of the
page. Beneath the image of the girl are the statements "i am the internet
generation," "i am a vast community" and " And, i am here." Displayed
horizontally beneath these statements are the logos of the four Snowball
networks. Beneath the network logos is the Snowball logo, with the phrase "We
are i" under the logo.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Cautionary Note on Forward-Looking Statements............................ 18
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Consolidated Financial Data..................................... 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 31
Management............................................................... 46
Related Party Transactions............................................... 59
Principal Stockholders................................................... 61
Description of Capital Stock............................................. 63
Shares Available for Future Sale......................................... 67
Underwriting............................................................. 69
Legal Matters............................................................ 71
Experts.................................................................. 71
Where You Can Find Additional Information................................ 71
Index to Financial Statements............................................ F-1
</TABLE>
--------------
Through and including , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealer's obligation to deliver a prospectus when
acting as an underwriter and with respect to an unsold allotment or
subscription.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,250,000 Shares
Snowball.com, Inc.
Common Stock
--------------
--------------
Goldman, Sachs & Co.
Chase H&Q
Robertson Stephens
Representatives of the Underwriters
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses to be paid by the
Registrant in connection with the sale of the shares of common stock being
registered hereby. All amounts are estimates except for the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 22,770
NASD filing fee.................................................. 9,125
Nasdaq National Market filing fee................................ 95,000
Accounting fees and expenses..................................... 300,000
Legal fees and expenses.......................................... 400,000
Road show expenses............................................... 35,000
Printing and engraving expenses.................................. 250,000
Blue sky fees and expenses....................................... 10,000
Transfer agent and registrar fees and expenses................... 10,000
Miscellaneous.................................................... 168,105
----------
Total...................................................... $1,300,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act").
As permitted by the Delaware General Corporation Law, the Registrant's
Certificate of Incorporation includes a provision that eliminates the personal
liability of its directors for monetary damages for breach of fiduciary duty as
a director, except for liability:
. for any breach of the director's duty of loyalty to the Registrant or
its stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under section 174 of the Delaware General Corporation Law (regarding
unlawful dividends and stock purchases); or
. for any transaction from which the director derived an improper personal
benefit.
As permitted by the Delaware General Corporation Law, the Registrant's Bylaws
provide that:
. the Registrant is required to indemnify its directors and officers to
the fullest extent permitted by the Delaware General Corporation Law,
subject to certain very limited exceptions;
. the Registrant may indemnify its other employees and agents as set forth
in the Delaware General Corporation Law;
. the Registrant is required to advance expenses, as incurred, to its
directors and officers in connection with a legal proceeding to the
fullest extent permitted by the Delaware General Corporation Law,
subject to certain very limited exceptions; and
. the rights conferred in the Bylaws are not exclusive.
II-1
<PAGE>
The Registrant intends to enter into Indemnity Agreements with each of its
current directors and executive officers to give such directors and executive
officers additional contractual assurances regarding the scope of the
indemnification set forth in the Registrant's Certificate of Incorporation and
to provide additional procedural protections. At present, there is no pending
litigation or proceeding involving a director, officer or employee of the
Registrant regarding which indemnification is sought, nor is the Registrant
aware of any threatened litigation that may result in claims for
indemnification.
Reference is also made to Section 8 of the Underwriting Agreement, which
provides for the indemnification of officers, directors and controlling persons
of the Registrant against certain liabilities. The indemnification provision in
the Registrant's Certificate of Incorporation, Bylaws and the Indemnity
Agreements entered into between the Registrant and each of its directors and
executive officers may be sufficiently broad to permit indemnification of the
Registrant's directors and executive officers for liabilities arising under the
Securities Act.
The Registrant maintains directors' and officers' liability insurance and
expects to obtain a rider to such coverage for securities matters.
See also the undertakings set out in response to Item 17.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
Exhibit Document Number
---------------- ------
<S> <C>
Form of Underwriting Agreement...................................... 1.01
Registrant's Amended and Restated Certificate of Incorporation...... 3.01
Registrant's Restated Bylaws........................................ 3.03
Amended and Restated Investor Rights Agreement, dated as of December
20, 1999........................................................... 4.02
Form of Indemnity Agreement......................................... 10.01
</TABLE>
Item 15. Recent Sales of Unregistered Securities.
1. Through December 31, 1999, we issued and sold an aggregate of
3,613,075 shares of our common stock to employees, consultants, directors,
and other service providers at prices ranging from $0.0467 to $4.50 per
share under direct issuances or exercises of options granted under our 1999
Equity Incentive Plan or exercises of options granted outside of our
1999 Equity Incentive Plan. All shares purchased under our 1999 Equity
Incentive Plan are subject to our right to repurchase such shares at their
original exercise price. The repurchase feature generally expires for 25%
of the shares after the first year of service and then expires ratably over
the next 36 months. All sales of common stock made pursuant to the exercise
of stock options were made in reliance on Section 4(2) of the Securities
Act and/or on Rule 701 or Rule 506 promulgated under the Securities Act.
Aggregate sales made in reliance on Rule 701 did not exceed either 15% of
our outstanding securities or 15% of our total assets.
2. On February 1, 1999, we issued and sold 1,978,021 shares of our common
stock to our President and Chief Executive Officer, Mark Jung, for a
purchase price of $92,307.67. This sale was made in reliance on Section
4(2) of the Securities Act and/or Rule 506 promulgated under the Securities
Act and was made without general solicitation or advertising. Mr. Jung is
an accredited investor and has access to all relevant information to
evaluate the investment and represented to us that the shares were being
acquired for investment.
3. On February 1, 1999, we issued and sold an aggregate of 989,011 shares
of our Series A preferred stock to certain of our officers and directors
and Imagine Media for an
II-2
<PAGE>
aggregate purchase price of $3,230,770 plus certain assets of Imagine
Media. On March 15, 1999, we issued and sold an additional 100,000 shares
of our Series A preferred stock to one of our officers for a purchase price
of $35,000. Collectively, these shares are convertible into 14,985,165
shares of our common stock. Both sales were made in reliance on Section
4(2) of the Securities Act and/or Rule 506 promulgated under the Securities
Act and were made without general solicitation or advertising. Each
purchaser is a sophisticated investor and had access to all relevant
information necessary to evaluate the investment and represented to us that
the shares were being acquired for investment.
4. On February 1, 1999, we issued and sold an aggregate of 5,000,000
shares of Series B preferred stock to Imagine Media in exchange for certain
assets of that company. These shares were converted into 276,461 shares of
Series B-1 preferred stock on May 11, 1999 for no additional consideration.
The Series B-1 shares are convertible into 414,691 shares of our common
stock. This sale was made in reliance on Section 4(2) of the Securities Act
and/or Rule 506 promulgated under the Securities Act and was made without
general solicitation or advertising. Imagine Media is an accredited
investor and had access to all relevant information necessary to evaluate
the investment and represented to us that the shares were being acquired
for investment.
5. On April 30, 1999, we issued warrants to purchase 21,063 shares of our
Series B-1 preferred stock to Comdisco in connection with a Master Lease
Agreement between Comdisco and us. These warrants were issued to Comdisco
in consideration for the leases under the Master Lease Agreement and have
an exercise price of $4.75 per share.These shares are convertible into
31,595 shares of our common stock. This sale was made in reliance on
Section 4(2) of the Securities Act and/or Rule 506 promulgated under the
Securities Act and was made without general solicitation or advertising.
Comdisco is an accredited investor and had access to all relevant
information necessary to evaluate the investment and represented to us that
the shares were being acquired for investment.
6. On May 11, 1999, we issued and sold an aggregate of 3,530,806 shares
of our Series B-1 preferred stock to private investors and one of our
directors for an aggregate purchase price of $22,350,002. On June 14, 1999,
we issued and sold an additional 221,170 shares of Series B-1 preferred
stock to private investors for an aggregate purchase price of $1,400,007.
On the 20th and 22nd of October 1999, we issued and sold an additional
100,000 shares and 7,899 shares of Series B-1 preferred stock to trusts
associated with one of our directors and a private investor for an
aggregate purchase price of $683,000. Collectively, these shares are
convertible into 5,789,807 shares of our common stock. All sales were made
in reliance on Section 4(2) of the Securities Act and/or Rule 506
promulgated under the Securities Act and were made without general
solicitation or advertising. Each purchaser is an accredited investor and
had access to all relevant information necessary to evaluate the investment
and represented to us that the shares were being acquired for investment.
7. On July 9, 1999, we issued 57,500 shares of our common stock to
certain former members of Vault Networks in connection with their
employment by Snowball. These shares represent 86,250 shares of our common
stock after adjustment for the 3-for-2 stock split of our common stock.
These sales were made in reliance on Section 4(2) of the Securities Act
and/or Rule 504 promulgated under the Securities Act and were made without
general solicitation or advertising. Each purchaser represented to us that
the shares were being acquired without an intent to distribute. We
disclosed to each purchaser that the shares were not registered under the
Securities Act and could not be resold unless registered under or exempt
from the registration requirements of the Securities Act.
8. On September 28, 1999, we issued 30,000 shares of our common stock to
certain stockholders of AmeriTrack in exchange for their shares of that
company. These shares
II-3
<PAGE>
represent 45,000 shares of our common stock after adjustment for the 3-for-
2 stock split of our common stock. These sales were made in reliance on
Section 4(2) of the Securities Act and/or Rule 504 promulgated under the
Securities Act and were made without general solicitation or advertising.
Each purchaser represented to us that the shares were being acquired
without an intent to distribute. We disclosed to each purchaser that the
shares were not registered under the Securities Act and could not be resold
unless registered under or exempt from the registration requirements of the
Securities Act.
9. On October 31, 1999, we issued warrants to purchase 14,064 shares of
our Series B-1 preferred stock to Comdisco in connection with a Master
Lease Agreement between Comdisco and us. These warrants were issued to
Comdisco in consideration for additional leases under the Master Lease
Agreement and have an exercise price of $10.67 per share. These shares are
convertible into 21,097 shares of our common stock. This sale was made in
reliance on Section 4(2) of the Securities Act and/or Rule 506 promulgated
under the Securities Act and was made without general solicitation or
advertising. Comdisco is an accredited investor and had access to all
relevant information necessary to evaluate the investment and represented
to us that the shares were being acquired for investment.
10. On October 15, 1999, we issued and sold 560,822 shares of Series B-1
preferred stock to New Line New Media in connection with a commercial
transaction, for an aggregate purchase price of $3,550,000. These shares
are convertible into 841,233 shares of our common stock. This sale was made
in reliance on Section 4(2) of the Securities Act and/or Rule 506
promulgated under the Securities Act and was made without general
solicitation or advertising. New Line New Media is an accredited investor
and had access to all relevant information necessary to evaluate the
investment and represented to us that the shares were being acquired for
investment.
11. On November 8, 1999, we issued warrants to purchase 180,000 shares of
Series B-1 preferred stock to several creditors in connection with a Loan
and Security Agreement between Sand Hill Capital and us. These warrants
were issued to each of these creditors in consideration for the payment of
$1.00 and have an exercise price of $12.66 per share. These shares are
convertible into 269,996 shares of our common stock. These sales were made
in reliance on Section 4(2) of the Securities Act and/or Rule 506
promulgated under the Securities Act and were made without general
solicitation or advertising. Each purchaser is an accredited investor and
had access to all relevant information necessary to evaluate the investment
and represented to us that the shares were being acquired for investment.
12. On December 17, 1999, we issued 75,000 shares of our common stock to
certain stockholders of Extreme Interactive Media in exchange for their
shares of that company. These sales were made in reliance on Section 4(2)
of the Securities Act and/or Rule 504 promulgated under the Securities Act
and were made without general solicitation or advertising. Each purchaser
represented to us that the shares were being acquired without an intent to
distribute. We disclosed to each purchaser that the shares were not
registered under the Securities Act and could not be resold unless
registered under or exempt from the registration requirements of the
Securities Act.
13. On December 20, 1999, we sold an aggregate of 3,529,000 shares of our
Series C preferred stock, of which 3,379,000 shares were issued on December
20, 1999 and 150,000 shares were issued on January 5, 2000, to private
investors for an aggregate purchase price of approximately $32.3 million in
cash and $3.0 million in debt conversion. Collectively, these shares are
convertible into 3,529,000 shares of our common stock. These sales were
made in reliance on Section 4(2) of the Securities Act and/or Rule 506
promulgated under the Securities Act and were made without general
solicitation or advertising. Each purchaser is an accredited investor and
had access to all relevant information necessary to evaluate the investment
and represented to us that the shares were being acquired for investment.
II-4
<PAGE>
Shares of our Preferred Stock may be converted to Common Stock by any holder
of these shares at any time upon surrender of the certificates representing
such shares and written notice to us. Shares of any series of our Preferred
Stock automatically convert to Common Stock, if a majority of the shares of
that series elects to convert. All shares of our Preferred Stock will convert
to Common Stock upon completion of this offering.
Item 16. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.01* Form of Underwriting Agreement.
2.01* Stock Exchange Agreement among Registrant, Ameritrack, Inc. and the
security holders of Ameritrack, Inc., dated as of September 28, 1999.
2.02* Stock Purchase and Exchange Agreement among Registrant, Extreme
Interactive Media, Inc. and all of the security holders of Extreme
Interactive Media, Inc., dated as of December 17, 1999.
3.01* Registrant's Amended and Restated Certificate of Incorporation.
3.02 Registrant's Amended and Restated Certificate of Incorporation (to be
filed immediately after the closing of this offering).
3.03* Registrant's Bylaws.
3.04 Registrant's Restated Bylaws (adopted February 22, 2000 with an
effective date immediately following this offering).
4.01** Form of Specimen Certificate for Registrant's common stock.
4.02* Amended and Restated Investor Rights Agreement, dated as of December
20, 1999.
5.01** Opinion of Fenwick & West LLP regarding legality of the securities
being registered.
10.01* Form of Indemnity Agreement between Registrant and each of its
directors and executive officers.
10.02* 1999 Equity Incentive Plan and related agreements.
10.03 2000 Equity Incentive Plan and forms of stock option agreements and
stock option exercise agreements.
10.04 2000 Employee Stock Purchase Plan and forms of related agreements.
10.05* Adoption Agreement for Pan American Life Insurance Standardized 401(k)
Profit Sharing Plan and Trust dated April 1, 1999, and related
agreements.
10.06* Offer Letter dated February 1, 1999 from Registrant to Mark A. Jung.
10.07* Offer Letter dated January 18, 1999 from Registrant to Janette S.
Chock.
10.08* Offer Letter dated March 4, 1999 from Registrant to Elizabeth G.
Murphy.
10.09* Offer Letter dated March 15, 1999 from Registrant to Teresa M.
Crummett.
10.10* Offer Letter dated March 15, 1999 from Registrant to Kenneth H.
Keller.
10.11* Offer Letter dated October 18, 1999 from Registrant to James R.
Tolonen.
10.12* Secured Promissory Note between Registrant and Mark A. Jung, dated as
of February 1, 1999.
10.13* Secured Promissory Note between Registrant and Christopher Anderson,
dated as of February 1, 1999.
10.14* Secured Promissory Note between Registrant and James R. Tolonen and
Ginger Tolonen Family Trust dated 9/26/96, dated as of October 20,
1999.
10.15* Secured Promissory Note between Registrant and James R. Tolonen, dated
as of November 30, 1999.
10.16* Series A Preferred Stock and Series B Preferred Stock Purchase
Agreement, dated as of January 7, 1999.
10.17* Services and Support Agreement between Registrant and Imagine Media,
Inc., dated as of January 7, 1999.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.18* Brisbane Technology Park Lease dated November 29, 1999, between
Registrant and GAL-Brisbane, L.P.
10.19* Sublease Agreement dated as of May 1, 1999, between Registrant and
Imagine Media, Inc.
10.20* Loan and Security Agreement dated November 8, 1999, between Registrant
and Sand Hill Capital II, L.P.
10.21* Indemnity Agreement dated as of June 1, 1999, between Registrant and
Richard LeFurgy.
10.22+* Desktop.com Letter Agreement dated as of December 29, 1999 between the
Registrant and Desktop.com, Inc.
10.23+* eCommerce and Content Agreement dated as of January 1, 2000 between
the Registrant and EBWorld.com, Inc.
10.24+* eCommerce Agreement dated as of October 15, 1999 between the
Registrant and edu.com, inc.
10.25+* Content Agreement dated as of September 29, 1999 between the
Registrant and Gloss.com, Inc.
10.26+* eCommerce Agreement dated as of December 23, 1999 between the
Registrant and Kabang.com, Inc.
10.27+* Services and Promotion Agreement dated as of December 22, 1999 between
the Registrant and Riffage.com, Inc.
10.28+* Services and Promotion Agreement dated as of December 22, 1999 between
the Registrant and X-drive, Inc.
10.29+* Webcourier Provider Agreement dated as of November 29, 1999 between
the Registrant and Microsoft Corporation.
10.30+* Webcourier Provider Agreement dated as of October 28, 1999 between the
Registrant and Microsoft Corporation.
10.31+* Webcourier Provider Agreement dated as of October 25, 1999 between the
Registrant and Microsoft Corporation.
21.01* Subsidiaries of Registrant
23.01** Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of Ernst & Young LLP, independent auditors.
23.03 Consent of Hamilton & Associates, Inc., independent auditors.
23.04 Consent of J.W. Hunt and Company LLP, independent auditors.
24.01* Power of Attorney.
27.01* Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
+ Portions of this exhibit have been omitted pursuant to an application for
confidential treatment.
(b) Financial statement schedules are omitted because the information called
for is not required or is shown either in the financial statements or the
notes thereto.
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 for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, 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
II-6
<PAGE>
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 such director, officer or controlling person in
connection with the securities being registered, 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:
(1) 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.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of San Francisco, State
of California, on this 25th day of February, 2000.
SNOWBALL.COM, INC.
/s/ James R. Tolonen
By: _________________________________
James R. Tolonen
Chief Financial Officer and Chief
Operating Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* President, Chief Executive February 25, 2000
______________________________________ Officer and a director
Mark A. Jung (Principal Executive
Officer)
/s/ James R. Tolonen Chief Financial Officer and February 25, 2000
______________________________________ Chief Operating Officer
James R. Tolonen (Principal Financial
Officer)
* Controller and Chief February 25, 2000
______________________________________ Accounting Officer
Janette S. Chock (Principal Accounting
Officer)
* Director February 25, 2000
______________________________________
Christopher Anderson
* Director February 25, 2000
______________________________________
Richard A. LeFurgy
* Director February 25, 2000
______________________________________
Michael Orsak
* Director February 25, 2000
______________________________________
Robert H. Reid
*By: _________________________________
/s/ James R. Tolonen
James R. Tolonen
Attorney-in-Fact
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
3.02 Registrant's Amended and Restated Certificate of Incorporation (to be
filed after the closing of this offering).
3.04 Registrant's Restated Bylaws (adopted February 22, 2000 with an
effective date immediately following this offering).
10.03 2000 Equity Incentive Plan and forms of stock option agreements and
stock option exercise agreements.
10.04 2000 Employee Stock Purchase Plan and forms of related agreements.
23.02 Consent of Ernst & Young LLP, independent auditors.
23.03 Consent of Hamilton & Associates, Inc., independent auditors.
23.04 Consent of J.W. Hunt and Company LLP, independent auditors.
</TABLE>
<PAGE>
EXHIBIT 3.02
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SNOWBALL.COM, INC.
(Originally incorporated on January 6, 1999 under the name Affiliation, Inc.
(Delaware))
Snowball.com, Inc., a Delaware corporation, hereby certifies that the
Second Amended and Restated Certificate of Incorporation of the corporation
attached hereto as Exhibit "A", which is incorporated herein by this reference,
-----------
has been duly adopted by the corporation's Board of Directors and stockholders
in accordance with Sections 242 and 245 of the Delaware General Corporation Law,
with the approval of the corporation's stockholders having been given by written
consent without a meeting in accordance with Section 228 of the Delaware General
Corporation Law.
IN WITNESS WHEREOF, said corporation has caused this Second Amended and
Restated Certificate of Incorporation to be signed by its by duly authorized
officer.
Dated: March __, 2000
Snowball.com, Inc.
____________________________________________
Mark A. Jung, President and Chief Executive
Officer
<PAGE>
Exhibit "A"
-----------
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SNOWBALL.COM, INC.
ARTICLE I
The name of the corporation is Snowball.com, Inc.
ARTICLE II
The address of the registered office of the corporation in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle. The
name of its registered agent at that address is Corporation Service Company.
ARTICLE III
The purpose of the corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
ARTICLE IV
The total number of shares of all classes of stock which the corporation
has authority to issue is 105,000,000 shares, consisting of two classes:
100,000,000 shares of Common Stock, $0.001 par value per share, and 5,000,000
shares of Preferred Stock, $0.001 par value per share.
The Board of Directors is authorized, subject to any limitations prescribed
by the law of the State of Delaware, to provide for the issuance of the shares
of Preferred Stock in one or more series, and, by filing a Certificate of
Designation pursuant to the applicable law of the State of Delaware, to
establish from time to time the number of shares to be included in each such
series, to fix the designation, powers, preferences and rights of the shares of
each such series and any qualifications, limitations or restrictions thereof,
and to increase or decrease the number of shares of any such series (but not
below the number of shares of such series then outstanding). The number of
authorized shares of Preferred Stock may also be increased or decreased (but not
below the number of shares thereof then outstanding) by the affirmative vote of
the holders of a majority of the stock of the corporation entitled to vote,
unless a vote of any other holders is required pursuant to a Certificate or
Certificates establishing a series of Preferred Stock.
Except as otherwise expressly provided in any Certificate of Designation
designating any series of Preferred Stock pursuant to the foregoing provisions
of this Article IV, any new series of Preferred Stock may be designated, fixed
and determined as provided herein by the Board of Directors without approval of
the holders of Common Stock or the holders of Preferred Stock, or any series
thereof, and any such new series may have powers, preferences and rights,
including, without limitation, voting rights, dividend rights, liquidation
rights, redemption rights and
<PAGE>
conversion rights, senior to, junior to or pari passu with the rights of the
Common Stock, the Preferred Stock, or any future class or series of Preferred
Stock or Common Stock.
ARTICLE V
The Board of Directors of the corporation shall have the power to adopt,
amend or repeal the Bylaws of the corporation.
ARTICLE VI
For the management of the business and for the conduct of the affairs of
the corporation, and in further definition, limitation and regulation of the
powers of the corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
(A) The conduct of the affairs of the corporation shall be managed under
the direction of the Board of Directors. The number of directors shall be fixed
from time to time exclusively by resolution of the Board of Directors.
(B) Notwithstanding the foregoing provision of this Article VI, each
director shall hold office until such director's successor is elected and
qualified, or until such director's earlier death, resignation or removal. No
decrease in the authorized number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
(C) Subject to the rights of the holders of any series of Preferred Stock,
any vacancy occurring in the Board of Directors for any cause, and any newly
created directorship resulting from any increase in the authorized number of
directors, shall, unless (i) the Board of Directors determines by resolution
that any such vacancies or newly created directorships shall be filled by the
stockholders, or (ii) as otherwise provided by law, be filled only by the
affirmative vote of a majority of the directors then in office, although less
than a quorum, or by a sole remaining director, and not by the stockholders.
Any director elected in accordance with the preceding sentence shall hold office
for the remainder of the full term of the director for which the vacancy was
created or occurred.
(D) Subject to the rights of the holders of any series of Preferred Stock,
any director or the entire Board of Directors may be removed by the holders of
at least sixty-six and two-thirds percent (66-2/3%) of the shares then entitled
to vote at an election of directors.
(E) Subject to the rights of the holders of any series of Preferred Stock
to elect additional directors under specified circumstances, the directors shall
be divided, with respect to the time for which they severally hold office, into
three classes designated as Class I, Class II and Class III, respectively.
Directors shall be assigned to each class in accordance with a resolution or
resolutions adopted by the Board of Directors, with the number of directors in
each class to be divided as equally as reasonably possible. The term of office
of the Class I directors shall expire at the corporation's first annual meeting
of stockholders following the closing of the corporation's initial public
offering pursuant to an effective registration statement under the Securities
Act of
2
<PAGE>
1933, as amended, covering the offer and sale of Common Stock to the public (the
"Initial Public Offering"), the term of office of the Class II directors shall
expire at the corporation's second annual meeting of stockholders following the
closing of the Initial Public Offering, and the term of office of the Class III
directors shall expire at the corporation's third annual meeting of stockholders
following the closing of the Initial Public Offering. At each annual meeting of
stockholders commencing with the first annual meeting of stockholders following
the closing of the Initial Public Offering, directors elected to succeed those
directors of the class whose terms then expire shall be elected for a term of
office to expire at the third succeeding annual meeting of stockholders after
their election.
(F) Election of directors need not be by written ballot unless the Bylaws
of the corporation shall so provide.
(G) No action shall be taken by the stockholders of the corporation except
at an annual or special meeting of stockholders called in accordance with the
Bylaws of the corporation, and no action shall be taken by the stockholders by
written consent.
(H) Advance notice of stockholder nominations for the election of directors
of the corporation and of business to be brought by stockholders before any
meeting of stockholders of the corporation shall be given in the manner provided
in the Bylaws of the corporation. Business transacted at special meetings of
stockholders shall be confined to the purpose or purposes stated in the notice
of meeting.
(I) Subject to Section 6.5 of the Bylaws of the corporation, stockholders
of the corporation holding at least sixty-six and two-thirds percent (66-2/3%)
of the corporation's outstanding voting stock then entitled to vote at an
election of directors shall have the power to adopt, amend or repeal Bylaws of
the corporation.
(J) The affirmative vote of the holders of at least sixty-six and two-
thirds percent (66-2/3%) of the corporation's outstanding voting stock then
entitled to vote at an election of directors, voting together as a single class,
shall be required to alter, change, amend, repeal or adopt any provision
inconsistent with this Article VI.
ARTICLE VII
To the fullest extent permitted by law, no director of the corporation
shall be personally liable for monetary damages for breach of fiduciary duty as
a director. Without limiting the effect of the preceding sentence, if the
Delaware General Corporation Law is hereafter amended to authorize the further
elimination or limitation of the liability of a director, then the liability of
a director of the corporation shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law, as so amended.
Neither any amendment nor repeal of this Article VII, nor the adoption of
any provision of this Certificate of Incorporation inconsistent with this
Article VII, shall eliminate, reduce or otherwise adversely affect any
limitation on the personal liability of a director of the corporation existing
at the time of such amendment, repeal or adoption of such an inconsistent
provision.
3
<PAGE>
EXHIBIT 3.04
RESTATED BYLAWS
OF
SNOWBALL.COM, INC.
(a Delaware corporation)
As Adopted February 22, 2000
Effective upon the date the Company's registration
statement on Form S-1 (Registration No. 333-93487)
is declared effective by the Securities and Exchange
Commission
<PAGE>
RESTATED BYLAWS
OF
SNOWBALL.COM, INC.
a Delaware corporation
TABLE OF CONTENTS
<TABLE>
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Article I - STOCKHOLDERS
Section 1.1: Annual Meetings........................................ 1
Section 1.2: Special Meetings....................................... 1
Section 1.3: Notice of Meetings..................................... 1
Section 1.4: Adjournments........................................... 1
Section 1.5: Quorum................................................. 2
Section 1.6: Organization........................................... 2
Section 1.7: Voting; Proxies........................................ 2
Section 1.8: Fixing Date for Determination of Stockholders of
Record ................................................ 2
Section 1.9: List of Stockholders Entitled to Vote.................. 3
Section 1.10: Inspectors of Elections................................ 3
Section 1.11: Notice of Stockholder Business; Nominations............ 4
Article II - BOARD OF DIRECTORS
Section 2.1: Number; Qualifications................................. 6
Section 2.2: Election; Resignation; Removal; Vacancies.............. 6
Section 2.3: Regular Meetings....................................... 7
Section 2.4: Special Meetings....................................... 7
Section 2.5: Telephonic Meetings Permitted.......................... 7
Section 2.6: Quorum; Vote Required for Action....................... 8
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<PAGE>
RESTATED BYLAWS
OF
SNOWBALL.COM, INC.
a Delaware corporation
TABLE OF CONTENTS (cont'd)
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Section 2.7: Organization.......................................... 8
Section 2.8: Written Action by Directors........................... 8
Section 2.9: Powers................................................ 8
Section 2.10: Compensation of Directors............................. 8
Article III - COMMITTEES
Section 3.1: Committees............................................ 8
Section 3.2: Committee Rules....................................... 9
Article IV - OFFICERS
Section 4.1: Generally............................................. 9
Section 4.2: Chief Executive Officer............................... 9
Section 4.3: Chairperson of the Board.............................. 10
Section 4.4: President............................................. 10
Section 4.5: Vice President........................................ 10
Section 4.6: Chief Financial Officer............................... 10
Section 4.7: Treasurer............................................. 10
Section 4.8: Secretary............................................. 10
Section 4.9: Delegation of Authority............................... 10
Section 4.10: Removal............................................... 11
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RESTATED BYLAWS
OF
SNOWBALL.COM, INC.
a Delaware corporation
TABLE OF CONTENTS (cont'd)
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Article V - STOCK
Section 5.1: Certificates........................................... 11
Section 5.2: Lost, Stolen or Destroyed Stock Certificates;
Issuance of New Certificate............................ 11
Section 5.3: Other Regulations...................................... 11
Article VI - INDEMNIFICATION
Section 6.1: Indemnification of Officers and Directors.............. 11
Section 6.2: Advance of Expenses.................................... 12
Section 6.3: Non-Exclusivity of Rights.............................. 12
Section 6.4: Indemnification Contracts.............................. 12
Section 6.5: Effect of Amendment.................................... 12
Article VII - NOTICES
Section 7.1: Notice................................................. 13
Section 7.2: Waiver of Notice....................................... 13
Article VIII - INTERESTED DIRECTORS
Section 8.1: Interested Directors; Quorum........................... 13
Article IX - MISCELLANEOUS................................................. 14
Section 9.1: Fiscal Year............................................ 14
Section 9.2: Seal................................................... 14
Section 9.3: Form of Records........................................ 14
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<PAGE>
RESTATED BYLAWS
OF
SNOWBALL.COM, INC.
(a Delaware corporation)
As adopted February 22, 2000*
ARTICLE I
STOCKHOLDERS
Section 1.1: Annual Meetings. Unless directors are elected by written
----------- ---------------
consent in lieu of an annual meeting as permitted by Section 211 of the Delaware
General Corporation Law, an annual meeting of stockholders shall be held for the
election of directors at such date, time and place, either within or without the
State of Delaware, as the Board of Directors shall each year fix. Any other
proper business may be transacted at the annual meeting.
Section 1.2: Special Meetings. Special meetings of stockholders for any
----------- ----------------
purpose or purposes may be called at any time by the Board of Directors, and
shall be called upon the request of the Chairperson of the Board of Directors,
the Chief Executive Officer, the President, or by a majority of the members of
the Board of Directors. Special meetings may not be called by any other person
or persons. If a special meeting of stockholders is called at the request of
any person or persons other than by a majority of the members of the Board of
----------
Directors, then such person or persons shall request such meeting by delivering
a written request to call such meeting to each member of the Board of Directors,
and the Board of Directors shall then determine the time, date and place of such
special meeting, which shall be held not more than one hundred twenty (120) nor
less than thirty-five (35) days after the written request to call such special
meeting was delivered to each member of the Board of Directors.
Section 1.3: Notice of Meetings. Written notice of all meetings of
----------- ------------------
stockholders shall be given stating the place, date and time of the meeting and,
in the case of a special meeting, the purpose or purposes for which the meeting
is called. Unless otherwise required by applicable law or the Certificate of
Incorporation of the Corporation, such notice shall be given not less than ten
(10) nor more than sixty (60) days before the date of the meeting to each
stockholder of record entitled to vote at such meeting.
Section 1.4: Adjournments. Any meeting of stockholders may adjourn from
----------- ------------
time to time to reconvene at the same or another place, and notice need not be
given of any such adjourned meeting if the time, date and place thereof are
announced at the meeting at which the adjournment is taken; provided, however,
-------- -------
that if the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, then a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting. At the adjourned meeting the Corporation may transact
any business that might have been transacted at the original meeting.
1
- -----------
* Effective upon the date the Company's registration statement on Form S-1
(Registration No. 333-93487) is declared effective by the Securities and
Exchange Commission.
<PAGE>
Section 1.5: Quorum. At each meeting of stockholders the holders of a
----------- ------
majority of the shares of stock entitled to vote at the meeting, present in
person or represented by proxy, shall constitute a quorum for the transaction of
business, except if otherwise required by applicable law. If a quorum shall
fail to attend any meeting, the chairperson of the meeting or the holders of a
majority of the shares entitled to vote who are present, in person or by proxy,
at the meeting may adjourn the meeting. Shares of the Corporation's stock
belonging to the Corporation (or to another corporation, if a majority of the
shares entitled to vote in the election of directors of such other corporation
are held, directly or indirectly, by the Corporation), shall neither be entitled
to vote nor be counted for quorum purposes; provided, however, that the
-------- -------
foregoing shall not limit the right of the Corporation or any other corporation
to vote any shares of the Corporation's stock held by it in a fiduciary
capacity.
Section 1.6: Organization. Meetings of stockholders shall be presided
----------- ------------
over by such person as the Board of Directors may designate, or, in the absence
of such a person, the Chairperson of the Board of Directors, or, in the absence
of such person, the President of the Corporation, or, in the absence of such
person, such person as may be chosen by the holders of a majority of the shares
entitled to vote who are present, in person or by proxy, at the meeting. Such
person shall be chairperson of the meeting and, subject to Section 1.10 hereof,
shall determine the order of business and the procedure at the meeting,
including such regulation of the manner of voting and the conduct of discussion
as seems to him or her to be in order. The Secretary of the Corporation shall
act as secretary of the meeting, but in such person's absence the chairperson of
the meeting may appoint any person to act as secretary of the meeting.
Section 1.7: Voting; Proxies. Unless otherwise provided by law or the
----------- ---------------
Certificate of Incorporation, and subject to the provisions of Section 1.8 of
these Bylaws, each stockholder shall be entitled to one (1) vote for each share
of stock held by such stockholder. 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
such stockholder by proxy. Such a proxy may be prepared, transmitted and
delivered in any manner permitted by applicable law. Voting at meetings of
stockholders need not be by written ballot unless such is demanded at the
meeting before voting begins by a stockholder or stockholders holding shares
representing at least one percent (1%) of the votes entitled to vote at such
meeting, or by such stockholder's or stockholders' proxy; provided, however,
-------- -------
that an election of directors shall be by written ballot if demand is so made by
any stockholder at the meeting before voting begins. If a vote is to be taken
by written ballot, then each such ballot shall state the name of the stockholder
or proxy voting and such other information as the chairperson of the meeting
deems appropriate. Directors shall be elected by a plurality of the votes of
the shares present in person or represented by proxy at the meeting and entitled
to vote on the election of directors. Unless otherwise provided by applicable
law, the Certificate of Incorporation or these Bylaws, every matter other than
the election of directors shall be decided by the affirmative vote of the
holders of a majority of the shares of stock entitled to vote thereon that are
present in person or represented by proxy at the meeting and are voted for or
against the matter.
Section 1.8: Fixing Date for Determination of Stockholders of Record. 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 receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
2
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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
precede the date upon which the resolution fixing the record date is adopted by
the Board of Directors and 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 no record date is fixed by the Board of
Directors, then the record date shall be as provided by applicable law. 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.
Section 1.9: List of Stockholders Entitled to Vote. A complete list of
----------- -------------------------------------
stockholders entitled to vote at any meeting of stockholders, arranged in
alphabetical order and showing the address of each stockholder and the number of
shares registered in the name of each stockholder, 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 at the meeting.
Section 1.10: Inspectors of Elections.
------------ -----------------------
(a) Applicability. Unless otherwise provided in the Corporation's
-------------
Certificate of Incorporation or required by the Delaware General Corporation
Law, the following provisions of this Section 1.10 shall apply only if and when
the Corporation has a class of voting stock that is: (i) listed on a national
securities exchange; (ii) authorized for quotation on an automated interdealer
quotation system of a registered national securities association; or (iii) held
of record by more than 2,000 stockholders; in all other cases, observance of the
provisions of this Section 1.10 shall be optional, and at the discretion of the
Corporation.
(b) Appointment. The Corporation shall, in advance of any meeting of
-----------
stockholders, appoint one or more inspectors of election to act at the meeting
and make a written report thereof. The Corporation may designate one or more
persons as alternate inspectors to replace any inspector who fails to act. If
no inspector or alternate is able to act at a meeting of stockholders, the
person presiding at the meeting shall appoint one or more inspectors to act at
the meeting.
(c) Inspector's Oath. Each inspector of election, before entering upon the
----------------
discharge of his duties, shall take and sign an oath faithfully to execute the
duties of inspector with strict impartiality and according to the best of such
inspector's ability.
(d) Duties of Inspectors. At a meeting of stockholders, the inspectors of
--------------------
election shall (i) ascertain the number of shares outstanding and the voting
power of each share, (ii) determine the shares represented at a meeting and the
validity of proxies and ballots, (iii) count all votes and ballots, (iv)
determine and retain for a reasonable period of time a record of the disposition
of any challenges made to any determination by the inspectors, and (v) certify
their determination of the number of shares represented at the meeting, and
their count of all votes and ballots. The
3
<PAGE>
inspectors may appoint or retain other persons or entities to assist the
inspectors in the performance of the duties of the inspectors.
(e) Opening and Closing of Polls. The date and time of the opening and the
----------------------------
closing of the polls for each matter upon which the stockholders will vote at a
meeting shall be announced by the chairperson of the meeting. No ballot,
proxies or votes, nor any revocations thereof or changes thereto, shall be
accepted by the inspectors after the closing of the polls unless the Court of
Chancery upon application by a stockholder shall determine otherwise.
(f) Determinations. In determining the validity and counting of proxies
--------------
and ballots, the inspectors shall be limited to an examination of the proxies,
any envelopes submitted with those proxies, any information provided in
connection with proxies in accordance with Section 212(c)(2) of the Delaware
General Corporation Law, ballots and the regular books and records of the
Corporation, except that the inspectors may consider other reliable information
for the limited purpose of reconciling proxies and ballots submitted by or on
behalf of banks, brokers, their nominees or similar persons which represent more
votes than the holder of a proxy is authorized by the record owner to cast or
more votes than the stockholder holds of record. If the inspectors consider
other reliable information for the limited purpose permitted herein, the
inspectors at the time they make their certification of their determinations
pursuant to this Section 1.10 shall specify the precise information considered
by them, including the person or persons from whom they obtained the
information, when the information was obtained, the means by which the
information was obtained and the basis for the inspectors' belief that such
information is accurate and reliable.
Section 1.11: Notice of Stockholder Business; Nominations.
------------- -------------------------------------------
(a) Annual Meeting of Stockholders.
------------------------------
(i) Nominations of persons for election to the Board of Directors
and the proposal of business to be considered by the stockholders shall be made
at an annual meeting of stockholders (A) pursuant to the Corporation's notice of
such meeting, (B) by or at the direction of the Board of Directors or (C) by any
stockholder of the Corporation who was a stockholder of record at the time of
giving of the notice provided for in this Section 1.11, who is entitled to vote
at such meeting and who complies with the notice procedures set forth in this
Section 1.11.
(ii) For nominations or other business to be properly brought before
an annual meeting by a stockholder pursuant to clause (C) of subparagraph (a)(i)
of this Section 1.11, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation and such other business must
otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice must be delivered to the Secretary at the principal
executive offices of the Corporation not later than the close of business on the
sixtieth (60th) day nor earlier than the close of business on the ninetieth
(90th) day prior to the first anniversary of the preceding year's annual meeting
(except in the case of the 2001 annual meeting, for which such notice shall be
timely if delivered in the same time period as if such meeting were a special
meeting governed by subparagraph (b) of this Section 1.11); provided, however,
-------- -------
that in the event that the date of the annual meeting is more than thirty (30)
days before or more than sixty (60) days after such anniversary date, notice by
the stockholder to be timely must be so delivered not earlier than the close of
business on the ninetieth (90th) day prior to such annual meeting and not later
than the
4
<PAGE>
close of business on the later of the sixtieth (60th) day prior to such
annual meeting or the close of business on the tenth (10th) day following the
day on which public announcement of the date of such meeting is first made by
the Corporation. Such stockholder's notice shall set forth: (a) as to each
person whom the stockholder proposes to nominate for election or reelection as a
director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected; (b) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (c) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (1) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner, and (2) the class and number of shares of the Corporation that are owned
beneficially and held of record by such stockholder and such beneficial owner.
(iii) Notwithstanding anything in the second sentence of subparagraph
(a)(ii) of this Section 1.11 to the contrary, in the event that the number of
directors to be elected to the Board of Directors of the Corporation is
increased and there is no public announcement by the Corporation naming all of
the nominees for director or specifying the size of the increased board of
directors at least seventy (70) days prior to the first anniversary of the
preceding year's annual meeting (or, if the annual meeting is held more than
thirty (30) days before or sixty (60) days after such anniversary date, at least
seventy (70) days prior to such annual meeting), a stockholder's notice required
by this Section 1.11 shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall be
delivered to the Secretary of the Corporation at the principal executive office
of the Corporation not later than the close of business on the tenth (10th) day
following the day on which such public announcement is first made by the
Corporation.
(b) Special Meetings of Stockholders. Only such business shall be
--------------------------------
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of such meeting. Nominations
of persons for election to the Board of Directors may be made at a special
meeting of stockholders at which directors are to be elected pursuant to the
Corporation's notice of such meeting (i) by or at the direction of the Board of
Directors or (ii) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice of
the special meeting, who shall be entitled to vote at the meeting and who
complies with the notice procedures set forth in this Section 1.11. In the
event the Corporation calls a special meeting of stockholders for the purpose of
electing one or more directors to the Board of Directors, any such stockholder
may nominate a person or persons (as the case may be), for election to such
position(s) as specified in the Corporation's notice of meeting, if the
stockholder's notice required by subparagraph (a)(ii) of this Section 1.11 shall
be delivered to the Secretary of the Corporation at the principal executive
offices of the Corporation not earlier than the ninetieth (90th) day prior to
such special meeting and not later than the close of business on the later of
the sixtieth (60th) day prior to such special meeting or the tenth (10th)
5
<PAGE>
day following the day on which public announcement is first made of the date of
the special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting.
(c) General.
-------
(i) Only such persons who are nominated in accordance with the
procedures set forth in this Section 1.11 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 1.11. Except as otherwise provided by law or these
Bylaws, the chairperson of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought before the
meeting was made or proposed, as the case may be, in accordance with the
procedures set forth in this Section 1.11 and, if any proposed nomination or
business is not in compliance herewith, to declare that such defective proposal
or nomination shall be disregarded.
(ii) For purposes of this Section 1.11, the term "public
announcement" shall mean disclosure in a press release reported by the Dow Jones
News Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to section 13, 14 or 15(d) of the Exchange Act.
(iii) Notwithstanding the foregoing provisions of this Section 1.11,
a stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth herein. Nothing in this Section 1.11 shall be deemed to affect any rights
of stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1: Number; Qualifications. The Board of Directors shall consist
----------- ----------------------
of one or more members. The initial number of directors shall be six (6), and
thereafter shall be fixed from time to time by resolution of the Board of
Directors. No decrease in the authorized number of directors constituting the
Board of Directors shall shorten the term of any incumbent director. Directors
need not be stockholders of the Corporation.
Section 2.2: Election; Resignation; Removal; Vacancies. Subject to the
----------- -----------------------------------------
rights of the holders of any series of Preferred Stock to elect additional
directors under specified circumstances, the directors shall be divided, with
respect to the time for which they severally hold office, into three classes
designated as Class I, Class II and Class III, respectively. Directors shall be
assigned to each class in accordance with a resolution or resolutions adopted by
the Board of Directors, with the number of directors in each class to be divided
as equally as reasonably possible. The term of office of the Class I directors
shall expire at the corporation's first annual meeting of stockholders following
the closing of the corporation's initial public offering pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
covering the offer and sale of Common Stock to the public (the "Initial Public
Offering"), the term of office of the Class II directors shall expire at the
corporation's second annual meeting of stockholders following the closing of the
Initial Public Offering, and the term of office of the Class III directors shall
expire at the corporation's third annual meeting of
6
<PAGE>
stockholders following the closing of the Initial Public Offering. At each
annual meeting of stockholders commencing with the first annual meeting of
stockholders following the closing of the Initial Public Offering, directors
elected to succeed those directors of the class whose terms then expire shall be
elected for a term of office to expire at the third succeeding annual meeting of
stockholders after their election. Any director may resign at any time upon
written notice to the Corporation. Subject to the rights of the holders of any
series of Preferred Stock, any director or the entire Board of Directors may be
removed by the holders of at least sixty-six and two-thirds percent (66-2/3%) of
the shares then entitled to vote at an election of directors. Subject to the
rights of the holders of any series of Preferred Stock, any vacancy occurring in
the Board of Directors for any cause, and any newly created directorship
resulting from any increase in the authorized number of directors, shall, unless
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, although less than a quorum, or by a sole
remaining director, and not by the stockholders.
Section 2.3: Regular Meetings. Regular meetings of the Board of Directors
----------- ----------------
may be held at such places, within or without the State of Delaware, and at such
times as the Board of Directors may from time to time determine. Notice of
regular meetings need not be given if the date, times and places thereof are
fixed by resolution of the Board of Directors.
Section 2.4: Special Meetings. Special meetings of the Board of Directors
----------- ----------------
may be called by the Chairperson of the Board of Directors, the President or a
majority of the members of the Board of Directors then in office and may be held
at any time, date or place, within or without the State of Delaware, as the
person or persons calling the meeting shall fix. Notice of the time, date and
place of such meeting shall be given, orally or in writing, by the person or
persons calling the meeting to all directors at least four (4) days before the
meeting if the notice is mailed, or at least twenty-four (24) hours before the
meeting if such notice is given by telephone, hand delivery, telegram, telex,
mailgram, facsimile or similar communication method. Unless otherwise indicated
in the notice, any and all business may be transacted at a special meeting.
Section 2.5: Telephonic Meetings Permitted. Members of the Board of
----------- -----------------------------
Directors, or any committee of the Board, may participate in a meeting of the
Board or such 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 participation in a meeting pursuant to
conference telephone or similar communications equipment shall constitute
presence in person at such meeting.
Section 2.6: Quorum; Vote Required for Action. At all meetings of the
----------- --------------------------------
Board of Directors a majority of the total number of authorized directors shall
constitute a quorum for the transaction of business. Except as otherwise
provided herein or in the Certificate of Incorporation, or required by law, the
vote of a majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board of Directors.
Section 2.7: Organization. Meetings of the Board of Directors shall be
----------- ------------
presided over by the Chairperson of the Board of Directors, or in such person's
absence by the President, or in such person's absence by a chairperson chosen at
the meeting. The Secretary shall act as secretary of the meeting, but in such
person's absence the chairperson of the meeting may appoint any person to act as
secretary of the meeting.
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Section 2.8: Written Action by Directors. 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
such 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,
respectively.
Section 2.9: Powers. The Board of Directors may, except as otherwise
------------ ------
required by law or the Certificate of Incorporation, exercise all such powers
and do all such acts and things as may be exercised or done by the Corporation.
Section 2.10: Compensation of Directors. Directors, as such, may receive,
------------ -------------------------
pursuant to a resolution of the Board of Directors, fees and other compensation
for their services as directors, including without limitation their services as
members of committees of the Board of Directors.
ARTICLE III
COMMITTEES
Section 3.1: Committees. The Board of Directors may designate one or
----------- ----------
more committees, each committee to consist of one or more of the directors of
the Corporation. The Board of Directors 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 the committee, the member or members thereof present at any meeting of
such committee who are not disqualified from voting, whether or not such member
or members constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in place of any such absent or
disqualified member. Any such committee, to the extent provided in a resolution
of the Board of Directors, 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 in reference to the following matters: (i) approving or
adopting, or recommending to the stockholders, any action or matter expressly
required by the Delaware General Corporation Law to be submitted to stockholders
for approval or (ii) adopting, amending or repealing any bylaw of the
Corporation.
Section 3.2: Committee Rules. Unless the Board of Directors otherwise
----------- ---------------
provides, each committee designated by the Board of Directors may make, alter
and repeal rules for the conduct of its business. In the absence of such rules
each committee shall conduct its business in the same manner as the Board of
Directors conducts its business pursuant to Article II of these Bylaws.
ARTICLE IV
OFFICERS
Section 4.1: Generally. The officers of the Corporation shall consist of
----------- ---------
a Chief Executive Officer and/or a President, a Secretary, a Treasurer and such
other officers as may from time to time be appointed by the Board of Directors.
All officers shall be elected by the Board of Directors; provided, however, that
-------- -------
the Board of Directors may empower the Chief
8
<PAGE>
Executive Officer of the Corporation to appoint officers other than the
Chairperson of the Board, the Chief Executive Officer, the President, the Chief
Financial Officer or the Treasurer. Each officer shall hold office until such
person's successor is elected and qualified or until such person's earlier
resignation or removal. Any number of offices may be held by the same person.
Any officer may resign at any time upon written notice to the Corporation. Any
vacancy occurring in any office of the Corporation by death, resignation,
removal or otherwise may be filled by the Board of Directors.
Section 4.2: Chief Executive Officer. Subject to the control of the Board
----------- -----------------------
of Directors and such supervisory powers, if any, as may be given by the Board
of Directors, the powers and duties of the Chief Executive Officer of the
Corporation are:
(a) To act as the general manager and, subject to the control of the Board
of Directors, to have general supervision, direction and control of the business
and affairs of the Corporation;
(b) To preside at all meetings of the stockholders;
(c) To call meetings of the stockholders to be held at such times and,
subject to the limitations prescribed by law or by these Bylaws, at such places
as he or she shall deem proper; and
(d) To affix the signature of the Corporation to all deeds, conveyances,
mortgages, guarantees, leases, obligations, bonds, certificates and other papers
and instruments in writing which have been authorized by the Board of Directors
or which, in the judgment of the Chief Executive Officer, should be executed on
behalf of the Corporation; to sign certificates for shares of stock of the
Corporation; and, subject to the direction of the Board of Directors, to have
general charge of the property of the Corporation and to supervise and control
all officers, agents and employees of the Corporation.
The President shall be the Chief Executive Officer of the Corporation
unless the Board of Directors shall designate another officer to be the Chief
Executive Officer. If there is no President, and the Board of Directors has not
designated any other officer to be the Chief Executive Officer, then the
Chairperson of the Board of Directors shall be the Chief Executive Officer.
Section 4.3: Chairperson of the Board. The Chairperson of the Board of
----------- ------------------------
Directors shall have the power to preside at all meetings of the Board of
Directors and shall have such other powers and duties as provided in these
Bylaws and as the Board of Directors may from time to time prescribe.
Section 4.4: President. The President shall be the Chief Executive
----------- ---------
Officer of the Corporation unless the Board of Directors shall have designated
another officer as the Chief Executive Officer of the Corporation. Subject to
the provisions of these Bylaws and to the direction of the Board of Directors,
and subject to the supervisory powers of the Chief Executive Officer (if the
Chief Executive Officer is an officer other than the President), and subject to
such supervisory powers and authority as may be given by the Board of Directors
to the Chairperson of the Board of Directors, and/or to any other officer, the
President shall have the responsibility for the general management the control
of the business and affairs of the Corporation and the general supervision and
direction of all of the officers, employees and agents of the Corporation
9
<PAGE>
(other than the Chief Executive Officer, if the Chief Executive Officer is an
officer other than the President) and shall perform all duties and have all
powers that are commonly incident to the office of President or that are
delegated to the President by the Board of Directors.
Section 4.5: Vice President. Each Vice President shall have all such
----------- --------------
powers and duties as are commonly incident to the office of Vice President, or
that are delegated to him or her by the Board of Directors or the Chief
Executive Officer. A Vice President may be designated by the Board to perform
the duties and exercise the powers of the Chief Executive Officer in the event
of the Chief Executive Officer's absence or disability.
Section 4.6: Chief Financial Officer. The Chief Financial Officer shall
----------- -----------------------
be the Treasurer of the Corporation unless the Board of Directors shall have
designated another officer as the Treasurer of the Corporation. Subject to the
direction of the Board of Directors and the Chief Executive Officer, the Chief
Financial Officer shall perform all duties and have all powers that are commonly
incident to the office of Chief Financial Officer.
Section 4.7: Treasurer. The Treasurer shall have custody of all monies
----------- ---------
and securities of the Corporation. The Treasurer shall make such disbursements
of the funds of the Corporation as are authorized and shall render from time to
time an account of all such transactions. The Treasurer shall also perform such
other duties and have such other powers as are commonly incident to the office
of Treasurer, or as the Board of Directors or the Chief Executive Officer may
from time to time prescribe.
Section 4.8: Secretary. The Secretary shall issue or cause to be issued
----------- ---------
all authorized notices for, and shall keep, or cause to be kept, minutes of all
meetings of the stockholders and the Board of Directors. The Secretary shall
have charge of the corporate minute books and similar records and shall perform
such other duties and have such other powers as are commonly incident to the
office of Secretary, or as the Board of Directors or the Chief Executive Officer
may from time to time prescribe.
Section 4.9: Delegation of Authority. The Board of Directors may from
----------- -----------------------
time to time delegate the powers or duties of any officer to any other officers
or agents, notwithstanding any provision hereof.
Section 4.10: Removal. Any officer of the Corporation shall serve at the
------------ -------
pleasure of the Board of Directors and may be removed at any time, with or
without cause, by the Board of Directors. Such removal shall be without
prejudice to the contractual rights of such officer, if any, with the
Corporation.
ARTICLE V
STOCK
Section 5.1: Certificates. Every holder of stock shall be entitled to
----------- ------------
have a certificate signed by or in the name of the Corporation by the
Chairperson or Vice-Chairperson of the Board of Directors, or the President or a
Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary
or an Assistant Secretary, of the Corporation, certifying the number of shares
owned by such stockholder in the Corporation. Any or all of the signatures on
the certificate may be a facsimile.
10
<PAGE>
Section 5.2: Lost, Stolen or Destroyed Stock Certificates; Issuance of
----------- ---------------------------------------------------------
New Certificates. The Corporation may issue a new certificate of stock in the
- ----------------
place of any certificate previously 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 such owner's legal representative, to agree
to indemnify the Corporation and/or to give the Corporation a bond sufficient to
indemnify it, against any claim 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.
Section 5.3: Other Regulations. The issue, transfer, conversion and
----------- -----------------
registration of stock certificates shall be governed by such other regulations
as the Board of Directors may establish.
ARTICLE VI
INDEMNIFICATION
Section 6.1 Indemnification of Officers and Directors. Each person who
----------- -----------------------------------------
was or is made a party to, or is threatened to be made a party to, or is
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "Proceeding"), by reason of the fact that
such person (or a person of whom such person is the legal representative), is or
was a director or officer of the Corporation or is or was serving at the request
of the Corporation as a director or officer of another corporation, or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, shall be indemnified and held harmless by the
Corporation to the fullest extent permitted by the Delaware General Corporation
Law, against all expenses, liability and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes and penalties and amounts paid or to be
paid in settlement) reasonably incurred or suffered by such person in connection
therewith, provided such person acted in good faith and in a manner which the
person reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the person's conduct was unlawful. Such
indemnification shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of such person's heirs, executors and
administrators. Notwithstanding the foregoing, the Corporation shall indemnify
any such person seeking indemnity in connection with a Proceeding (or part
thereof) initiated by such person only if such Proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation.
Section 6.2: Advance of Expenses. The Corporation shall pay all expenses
----------- -------------------
(including attorneys' fees) incurred by such a director or officer in defending
any such Proceeding as they are incurred in advance of its final disposition;
provided, however, that if the Delaware General Corporation Law then so
- -------- -------
requires, the payment of such expenses incurred by such a director or officer in
advance of the final disposition of such Proceeding shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such director
or officer, to repay all amounts so advanced if it should be determined
ultimately that such director or officer is not entitled to be indemnified under
this Article VI or otherwise; and provided, further, that the Corporation shall
-------- -------
not be required to advance any expenses to a person against whom the Corporation
directly brings a claim, in a Proceeding, alleging that such person has breached
such person's duty of loyalty to the Corporation, committed an act or omission
not in good faith or that
11
<PAGE>
involves intentional misconduct or a knowing violation of law, or derived an
improper personal benefit from a transaction.
Section 6.3: Non-Exclusivity of Rights. The rights conferred on any
------------ -------------------------
person in this Article VI shall not be exclusive of any other right that such
person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, Bylaw, agreement, vote or consent of stockholders
or disinterested directors, or otherwise. Additionally, nothing in this Article
VI shall limit the ability of the Corporation, in its discretion, to indemnify
or advance expenses to persons whom the Corporation is not obligated to
indemnify or advance expenses pursuant to this Article VI.
Section 6.4: Indemnification Contracts. The Board of Directors is
----------- -------------------------
authorized to cause the Corporation to enter into indemnification contracts with
any director, officer, employee or agent of the Corporation, or any person
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, including employee benefit plans, providing indemnification rights
to such person. Such rights may be greater than those provided in this Article
VI.
Section 6.5: Effect of Amendment. Any amendment, repeal or modification
----------- -------------------
of any provision of this Article VI shall be prospective only, and shall not
adversely affect any right or protection conferred on a person pursuant to this
Article VI and existing at the time of such amendment, repeal or modification.
ARTICLE VII
NOTICES
Section 7.1: Notice. Except as otherwise specifically provided herein or
----------- ------
required by law, all notices required to be given pursuant to these Bylaws shall
be in writing and may in every instance be effectively given by hand delivery
(including use of a delivery service), by depositing such notice in the mail,
postage prepaid, or by sending such notice by prepaid telegram, telex, overnight
express courier, mailgram or facsimile. Any such notice shall be addressed to
the person to whom notice is to be given at such person's address as it appears
on the records of the Corporation. The notice shall be deemed given (i) in the
case of hand delivery, when received by the person to whom notice is to be given
or by any person accepting such notice on behalf of such person, (ii) in the
case of delivery by mail, upon deposit in the mail, (iii) in the case of
delivery by overnight express courier, when dispatched, and (iv) in the case of
delivery via telegram, telex, mailgram or facsimile, when dispatched.
Section 7.2: Waiver of Notice. Whenever notice is required to be given
----------- ----------------
under any provision of these Bylaws, a written waiver of notice, 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 stockholders, directors or members of a
committee of directors need be specified in any written waiver of notice.
12
<PAGE>
ARTICLE VIII
INTERESTED DIRECTORS
Section 8.1: Interested Directors; Quorum. No contract or transaction
----------- ----------------------------
between the Corporation and one or more of its directors or officers, or between
the Corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof that
authorizes the contract or transaction, or solely because his, her or their
votes are counted for such purpose, if: (i) the material facts as to his, her or
their relationship or interest and as to the contract or transaction are
disclosed or are known to the Board of Directors or the committee, and the Board
of Directors or committee in good faith authorizes the contract or transaction
by the affirmative votes of a majority of the disinterested directors, even
though the disinterested directors be less than a quorum; (ii) the material
facts as to his, her or their relationship or interest and as to the contract or
transaction are disclosed or are known to the stockholders entitled to vote
thereon, and the contract or transaction is specifically approved in good faith
by vote of the stockholders; or (iii) the contract or transaction is fair as to
the Corporation as of the time it is authorized, approved or ratified by the
Board of Directors, a committee thereof, or the stockholders. Interested
directors may be counted in determining the presence of a quorum at a meeting of
the Board of Directors or of a committee which authorizes the contract or
transaction.
ARTICLE IX
MISCELLANEOUS
Section 9.1: Fiscal Year. The fiscal year of the Corporation shall be
----------- -----------
determined by resolution of the Board of Directors.
Section 9.2: Seal. The Board of Directors may provide for a corporate
----------- ----
seal, which shall have the name of the Corporation inscribed thereon and shall
otherwise be in such form as may be approved from time to time by the Board of
Directors.
Section 9.3: Form of Records. Any records maintained by the Corporation
----------- ---------------
in the regular course of its business, including its stock ledger, books of
account and minute books, may be kept on, or be in the form of, magnetic tape,
diskettes, photographs, microphotographs or any other information storage
device, provided that the records so kept can be converted into clearly legible
form within a reasonable time. The Corporation shall so convert any records so
kept upon the request of any person entitled to inspect the same.
Section 9.4: Reliance Upon Books and Records. A member of the Board of
----------- -------------------------------
Directors, or a member of any committee designated by the Board of Directors
shall, in the performance of such person's duties, be fully protected in relying
in good faith upon records of the Corporation and upon such information,
opinions, reports or statements presented to the Corporation by any of the
Corporation's officers or employees, or committees of the Board of Directors, or
by any other person as to matters the member reasonably believes are within such
other person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation.
13
<PAGE>
Section 9.5: Certificate of Incorporation Governs. In the event of any
----------- ------------------------------------
conflict between the provisions of the Corporation's Certificate of
Incorporation and Bylaws, the provisions of the Certificate of Incorporation
shall govern.
Section 9.6: Severability. If any provision of these Bylaws shall be held
----------- ------------
to be invalid, illegal, unenforceable or in conflict with the provisions of the
Corporation's Certificate of Incorporation, then such provision shall
nonetheless be enforced to the maximum extent possible consistent with such
holding and the remaining provisions of these Bylaws (including without
limitation, all portions of any section of these Bylaws containing any such
provision held to be invalid, illegal, unenforceable or in conflict with the
Certificate of Incorporation, that are not themselves invalid, illegal,
unenforceable or in conflict with the Certificate of Incorporation) shall remain
in full force and effect.
ARTICLE X
AMENDMENT
Section 10.1: Amendments. Stockholders of the Corporation holding at
------------ ----------
least sixty-six and two-thirds percent (66-2/3%) of the Corporation's
outstanding voting stock then entitled to vote at an election of directors shall
have the power to adopt, amend or repeal Bylaws. To the extent provided in the
Corporation's Certificate of Incorporation, the Board of Directors of the
Corporation shall also have the power to adopt, amend or repeal Bylaws of the
Corporation.
14
<PAGE>
EXHIBIT 10.03
SNOWBALL.COM, INC.
2000 EQUITY INCENTIVE PLAN
As Adopted February 22, 2000
1. PURPOSE. The purpose of this Plan is to provide incentives to
-------
attract, retain and motivate eligible persons whose present and potential
contributions are important to the success of the Company, its Parent and
Subsidiaries, by offering them an opportunity to participate in the Company's
future performance through awards of Options, Restricted Stock and Stock
Bonuses. Capitalized terms not defined in the text are defined in Section 23.
2. SHARES SUBJECT TO THE PLAN.
--------------------------
2.1 Number of Shares Available. Subject to Sections 2.2 and 18, the
--------------------------
total number of Shares reserved and available for grant and issuance pursuant to
this Plan will be 5,000,000 Shares plus Shares that are subject to: (a) issuance
upon exercise of an Option but cease to be subject to such Option for any reason
other than exercise of such Option; (b) an Award granted hereunder but are
forfeited or are repurchased by the Company at the original issue price; and (c)
an Award that otherwise terminates without Shares being issued. In addition, any
authorized shares not issued or subject to outstanding grants under the
Company's 1999 Equity Incentive Plan (the "Prior Plan") on the Effective Date
(as defined below) and any shares issued under the Prior Plan that are forfeited
or repurchased by the Company or that are issuable upon exercise of options
granted pursuant to the Prior Plan that expire or become unexercisable for any
reason without having been exercised in full, will no longer be available for
grant and issuance under the Prior Plan, but will be available for grant and
issuance under this Plan. In addition, on each January 1, the aggregate number
of Shares reserved and available for grant and issuance pursuant to this Plan
will be increased automatically by a number of Shares equal to 5% of the total
outstanding shares of the Company as of the immediately preceding December 31,
provided that no more than 30,000,000 shares shall be issued as ISOs (as defined
in Section 5 below). At all times the Company shall reserve and keep available a
sufficient number of Shares as shall be required to satisfy the requirements of
all outstanding Options granted under this Plan and all other outstanding but
unvested Awards granted under this Plan.
2.2 Adjustment of Shares. In the event that the number of
--------------------
outstanding shares is changed by a stock dividend, recapitalization, stock
split, reverse stock split, subdivision, combination, reclassification or
similar change in the capital structure of the Company without consideration,
then (a) the number of Shares reserved for issuance under this Plan, (b) the
number of shares that may be granted pursuant to Sections 3 and 9 below, (c) the
Exercise Prices of and number of Shares subject to outstanding Options, and (d)
the number of Shares subject to other outstanding Awards will be proportionately
adjusted, subject to any required action by the Board or the stockholders of the
Company and compliance with applicable securities laws; provided, however, that
-------- -------
fractions of a Share will not be issued but will either be replaced by a cash
payment equal to the Fair Market Value of such fraction of a Share or will be
rounded up to the nearest whole Share, as determined by the Committee.
3. ELIGIBILITY. ISOs (as defined in Section 5 below) may be granted only
-----------
to employees (including officers and directors who are also employees) of the
Company or of a Parent or Subsidiary of the Company. All other Awards may be
granted to employees, officers, directors, consultants, independent contractors
and advisors of the Company or any Parent or Subsidiary of the Company; provided
--------
such consultants, contractors and advisors render bona fide services not in
connection with the offer and sale of securities in a capital-raising
transaction. No person will be eligible to receive more than 1,500,000 Shares
in any calendar year under this Plan pursuant to the grant of Awards hereunder,
other than new employees of the Company or of a Parent or Subsidiary of the
Company (including new employees who are also officers and directors of the
Company or any Parent or Subsidiary of the Company), who are eligible to receive
up to a maximum of 3,000,000 Shares in the calendar year in which they commence
their employment. A person may be granted more than one Award under this Plan.
<PAGE>
Snowball.com, Inc.
2000 Equity Incentive Plan
4. ADMINISTRATION.
--------------
4.1 Committee Authority. This Plan will be administered by the
-------------------
Committee or by the Board acting as the Committee. Except for automatic grants
to Outside Directors pursuant to Section 9 hereof, and subject to the general
purposes, terms and conditions of this Plan, and to the direction of the Board,
the Committee will have full power to implement and carry out this Plan. Except
for automatic grants to Outside Directors pursuant to Section 9 hereof, the
Committee will have the authority to:
(a) construe and interpret this Plan, any Award Agreement and any
other agreement or document executed pursuant to this Plan;
(b) prescribe, amend and rescind rules and regulations relating to
this Plan or any Award;
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration subject to
Awards;
(f) determine whether Awards will be granted singly, in combination
with, in tandem with, in replacement of, or as alternatives to,
other Awards under this Plan or any other incentive or
compensation plan of the Company or any Parent or Subsidiary of
the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission or reconcile any
inconsistency in this Plan, any Award or any Award Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for the
administration of this Plan.
4.2 Committee Discretion. Except for automatic grants to Outside
--------------------
Directors pursuant to Section 9 hereof, any determination made by the Committee
with respect to any Award will be made in its sole discretion at the time of
grant of the Award or, unless in contravention of any express term of this Plan
or Award, at any later time, and such determination will be final and binding on
the Company and on all persons having an interest in any Award under this Plan.
The Committee may delegate to one or more officers of the Company the authority
to grant an Award under this Plan to Participants who are not Insiders of the
Company.
5. OPTIONS. The Committee may grant Options to eligible persons and will
-------
determine whether such Options will be Incentive Stock Options within the
meaning of the Code ("ISO") or Nonqualified Stock Options ("NQSOs"), the number
of Shares subject to the Option, the Exercise Price of the Option, the period
during which the Option may be exercised, and all other terms and conditions of
the Option, subject to the following:
5.1 Form of Option Grant. Each Option granted under this Plan will
--------------------
be evidenced by an Award Agreement which will expressly identify the Option as
an ISO or an NQSO ("Stock Option Agreement"), and, except as otherwise required
by the terms of Section 9 hereof, will be in such form and contain such
provisions (which need not be the same for each Participant) as the Committee
may from time to time approve, and which will comply with and be subject to the
terms and conditions of this Plan.
2
<PAGE>
Snowball.com, Inc.
2000 Equity Incentive Plan
5.2 Date of Grant. The date of grant of an Option will be the date
-------------
on which the Committee makes the determination to grant such Option, unless
otherwise specified by the Committee. The Stock Option Agreement and a copy of
this Plan will be delivered to the Participant within a reasonable time after
the granting of the Option.
5.3 Exercise Period. Options may be exercisable within the times or
---------------
upon the events determined by the Committee as set forth in the Stock Option
Agreement governing such Option; provided, however, that no Option will be
-------- -------
exercisable after the expiration of ten (10) years from the date the Option is
granted; and provided further that no ISO granted to a person who directly or by
----------------
attribution owns more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or of any Parent or Subsidiary of the
Company ("Ten Percent Stockholder") will be exercisable after the expiration of
five (5) years from the date the ISO is granted. The Committee also may provide
for Options to become exercisable at one time or from time to time, periodically
or otherwise, in such number of Shares or percentage of Shares as the Committee
determines.
5.4 Exercise Price. The Exercise Price of an Option will be
--------------
determined by the Committee when the Option is granted and may be not less than
85% of the Fair Market Value of the Shares on the date of grant; provided that:
(i) the Exercise Price of an ISO will be not less than 100% of the Fair Market
Value of the Shares on the date of grant; and (ii) the Exercise Price of any ISO
granted to a Ten Percent Stockholder will not be less than 110% of the Fair
Market Value of the Shares on the date of grant. Payment for the Shares
purchased may be made in accordance with Section 8 of this Plan.
5.5 Method of Exercise. Options may be exercised only by delivery to
------------------
the Company of a written stock option exercise agreement (the "Exercise
Agreement") in a form approved by the Committee (which need not be the same for
each Participant), stating the number of Shares being purchased, the
restrictions imposed on the Shares purchased under such Exercise Agreement, if
any, and such representations and agreements regarding Participant's investment
intent and access to information and other matters, if any, as may be required
or desirable by the Company to comply with applicable securities laws, together
with payment in full of the Exercise Price for the number of Shares being
purchased.
5.6 Termination. Notwithstanding the exercise periods set forth in
-----------
the Stock Option Agreement, exercise of an Option will always be subject to the
following:
(a) Except for automatic grants to Outside Directors pursuant to
Section 9 hereof, if the Participant is Terminated for any reason
except death or Disability, then the Participant may exercise
such Participant's Options only to the extent that such Options
would have been exercisable upon the Termination Date no later
than three (3) months after the Termination Date (or such shorter
or longer time period not exceeding five (5) years as may be
determined by the Committee, with any exercise beyond three (3)
months after the Termination Date deemed to be an NQSO), but in
any event, no later than the expiration date of the Options.
(b) If the Participant is Terminated because of Participant's death
or Disability (or the Participant dies within three (3) months
after a Termination other than for Cause or because of
Participant's Disability), then Participant's Options may be
exercised only to the extent that such Options would have been
exercisable by Participant on the Termination Date and must be
exercised by Participant (or Participant's legal representative
or authorized assignee) no later than twelve (12) months after
the Termination Date (or such shorter or longer time period not
exceeding five (5) years as may be determined by the Committee,
with any such exercise beyond (a) three (3) months after the
Termination Date when the Termination is for any reason other
than the Participant's death or Disability, or (b) twelve (12)
months after the Termination Date when the Termination is for
Participant's
3
<PAGE>
Snowball.com, Inc.
2000 Equity Incentive Plan
death or Disability, deemed to be an NQSO), but in any event no
later than the expiration date of the Options.
(c) If a Participant is terminated for Cause, then the Participant
may exercise such Participant's Options only to the extent that
such Options would have been exercisable upon the Termination
Date no later than one (1) month after the Termination Date (or
such shorter or longer time period as may be determined by the
Committee, with any exercise beyond three (3) months after the
Termination Date deemed to be an NQSO), but in any event, no
later than the expiration date of the Options.
5.7 Limitations on Exercise. The Committee may specify a reasonable
-----------------------
minimum number of Shares that may be purchased on any exercise of an Option,
provided that such minimum number will not prevent Participant from exercising
the Option for the full number of Shares for which it is then exercisable.
5.8 Limitations on ISO. The aggregate Fair Market Value (determined
------------------
as of the date of grant) of Shares with respect to which ISO are exercisable for
the first time by a Participant during any calendar year (under this Plan or
under any other incentive stock option plan of the Company, Parent or Subsidiary
of the Company) will not exceed $100,000. If the Fair Market Value of Shares on
the date of grant with respect to which ISO are exercisable for the first time
by a Participant during any calendar year exceeds $100,000, then the Options for
the first $100,000 worth of Shares to become exercisable in such calendar year
will be ISO and the Options for the amount in excess of $100,000 that become
exercisable in that calendar year will be NQSOs. In the event that the Code or
the regulations promulgated thereunder are amended after the Effective Date of
this Plan to provide for a different limit on the Fair Market Value of Shares
permitted to be subject to ISO, such different limit will be automatically
incorporated herein and will apply to any Options granted after the effective
date of such amendment.
5.9 Modification, Extension or Renewal. The Committee may modify,
----------------------------------
extend or renew outstanding Options and authorize the grant of new Options in
substitution therefor, provided that any such action may not, without the
written consent of a Participant, impair any of such Participant's rights under
any Option previously granted. Any outstanding ISO that is modified, extended,
renewed or otherwise altered will be treated in accordance with Section 424(h)
of the Code. The Committee may reduce the Exercise Price of outstanding Options
without the consent of Participants affected by a written notice to them;
provided, however, that the Exercise Price may not be reduced below the minimum
- -------- -------
Exercise Price that would be permitted under Section 5.4 of this Plan for
Options granted on the date the action is taken to reduce the Exercise Price.
5.10 No Disqualification. Notwithstanding any other provision in this
-------------------
Plan, no term of this Plan relating to ISO will be interpreted, amended or
altered, nor will any discretion or authority granted under this Plan be
exercised, so as to disqualify this Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any ISO under
Section 422 of the Code.
6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company
----------------
to sell to an eligible person Shares that are subject to restrictions. The
Committee will determine to whom an offer will be made, the number of Shares the
person may purchase, the price to be paid (the "Purchase Price"), the
restrictions to which the Shares will be subject, and all other terms and
conditions of the Restricted Stock Award, subject to the following:
6.1 Form of Restricted Stock Award. All purchases under a Restricted
------------------------------
Stock Award made pursuant to this Plan will be evidenced by an Award Agreement
("Restricted Stock Purchase Agreement") that will be in such form (which need
not be the same for each Participant) as the Committee will from time to time
approve, and will comply with and be subject to the terms and conditions of this
Plan. The offer of Restricted Stock will be accepted by the Participant's
execution and delivery of the Restricted Stock Purchase Agreement and full
payment for the Shares to the Company within thirty (30) days from the date the
Restricted Stock Purchase Agreement is delivered to the person. If such person
does not execute and deliver the Restricted Stock Purchase Agreement along
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with full payment for the Shares to the Company within thirty (30) days, then
the offer will terminate, unless otherwise determined by the Committee.
6.2 Purchase Price. The Purchase Price of Shares sold pursuant to a
--------------
Restricted Stock Award will be determined by the Committee on the date the
Restricted Stock Award is granted, except in the case of a sale to a Ten Percent
Stockholder, in which case the Purchase Price will be 100% of the Fair Market
Value. Payment of the Purchase Price may be made in accordance with Section 8
of this Plan.
6.3 Terms of Restricted Stock Awards. Restricted Stock Awards shall
--------------------------------
be subject to such restrictions as the Committee may impose. These restrictions
may be based upon completion of a specified number of years of service with the
Company or upon completion of the performance goals as set out in advance in the
Participant's individual Restricted Stock Purchase Agreement. Restricted Stock
Awards may vary from Participant to Participant and between groups of
Participants. Prior to the grant of a Restricted Stock Award, the Committee
shall: (a) determine the nature, length and starting date of any Performance
Period for the Restricted Stock Award; (b) select from among the Performance
Factors to be used to measure performance goals, if any; and (c) determine the
number of Shares that may be awarded to the Participant. Prior to the payment
of any Restricted Stock Award, the Committee shall determine the extent to which
such Restricted Stock Award has been earned. Performance Periods may overlap
and Participants may participate simultaneously with respect to Restricted Stock
Awards that are subject to different Performance Periods and having different
performance goals and other criteria.
6.4 Termination During Performance Period. If a Participant is
-------------------------------------
Terminated during a Performance Period for any reason, then such Participant
will be entitled to payment (whether in Shares, cash or otherwise) with respect
to the Restricted Stock Award only to the extent earned as of the date of
Termination in accordance with the Restricted Stock Purchase Agreement, unless
the Committee will determine otherwise.
7. STOCK BONUSES.
-------------
7.1 Awards of Stock Bonuses. A Stock Bonus is an award of Shares
-----------------------
(which may consist of Restricted Stock) for services rendered to the Company or
any Parent or Subsidiary of the Company. A Stock Bonus may be awarded for past
services already rendered to the Company, or any Parent or Subsidiary of the
Company pursuant to an Award Agreement (the "Stock Bonus Agreement") that will
be in such form (which need not be the same for each Participant) as the
Committee will from time to time approve, and will comply with and be subject to
the terms and conditions of this Plan. A Stock Bonus may be awarded upon
satisfaction of such performance goals as are set out in advance in the
Participant's individual Award Agreement (the "Performance Stock Bonus
Agreement") that will be in such form (which need not be the same for each
Participant) as the Committee will from time to time approve, and will comply
with and be subject to the terms and conditions of this Plan. Stock Bonuses may
vary from Participant to Participant and between groups of Participants, and may
be based upon the achievement of the Company, Parent or Subsidiary and/or
individual performance factors or upon such other criteria as the Committee may
determine.
7.2 Terms of Stock Bonuses. The Committee will determine the number
----------------------
of Shares to be awarded to the Participant. If the Stock Bonus is being earned
upon the satisfaction of performance goals pursuant to a Performance Stock Bonus
Agreement, then the Committee will: (a) determine the nature, length and
starting date of any Performance Period for each Stock Bonus; (b) select from
among the Performance Factors to be used to measure the performance, if any; and
(c) determine the number of Shares that may be awarded to the Participant.
Prior to the payment of any Stock Bonus, the Committee shall determine the
extent to which such Stock Bonuses have been earned. Performance Periods may
overlap and Participants may participate simultaneously with respect to Stock
Bonuses that are subject to different Performance Periods and different
performance goals and other criteria. The number of Shares may be fixed or may
vary in accordance with such performance goals and criteria as may be determined
by the Committee. The Committee may adjust the performance goals applicable to
the Stock Bonuses to take into account changes in law and accounting or tax
rules and to make such adjustments as the Committee deems necessary or
appropriate to reflect the impact of extraordinary or unusual items, events or
circumstances to avoid windfalls or hardships.
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7.3 Form of Payment. The earned portion of a Stock Bonus may be paid
---------------
currently or on a deferred basis with such interest or dividend equivalent, if
any, as the Committee may determine. Payment may be made in the form of cash or
whole Shares or a combination thereof, either in a lump sum payment or in
installments, all as the Committee will determine.
8. PAYMENT FOR SHARE PURCHASES.
---------------------------
8.1 Payment. Payment for Shares purchased pursuant to this Plan may
-------
be made in cash (by check) or, where expressly approved for the Participant by
the Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to the
Participant;
(b) by surrender of shares that either: (1) have been owned by
Participant for more than six (6) months and have been paid for
within the meaning of SEC Rule 144 (and, if such shares were
purchased from the Company by use of a promissory note, such note
has been fully paid with respect to such shares); or (2) were
obtained by Participant in the public market;
(c) by tender of a full recourse promissory note having such terms as
may be approved by the Committee and bearing interest at a rate
sufficient to avoid imputation of income under Sections 483 and
1274 of the Code; provided, however, that Participants who are
-------- -------
not employees or directors of the Company will not be entitled to
purchase Shares with a promissory note unless the note is
adequately secured by collateral other than the Shares;
(d) by waiver of compensation due or accrued to the Participant for
services rendered;
(e) with respect only to purchases upon exercise of an Option, and
provided that a public market for the Company's stock exists:
(1) through a "same day sale" commitment from the Participant
and a broker-dealer that is a member of the National
Association of Securities Dealers (an "NASD Dealer") whereby
the Participant irrevocably elects to exercise the Option
and to sell a portion of the Shares so purchased to pay for
the Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the Exercise
Price directly to the Company; or
(2) through a "margin" commitment from the Participant and a
NASD Dealer whereby the Participant irrevocably elects to
exercise the Option and to pledge the Shares so purchased to
the NASD Dealer in a margin account as security for a loan
from the NASD Dealer in the amount of the Exercise Price,
and whereby the NASD Dealer irrevocably commits upon receipt
of such Shares to forward the Exercise Price directly to the
Company; or
(f) by any combination of the foregoing.
8.2 Loan Guarantees. The Committee may help the Participant pay for
---------------
Shares purchased under this Plan by authorizing a guarantee by the Company of a
third-party loan to the Participant.
9. AUTOMATIC GRANTS TO OUTSIDE DIRECTORS.
--------------------------------------
9.1 Types of Options and Shares. Options granted under this Plan and
----------------------------
subject to this Section 9 shall be NQSOs.
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9.2 Eligibility. Options subject to this Section 9 shall be granted
-----------
only to Outside Directors.
9.3 Initial Grant. Each Outside Director who first becomes a member
-------------
of the Board on or after the Effective Date will automatically be granted an
Option for 20,000 Shares (an "Initial Grant") on the date such Outside Director
first becomes a member of the Board, unless such Outside Director received a
grant of Options before the Effective Date. Each Outside Director who became a
member of the Board prior to the Effective Date and who did not receive a prior
Option grant will receive an Initial Grant immediately following the Effective
Date.
9.4 Succeeding Grants. Immediately following each Annual Meeting of
-----------------
stockholders, each Outside Director will automatically be granted an Option for
5,000 Shares (a "Succeeding Grant"), provided the Outside Director is a member
of the Board on such date and has served continuously as a member of the Board
for a period of at least one year since the date of such Outside Director's
Initial Grant.
9.5 Vesting. The date an Outside Director receives an Initial Grant
-------
or a Succeeding Grant is referred to in this Plan as the "Start Date" for such
Option.
(a) Initial Grant. Each Initial Grant will vest as to 25% of the
-------------
Shares on the first anniversary of the Start Date for such
Initial Grant, and as to 2.08333% of the Shares on each
subsequent monthly anniversary of the Start Date, so long as the
Outside Director continuously remains a director or a consultant
of the Company.
(b) Succeeding Grant. Each Succeeding Grant will vest as to 25% of
----------------
the Shares on the first anniversary of the Start Date for such
Succeeding Grant, and as to 2.08333% of the Shares on each
subsequent monthly anniversary of the Start Date, so long as the
Outside Director continuously remains a director or a consultant
of the Company.
Notwithstanding any provision to the contrary, in the event of a corporate
transaction described in Section 18.1, the vesting of all options granted to
Outside Directors pursuant to this Section 9 will accelerate and such options
will become exercisable in full prior to the consummation of such event at such
times and on such conditions as the Committee determines, and must be exercised,
if at all, within three months of the consummation of said event. Any options
not exercised within such three-month period shall expire.
9.6 Exercise Price. The exercise price of an Option pursuant to an
--------------
Initial Grant or Succeeding Grant shall be the Fair Market Value of the Shares,
at the time that the Option is granted.
9.7 Termination. If the Outside Director ceases to be a member of
-----------
the Board or a consultant of the Company for any reason except death of the
Outside Director or disability of the Outside Director (whether temporary or
permanent, partial or total, as determined by the Committee), then each Option
then held by such Outside Director, to the extent (and only to the extent) that
it would have been exercisable by the Outside Director on the Termination Date,
may be exercised by the Outside Director on the later of seven (7) months after
the Termination Date, but in no event later than the Expiration Date.
10. WITHHOLDING TAXES.
-----------------
10.1 Withholding Generally. Whenever Shares are to be issued in
---------------------
satisfaction of Awards granted under this Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to the delivery of any
certificate or certificates for such Shares. Whenever, under this Plan,
payments in satisfaction of Awards are to be made in cash, such payment will be
net of an amount sufficient to satisfy federal, state, and local withholding tax
requirements.
10.2 Stock Withholding. When, under applicable tax laws, a
-----------------
Participant incurs tax liability in connection with the exercise or vesting of
any Award that is subject to tax withholding and the Participant is
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2000 Equity Incentive Plan
obligated to pay the Company the amount required to be withheld, the Committee
may in its sole discretion allow the Participant to satisfy the minimum
withholding tax obligation by electing to have the Company withhold from the
Shares to be issued that number of Shares having a Fair Market Value equal to
the minimum amount required to be withheld, determined on the date that the
amount of tax to be withheld is to be determined. All elections by a Participant
to have Shares withheld for this purpose will be made in accordance with the
requirements established by the Committee and be in writing in a form acceptable
to the Committee.
11. TRANSFERABILITY.
---------------
11.1 Except as otherwise provided in this Section 11, Awards granted
under this Plan, and any interest therein, will not be transferable or
assignable by Participant, and may not be made subject to execution, attachment
or similar process, otherwise than by will or by the laws of descent and
distribution or as determined by the Committee and set forth in the Award
Agreement with respect to Awards that are not ISOs.
11.2 All Awards other than NQSO's. All Awards other than NQSO's shall
-----------------------------
be exercisable: (i) during the Participant's lifetime, only by (A) the
Participant, or (B) the Participant's guardian or legal representative; and (ii)
after Participant's death, by the legal representative of the Participant's
heirs or legatees.
11.3 NQSOs. Unless otherwise restricted by the Committee, an NQSO
-----
shall be exercisable: (i) during the Participant's lifetime only by (A) the
Participant, (B) the Participant's guardian or legal representative, (C) a
Family Member of the Participant who has acquired the NQSO by "permitted
transfer;" and (ii) after Participant's death, by the legal representative of
the Participant's heirs or legatees. "Permitted transfer" means, as authorized
by this Plan and the Committee in an NQSO, any transfer effected by the
Participant during the Participant's lifetime of an interest in such NQSO but
only such transfers which are by gift or domestic relations order. A permitted
transfer does not include any transfer for value and neither of the following
are transfers for value: (a) a transfer of under a domestic relations order in
settlement of marital property rights or (b) a transfer to an entity in which
more than fifty percent of the voting interests are owned by Family Members or
the Participant in exchange for an interest in that entity.
12. PRIVILEGES OF STOCK OWNERSHIP; RESTRICTIONS ON SHARES..
------------------------------------------------------
12.1 Voting and Dividends. No Participant will have any of the rights
--------------------
of a stockholder with respect to any Shares until the Shares are issued to the
Participant. After Shares are issued to the Participant, the Participant will
be a stockholder and have all the rights of a stockholder with respect to such
Shares, including the right to vote and receive all dividends or other
distributions made or paid with respect to such Shares; provided, that if such
--------
Shares are Restricted Stock, then any new, additional or different securities
the Participant may become entitled to receive with respect to such Shares by
virtue of a stock dividend, stock split or any other change in the corporate or
capital structure of the Company will be subject to the same restrictions as the
Restricted Stock; provided, further, that the Participant will have no right to
-------- -------
retain such stock dividends or stock distributions with respect to Shares that
are repurchased at the Participant's Purchase Price or Exercise Price pursuant
to Section 12.
12.2 Financial Statements. The Company will provide financial
--------------------
statements to each Participant prior to such Participant's purchase of Shares
under this Plan, and to each Participant annually during the period such
Participant has Awards outstanding; provided, however, the Company will not be
-------- -------
required to provide such financial statements to Participants whose services in
connection with the Company assure them access to equivalent information.
12.3 Restrictions on Shares. At the discretion of the Committee, the
-----------------------
Company may reserve to itself and/or its assignee(s) in the Award Agreement a
right to repurchase a portion of or all Unvested Shares held by a Participant
following such Participant's Termination at any time within ninety (90) days
after the later of Participant's Termination Date and the date Participant
purchases Shares under this Plan, for cash and/or cancellation of purchase money
indebtedness, at the Participant's Exercise Price or Purchase Price, as the case
may be.
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13. CERTIFICATES. All certificates for Shares or other securities
------------
delivered under this Plan will be subject to such stock transfer orders, legends
and other restrictions as the Committee may deem necessary or advisable,
including restrictions under any applicable federal, state or foreign securities
law, or any rules, regulations and other requirements of the SEC or any stock
exchange or automated quotation system upon which the Shares may be listed or
quoted.
14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a
------------------------
Participant's Shares, the Committee may require the Participant to deposit all
certificates representing Shares, together with stock powers or other
instruments of transfer approved by the Committee, appropriately endorsed in
blank, with the Company or an agent designated by the Company to hold in escrow
until such restrictions have lapsed or terminated, and the Committee may cause a
legend or legends referencing such restrictions to be placed on the
certificates. Any Participant who is permitted to execute a promissory note as
partial or full consideration for the purchase of Shares under this Plan will be
required to pledge and deposit with the Company all or part of the Shares so
purchased as collateral to secure the payment of Participant's obligation to the
Company under the promissory note; provided, however, that the Committee may
-------- -------
require or accept other or additional forms of collateral to secure the payment
of such obligation and, in any event, the Company will have full recourse
against the Participant under the promissory note notwithstanding any pledge of
the Participant's Shares or other collateral. In connection with any pledge of
the Shares, Participant will be required to execute and deliver a written pledge
agreement in such form as the Committee will from time to time approve. The
Shares purchased with the promissory note may be released from the pledge on a
pro rata basis as the promissory note is paid.
15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from
-----------------------------
time to time, authorize the Company, with the consent of the respective
Participants, to issue new Awards in exchange for the surrender and cancellation
of any or all outstanding Awards. The Committee may at any time buy from a
Participant an Award previously granted with payment in cash, Shares (including
Restricted Stock) or other consideration, based on such terms and conditions as
the Committee and the Participant may agree.
16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not be
----------------------------------------------
effective unless such Award is in compliance with all applicable federal and
state securities laws, rules and regulations of any governmental body, and the
requirements of any stock exchange or automated quotation system upon which the
Shares may then be listed or quoted, as they are in effect on the date of grant
of the Award and also on the date of exercise or other issuance.
Notwithstanding any other provision in this Plan, the Company will have no
obligation to issue or deliver certificates for Shares under this Plan prior to:
(a) obtaining any approvals from governmental agencies that the Company
determines are necessary or advisable; and/or (b) completion of any registration
or other qualification of such Shares under any state or federal law or ruling
of any governmental body that the Company determines to be necessary or
advisable. The Company will be under no obligation to register the Shares with
the SEC or to effect compliance with the registration, qualification or listing
requirements of any state securities laws, stock exchange or automated quotation
system, and the Company will have no liability for any inability or failure to
do so.
17. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted
-----------------------
under this Plan will confer or be deemed to confer on any Participant any right
to continue in the employ of, or to continue any other relationship with, the
Company or any Parent or Subsidiary of the Company or limit in any way the right
of the Company or any Parent or Subsidiary of the Company to terminate
Participant's employment or other relationship at any time, with or without
cause.
18. CORPORATE TRANSACTIONS.
----------------------
18.1 Assumption or Replacement of Awards by Successor. Except for
------------------------------------------------
automatic grants to Outside Directors pursuant to Section 9 hereof, in the event
of (a) a dissolution or liquidation of the Company, (b) a merger or
consolidation in which the Company is not the surviving corporation (other than
a merger or consolidation with a wholly-owned subsidiary, a reincorporation of
the Company in a different jurisdiction, or other transaction in which there is
no substantial change in the stockholders of the Company or their relative stock
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holdings and the Awards granted under this Plan are assumed, converted or
replaced by the successor corporation, which assumption will be binding on all
Participants), (c) a merger in which the Company is the surviving corporation
but after which the stockholders of the Company immediately prior to such merger
(other than any stockholder that merges, or which owns or controls another
corporation that merges, with the Company in such merger) cease to own their
shares or other equity interest in the Company, (d) the sale of substantially
all of the assets of the Company, or (e) the acquisition, sale, or transfer of
more than 50% of the outstanding shares of the Company by tender offer or
similar transaction, any or all outstanding Awards may be assumed, converted or
replaced by the successor corporation (if any), which assumption, conversion or
replacement will be binding on all Participants. In the alternative, the
successor corporation may substitute equivalent Awards or provide substantially
similar consideration to Participants as was provided to stockholders (after
taking into account the existing provisions of the Awards). The successor
corporation may also issue, in place of outstanding Shares of the Company held
by the Participants, substantially similar shares or other property subject to
repurchase restrictions no less favorable to the Participant. In the event such
successor corporation (if any) refuses to assume or substitute Awards, as
provided above, pursuant to a transaction described in this Subsection 18.1,
such Awards will expire on such transaction at such time and on such conditions
as the Committee will determine. Notwithstanding anything in this Plan to the
contrary, the Committee may, in its sole discretion, provide that the vesting of
any or all Awards granted pursuant to this Plan will accelerate upon a
transaction described in this Section 18. If the Committee exercises such
discretion with respect to Options, such Options will become exercisable in full
prior to the consummation of such event at such time and on such conditions as
the Committee determines, and if such Options are not exercised prior to the
consummation of the corporate transaction, they shall terminate at such time as
determined by the Committee.
18.2 Other Treatment of Awards. Subject to any greater rights granted
-------------------------
to Participants under the foregoing provisions of this Section 18, in the event
of the occurrence of any transaction described in Section 18.1, any outstanding
Awards will be treated as provided in the applicable agreement or plan of
merger, consolidation, dissolution, liquidation, or sale of assets.
18.3 Assumption of Awards by the Company. The Company, from time to
-----------------------------------
time, also may substitute or assume outstanding awards granted by another
company, whether in connection with an acquisition of such other company or
otherwise, by either; (a) granting an Award under this Plan in substitution of
such other company's award; or (b) assuming such award as if it had been granted
under this Plan if the terms of such assumed award could be applied to an Award
granted under this Plan. Such substitution or assumption will be permissible if
the holder of the substituted or assumed award would have been eligible to be
granted an Award under this Plan if the other company had applied the rules of
this Plan to such grant. In the event the Company assumes an award granted by
another company, the terms and conditions of such award will remain unchanged
(except that the exercise price and the number and nature of Shares issuable
- -------
upon exercise of any such option will be adjusted appropriately pursuant to
Section 424(a) of the Code). In the event the Company elects to grant a new
Option rather than assuming an existing option, such new Option may be granted
with a similarly adjusted Exercise Price.
19. ADOPTION AND STOCKHOLDER APPROVAL. This Plan will become effective on
---------------------------------
the date on which the registration statement filed by the Company with the SEC
under the Securities Act registering the initial public offering of the
Company's Common Stock is declared effective by the SEC (the "Effective Date").
This Plan shall be approved by the stockholders of the Company (excluding Shares
issued pursuant to this Plan), consistent with applicable laws, within twelve
(12) months before or after the date this Plan is adopted by the Board. Upon
the Effective Date, the Committee may grant Awards pursuant to this Plan;
provided, however, that: (a) no Option may be exercised prior to initial
- -------- -------
stockholder approval of this Plan; (b) no Option granted pursuant to an increase
in the number of Shares subject to this Plan approved by the Board will be
exercised prior to the time such increase has been approved by the stockholders
of the Company; (c) in the event that initial stockholder approval is not
obtained within the time period provided herein, all Awards granted hereunder
shall be cancelled, any Shares issued pursuant to any Awards shall be cancelled
and any purchase of Shares issued hereunder shall be rescinded; and (d) in the
event that stockholder approval of such increase is not obtained within the time
period provided herein, all Awards granted pursuant to such increase will be
cancelled, any Shares issued pursuant to any Award granted pursuant to such
increase will be cancelled, and any purchase of Shares pursuant to such increase
will be rescinded.
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20. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided
--------------------------
herein, this Plan will terminate ten (10) years from the date this Plan is
adopted by the Board or, if earlier, the date of stockholder approval. This
Plan and all agreements thereunder shall be governed by and construed in
accordance with the laws of the State of California.
21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate
--------------------------------
or amend this Plan in any respect, including without limitation amendment of any
form of Award Agreement or instrument to be executed pursuant to this Plan;
provided, however, that the Board will not, without the approval of the
- -------- -------
stockholders of the Company, amend this Plan in any manner that requires such
stockholder approval.
22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the
--------------------------
Board, the submission of this Plan to the stockholders of the Company for
approval, nor any provision of this Plan will be construed as creating any
limitations on the power of the Board to adopt such additional compensation
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and bonuses otherwise than under this Plan, and such
arrangements may be either generally applicable or applicable only in specific
cases.
23. DEFINITIONS. As used in this Plan, the following terms will have the
-----------
following meanings:
"Award" means any award under this Plan, including any Option,
Restricted Stock or Stock Bonus.
"Award Agreement" means, with respect to each Award, the signed
written agreement between the Company and the Participant setting forth the
terms and conditions of the Award.
"Board" means the Board of Directors of the Company.
"Cause" means the commission of an act of theft, embezzlement, fraud,
dishonesty or a breach of fiduciary duty to the Company or a Parent or
Subsidiary of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Compensation Committee of the Board.
"Company" means Snowball.com, Inc. or any successor corporation.
"Disability" means a disability, whether temporary or permanent,
partial or total, as determined by the Committee.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exercise Price" means the price at which a holder of an Option may
purchase the Shares issuable upon exercise of the Option.
"Fair Market Value" means, as of any date, the value of a share of the
Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq National
Market, its closing price on the Nasdaq National Market on the
date of determination as reported in The Wall Street Journal;
-----------------------
(b) if such Common Stock is publicly traded and is then listed on a
national securities exchange, its closing price on the date of
determination on the principal national
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securities exchange on which the Common Stock is listed or
admitted to trading as reported in The Wall Street Journal;
-----------------------
(c) if such Common Stock is publicly traded but is not quoted on the
Nasdaq National Market nor listed or admitted to trading on a
national securities exchange, the average of the closing bid and
asked prices on the date of determination as reported in The Wall
--------
Street Journal;
--------------
(d) in the case of an Award made on the Effective Date, the price per
share at which shares of the Company's Common Stock are initially
offered for sale to the public by the Company's underwriters in
the initial public offering of the Company's Common Stock
pursuant to a registration statement filed with the SEC under the
Securities Act; or
(e) if none of the foregoing is applicable, by the Committee in good
faith.
"Family Member" includes any of the following:
(a) child, stepchild, grandchild, parent, stepparent, grandparent,
spouse, former spouse, sibling, niece, nephew, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law, or
sister-in-law of the Participant, including any such person with
such relationship to the Participant by adoption;
(b) any person (other than a tenant or employee) sharing the
Participant's household;
(c) a trust in which the persons in (a) and (b) have more than fifty
percent of the beneficial interest;
(d) a foundation in which the persons in (a) and (b) or the
Participant control the management of assets; or
(e) any other entity in which the persons in (a) and (b) or the
Participant own more than fifty percent of the voting interest.
"Insider" means an officer or director of the Company or any other
person whose transactions in the Company's Common Stock are subject to Section
16 of the Exchange Act.
"Option" means an award of an option to purchase Shares pursuant to
Section 5.
"Outside Director" means a member of the Board who is not an employee
of the Company or any Parent, Subsidiary or Affiliate of the Company.
"Parent" means any corporation (other than the Company) in an unbroken
chain of corporations ending with the Company if each of such corporations other
than the Company owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain.
"Participant" means a person who receives an Award under this Plan.
"Performance Factors" means the factors selected by the Committee from
among the following measures to determine whether the performance goals
established by the Committee and applicable to Awards have been satisfied:
(a) Net revenue and/or net revenue growth;
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(b) Earnings before income taxes and amortization and/or earnings
before income taxes and amortization growth;
(c) Operating income and/or operating income growth;
(d) Net income and/or net income growth;
(e) Earnings per share and/or earnings per share growth;
(f) Total stockholder return and/or total stockholder return growth;
(g) Return on equity;
(h) Operating cash flow return on income;
(i) Adjusted operating cash flow return on income;
(j) Economic value added; and
(k) Individual confidential business objectives.
"Performance Period" means the period of service determined by the
Committee, not to exceed five years, during which years of service or
performance is to be measured for Restricted Stock Awards or Stock Bonuses.
"Plan" means this Snowball.com, Inc. 2000 Equity Incentive Plan, as
amended from time to time.
"Restricted Stock Award" means an award of Shares pursuant to Section
6.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means shares of the Company's Common Stock reserved for
issuance under this Plan, as adjusted pursuant to Sections 2 and 18, and any
successor security.
"Stock Bonus" means an award of Shares, or cash in lieu of Shares,
pursuant to Section 7.
"Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
"Termination" or "Terminated" means, for purposes of this Plan with
respect to a Participant, that the Participant has for any reason ceased to
provide services as an employee, officer, director, consultant, independent
contractor, or advisor to the Company or a Parent or Subsidiary of the Company.
An employee will not be deemed to have ceased to provide services in the case of
(i) sick leave, (ii) military leave, or (iii) any other leave of absence
approved by the Committee, provided, that such leave is for a period of not more
than 90 days, unless reemployment upon the expiration of such leave is
guaranteed by contract or statute or unless provided otherwise pursuant to
formal policy adopted from time to time by the Company and issued and
promulgated to employees in writing. In the case of any employee on an approved
leave of absence, the Committee may make such provisions respecting suspension
of vesting of the Award while on leave from the employ of the Company or a
Subsidiary as it may deem appropriate, except that in no event may an Option be
exercised after the expiration of
13
<PAGE>
Snowball.com, Inc.
2000 Equity Incentive Plan
the term set forth in the Option agreement. The Committee will have sole
discretion to determine whether a Participant has ceased to provide services and
the effective date on which the Participant ceased to provide services (the
"Termination Date").
"Unvested Shares" means "Unvested Shares" as defined in the Award
Agreement.
"Vested Shares" means "Vested Shares" as defined in the Award
Agreement.
14
<PAGE>
No. ___
SNOWBALL.COM, INC.
2000 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
----------------------
This Stock Option Agreement (this "Agreement") is made and entered
into as of the Date of Grant set forth below (the "Date of Grant") by and
between Snowball.com, Inc., a Delaware corporation (the "Company"), and the
Optionee named below ("Optionee"). Capitalized terms not defined herein shall
have the meanings ascribed to them in the Company's 2000 Equity Incentive Plan
(the "Plan").
Optionee: __________________________________________
Social Security Number: __________________________________________
Optionee's Address: __________________________________________
__________________________________________
Total Option Shares: __________________________________________
Exercise Price Per Share: __________________________________________
Date of Grant: __________________________________________
Expiration Date: __________________________________________
(unless earlier terminated under Section 3 hereof)
Type of Stock Option
(Check one): [ ] Incentive Stock Option
[ ] Nonqualified Stock Option
1. Grant of Option. The Company hereby grants to Optionee an option
---------------
(this "Option") to purchase up to the total number of shares of Common Stock of
the Company set forth above as Total Option Shares (collectively, the "Shares")
at the Exercise Price Per Share set forth above (the "Exercise Price"), subject
to all of the terms and conditions of this Agreement and the Plan. If
designated as an Incentive Stock Option above, this Option is intended to
qualify as an "incentive stock option" ("ISO") within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"), to the extent
permitted under Code Section 422.
2. Vesting; Exercise Period.
------------------------
2.1 Vesting of Shares. This Option shall be exercisable as it
-----------------
vests. Subject to the terms and conditions of the Plan and this Agreement, this
Option shall vest and become exercisable as to portions of the Shares as
follows: (a) this Option shall not be exercisable with respect to any of the
Shares until _________________, 19___ (the "First Vesting Date"); (b) if
Optionee has continuously provided services to the Company, or any Parent or
Subsidiary of the Company, then on the First Vesting Date, this Option shall
become exercisable as to _______________% of the Shares; and (c) thereafter this
Option shall become
<PAGE>
Snowball.com, Inc.
Stock Option Agreement
2000 Equity Incentive Plan
exercisable as to an additional _____________% of the Shares on each monthly
anniversary of the First Vesting Date, provided that Optionee has continuously
provided services to the Company, or any Parent or Subsidiary of the Company, at
all times during the relevant month. This Option shall cease to vest upon
Optionee's Termination and Optionee shall in no event be entitled under this
Option to purchase a number of shares of the Company's Common Stock greater than
the "Total Option Shares."
2.2 Vesting of Options. Shares that are vested pursuant to the
------------------
schedule set forth in Section 2.1 hereof are "Vested Shares." Shares that are
not vested pursuant to the schedule set forth in Section 2.1 hereof are
"Unvested Shares."
2.3 Expiration. This Option shall expire on the Expiration Date
----------
set forth above and must be exercised, if at all, on or before the earlier of
the Expiration Date or the date on which this Option is earlier terminated in
accordance with the provisions of Section 3 hereof.
3. Termination.
-----------
3.1 Termination for Any Reason Except Death, Disability or
------------------------------------------------------
Cause. If Optionee is Terminated for any reason except Optionee's death,
- -----
Disability or Cause, then this Option, to the extent (and only to the extent)
that it is vested in accordance with the schedule set forth in Section 2.1
hereof on the Termination Date, may be exercised by Optionee no later than three
(3) months after the Termination Date, but in any event no later than the
Expiration Date.
3.2 Termination Because of Death or Disability. If Optionee is
------------------------------------------
Terminated because of death or Disability of Optionee (or the Optionee dies
within three (3) months after Termination other than for Cause or because of
Disability), then this Option, to the extent that it is vested in accordance
with the schedule set forth in Section 2.1 hereof on the Termination Date, may
be exercised by Optionee (or Optionee's legal representative or authorized
assignee) no later than twelve (12) months after the Termination Date, but in
any event no later than the Expiration Date. Any exercise after three months
after the Termination Date when the Termination is for any reason other than
Optionee's death or disability, within the meaning of Code Section 22(e)(3),
shall be deemed to be the exercise of a nonqualified stock option.
3.3 Termination for Cause. If Optionee is Terminated for Cause,
---------------------
then this Option, to the extenct that it is vested in accordance with the
schedule set forth in Section 2.1 hereof on the Termination Date, may be
exercised by Optionee no later than one (1) month after the Termination Date,
but in any event no later than the Expiration Date.
3.4 No Obligation to Employ. Nothing in the Plan or this
-----------------------
Agreement shall confer on Optionee any right to continue in the employ of, or
other relationship with, the Company or any Parent or Subsidiary of the Company,
or limit in any way the right of the Company or any Parent or Subsidiary of the
Company to terminate Optionee's employment or other relationship at any time,
with or without Cause.
2
<PAGE>
Snowball.com, Inc.
Stock Option Agreement
2000 Equity Incentive Plan
4. Manner of Exercise.
------------------
4.1 Stock Option Exercise Agreement. To exercise this Option,
-------------------------------
Optionee (or in the case of exercise after Optionee's death, Optionee's
executor, administrator, heir or legatee, as the case may be) must deliver to
the Company an executed stock option exercise agreement in the form attached
hereto as Exhibit A, or in such other form as may be approved by the Company
---------
from time to time (the "Exercise Agreement"), which shall set forth, inter alia,
----- ----
Optionee's election to exercise this Option, the number of shares being
purchased, any restrictions imposed on the Shares and any representations,
warranties and agreements regarding Optionee's investment intent and access to
information as may be required by the Company to comply with applicable
securities laws. If someone other than Optionee exercises this Option, then
such person must submit documentation reasonably acceptable to the Company that
such person has the right to exercise this Option.
4.2 Limitations on Exercise. This Option may not be exercised
-----------------------
unless such exercise is in compliance with all applicable federal and state
securities laws, as they are in effect on the date of exercise. This Option may
not be exercised as to fewer than 100 Shares unless it is exercised as to all
Shares as to which this Option is then exercisable.
4.3 Payment. The Exercise Agreement shall be accompanied by full
-------
payment of the Exercise Price for the Shares being purchased in cash (by check),
or where permitted by law:
(a) by cancellation of indebtedness of the Company to the Optionee;
(b) by surrender of shares of the Company's Common Stock that either: (1)
have been owned by Optionee for more than six (6) months and have been
paid for within the meaning of SEC Rule 144 (and, if such shares were
purchased from the Company by use of a promissory note, such note has
been fully paid with respect to such shares); or (2) were obtained by
Optionee in the open public market; and (3) are clear of all liens,
---
claims, encumbrances or security interests;
(c) by waiver of compensation due or accrued to Optionee for services
rendered;
(d) provided that a public market for the Company's stock exists: (1)
through a "same day sale" commitment from Optionee and a broker-dealer
that is a member of the National Association of Securities Dealers (an
"NASD Dealer") whereby Optionee irrevocably elects to exercise this
Option and to sell a portion of the Shares so purchased to pay for the
Exercise Price and whereby the NASD Dealer irrevocably commits upon
receipt of such Shares to forward the exercise price directly to the
Company; or (2) through a "margin" commitment from Optionee and an
--
NASD Dealer whereby Optionee irrevocably elects to exercise this
Option and to pledge the Shares so purchased to the NASD Dealer in a
margin account as security for a loan from the NASD Dealer in the
amount of the Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the Exercise Price
directly to the Company; or
3
<PAGE>
Snowball.com, Inc.
Stock Option Agreement
2000 Equity Incentive Plan
(e) by any combination of the foregoing.
4.4 Tax Withholding. Prior to the issuance of the Shares upon
---------------
exercise of this Option, Optionee must pay or provide for any applicable federal
or state withholding obligations of the Company. If the Committee permits,
Optionee may provide for payment of withholding taxes upon exercise of this
Option by requesting that the Company retain Shares with a Fair Market Value
equal to the minimum amount of taxes required to be withheld. In such case, the
Company shall issue the net number of Shares to the Optionee by deducting the
Shares retained from the Shares issuable upon exercise.
4.5 Issuance of Shares. Provided that the Exercise Agreement and
------------------
payment are in form and substance satisfactory to counsel for the Company, the
Company shall issue the Shares registered in the name of Optionee, Optionee's
authorized assignee, or Optionee's legal representative, and shall deliver
certificates representing the Shares with the appropriate legends affixed
thereto.
5. Notice of Disqualifying Disposition of ISO Shares. To the extent
-------------------------------------------------
this Option is an ISO, if Optionee sells or otherwise disposes of any of the
Shares acquired pursuant to the ISO on or before the later of (a) the date two
(2) years after the Date of Grant, and (b) the date one (1) year after transfer
of such Shares to Optionee upon exercise of this Option, then Optionee shall
immediately notify the Company in writing of such disposition.
6. Compliance with Laws and Regulations. The exercise of this Option
------------------------------------
and the issuance and transfer of Shares shall be subject to compliance by the
Company and Optionee with all applicable requirements of federal and state
securities laws and with all applicable requirements of any stock exchange on
which the Company's Common Stock may be listed at the time of such issuance or
transfer. Optionee understands that the Company is under no obligation to
register or qualify the Shares with the SEC, any state securities commission or
any stock exchange to effect such compliance.
7. Nontransferability of Option. This Option may not be transferred
----------------------------
in any manner other than under the terms and conditions of the Plan or by will
or by the laws of descent and distribution and may be exercised during the
lifetime of Optionee only by Optionee. The terms of this Option shall be
binding upon the executors, administrators, successors and assigns of Optionee.
8. Tax Consequences. Set forth below is a brief summary as of the
----------------
date the Board adopted the Plan 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.
OPTIONEE SHOULD CONSULT A TAX ADVISOR BEFORE EXERCISING THIS OPTION OR DISPOSING
OF THE SHARES.
8.1 Exercise of Incentive Stock Option. To the extent this
----------------------------------
Option qualifies as an ISO, there will be no regular federal income tax
liability upon the exercise of this
4
<PAGE>
Snowball.com, Inc.
Stock Option Agreement
2000 Equity Incentive Plan
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 a tax preference
item for federal income tax purposes and may subject the Optionee to the
alternative minimum tax in the year of exercise.
8.2 Exercise of Nonqualified Stock Option. To the extent this
-------------------------------------
Option does not qualify as an ISO, there may be a regular federal income tax
liability upon the exercise of this Option. 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. The Company may be required to withhold from
Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount equal to a percentage of this compensation income
at the time of exercise.
8.3 Disposition of Shares. The following tax consequences may
---------------------
apply upon disposition of the Shares.
a. Incentive Stock Options. If the Shares are held for
-----------------------
twelve (12) months or more after the date of the transfer of the Shares pursuant
to the exercise of an ISO and are disposed of two (2) years or more after the
Date of Grant, any gain realized on disposition of the Shares will be treated as
capital gain for federal income tax purposes. If Shares purchased under an ISO
are disposed of within the applicable one (1) year or two (2) year period, any
gain realized on such disposition will be treated as compensation income
(taxable at ordinary income rates) to the extent of the excess, if any, of the
fair market value of the Shares on the date of exercise over the Exercise Price.
b. Nonqualified Stock Options. If the Shares are held for
--------------------------
more than twelve (12) months after the date of the transfer of the Shares
pursuant to the exercise of an NQSO, any gain realized on disposition of the
Shares will be treated as long-term capital gain.
c. Withholding. The Company may be required to withhold
-----------
from Optionee's compensation or collect from the Optionee and pay to the
applicable taxing authorities an amount equal to a percentage of this
compensation income.
9. Privileges of Stock Ownership. Optionee shall not have any of the
-----------------------------
rights of a stockholder with respect to any Shares until the Shares are issued
to Optionee.
10. Interpretation. Any dispute regarding the interpretation of this
--------------
Agreement shall be submitted by Optionee or the Company to the Committee for
review. The resolution of such a dispute by the Committee shall be final and
binding on the Company and Optionee.
11. Entire Agreement. The Plan is incorporated herein by reference.
----------------
This Agreement and the Plan and the Exercise Agreement constitute the entire
agreement and understanding of the parties hereto with respect to the subject
matter hereof and supersede all prior understandings and agreements with respect
to such subject matter.
12. Notices. Any notice required to be given or delivered to the
-------
Company under the terms of this Agreement shall be in writing and addressed to
the Corporate Secretary of the
5
<PAGE>
Snowball.com, Inc.
Stock Option Agreement
2000 Equity Incentive Plan
the Company at its principal corporate offices. Any notice required to be given
or delivered to Optionee shall be in writing and addressed to Optionee at the
address indicated above or to such other address as such party may designate in
writing from time to time to the Company. All notices shall be deemed to have
been given or delivered upon: personal delivery; three (3) days after deposit in
the United States mail by certified or registered mail (return receipt
requested); one (1) business day after deposit with any return receipt express
courier (prepaid); or one (1) business day after transmission by facsimile.
13. Successors and Assigns. The Company may assign any of its rights
----------------------
under this Agreement. This Agreement shall be binding upon and inure to the
benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer set forth herein, this Agreement shall be binding upon
Optionee and Optionee's heirs, executors, administrators, legal representatives,
successors and assigns.
14. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the internal laws of the State of California, without regard
to that body of law pertaining to choice of law or conflict of law.
15. Acceptance. Optionee hereby acknowledges receipt of a copy of the
----------
Plan and this Agreement. Optionee has read and understands the terms and
provisions thereof, and accepts this Option subject to all the terms and
conditions of the Plan and this Agreement. Optionee acknowledges that there may
be adverse tax consequences upon exercise of this Option or disposition of the
Shares and that the Company has advised Optionee to consult a tax advisor prior
to such exercise or disposition.
6
<PAGE>
Snowball.com, Inc.
Stock Option Agreement
2000 Equity Incentive Plan
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
in duplicate by its duly authorized representative and Optionee has executed
this Agreement in duplicate as of the Date of Grant.
SNOWBALL.COM, INC. OPTIONEE
By: _________________________________ ____________________________________
(Signature)
______________________________________ ____________________________________
(Please print name) (Please print name)
______________________________________
(Please print title)
7
<PAGE>
EXHIBIT A
---------
STOCK OPTION EXERCISE AGREEMENT
<PAGE>
Exhibit A
---------
SNOWBALL.COM, INC.
2000 EQUITY INCENTIVE PLAN (the "Plan")
STOCK OPTION EXERCISE AGREEMENT
-------------------------------
I hereby elect to purchase the number of shares of Common Stock of
Snowball.com, Inc. (the "Company") as set forth below:
<TABLE>
<S> <C>
Optionee____________________________________________________ Number of Shares Purchased:_________________________________________
Social Security Number:_____________________________________ Purchase Price per Share:___________________________________________
Address:____________________________________________________ Aggregate Purchase Price:___________________________________________
_____________________________________________ Date of Option Agreement:____________________
_____________________________________________
Type of Option: [ ] Incentive Stock Option Exact Name of Title to Shares:______________________________________
[ ] Nonqualified Stock ____________________________________________________________________
</TABLE>
1. Delivery of Purchase Price. Optionee hereby delivers to the Company the
Aggregate Purchase Price, to the extent permitted in the Option Agreement (the
"Option Agreement") as follows (check as applicable and complete):
[ ] in cash (by check) in the amount of $_____________________, receipt of
which is acknowledged by the Company;
[ ] by cancellation of indebtedness of the Company to Optionee in the amount
of $___________________________________;
[ ] by delivery of ______________________________ fully-paid, nonassessable
and vested shares of the Common Stock of the Company owned by Optionee for
at least six (6) months prior to the date hereof (and which have been paid
for within the meaning of SEC Rule 144), or obtained by Optionee in the
open public market, and owned free and clear of all liens, claims,
encumbrances or security interests, valued at the current Fair Market
Value of $____________________ per share;
[ ] by the waiver hereby of compensation due or accrued to Optionee for
services rendered in the amount of $____________________________________;
[ ] through a "same-day-sale" commitment, delivered herewith, from Optionee
and the NASD Dealer named therein, in the amount of $_________________; or
[ ] through a "margin" commitment, delivered herewith from Optionee and the
NASD Dealer named therein, in the amount of $____________________________.
2. Market Standoff Agreement. Optionee, if requested by the Company and an
underwriter of Common Stock (or other securities) of the Company, agrees not to
sell or otherwise transfer or dispose of any Common Stock (or other securities)
of the Company held by Optionee during the period requested by the managing
underwriter following the effective date of a registration statement of the
Company filed under the Securities Act, provided that all officers and directors
of the Company are required to enter into similar agreements. Such agreement
shall be in writing in a form satisfactory to the Company and such underwriter.
The Company may impose stop-transfer instructions with respect to the shares (or
other securities) subject to the foregoing restriction until the end of such
period.
3. Tax Consequences. 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
CONSULTANT(S) 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.
4. Entire Agreement. The Plan and Option Agreement are incorporated herein by
reference. This Exercise Agreement, the Plan and the Option Agreement
constitute the entire agreement and understanding of the parties and supersede
in their entirety all prior understandings and agreements of the Company and
Optionee with respect to the subject matter hereof, and are governed by
California law except for that body of law pertaining to choice of law or
conflict of law.
Date:_____________________________ ___________________________________
Signature of Optionee
<PAGE>
Spousal Consent
I acknowledge that I have read the foregoing Stock Option Exercise
Agreement (the "Agreement") and that I know its contents. I hereby consent to
and approve all of the provisions of the Agreement, and agree that the shares of
the Common Stock of Snowball.com, Inc. purchased thereunder (the "Shares") and
any interest I may have in such Shares are subject to all the provisions of the
Agreement. I will take no action at any time to hinder operation of the
Agreement on these Shares or any interest I may have in or to them.
__________________________________ Date:__________________
Signature of Optionee's Spouse
__________________________________
Spouse's Name - Typed or Printed
__________________________________
Optionee's Name - Typed or Printed
<PAGE>
No. ______
SNOWBALL.COM, INC.
2000 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
----------------------
(Initial Grants For Non-Employee Directors)
This Stock Option Agreement (this "Agreement") is made and entered
into as of the Date of Grant set forth below (the "Date of Grant") by and
between Snowball.com, Inc., a Delaware corporation (the "Company"), and the
Optionee named below ("Optionee"). Capitalized terms not defined herein shall
have the meanings ascribed to them in the Company's 2000 Equity Incentive Plan
(the "Plan").
Optionee: ____________________________
Social Security Number: ____________________________
Optionee's Address: ____________________________
____________________________
Total Option Shares: 20,000
----------------------------
Exercise Price Per Share: ____________________________
Date of Grant: ____________________________
Expiration Date: ____________________________
(unless earlier terminated
under Section 3 hereof)
Type of Stock Option: Nonqualified Stock Option
----------------------------
1. Grant of Option. The Company hereby grants to Optionee an option
---------------
(this "Option") to purchase up to the total number of shares of Common Stock of
the Company set forth above as Total Option Shares (collectively, the "Shares")
at the Exercise Price Per Share set forth above (the "Exercise Price"), subject
to all of the terms and conditions of this Agreement and the Plan.
2. Vesting; Exercise Period.
------------------------
2.1 Vesting of Shares. Subject to the terms and conditions of
-----------------
the Plan and this Agreement, this Option shall be exercisable as it vests.
Subject to the terms and conditions of the Plan and this Agreement, this Option
shall vest as to 25% of the Shares on the first anniversary of the Date of
Grant, and as to 2.08333% of the Shares monthly thereafter until all of the
Shares are fully vested, so long as the Optionee continuously remains a director
of the Company.
2.2 Expiration. This Option shall expire on the Expiration Date
----------
set forth above and must be exercised, if at all, on or before the earlier of
the Expiration Date or the date on which this Option is earlier terminated in
accordance with the provisions of Section 3 hereof.
<PAGE>
Snowball.com, Inc.
Stock Open Agreement
For Non-Employee Directors
2000 Equity Incentive Plan
Initial Grant
3. Termination. Except as provided below in this Section, this
-----------
Option shall terminate and may not be exercised if Optionee ceases to be a
member of the Board of Directors of the Company ("Board Member"). The date on
which Optionee ceases to be a Board Member shall be referred to as the
"Termination Date."
3.1 Termination for Any Reason Except Death, Disability or Cause.
------------------------------------------------------------
If Optionee ceases to be a Board Member for any reason except death, Disability
or Cause, then this Option may be exercised by Optionee no later than seven (7)
months after the Termination Date, but in any event no later than the Expiration
Date.
3.2 Termination Because of Death or Disability. If Optionee
------------------------------------------
ceases to be a Board Member due to Optionee's death or Disability (or dies
within 3 months after Termination other than for Cause or because of
Disability), then this Option may be exercised by Optionee (or Optionee's legal
representative or authorized assignee) no later than twelve (12) months after
the Termination Date, but in any event no later than the Expiration Date.
3.3 Termination for Cause. If Optionee is Terminated for Cause,
---------------------
then this Option, to the extenct that it is vested in accordance with the
schedule set forth in Section 2.1 hereof on the Termination Date, may be
exercised by Optionee no later than one (1) month after the Termination Date,
but in any event no later than the Expiration Date.
4. Manner of Exercise.
------------------
4.1 Stock Option Exercise Agreement. To exercise this Option,
-------------------------------
Optionee (or in the case of exercise after Optionee's death, Optionee's
executor, administrator, heir or legatee, as the case may be) must deliver to
the Company an executed stock option exercise agreement in the form attached
hereto as Exhibit A, or in such other form as may be approved by the Company
from time to time (the "Exercise Agreement"), which shall set forth, inter alia,
----- ----
Optionee's election to exercise this Option, the number of shares being
purchased, any restrictions imposed on the Shares and any representations,
warranties and agreements regarding Optionee's investment intent and access to
information as may be required by the Company to comply with applicable
securities laws. If someone other than Optionee exercises this Option, then such
person must submit documentation reasonably acceptable to the Company that such
person has the right to exercise this Option.
4.2 Limitations on Exercise. This Option may not be exercised
-----------------------
unless such exercise is in compliance with all applicable federal and state
securities laws, as they are in effect on the date of exercise. This Option may
not be exercised as to fewer than 100 Shares unless it is exercised as to all
Shares as to which this Option is then exercisable.
4.3 Payment. The Exercise Agreement shall be accompanied by full
-------
payment of the Exercise Price for the Shares being purchased in cash (by check),
or where permitted by law:
2
<PAGE>
Snowball.com, Inc.
Stock Open Agreement
For Non-Employee Directors
2000 Equity Incentive Plan
Initial Grant
(a) by cancellation of indebtedness of the Company to the Optionee;
(b) by surrender of shares of the Company's Common Stock that either: (1)
have been owned by Optionee for more than six (6) months and have been
paid for within the meaning of SEC Rule 144 (and, if such shares were
purchased from the Company by use of a promissory note, such note has
been fully paid with respect to such shares); or (2) were obtained by
Optionee in the open public market; and (3) are clear of all liens,
---
claims, encumbrances or security interests;
(c) by waiver of compensation due or accrued to Optionee for services
rendered;
(d) provided that a public market for the Company's stock exists: (1)
through a "same day sale" commitment from Optionee and a broker-dealer
that is a member of the National Association of Securities Dealers (an
"NASD Dealer") whereby Optionee irrevocably elects to exercise this
Option and to sell a portion of the Shares so purchased to pay for the
Exercise Price and whereby the NASD Dealer irrevocably commits upon
receipt of such Shares to forward the exercise price directly to the
Company; or (2) through a "margin" commitment from Optionee and an
--
NASD Dealer whereby Optionee irrevocably elects to exercise this
Option and to pledge the Shares so purchased to the NASD Dealer in a
margin account as security for a loan from the NASD Dealer in the
amount of the Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the Exercise Price
directly to the Company; or
(e) by any combination of the foregoing.
4.4 Tax Withholding. Prior to the issuance of the Shares upon
---------------
exercise of this Option, Optionee must pay or provide for any applicable federal
or state withholding obligations of the Company. If the Committee permits,
Optionee may provide for payment of withholding taxes upon exercise of this
Option by requesting that the Company retain Shares with a Fair Market Value
equal to the minimum amount of taxes required to be withheld. In such case, the
Company shall issue the net number of Shares to the Optionee by deducting the
Shares retained from the Shares issuable upon exercise.
4.5 Issuance of Shares. Provided that the Exercise Agreement and
------------------
payment are in form and substance satisfactory to counsel for the Company, the
Company shall issue the Shares registered in the name of Optionee, Optionee's
authorized assignee, or Optionee's legal representative, and shall deliver
certificates representing the Shares with the appropriate legends affixed
thereto.
5. Compliance with Laws and Regulations. The exercise of this Option
------------------------------------
and the issuance and transfer of Shares shall be subject to compliance by the
Company and Optionee with all applicable requirements of federal and state
securities laws and with all applicable requirements of any stock exchange on
which the Company's Common Stock may be listed at the
3
<PAGE>
Snowball.com, Inc.
Stock Open Agreement
For Non-Employee Directors
2000 Equity Incentive Plan
Initial Grant
time of such issuance or transfer. Optionee understands that the Company is
under no obligation to register or qualify the Shares with the SEC, any state
securities commission or any stock exchange to effect such compliance.
6. Nontransferability of Option. This Option may not be transferred
----------------------------
in any manner other than under the terms and conditions of the Plan or by will
or by the laws of descent and distribution and may be exercised during the
lifetime of Optionee only by Optionee. The terms of this Option shall be binding
upon the executors, administrators, successors and assigns of Optionee.
7. Tax Consequences. Set forth below is a brief summary as of the
----------------
date the Board adopted the Plan 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.
OPTIONEE SHOULD CONSULT A TAX ADVISOR BEFORE EXERCISING THIS OPTION OR DISPOSING
OF THE SHARES.
7.1 Exercise of Nonqualified Stock Option. There may be a
-------------------------------------
regular federal income tax liability upon the exercise of this Option. 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. The Company may be
required to withhold from Optionee's compensation or collect from Optionee and
pay to the applicable taxing authorities an amount equal to a percentage of this
compensation income at the time of exercise.
7.2 Disposition of Shares. If the Shares are held for more than
---------------------
twelve (12) months after the date of the transfer of the Shares pursuant to the
exercise of an NQSO, any gain realized on disposition of the Shares will be
treated as long-term capital gain.
8. Privileges of Stock Ownership. Optionee shall not have any of the
-----------------------------
rights of a stockholder with respect to any Shares until the Shares are issued
to Optionee.
9. Interpretation. Any dispute regarding the interpretation of this
--------------
Agreement shall be submitted by Optionee or the Company to the Committee for
review. The resolution of such a dispute by the Committee shall be final and
binding on the Company and Optionee.
10. Entire Agreement. The Plan is incorporated herein by reference.
----------------
This Agreement and the Plan and the Exercise Agreement constitute the entire
agreement and understanding of the parties hereto with respect to the subject
matter hereof and supersede all prior understandings and agreements with respect
to such subject matter.
11. Notices. Any notice required to be given or delivered to the
-------
Company under the terms of this Agreement shall be in writing and addressed to
the Corporate Secretary of the Company at its principal corporate offices. Any
notice required to be given or delivered to
4
<PAGE>
Snowball.com, Inc.
Stock Open Agreement
For Non-Employee Directors
2000 Equity Incentive Plan
Initial Grant
Optionee shall be in writing and addressed to Optionee at the address indicated
above or to such other address as such party may designate in writing from time
to time to the Company. All notices shall be deemed to have been given or
delivered upon: personal delivery; three (3) days after deposit in the United
States mail by certified or registered mail (return receipt requested); one (1)
business day after deposit with any return receipt express courier (prepaid); or
one (1) business day after transmission by facsimile.
12. Successors and Assigns. The Company may assign any of its rights
----------------------
under this Agreement. This Agreement shall be binding upon and inure to the
benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer set forth herein, this Agreement shall be binding upon
Optionee and Optionee's heirs, executors, administrators, legal representatives,
successors and assigns.
13. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the internal laws of the State of California, without regard
to that body of law pertaining to choice of law or conflict of law.
14. Acceptance. Optionee hereby acknowledges receipt of a copy of the
----------
Plan and this Agreement. Optionee has read and understands the terms and
provisions thereof, and accepts this Option subject to all the terms and
conditions of the Plan and this Agreement. Optionee acknowledges that there may
be adverse tax consequences upon exercise of this Option or disposition of the
Shares and that the Company has advised Optionee to consult a tax advisor prior
to such exercise or disposition.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed in duplicate by its duly authorized representative and Optionee has
executed this Agreement in duplicate as of the Date of Grant.
SNOWBALL.COM, INC. OPTIONEE
By:________________________________ _______________________________
(Signature)
___________________________________ _______________________________
(Please print name) (Please print name)
___________________________________
(Please print title)
5
<PAGE>
EXHIBIT A
---------
STOCK OPTION EXERCISE AGREEMENT
<PAGE>
Exhibit A
---------
SNOWBALL.COM, INC.
2000 EQUITY INCENTIVE PLAN (the "Plan")
STOCK OPTION EXERCISE AGREEMENT
-------------------------------
(For Non-Employee Directors)
I hereby elect to purchase the number of shares of Common Stock of
Snowball.com, Inc. (the "Company") as set forth below:
<TABLE>
<CAPTION>
<S> <C>
Optionee______________________________________ Number of Shares Purchased:________________________________
Social Security Number:_______________________ Purchase Price per Share:__________________________________
Address:______________________________________ Aggregate Purchase Price:__________________________________
Date of Option Agreement: _________________________________
____________________________________
____________________________________
Type of Option: Nonqualified Stock Option Exact Name of Title to Shares:_____________________________
___________________________________________________________
</TABLE>
1. Delivery of Purchase Price. Optionee hereby delivers to the Company the
Aggregate Purchase Price, to the extent permitted in the Option Agreement (the
"Option Agreement") as follows (check as applicable and complete):
[ ] in cash (by check) in the amount of $_____________________, receipt of
which is acknowledged by the Company;
[ ] by cancellation of indebtedness of the Company to Optionee in the amount
of $___________________________________;
[ ] by delivery of ______________________________ fully-paid, nonassessable
and vested shares of the Common Stock of the Company owned by Optionee for
at least six (6) months prior to the date hereof (and which have been paid
for within the meaning of SEC Rule 144), or obtained by Optionee in the
open public market, and owned free and clear of all liens, claims,
encumbrances or security interests, valued at the current Fair Market Value
of $____________________ per share;
[ ] by the waiver hereby of compensation due or accrued to Optionee for
services rendered in the amount of $____________________________________;
[ ] through a "same-day-sale" commitment, delivered herewith, from Optionee
and the NASD Dealer named therein, in the amount of
$_______________________________; or
[ ] through a "margin" commitment, delivered herewith from Optionee and the
NASD Dealer named therein, in the amount of
$_________________________________________.
2. Market Standoff Agreement. Optionee, if requested by the Company and an
underwriter of Common Stock (or other securities) of the Company, agrees not to
sell or otherwise transfer or dispose of any Common Stock (or other securities)
of the Company held by Optionee during the period requested by the managing
underwriter following the effective date of a registration statement of the
Company filed under the Securities Act, provided that all officers and directors
of the Company are required to enter into similar agreements. Such agreement
shall be in writing in a form satisfactory to the Company and such underwriter.
The Company may impose stop-transfer instructions with respect to the shares (or
other securities) subject to the foregoing restriction until the end of such
period.
3. Tax Consequences. 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 CONSULTANT(S)
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.
4. Entire Agreement. The Plan and Option Agreement are incorporated herein by
reference. This Exercise Agreement, the Plan and the Option Agreement constitute
the entire agreement and understanding of the parties and supersede in their
entirety all prior understandings and agreements of the Company and Optionee
with respect to the subject matter hereof, and are governed by California law
except for that body of law pertaining to choice of law or conflict of law.
Date: ________________ ___________________________
Signature of Optionee
<PAGE>
Spousal Consent
I acknowledge that I have read the foregoing Stock Option Exercise
Agreement (the "Agreement") and that I know its contents. I hereby consent to
and approve all of the provisions of the Agreement, and agree that the shares of
the Common Stock of Snowball.com, Inc. purchased thereunder (the "Shares") and
any interest I may have in such Shares are subject to all the provisions of the
Agreement. I will take no action at any time to hinder operation of the
Agreement on these Shares or any interest I may have in or to them.
__________________________________ Date:__________________
Signature of Optionee's Spouse
__________________________________
Spouse's Name - Typed or Printed
__________________________________
Optionee's Name - Typed or Printed
<PAGE>
No. ___
SNOWBALL.COM, INC.
2000 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
----------------------
(Succeeding Grant For Non-Employee Directors)
This Stock Option Agreement (this "Agreement") is made and entered
into as of the Date of Grant set forth below (the "Date of Grant") by and
between Snowball.com, Inc., a Delaware corporation (the "Company"), and the
Optionee named below ("Optionee"). Capitalized terms not defined herein shall
have the meanings ascribed to them in the Company's 2000 Equity Incentive Plan
(the "Plan").
Optionee: _______________________________________________
Social Security Number: _______________________________________________
Optionee's Address: _______________________________________________
Total Option Shares: 5,000
-----------------------------------------------
Exercise Price Per Share: _______________________________________________
Date of Grant: _______________________________________________
Expiration Date: _______________________________________________
(unless earlier terminated under Section 3 hereof)
Type of Stock Option: Nonqualified Stock Option
-----------------------------------------------
1. Grant of Option. The Company hereby grants to Optionee an option
---------------
(this "Option") to purchase up to the total number of shares of Common Stock of
the Company set forth above as Total Option Shares (collectively, the "Shares")
at the Exercise Price Per Share set forth above (the "Exercise Price"), subject
to all of the terms and conditions of this Agreement and the Plan.
2. Vesting; Exercise Period.
------------------------
2.1 Vesting of Shares. Subject to the terms and conditions of
-----------------
the Plan and this Agreement, this Option shall be exercisable as it vests.
Subject to the terms and conditions of the Plan and this Agreement, this Option
shall vest as to 25% of the Shares on the first anniversary of the Date of
Grant, and as to 2.08333% of the Shares monthly thereafter until all of the
Shares are fully vested, so long as the Optionee continuously remains a director
of the Company.
2.2 Expiration. This Option shall expire on the Expiration Date
----------
set forth above and must be exercised, if at all, on or before the earlier of
the Expiration Date or the date on which this Option is earlier terminated in
accordance with the provisions of Section 3 hereof.
<PAGE>
Snowball.com, Inc.
Stock Option Plan
For Non-Employee Directors
2000 Equity Incentive Plan
Succeeding Grant
3. Termination. Except as provided below in this Section, this
-----------
Option shall terminate and may not be exercised if Optionee ceases to be a
member of the Board of Directors of the Company ("Board Member"). The date on
which Optionee ceases to be a Board Member shall be referred to as the
"Termination Date."
3.1 Termination for Any Reason Except Death, Disability or
------------------------------------------------------
Cause. If Optionee ceases to be a Board Member for any reason except death,
- -----
Disability or Cause, then this Option may be exercised by Optionee no later than
seven (7) months after the Termination Date, but in any event no later than the
Expiration Date.
3.2 Termination Because of Death or Disability. If Optionee
------------------------------------------
ceases to be a Board Member due to Optionee's death or Disability (or dies
within 3 months after Termination other than for Cause or because of
Disability), then this Option may be exercised by Optionee (or Optionee's legal
representative or authorized assignee) no later than twelve (12) months after
the Termination Date, but in any event no later than the Expiration Date.
3.3 Termination for Cause. If Optionee is Terminated for Cause,
---------------------
then this Option, to the extenct that it is vested in accordance with the
schedule set forth in Section 2.1 hereof on the Termination Date, may be
exercised by Optionee no later than one (1) month after the Termination Date,
but in any event no later than the Expiration Date.
4. Manner of Exercise.
------------------
4.1 Stock Option Exercise Agreement. To exercise this Option,
-------------------------------
Optionee (or in the case of exercise after Optionee's death, Optionee's
executor, administrator, heir or legatee, as the case may be) must deliver to
the Company an executed stock option exercise agreement in the form attached
hereto as Exhibit A, or in such other form as may be approved by the Company
---------
from time to time (the "Exercise Agreement"), which shall set forth, inter alia,
----- ----
Optionee's election to exercise this Option, the number of shares being
purchased, any restrictions imposed on the Shares and any representations,
warranties and agreements regarding Optionee's investment intent and access to
information as may be required by the Company to comply with applicable
securities laws. If someone other than Optionee exercises this Option, then
such person must submit documentation reasonably acceptable to the Company that
such person has the right to exercise this Option.
4.2 Limitations on Exercise. This Option may not be exercised
-----------------------
unless such exercise is in compliance with all applicable federal and state
securities laws, as they are in effect on the date of exercise. This Option may
not be exercised as to fewer than 100 Shares unless it is exercised as to all
Shares as to which this Option is then exercisable.
4.3 Payment. The Exercise Agreement shall be accompanied by full
-------
payment of the Exercise Price for the Shares being purchased in cash (by check),
or where permitted by law:
2
<PAGE>
Snowball.com, Inc.
Stock Option Plan
For Non-Employee Directors
2000 Equity Incentive Plan
Succeeding Grant
(a) by cancellation of indebtedness of the Company to the Optionee;
(b) by surrender of shares of the Company's Common Stock that either: (1)
have been owned by Optionee for more than six (6) months and have been
paid for within the meaning of SEC Rule 144 (and, if such shares were
purchased from the Company by use of a promissory note, such note has
been fully paid with respect to such shares); or (2) were obtained by
Optionee in the open public market; and (3) are clear of all liens,
---
claims, encumbrances or security interests;
(c) by waiver of compensation due or accrued to Optionee for services
rendered;
(d) provided that a public market for the Company's stock exists: (1)
through a "same day sale" commitment from Optionee and a broker-dealer
that is a member of the National Association of Securities Dealers (an
"NASD Dealer") whereby Optionee irrevocably elects to exercise this
Option and to sell a portion of the Shares so purchased to pay for the
Exercise Price and whereby the NASD Dealer irrevocably commits upon
receipt of such Shares to forward the exercise price directly to the
Company; or (2) through a "margin" commitment from Optionee and an
--
NASD Dealer whereby Optionee irrevocably elects to exercise this
Option and to pledge the Shares so purchased to the NASD Dealer in a
margin account as security for a loan from the NASD Dealer in the
amount of the Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the Exercise Price
directly to the Company; or
(e) by any combination of the foregoing.
4.4 Tax Withholding. Prior to the issuance of the Shares upon
---------------
exercise of this Option, Optionee must pay or provide for any applicable federal
or state withholding obligations of the Company. If the Committee permits,
Optionee may provide for payment of withholding taxes upon exercise of this
Option by requesting that the Company retain Shares with a Fair Market Value
equal to the minimum amount of taxes required to be withheld. In such case, the
Company shall issue the net number of Shares to the Optionee by deducting the
Shares retained from the Shares issuable upon exercise.
4.5 Issuance of Shares. Provided that the Exercise Agreement and
------------------
payment are in form and substance satisfactory to counsel for the Company, the
Company shall issue the Shares registered in the name of Optionee, Optionee's
authorized assignee, or Optionee's legal representative, and shall deliver
certificates representing the Shares with the appropriate legends affixed
thereto.
5. Compliance with Laws and Regulations. The exercise of this Option
------------------------------------
and the issuance and transfer of Shares shall be subject to compliance by the
Company and Optionee with all applicable requirements of federal and state
securities laws and with all applicable requirements of any stock exchange on
which the Company's Common Stock may be listed at the
3
<PAGE>
Snowball.com, Inc.
Stock Option Plan
For Non-Employee Directors
2000 Equity Incentive Plan
Succeeding Grant
time of such issuance or transfer. Optionee understands that the Company is
under no obligation to register or qualify the Shares with the SEC, any state
securities commission or any stock exchange to effect such compliance.
6. Nontransferability of Option. This Option may not be transferred
----------------------------
in any manner other than under the terms and conditions of the Plan or by will
or by the laws of descent and distribution and may be exercised during the
lifetime of Optionee only by Optionee. The terms of this Option shall be
binding upon the executors, administrators, successors and assigns of Optionee.
7. Tax Consequences. Set forth below is a brief summary as of the
----------------
date the Board adopted the Plan 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.
OPTIONEE SHOULD CONSULT A TAX ADVISOR BEFORE EXERCISING THIS OPTION OR DISPOSING
OF THE SHARES.
7.1 Exercise of Nonqualified Stock Option. There may be a
-------------------------------------
regular federal income tax liability upon the exercise of this Option. 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. The Company may be
required to withhold from Optionee's compensation or collect from Optionee and
pay to the applicable taxing authorities an amount equal to a percentage of this
compensation income at the time of exercise.
7.2 Disposition of Shares. If the Shares are held for more than
---------------------
twelve (12) months after the date of the transfer of the Shares pursuant to the
exercise of an NQSO, any gain realized on disposition of the Shares will be
treated as long-term capital gain.
8. Privileges of Stock Ownership. Optionee shall not have any of the
-----------------------------
rights of a stockholder with respect to any Shares until the Shares are issued
to Optionee.
9. Interpretation. Any dispute regarding the interpretation of this
--------------
Agreement shall be submitted by Optionee or the Company to the Committee for
review. The resolution of such a dispute by the Committee shall be final and
binding on the Company and Optionee.
10. Entire Agreement. The Plan is incorporated herein by reference.
----------------
This Agreement and the Plan and the Exercise Agreement constitute the entire
agreement and understanding of the parties hereto with respect to the subject
matter hereof and supersede all prior understandings and agreements with respect
to such subject matter.
11. Notices. Any notice required to be given or delivered to the
-------
Company under the terms of this Agreement shall be in writing and addressed to
the Corporate Secretary of the Company at its principal corporate offices. Any
notice required to be given or delivered to
4
<PAGE>
Snowball.com, Inc.
Stock Option Agreement
For Non-Employee Directors
2000 Equity Incentive Plan
Succeeding Grant
Optionee shall be in writing and addressed to Optionee at the address indicated
above or to such other address as such party may designate in writing from time
to time to the Company. All notices shall be deemed to have been given or
delivered upon: personal delivery; three (3) days after deposit in the United
States mail by certified or registered mail (return receipt requested); one (1)
business day after deposit with any return receipt express courier (prepaid); or
one (1) business day after transmission by facsimile.
12. Successors And Assigns. The Company may assign any of its rights
----------------------
under this Agreement. This Agreement shall be binding upon and inure to the
benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer set forth herein, this Agreement shall be binding upon
Optionee and Optionee's heirs, executors, administrators, legal representatives,
successors and assigns.
13. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the internal laws of the State of California, without regard
to that body of law pertaining to choice of law or conflict of law.
14. Acceptance. Optionee hereby acknowledges receipt of a copy of the
----------
Plan and this Agreement. Optionee has read and understands the terms and
provisions thereof, and accepts this Option subject to all the terms and
conditions of the Plan and this Agreement. Optionee acknowledges that there may
be adverse tax consequences upon exercise of this Option or disposition of the
Shares and that the Company has advised Optionee to consult a tax advisor prior
to such exercise or disposition.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
in duplicate by its duly authorized representative and Optionee has executed
this Agreement in duplicate as of the Date of Grant.
SNOWBALL.COM, INC. OPTIONEE
By:------------------------- -----------------------------------
(Signature)
- ---------------------------- -----------------------------------
(Please print name) (Please print name)
- ----------------------------
(Please print title)
5
<PAGE>
Exhibit A
---------
SNOWBALL.COM, INC.
2000 EQUITY INCENTIVE PLAN (the "Plan")
STOCK OPTION EXERCISE AGREEMENT
-------------------------------
I hereby elect to purchase the number of shares of Common Stock of
Snowball.com, Inc. (the "Company") as set forth below:
<TABLE>
<S> <C>
Optionee____________________________________________________ Number of Shares Purchased:_________________________________________
Social Security Number:_____________________________________ Purchase Price per Share:___________________________________________
Address:____________________________________________________ Aggregate Purchase Price:___________________________________________
_____________________________________________ Date of Option Agreement:____________________
_____________________________________________
Type of Option: [ ] Incentive Stock Option Exact Name of Title to Shares:______________________________________
[ ] Nonqualified Stock ____________________________________________________________________
</TABLE>
1. Delivery of Purchase Price. Optionee hereby delivers to the Company the
Aggregate Purchase Price, to the extent permitted in the Option Agreement (the
"Option Agreement") as follows (check as applicable and complete):
[ ] in cash (by check) in the amount of $_____________________, receipt of
which is acknowledged by the Company;
[ ] by cancellation of indebtedness of the Company to Optionee in the amount
of $___________________________________;
[ ] by delivery of ______________________________ fully-paid, nonassessable
and vested shares of the Common Stock of the Company owned by Optionee for
at least six (6) months prior to the date hereof (and which have been paid
for within the meaning of SEC Rule 144), or obtained by Optionee in the
open public market, and owned free and clear of all liens, claims,
encumbrances or security interests, valued at the current Fair Market
Value of $____________________ per share;
[ ] by the waiver hereby of compensation due or accrued to Optionee for
services rendered in the amount of $____________________________________;
[ ] through a "same-day-sale" commitment, delivered herewith, from Optionee
and the NASD Dealer named therein, in the amount of $_________________; or
[ ] through a "margin" commitment, delivered herewith from Optionee and the
NASD Dealer named therein, in the amount of $____________________________.
2. Market Standoff Agreement. Optionee, if requested by the Company and an
underwriter of Common Stock (or other securities) of the Company, agrees not to
sell or otherwise transfer or dispose of any Common Stock (or other securities)
of the Company held by Optionee during the period requested by the managing
underwriter following the effective date of a registration statement of the
Company filed under the Securities Act, provided that all officers and directors
of the Company are required to enter into similar agreements. Such agreement
shall be in writing in a form satisfactory to the Company and such underwriter.
The Company may impose stop-transfer instructions with respect to the shares (or
other securities) subject to the foregoing restriction until the end of such
period.
3. Tax Consequences. 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
CONSULTANT(S) 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.
4. Entire Agreement. The Plan and Option Agreement are incorporated herein by
reference. This Exercise Agreement, the Plan and the Option Agreement
constitute the entire agreement and understanding of the parties and supersede
in their entirety all prior understandings and agreements of the Company and
Optionee with respect to the subject matter hereof, and are governed by
California law except for that body of law pertaining to choice of law or
conflict of law.
Date:_____________________________ ___________________________________
Signature of Optionee
<PAGE>
Spousal Consent
I acknowledge that I have read the foregoing Stock Option Exercise
Agreement (the "Agreement") and that I know its contents. I hereby consent to
and approve all of the provisions of the Agreement, and agree that the shares of
the Common Stock of Snowball.com, Inc. purchased thereunder (the "Shares") and
any interest I may have in such Shares are subject to all the provisions of the
Agreement. I will take no action at any time to hinder operation of the
Agreement on these Shares or any interest I may have in or to them.
__________________________________ Date:__________________
Signature of Optionee's Spouse
__________________________________
Spouse's Name - Typed or Printed
__________________________________
Optionee's Name - Typed or Printed
<PAGE>
EXHIBIT 10.04
SNOWBALL.COM, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
As Adopted February 22, 2000
1. Establishment of Plan. Snowball.com, Inc. (the "Company") proposes to
grant options for purchase of the Company's Common Stock to eligible employees
of the Company and its Participating Subsidiaries (as hereinafter defined)
pursuant to this Employee Stock Purchase Plan (this "Plan"). For purposes of
this Plan, "Parent Corporation" and "Subsidiary" shall have the same meanings as
"parent corporation" and "subsidiary corporation" in Sections 424(e) and 424(f),
respectively, of the Internal Revenue Code of 1986, as amended (the "Code").
"Participating Subsidiaries" are Parent Corporations or Subsidiaries that the
Board of Directors of the Company (the "Board") designates from time to time as
corporations that shall participate in this Plan. The Company intends this Plan
to qualify as an "employee stock purchase plan" under Section 423 of the Code
(including any amendments to or replacements of such Section), and this Plan
shall be so construed. Any term not expressly defined in this Plan but defined
for purposes of Section 423 of the Code shall have the same definition herein.
A total of 500,000 shares of the Company's Common Stock is reserved for
issuance under this Plan. In addition, on each January 1, the aggregate number
of shares of the Company's Common Stock reserved for issuance under the Plan
shall be increased automatically by a number of shares equal to 1% of the total
number of outstanding shares of the Company Common Stock on the immediately
preceding December 31; provided, that the Board or the Committee may in its sole
---------
discretion reduce the amount of the increase in any particular year; and,
provided further, that the aggregate number of shares issued over the term of
- ----------------
this Plan shall not exceed 5,000,000 shares. Such number shall be subject to
adjustments effected in accordance with Section 14 of this Plan.
2. Purpose. The purpose of this Plan is to provide eligible employees of
the Company and Participating Subsidiaries with a convenient means of acquiring
an equity interest in the Company through payroll deductions, to enhance such
employees' sense of participation in the affairs of the Company and
Participating Subsidiaries, and to provide an incentive for continued
employment.
3. Administration. This Plan shall be administered by the Compensation
Committee of the Board (the "Committee"). Subject to the provisions of this
Plan and the limitations of Section 423 of the Code or any successor provision
in the Code, all questions of interpretation or application of this Plan shall
be determined by the Committee and its decisions shall be final and binding upon
all participants. Members of the Committee shall receive no compensation for
their services in connection with the administration of this Plan, other than
standard fees as established from time to time by the Board for services
rendered by Board members serving on Board committees. All expenses incurred in
connection with the administration of this Plan shall be paid by the Company.
4. Eligibility. Any employee of the Company or the Participating
Subsidiaries is eligible to participate in an Offering Period (as hereinafter
defined) under this Plan except the following:
(a) employees who are not employed by the Company or a Participating
Subsidiary prior to the beginning of such Offering Period or prior to such other
time period as specified by the Committee, except that employees who are
employed on the Effective Date of the Registration Statement filed by the
Company with the Securities and Exchange Commission ("SEC") under the Securities
Act of 1933, as amended (the "Securities Act") registering the initial public
offering of the Company's Common Stock shall be eligible to participate in the
first Offering Period under the Plan;
(b) employees who are customarily employed for twenty (20) hours or
less per week;
(c) employees who are customarily employed for five (5) months or
less in a calendar year;
(d) employees who, together with any other person whose stock would
be attributed to such employee pursuant to Section 424(d) of the Code, own stock
or hold options to purchase stock possessing five
<PAGE>
Snowball.com, Inc.
2000 Employee Stock Purchase Plan
percent (5%) or more of the total combined voting power or value of all classes
of stock of the Company or any of its Participating Subsidiaries or who, as a
result of being granted an option under this Plan with respect to such Offering
Period, would own stock or hold options to purchase stock possessing five
percent (5%) or more of the total combined voting power or value of all classes
of stock of the Company or any of its Participating Subsidiaries; and
(e) individuals who provide services to the Company or any of its
Participating Subsidiaries as independent contractors who are reclassified as
common law employees for any reason except for federal income and employment tax
------ ---
purposes.
5. Offering Dates. The offering periods of this Plan (each, an "Offering
Period") shall be of twenty-four (24) months duration commencing on May 1
and November 1 of each year and ending on April 30 and October 31 of each year;
provided, however, that notwithstanding the foregoing, the first such Offering
- -----------------
Period shall commence on the first business day on which price quotations for
the Company's Common Stock are available on the Nasdaq National Market (the
"First Offering Date") and shall end on April 30, 2002. Except for the first
Offering Period, each Offering Period shall consist of four (4) six month
purchase periods (individually, a "Purchase Period") during which payroll
deductions of the participants are accumulated under this Plan. The first
Offering Period shall consist of no more than five and no fewer than three
Purchase Periods, any of which may be greater or less than six months as
determined by the Committee. The first business day of each Offering Period is
referred to as the "Offering Date". The last business day of each Purchase
Period is referred to as the "Purchase Date". The Committee shall have the
power to change the Offering Dates, the Purchase Dates and the duration of
Offering Periods or Purchase Periods without stockholder approval if such change
is announced prior to the relevant Offering Period, or prior to such other time
period as specified by the Committee.
6. Participation in this Plan. Eligible employees may become
participants in an Offering Period under this Plan on the first Offering Date
after satisfying the eligibility requirements by delivering a subscription
agreement to the Company prior to such Offering Date, or such other time period
as specified by the Committee. Notwithstanding the foregoing, the Committee may
set a later time for filing the subscription agreement authorizing payroll
deductions for all eligible employees with respect to a given Offering Period.
An eligible employee who does not deliver a subscription agreement to the
Company by such date after becoming eligible to participate in such Offering
Period shall not participate in that Offering Period or any subsequent Offering
Period unless such employee enrolls in this Plan by filing a subscription
agreement with the Company prior to such Offering Date, or such other time
period as specified by the Committee. Once an employee becomes a participant in
an Offering Period, such employee will automatically participate in the Offering
Period commencing immediately following the last day of the prior Offering
Period unless the employee withdraws or is deemed to withdraw from this Plan or
terminates further participation in the Offering Period as set forth in Section
11 below. Such participant is not required to file any additional subscription
agreement in order to continue participation in this Plan.
7. Grant of Option on Enrollment. Enrollment by an eligible employee in
this Plan with respect to an Offering Period will constitute the grant (as of
the Offering Date) by the Company to such employee of an option to purchase on
the Purchase Date up to that number of shares of Common Stock of the Company
determined by dividing (a) the amount accumulated in such employee's payroll
deduction account during such Purchase Period by (b) the lower of (i) eighty-
five percent (85%) of the fair market value of a share of the Company's Common
Stock on the Offering Date (but in no event less than the par value of a share
of the Company's Common Stock), or (ii) eighty-five percent (85%) of the fair
market value of a share of the Company's Common Stock on the Purchase Date (but
in no event less than the par value of a share of the Company's Common Stock),
provided, however, that the number of shares of the Company's Common Stock
- -----------------
subject to any option granted pursuant to this Plan shall not exceed the lesser
of (x) the maximum number of shares set by the Committee pursuant to Section
10(c) below with respect to the applicable Purchase Date, or (y) the maximum
number of shares which may be purchased pursuant to Section 10(b) below with
respect to the applicable Purchase Date. The fair market value of a share of
the Company's Common Stock shall be determined as provided in Section 8 below.
8. Purchase Price. The purchase price per share at which a share of
Common Stock will be sold in any Offering Period shall be eighty-five percent
(85%) of the lesser of:
2
<PAGE>
Snowball.com, Inc.
2000 Employee Stock Purchase Plan
(a) The fair market value on the Offering Date; or
(b) The fair market value on the Purchase Date.
For purposes of this Plan, the term "Fair Market Value" means, as of
any date, the value of a share of the Company's Common Stock determined as
follows:
(a) if such Common Stock is then quoted on the Nasdaq National
Market, its closing price on the Nasdaq National Market on the date of
determination as reported in The Wall Street Journal;
-----------------------
(b) if such Common Stock is publicly traded and is then listed on a
national securities exchange, its closing price on the date of determination on
the principal national securities exchange on which the Common Stock is listed
or admitted to trading as reported in The Wall Street Journal;
-----------------------
(c) if such Common Stock is publicly traded but is not quoted on the
Nasdaq National Market nor listed or admitted to trading on a national
securities exchange, the average of the closing bid and asked prices on the date
of determination as reported in The Wall Street Journal; or
-----------------------
(d) if none of the foregoing is applicable, by the Board in good
faith, which in the case of the First Offering Date will be the price per share
at which shares of the Company's Common Stock are initially offered for sale to
the public by the Company's underwriters in the initial public offering of the
Company's Common Stock pursuant to a registration statement filed with the SEC
under the Securities Act.
9. Payment Of Purchase Price; Changes In Payroll Deductions; Issuance Of
Shares.
(a) The purchase price of the shares is accumulated by regular
payroll deductions made during each Offering Period. The deductions are made as
a percentage of the participant's compensation in one percent (1%) increments
not less than one percent (1%), nor greater than ten percent (10%) or such lower
limit set by the Committee. Compensation shall mean all W-2 cash compensation,
including, but not limited to, base salary, wages, commissions, overtime, shift
premiums and bonuses, plus draws against commissions, provided, however, that
-------- -------
for purposes of determining a participant's compensation, any election by such
participant to reduce his or her regular cash remuneration under Sections 125 or
401(k) of the Code shall be treated as if the participant did not make such
election. Payroll deductions shall commence on the first payday of the Offering
Period and shall continue to the end of the Offering Period unless sooner
altered or terminated as provided in this Plan.
(b) A participant may increase or decrease the rate of payroll
deductions during an Offering Period by filing with the Company a new
authorization for payroll deductions, in which case the new rate shall become
effective for the next payroll period commencing after the Company's receipt of
the authorization and shall continue for the remainder of the Offering Period
unless changed as described below. Such change in the rate of payroll
deductions may be made at any time during an Offering Period, but not more than
one (1) change may be made effective during any Purchase Period. A participant
may increase or decrease the rate of payroll deductions for any subsequent
Offering Period by filing with the Company a new authorization for payroll
deductions prior to the beginning of such Offering Period, or prior to such
other time period as specified by the Committee.
(c) A participant may reduce his or her payroll deduction percentage
to zero during an Offering Period by filing with the Company a request for
cessation of payroll deductions. Such reduction shall be effective beginning
with the next payroll period after the Company's receipt of the request and no
further payroll deductions will be made for the duration of the Offering Period.
Payroll deductions credited to the participant's account prior to the effective
date of the request shall be used to purchase shares of Common Stock of the
Company in accordance with Section (e) below. A participant may not resume
making payroll deductions during the Offering Period in which he or she reduced
his or her payroll deductions to zero.
3
<PAGE>
Snowball.com, Inc.
2000 Employee Stock Purchase Plan
(d) All payroll deductions made for a participant are credited to his
or her account under this Plan and are deposited with the general funds of the
Company. No interest accrues on the payroll deductions. All payroll deductions
received or held by the Company may be used by the Company for any corporate
purpose, and the Company shall not be obligated to segregate such payroll
deductions.
(e) On each Purchase Date, so long as this Plan remains in effect and
provided that the participant has not submitted a signed and completed
withdrawal form before that date which notifies the Company that the participant
wishes to withdraw from that Offering Period under this Plan and have all
payroll deductions accumulated in the account maintained on behalf of the
participant as of that date returned to the participant, the Company shall apply
the funds then in the participant's account to the purchase of whole shares of
Common Stock reserved under the option granted to such participant with respect
to the Offering Period to the extent that such option is exercisable on the
Purchase Date. The purchase price per share shall be as specified in Section 8
of this Plan. Any cash remaining in a participant's account after such purchase
of shares shall be refunded to such participant in cash, without interest;
provided, however that any amount remaining in such participant's account on a
Purchase Date which is less than the amount necessary to purchase a full share
of Common Stock of the Company shall be carried forward, without interest, into
the next Purchase Period or Offering Period, as the case may be. In the event
that this Plan has been oversubscribed, all funds not used to purchase shares on
the Purchase Date shall be returned to the participant, without interest. No
Common Stock shall be purchased on a Purchase Date on behalf of any employee
whose participation in this Plan has terminated prior to such Purchase Date.
(f) As promptly as practicable after the Purchase Date, the Company
shall issue shares for the participant's benefit representing the shares
purchased upon exercise of his or her option.
(g) During a participant's lifetime, his or her option to purchase
shares hereunder is exercisable only by him or her. The participant will have
no interest or voting right in shares covered by his or her option until such
option has been exercised.
10. Limitations on Shares to be Purchased.
(a) No participant shall be entitled to purchase stock under this
Plan at a rate which, when aggregated with his or her rights to purchase stock
under all other employee stock purchase plans of the Company or any Subsidiary,
exceeds $25,000 in fair market value, determined as of the Offering Date (or
such other limit as may be imposed by the Code) for each calendar year in which
the employee participates in this Plan. The Company shall automatically suspend
the payroll deductions of any participant as necessary to enforce such limit
provided that when the Company automatically resumes such payroll deductions,
the Company must apply the rate in effect immediately prior to such suspension.
(b) No more than two hundred percent (200%) of the number of shares
determined by using eighty-five percent (85%) of the fair market value of a
share of the Company's Common Stock on the Offering Date as the denominator may
be purchased by a participant on any single Purchase Date.
(c) No participant shall be entitled to purchase more than the
Maximum Share Amount (as defined below) on any single Purchase Date. Prior to
the commencement of any Offering Period or prior to such time period as
specified by the Committee, the Committee may, in its sole discretion, set a
maximum number of shares which may be purchased by any employee at any single
Purchase Date (hereinafter the "Maximum Share Amount"). Until otherwise
determined by the Committee, there shall be no Maximum Share Amount. In no
event shall the Maximum Share Amount exceed the amounts permitted under Section
10(b) above. If a new Maximum Share Amount is set, then all participants must
be notified of such Maximum Share Amount prior to the commencement of the next
Offering Period. The Maximum Share Amount shall continue to apply with respect
to all succeeding Purchase Dates and Offering Periods unless revised by the
Committee as set forth above.
(d) If the number of shares to be purchased on a Purchase Date by all
employees participating in this Plan exceeds the number of shares then available
for issuance under this Plan, then the Company will make a pro rata allocation
of the remaining shares in as uniform a manner as shall be reasonably
practicable and as the
4
<PAGE>
Snowball.com, Inc.
2000 Employee Stock Purchase Plan
Committee shall determine to be equitable. In such event, the Company shall give
written notice of such reduction of the number of shares to be purchased under a
participant's option to each participant affected.
(e) Any payroll deductions accumulated in a participant's account
which are not used to purchase stock due to the limitations in this Section 10
shall be returned to the participant as soon as practicable after the end of the
applicable Purchase Period, without interest.
11. Withdrawal.
(a) Each participant may withdraw from an Offering Period under this
Plan by signing and delivering to the Company a written notice to that effect on
a form provided for such purpose. Such withdrawal may be elected at any time
prior to the end of an Offering Period, or such other time period as specified
by the Committee.
(b) Upon withdrawal from this Plan, the accumulated payroll
deductions shall be returned to the withdrawn participant, without interest, and
his or her interest in this Plan shall terminate. In the event a participant
voluntarily elects to withdraw from this Plan, he or she may not resume his or
her participation in this Plan during the same Offering Period, but he or she
may participate in any Offering Period under this Plan which commences on a date
subsequent to such withdrawal by filing a new authorization for payroll
deductions in the same manner as set forth in Section 6 above for initial
participation in this Plan.
(c) If the Fair Market Value on the first day of the current Offering
Period in which a participant is enrolled is higher than the Fair Market Value
on the first day of any subsequent Offering Period, the Company will
automatically enroll such participant in the subsequent Offering Period. Any
funds accumulated in a participant's account prior to the first day of such
subsequent Offering Period will be applied to the purchase of shares on the
Purchase Date immediately prior to the first day of such subsequent Offering
Period, if any.
12. Termination of Employment. Termination of a participant's
employment for any reason, including retirement, death or the failure of a
participant to remain an eligible employee of the Company or of a Participating
Subsidiary, immediately terminates his or her participation in this Plan. In
such event, the payroll deductions credited to the participant's account will be
returned to him or her or, in the case of his or her death, to his or her legal
representative, without interest. For purposes of this Section 12, an employee
will not be deemed to have terminated employment or failed to remain in the
continuous employ of the Company or of a Participating Subsidiary in the case of
sick leave, military leave, or any other leave of absence approved by the Board;
provided that such leave is for a period of not more than ninety (90) days or
- --------
reemployment upon the expiration of such leave is guaranteed by contract or
statute.
13. Return of Payroll Deductions. In the event a participant's interest
in this Plan is terminated by withdrawal, termination of employment or
otherwise, or in the event this Plan is terminated by the Board, the Company
shall deliver to the participant all payroll deductions credited to such
participant's account. No interest shall accrue on the payroll deductions of a
participant in this Plan.
14. Capital Changes. Subject to any required action by the stockholders
of the Company, the number of shares of Common Stock covered by each option
under this Plan which has not yet been exercised and the number of shares of
Common Stock which have been authorized for issuance under this Plan but have
not yet been placed under option (collectively, the "Reserves"), as well as the
price per share of Common Stock covered by each option under this Plan which has
not yet been exercised, shall be proportionately adjusted for any increase or
decrease in the number of issued and outstanding shares of Common Stock of the
Company resulting from a stock split or the payment of a stock dividend (but
only on the Common Stock) or any other increase or decrease in the number of
issued and outstanding shares of Common Stock effected without receipt of any
consideration by the Company; provided, however, that 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
Committee, whose determination shall be final, binding and conclusive. Except
as expressly provided herein, no issue by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no
5
<PAGE>
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an option.
In the event of the proposed dissolution or liquidation of the
Company, the Offering Period will terminate immediately prior to the
consummation of such proposed action, unless otherwise provided by the
Committee. The Committee may, in the exercise of its sole discretion in such
instances, declare that this Plan shall terminate as of a date fixed by the
Committee and give each participant the right to purchase shares under this Plan
prior to such termination. In the event of (i) a merger or consolidation in
which the Company is not the surviving corporation (other than a merger or
consolidation with a wholly-owned subsidiary, a reincorporation of the Company
in a different jurisdiction, or other transaction in which there is no
substantial change in the stockholders of the Company or their relative stock
holdings and the options under this Plan are assumed, converted or replaced by
the successor corporation, which assumption will be binding on all
participants), (ii) a merger in which the Company is the surviving corporation
but after which the stockholders of the Company immediately prior to such merger
(other than any stockholder that merges, or which owns or controls another
corporation that merges, with the Company in such merger) cease to own their
shares or other equity interest in the Company, (iii) the sale of all or
substantially all of the assets of the Company or (iv) the acquisition, sale, or
transfer of more than 50% of the outstanding shares of the Company by tender
offer or similar transaction, the Plan will continue with regard to Offering
Periods that commenced prior to the closing of the proposed transaction and
shares will be purchased based on the Fair Market Value of the surviving
corporation's stock on each Purchase Date, unless otherwise provided by the
Committee consistent with pooling of interests accounting treatment.
The Committee may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the Reserves, as well as the price
per share of Common Stock covered by each outstanding option, in the event that
the Company effects one or more reorganizations, recapitalizations, rights
offerings or other increases or reductions of shares of its outstanding Common
Stock, or in the event of the Company being consolidated with or merged into any
other corporation.
15. Nonassignability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under this Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 22 below) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be void and
without effect.
16. Reports. Individual accounts will be maintained for each participant
in this Plan. Each participant shall receive promptly after the end of each
Purchase Period a report of his or her account setting forth the total payroll
deductions accumulated, the number of shares purchased, the per share price
thereof and the remaining cash balance, if any, carried forward to the next
Purchase Period or Offering Period, as the case may be.
17. Notice of Disposition. Each participant shall notify the Company in
writing if the participant disposes of any of the shares purchased in any
Offering Period pursuant to this Plan if such disposition occurs within two (2)
years from the Offering Date or within one (1) year from the Purchase Date on
which such shares were purchased (the "Notice Period"). The Company may, at any
time during the Notice Period, place a legend or legends on any certificate
representing shares acquired pursuant to this Plan requesting the Company's
transfer agent to notify the Company of any transfer of the shares. The
obligation of the participant to provide such notice shall continue
notwithstanding the placement of any such legend on the certificates.
18. No Rights to Continued Employment. Neither this Plan nor the grant
of any option hereunder shall confer any right on any employee to remain in the
employ of the Company or any Participating Subsidiary, or restrict the right of
the Company or any Participating Subsidiary to terminate such employee's
employment.
19. Equal Rights And Privileges. All eligible employees shall have
equal rights and privileges with respect to this Plan so that this Plan
qualifies as an "employee stock purchase plan" within the meaning of Section 423
or any successor provision of the Code and the related regulations. Any
provision of this Plan which is inconsistent with Section 423 or any successor
provision of the Code shall, without further act or amendment by the
6
<PAGE>
Snowball.com, Inc.
2000 Employee Stock Purchase Plan
Company, the Committee or the Board, be reformed to comply with the requirements
of Section 423. This Section 19 shall take precedence over all other provisions
in this Plan.
20. Notices. All notices or other communications by a participant to
the Company under or in connection with this Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.
21. Term; Stockholder Approval. After this Plan is adopted by the
Board, this Plan will become effective on the First Offering Date (as defined
above). This Plan shall be approved by the stockholders of the Company, in any
manner permitted by applicable corporate law, within twelve (12) months before
or after the date this Plan is adopted by the Board. No purchase of shares
pursuant to this Plan shall occur prior to such stockholder approval. This Plan
shall continue until the earlier to occur of (a) termination of this Plan by the
Board (which termination may be effected by the Board at any time), (b) issuance
of all of the shares of Common Stock reserved for issuance under this Plan, or
(c) ten (10) years from the adoption of this Plan by the Board.
22. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
this Plan in the event of such participant's death subsequent to the end of an
Purchase Period but prior to delivery to him of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under this Plan in the event
of such participant's death prior to a Purchase Date.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and
in the absence of a beneficiary validly designated under this Plan who is living
at the time of such participant's death, the Company shall deliver such shares
or cash to the executor or administrator of the estate of the participant, or if
no such executor or administrator has been appointed (to the knowledge of the
Company), the Company, in its discretion, may deliver such shares or cash to the
spouse or to any one or more dependents or relatives of the participant, or if
no spouse, dependent or relative is known to the Company, then to such other
person as the Company may designate.
23. Conditions Upon Issuance of Shares; Limitation on Sale of Shares.
Shares shall not be issued with respect to an option unless the exercise of such
option and the issuance and delivery of such shares pursuant thereto shall
comply with all applicable provisions of law, domestic or foreign, including,
without limitation, the Securities Act, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange or automated quotation system upon which the shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
24. Applicable Law. The Plan shall be governed by the substantive laws
(excluding the conflict of laws rules) of the State of California.
25. Amendment or Termination of this Plan. The Board may at any time
amend, terminate or extend the term of this Plan, except that any such
termination cannot affect options previously granted under this Plan, nor may
any amendment make any change in an option previously granted which would
adversely affect the right of any participant, nor may any amendment be made
without approval of the stockholders of the Company obtained in accordance with
Section 21 above within twelve (12) months of the adoption of such amendment (or
earlier if required by Section 21) if such amendment would:
(a) increase the number of shares that may be issued under this Plan;
or
(b) change the designation of the employees (or class of employees)
eligible for participation in this Plan.
7
<PAGE>
Snowball.com, Inc.
2000 Employee Stock Purchase Plan
Notwithstanding the foregoing, the Board may make such amendments to
the Plan as the Board determines to be advisable, if the continuation of the
Plan or any Offering Period would result in financial accounting treatment for
the Plan that is different from the financial accounting treatment in effect on
the date this Plan is adopted by the Board.
8
<PAGE>
SNOWBALL.COM, INC. 2000 EMPLOYEE STOCK PURCHASE PLAN
ENROLLMENT FORM
<TABLE>
<S> <C>
Check One: Complete:
[ ] New Enrollment or Re-enrollment Social Security No._________________________________________________
[ ] Change Employee No.________________________________________________________
[ ] Change in How Shares Are to Be Held in Account
[ ] Increase in Payroll Deduction Level [ ] this Purchase Period [ ] next Offering Period
[ ] Decrease in Payroll Deduction Level [ ] this Purchase Period [ ] next Offering Period
[ ] Suspension of Payroll Deductions for Open Offering Period (Attach Completed Suspension Form)
[ ] Withdrawal (Attach Completed Withdrawal Form)
[ ] Beneficiary Change
</TABLE>
1. Name of Participant________________________________________________________
2. Shares purchased under the Plan should be held in account with the Plan
Broker in my name or in my name together with the name(s) indicated below:
Name__________________________ Social Security No.______________________
Name__________________________ Social Security No.______________________
There may be tax consequences for naming individuals other than your spouse
on the account in which Shares purchased under the Plan are held. If spouse
(circle one): Joint Tenants/Community Property.
Please notify the Plan Broker directly to transfer or sell your stock.
3. Payroll Deduction Level (from 1% to 10% in whole percentages):____________
(the percentage deduction will be made from your W-2 compensation including
base salary, commissions, overtime, shift premiums, bonuses and draws
against commissions)
4. I confirm my spouse's interest (if married) in the community property
herein, and I hereby designate the following person(s) as my
beneficiary(ies) to receive all payments and/or stock attributable to my
interest under the Plan:
<TABLE>
NAME *To be divided ADDRESS
as follows:
<S> <C> <C>
__________________________________________ ______________ _______________________________________
Last First M.I. Number Street
__________________________________________ _______________________________________
Social Security No. Relationship City State Zip
__________________________________________ ______________ _______________________________________
Last First M.I. Number Street
__________________________________________ _______________________________________
Social Security No. Relationship City State Zip
</TABLE>
* If more than one beneficiary: (1) insert "in equal shares", or (2) insert
percentage to be paid to each beneficiary.
5. The information provided on this Enrollment Form will remain in effect
unless and until I complete and submit to Silicon Image, Inc. a new
enrollment form.
SNOWBALL.COM, INC. OFFICE USE:
Signature:_________________ Date received by the__________________:______
Name:______________________ Date entered into system:____________________
Date:______________________ Please return this completed form to
Snowball.com, Inc.
<PAGE>
SNOWBALL.COM, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
1. I elect to participate in the Snowball.com, Inc. (the "Company") 2000
Employee Stock Purchase Plan (the "Plan") and to subscribe to purchase
shares of the Company's Common Stock (the "Shares") in accordance with this
Subscription Agreement and the Plan.
2. I authorize payroll deductions from each of my paychecks in that percentage
of my base salary, commissions, overtime, shift premiums, bonuses and draws
against commissions as shown on my Enrollment Form, in accordance with the
Plan.
3. I understand that such payroll deductions shall be accumulated for the
purchase of Shares under the Plan at the applicable purchase price
determined in accordance with the Plan. I further understand that except as
otherwise set forth in the Plan, Shares will be purchased for me
automatically at the end of each Purchase Period unless I withdraw from the
Plan or otherwise become ineligible to participate in the Plan.
4. I understand that this Subscription Agreement will automatically re-enroll
me in all subsequent Offering Periods unless I withdraw from the Plan or I
become ineligible to participate in the Plan.
5. I acknowledge that I have a copy of and am familiar with the Company's most
recent Prospectus which describes the Plan. A copy of the complete Plan and
the Prospectus is on file with the Company. (In the case of the initial
Plan Purchase Period, the Prospectus will be on file on the first day of
the Offering Period.)
6. I understand that Shares purchased for me under the Plan will be held in a
personal account with the Plan Broker unless I request otherwise.
7. I hereby agree to be bound by the terms of the Plan. The effectiveness of
this Subscription Agreement is dependent upon my eligibility to participate
in the Plan.
8. I have read and understood this Subscription Agreement.
Signature:_________________________
Name:______________________________
Date:______________________________
Please return this completed form to the Company.
<PAGE>
SNOWBALL.COM, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
I, _________________________, the undersigned participant in the Offering
Period of the Snowball.com, Inc. 2000 Employee Stock Purchase Plan (the "Plan")
which began on _______________, hereby notify Snowball.com, Inc. (the "Company")
that I wish to withdraw from the Offering Period. I direct the Company to pay
to me as promptly as practicable all payroll deductions credited to my account
with respect to such Offering Period. I understand and agree that my
participation in the Plan will terminate and no shares will be purchased for me
at the end of the Purchase Period so long as I submit this Notice of Withdrawal
to the Company prior to the end of the Purchase Period, or such other time
period as specified by the Company. I understand and agree that if I submit
this Notice of Withdrawal to the Company prior to the end of the Purchase
Period, shares will be purchased for me at the end of the Purchase Period, and
my participation in the Plan will end at the beginning of the next Purchase
Period or Offering Period, as the case may be. I further understand that no
additional payroll deductions will be made for the purchase of shares in the
current Offering Period, and I shall be eligible to participate in succeeding
Offering Periods only by timely delivering to the Company a new Subscription
Agreement and Enrollment Form.
Name and address of Participant (please print):
Name:______________________________________________________________________
Street Address or P.O. Box:________________________________________________
City, State ZIP:___________________________________________________________
__________________________________ __________________________________
Signature Date
Please return this form to the Company.
<PAGE>
SNOWBALL.COM, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF SUSPENSION
I, _________________________, the undersigned participant in the Offering
Period of the Snowball.com, Inc. 2000 Employee Stock Purchase Plan (the "Plan")
which began on _______________, hereby notify Snowball.com, Inc. (the "Company")
that I wish to suspend my payroll deductions to the Plan for the remainder of
the Offering Period. I understand and agree that my request will be effective
beginning with the next payroll period after the Company receives this Notice of
Suspension. I understand and agree that payroll deductions credited to my
account prior to the date this Notice of Suspension is effective will be used to
purchase shares on the next Purchase Date. I further understand that no
additional payroll deductions will be made for the purchase of shares in the
current Offering Period, and I will be eligible to participate in succeeding
Offering Periods only by timely delivering to the Company a new Subscription
Agreement and Enrollment Form.
Name and address of Participant (please print):
Name:______________________________________________________________________
Street Address or P.O. Box:________________________________________________
City, State ZIP:___________________________________________________________
_____________________________________ ______________________________
Signature Date
Please return this form to the Company.
<PAGE>
Exhibit 23.02
Consent of Ernst & Young LLP, Independent Auditors
--------------------------------------------------
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our report dated January 28, 2000,
in Amendment No. 2 to the Registration Statement (Form S-1 No. 333-93487) and
related Prospectus of Snowball.com, Inc. for the registration of 7,187,500
shares of its common stock.
/s/ Ernst & Young LLP
Palo Alto, California
February 28, 2000
<PAGE>
EXHIBIT 23.03
Consent of Independent Accountants
We hereby consent to the use in Amendment 2 of Snowball.com on Form S-1 of our
report dated December 9, 1999, relating to the audited financial statements of
Extreme Interactive Media, Inc., which appear in such registration statement. We
also consent to the reference to us under heading "Experts" in such registration
statement.
Sincerely,
/s/ Hamilton & Associates, Inc.
Hamilton & Associates, Inc.
February 25, 2000
<PAGE>
Exhibit 23.04
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated October 8, 1999, with respect to the financial
statements and schedules of Ameritrack, Inc. included in Amendment #2 to the
Registration Statement (Form S-1) and related Prospectus of Snowball.com, Inc.
for the registration of shares of its common stock.
/s/ J.W. Hunt and Company, LLP
Columbia, South Carolina
February 25, 2000
