<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 16, 2000
REGISTRATION NO. 333-94271
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TELOCITY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 7370 77-0467929
(PRIOR TO REINCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
DELAWARE CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
(AFTER REINCORPORATION)
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
</TABLE>
10355 NORTH DE ANZA BOULEVARD
CUPERTINO, CALIFORNIA 95014
(408) 863-6600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
SCOTT MARTIN
EXECUTIVE VICE PRESIDENT, CHIEF ADMINISTRATIVE OFFICER AND CORPORATE SECRETARY
10355 NORTH DE ANZA BOULEVARD
CUPERTINO, CALIFORNIA 95014
(408) 863-6600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C> <C>
MARGARET H. KAVALARIS, ESQ. MATTHEW J. STEPOVICH, ESQ. MALCOLM I. ROSS, ESQ.
JOHN M. FOGG, ESQ. SENIOR VICE PRESIDENT, LEGAL AFFAIRS BAKER & MCKENZIE
GRAY CARY WARE & FREIDENRICH LLP DAVID I. FRAZEE, ESQ. 805 THIRD AVENUE
400 HAMILTON AVENUE CORPORATE GENERAL COUNSEL NEW YORK, NEW YORK 10022
PALO ALTO, CALIFORNIA 94301 10355 NORTH DE ANZA BOULEVARD (212) 751-5700
(650) 833-2000 CUPERTINO, CALIFORNIA 95014
(408) 863-6600
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE(2)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.001 par value.............................. $150,000,000 $39,600
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated pursuant to Rule 457(o) of the Securities Act of 1933 solely for
the purpose of computing the amount of the registration fee.
(2) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER
TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED , 2000
PROSPECTUS
SHARES
[TELOCITY LOGO]
COMMON STOCK
----------------------
This is Telocity, Inc.'s initial public offering of common stock.
We expect the public offering price to be between $ and $ per
share. After pricing of the offering, we expect that the shares will be quoted
on the Nasdaq National Market under the symbol "TLCT."
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Telocity...................... $ $
</TABLE>
The underwriters may also purchase up to an additional shares at
the public offering price, less the underwriting discount, within 30 days from
the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares will be ready for delivery on or about , 2000.
----------------------
MERRILL LYNCH & CO. CREDIT SUISSE FIRST BOSTON
----------------------
DONALDSON, LUFKIN & JENRETTE
----------------------
THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE> 3
Page 1
[Telocity logo]
OUR BUSINESS
We intend to be the leading nationwide provider of residential broadband
services and applications to and throughout the home.
OUR CUSTOMER APPEAL
[Image depicting the smiling face of a man]
Telocity customers experience the true wonder of the Internet and more. They
surf and download up to 50 times faster than dial-up users. They are
"always-on," bypassing log-on and password delays -- virtually eliminating the
"World Wide Wait." At Telocity, we bring wonderment into people's lives.
[Image depicting the smiling face of a woman]
OUR CONTENT PARTNERS
MEDIA / ENTERTAINMENT / E-COMMERCE
Streaming Audio/Video, Online Gaming, Interactive Shopping,
Personalized Web Pages...
[Telocity logo]
[NBCi logo]
[NBC logo]
[Snap logo]
[Xoom logo]
COMMUNICATIONS
Internet Access, E-Mail, Remote Access, VPNs, Voice Enabled Features,
Chat Facilities...
[Telocity logo]
[NBCi logo]
UTILITY
Firewall Security, Secure Banking, Data Security, Home Networking, Home
Monitoring, Home Automation, Backup Services...
[Telocity logo]
[GE logo]
<PAGE> 4
PAGES 2 & 3
BROADBAND TO AND THROUGHOUT THE HOME
Three images of NBCi-related Web sites
[Image of house]
Telocity's current and future broadband services provide customers benefits such
as always-on, high-speed Internet access, personalized web pages, streaming
audio and video, online gaming, interactive shopping, firewall protection and
data security services, backup services, VPN capabilities, home networking, home
monitoring and automation and other Telocity / NBCi services and applications.
OUR RESIDENTIAL GATEWAY
[Images of Telocity gateway from two different angles - front and back]
[Identification of different ports on back of Telocity modem: DSL/Home PNA/Phone
Connection; USB Host/USB Slave; Power Connection; Ethernet and Parallel Port]
Our plug-and-play gateway is hassle-free and can be easily self-installed by the
customer. Our installation software configures a personal computer
automatically, providing immediate high-speed access to the Internet and all of
our services. Many services and applications can be added to conform to an
individual user's preferences without requiring new equipment or an on-site
visit by a technician.
OUR MANAGED NETWORK
[Artist rendering of map of United Sates]
Our nationwide managed network is designed to be responsive, reliable and
redundant. Data delivery is enhanced through our satellite-fed caching system.
Through our Network Operations Center and Operational Support System, we are
able to monitor our services throughout the network and ensure the highest level
of support.
<PAGE> 5
TABLE OF CONTENTS
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PAGE
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<S> <C>
Summary..................................................... 1
Risk Factors................................................ 6
Other Relevant Information.................................. 20
Use of Proceeds............................................. 20
Dividend Policy............................................. 20
Capitalization.............................................. 21
Dilution.................................................... 22
Selected Consolidated Financial Information................. 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 25
Business.................................................... 33
Management.................................................. 52
Related Party Transactions.................................. 67
Principal Stockholders...................................... 73
Description of Capital Stock................................ 77
Shares Eligible for Future Sale............................. 81
Underwriting................................................ 83
Legal Matters............................................... 86
Experts..................................................... 86
Additional Information...................................... 86
Index to Consolidated Financial Statements.................. F-1
</TABLE>
----------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
i
<PAGE> 6
SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including the "Risk
Factors" section and the consolidated financial statements and the notes to the
statements before making an investment decision.
OUR COMPANY
Our goal is to become a leading nationwide provider of broadband access
services, content and home networking services to the residential market. To
achieve this goal, we intend to utilize the technology we have developed to
deliver these services and content over a variety of methods from our nationwide
network to and throughout the home over high-speed, or broadband, connections.
These broadband connections allow our customers to enjoy content and services
that they could not access with traditional slower speed Internet connections.
We currently develop, market and deliver interactive online services and content
under the Telocity brand. We intend to enhance these services and content in the
future through our recent strategic partnership with NBC Internet, Inc., or
NBCi.
We generate revenue primarily by selling monthly subscriptions that may
include activation and other one-time fees. Revenues from these services for the
year ended December 31, 1999 were $187,000. We currently offer always connected
Internet access, e-mail accounts, storage space and hosting for Web pages and
remote access to the Internet when the customer is away from home. During 2000,
we will release our next-generation gateway and will begin offering the
following additional services and content:
- Electronic commerce, entertainment and media services such as
interactive shopping, online gaming and streaming audio and video
utilizing a full suite of NBCi's entertainment offerings, as well as
financial information, news and weather;
- Communication services such as virtual private networks that enable
customers to telecommute to their workplace securely from home,
voice-enabled features that allow our customers to access online
services through their phones and instant messaging and chat facilities
that allow our customers to interact with each other; and
- Utility services such as home networking of multiple computers and
electronic devices throughout a customer's home, data security systems
that protect a customer's computer from unauthorized access through the
Internet and backup services that allow customers to save data from a
home computer to a secure site outside the home.
We have developed an integrated service deployment system, our platform,
which delivers these broadband online services from our nationwide network
directly to our customers' homes. From a customer's perspective, the first
component of our platform is our proprietary residential gateway. The gateway is
a unique hardware device that combines a digital subscriber line modem, home
networking router, multiple connection ports and network monitoring software.
Our customers can conveniently install the gateway themselves simply by plugging
it into their personal computers, which allows them to connect directly to our
network and the Internet through their telephone lines. This simple,
self-installable plug-and-play solution allows us to connect large numbers of
residential consumers to our network. Once connected to our network, our
customers do not need to dial-up and wait to establish a connection each time
they want to gain access to the Internet or any of the other services we offer;
instead, their connections are always active -- and at speeds up to 50 times
faster than traditional dial-up Internet access.
In addition to our gateway and our network, our service deployment
platform consists of our user interface software, our customer care and support
services and our automated billing and provisioning systems. We designed our
platform so that we can offer a growing suite of services that we can remotely
configure from our network operations center to address each customer's
preferences. We believe our platform allows for the rapid addition of customers
while minimizing our associated costs and overhead.
1
<PAGE> 7
We have designed our service deployment platform to be flexible and
expandable. Currently, consumers may receive broadband connections to their
household through a number of local access technologies, commonly referred to as
last-mile technologies, including digital subscriber line technology, or DSL,
cable access, wireless access, and satellite access. Each of these local access
broadband technologies delivers connections much faster than traditional dial-up
Internet connections. Although we currently deliver our services to our
subscribers using DSL technology, we are not limited to DSL. Indeed, we have the
capability to configure our gateway easily to support all major residential
broadband access technologies. We will choose the most reliable, flexible and
cost-effective broadband access technology available in each local market as we
expand our services nationwide.
In July 1999, we began offering services commercially in Chicago. On
February 16, 2000, we were also serving customers in more than 40 metropolitan
statistical areas in the Southeast, Northeast, upper Midwest and Mid-Atlantic
states, including Miami, Atlanta, Detroit, Philadelphia and New York City. We
currently have approximately customers of which are receiving
our services and have placed orders for our services. By the end of 2000,
we expect that our targeted national rollout will cover in total approximately
150 of the nation's metropolitan statistical areas, which cover approximately
60% of the U.S. population, including 20 of the 25 most populous metropolitan
statistical areas. As part of providing our services, we have entered into
agreements with BellSouth, Bell Atlantic, SBC, MCI WorldCom, Level 3
Communications and Rhythms NetConnections for Internet access, data transmission
and other infrastructure necessary for our network to operate. We anticipate
signing additional agreements with other regional and national
telecommunications providers over the next several months.
In December 1999, we formed a strategic relationship with NBCi and its
subsidiaries, XOOM.com and Snap.com. Our agreements provide for the joint
development and design of services and content under the brand name of each
company such as entertainment, electronic commerce, gaming, search applications
and other features designed for use exclusively by broadband users. Our
customers will be able to utilize these online services through a Web portal
that we are developing jointly with NBCi. As part of these agreements, NBCi and
its affiliates, GE Capital, NBC and ValueVision, purchased approximately %
of our stock outstanding prior to this offering for $70.5 million, which
consisted of $37.5 million in cash and $33.0 million in promotional advertising
at discounted rates. In addition, after the commercial launch of the Web portal
which is scheduled for release in 2000, we have each agreed to share a portion
of the revenues generated from services, advertising and electronic commerce
activities offered through the portal, including the services we currently
offer.
Our senior management team has extensive experience in consumer,
telecommunications and technology businesses. Our President and Chief Executive
Officer, Patti Hart, was previously the President and Chief Operating Officer of
Sprint Corporation's Long Distance Division. Peter Olson, our Executive Vice
President and Chief Technical Officer, co-founded and was Chief Technical
Officer of Octel Communications. Edward Hayes, our Executive Vice President and
Chief Financial Officer, was previously the Chief Financial Officer of Lucent
Technologies, Inc.'s Global Service Provider Business. Jim Morrissey, our
Executive Vice President and Chief Marketing Officer, was an Executive Creative
Director and Executive Vice President for Grey Advertising.
As of January 31, 2000, our sponsors had invested approximately $149
million in cash and promotional services in connection with issuances of our
capital stock. Our sponsors include NBCi; NBC; GE Capital Equity Investments;
ValueVision International; August Capital; Bessemer Venture Partners; Mohr,
Davidow Ventures; RRE Investors, LLC; Bessemer Holdings, L.P.; Comdisco, Inc.;
Quantum Industrial Partners LDC; and Soros Fund Management LLC.
2
<PAGE> 8
MARKET OPPORTUNITY
We believe that a substantial business opportunity exists as a result of
the following factors:
- large, growing and underserved market;
- large and unmet demand for residential high-speed Internet connections;
- growing demand for broadband enabled services and content;
- emergence of DSL and other broadband local access technologies; and
- regulatory change that is contributing to the increase in cost-effective
local access broadband access.
THE TELOCITY SOLUTION
We believe our services address many of the residential market's unmet
data communication needs. Our solution offers:
- broadband enabled services and content;
- simple plug-and-play deployment;
- flexible, always connected broadband Internet access;
- scalable nationwide network with enhanced content delivery; and
- service flexibility and ease-of-use.
BUSINESS STRATEGY
Our goal is to exploit our advantage both as one of the first companies to
provide residential broadband services and our proprietary technology in order
to become a nationwide provider of choice for broadband enabled services and
content both to and throughout the homes. We intend to implement the following
strategies to achieve our goal:
- capture our early market entrant and proprietary technology advantages;
- deliver quality broadband services both to and throughout the home;
- extend and develop strategic partnerships;
- expand our direct marketing and branding efforts; and
- deliver high quality customer service and support.
Our principal executive offices are located at 10355 North De Anza
Boulevard, Cupertino, California 95014, and our telephone number is (408)
863-6600. We maintain Web sites at www.telocity.com and www.telocity.net.
Information contained in our Web sites does not constitute a part of this
prospectus.
3
<PAGE> 9
THE OFFERING
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<CAPTION>
<S> <C>
Common stock offered by Telocity:............ shares
Shares outstanding after the offering........ shares
Use of proceeds.............................. We estimate that our net proceeds from this
offering without exercise of the
over-allotment options will be approximately
$ million. We intend to use these
proceeds for general corporate purposes,
including:
- fund working capital needs, and
- expand our network, operations, and sales
and marketing efforts.
Risk factors................................. See "Risk Factors" and other information
included in this prospectus for a discussion
of factors you should carefully consider
before deciding to invest in shares of the
common stock.
Proposed Nasdaq National Market symbol....... TLCT
</TABLE>
The number of shares that will be outstanding after the offering is based
on 70,946,149 shares outstanding as of December 31, 1999 and excludes:
- 1,873,442 shares of common stock issuable upon exercise of options
outstanding at December 31, 1999 under our 1998 Stock Plan, with a
weighted average exercise price of $2.26 per share;
- 1,494,860 shares reserved for issuance under our 1998 stock option plan
as of December 31, 1999;
- 2,900,000 shares of common stock reserved for issuance under our 2000
Employee Stock Purchase Plan and our 2000 Outside Directors Stock Plan
immediately following the offering; and
- 4,375,274 shares of common stock issuable through the exercise of common
stock warrants and convertible preferred stock warrants outstanding on
December 31, 1999 at a weighted average exercise price per share of
$2.76.
This number assumes that the underwriters' over-allotment options are not
exercised. If the over-allotment options are exercised in full, we will issue
and sell an additional shares.
INFORMATION IN PROSPECTUS
You should be aware that, except where otherwise stated, numbers in this
prospectus are based upon the capitalization of our company as of December 31,
1999. Unless specifically stated, the information in this prospectus:
- reflects 20,282,270 shares of common stock outstanding on December 31,
1999 and the automatic conversion of all outstanding shares of our
Series A, B and C convertible redeemable preferred stock as of December
31, 1999 into 50,663,879 shares of common stock upon the closing of this
offering;
- assumes the reincorporation of our company in Delaware prior to the
closing of this offering;
- does not include any rights to purchase stock issued by us or
repurchases of stock executed by us after December 31, 1999.
All references to "we," "us," "our" or "Telocity" in this prospectus mean
Telocity, Inc.
4
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 18, 1997 YEAR ENDED YEAR ENDED
(INCORPORATION) TO DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1997 1998 1999
------------------ ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................... $ -- $ -- $ 187
Loss from operations............................... (678) (7,438) (42,125)
Net loss attributable to common stockholders....... (678) (7,590) (60,169)
Basic and diluted net loss per share............... $ (0.56) $ (1.39) $ (7.32)
Shares used in computing basic and diluted net loss
per share....................................... 1,219,538 5,471,617 8,219,183
Pro forma basic and diluted net loss per share
(unaudited)..................................... $ (1.79)
Shares used in computing pro forma basic and
diluted net loss per share (unaudited).......... 33,610,291
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 66,978 $ 66,978 $
Working capital......................................... 53,729 53,729
Total assets............................................ 140,071 140,071
Long-term obligations, less current portion............. 12,058 12,058
Mandatorily redeemable convertible preferred stock...... 156,020 --
Total stockholders' equity (deficit).................... (48,282) 107,738
</TABLE>
For an explanation of the determination of the number of shares used in
computing per share data refer to Note 2 of Notes to Consolidated Financial
Statements. The pro forma basis gives effect to the conversion of all
outstanding mandatorily redeemable convertible preferred stock which will be
converted automatically into common stock upon the closing of this offering. The
pro forma as adjusted amounts above give effect to the sale of the
shares of common stock offered hereby at an assumed public offering price of
$ per share, less underwriting discounts and commissions and estimated
offering expenses. Further information can also be found in "Use of Proceeds"
and "Capitalization."
5
<PAGE> 11
RISK FACTORS
Investing in our common stock involves a substantial risk. You should
consider carefully the risks and uncertainties described below before deciding
to buy our common stock. If any of the following risks or uncertainties occurs,
our business could be adversely affected. In this event, the trading price of
our common stock could decline, and you could lose all or part of your
investment.
RISKS RELATED TO OUR OPERATIONS AND FINANCIAL RESULTS
WE HAVE AN UNPROVEN BUSINESS MODEL AND A LIMITED OPERATING HISTORY IN A NEW AND
RAPIDLY EVOLVING INDUSTRY AND WE MAY NOT BE ABLE TO IMPLEMENT OUR BUSINESS PLAN.
Our business model is still in development and our limited historical
financial and operating data are not a good indication of how our business is
doing or how it is evolving. You must consider our business and prospects in
light of the risks and difficulties typically encountered by companies in new
and rapidly evolving industries such as ours. We may not adequately address
these risks, and if we do not, we may not be able to implement our business plan
as we intend. In addition, you should not expect future growth in operations,
revenue, employees or other benchmarks to be comparable to our recent
developments in those areas.
We were incorporated in August 1997 and first began offering residential
broadband services commercially in Chicago in July 1999. We have been offering
our services on a wider basis since November 1999, when we started our rollout
in the Southeast. As a result of the expansion of our services and the
accompanying buildout of our network, we grew from 36 employees at December 31,
1998 to approximately 239 employees at February 7, 2000. Of our entire current
executive management team of twelve, only four members were with us at December
31, 1998.
WE HAVE INCURRED NET LOSSES SINCE OUR INCEPTION AND EXPECT FUTURE LOSSES.
ACCORDINGLY, WE MAY NOT BE ABLE TO ACHIEVE PROFITABILITY, AND EVEN IF WE DO
BECOME PROFITABLE, WE MAY NOT BE ABLE TO SUSTAIN PROFITABILITY. IF WE CONTINUE
TO INCUR LOSSES, THE VALUE OF OUR STOCK COULD DECLINE.
We have incurred net losses in every quarter and annual period since our
incorporation in August 1997 and expect to continue to operate at a loss for the
foreseeable future, primarily as a result of the expansion of our network and
operations. If these losses continue, they could cause the value of our stock to
decline. Although we intend to increase our expenditures and operating expenses
rapidly and substantially as we expand our network and operations, we do not
expect our revenues to increase as rapidly and as substantially. We cannot
forecast with any degree of accuracy when, or if, we will become profitable.
This is true because of the following:
- we had negative cash flow from operating activities of $5.4 million in
1998 and $29.5 million in 1999;
- we had an annual interest and amortization expense relating to the
expansion of our network and operations of approximately $3.2 million in
1999 and expect this expense to increase significantly in the future;
- we had an annual charge to earnings relating to employee stock-based
compensation and non-employee option and warrant grants of approximately
$3.6 million in 1999 and expect this expense to increase significantly
in the future; and
- as of December 31, 1999, we had an accumulated deficit of approximately
$68.4 million.
6
<PAGE> 12
OUR FAILURE TO MANAGE OUR GROWTH COULD HARM OUR ABILITY TO RETAIN AND GROW OUR
CUSTOMER BASE AND EXPAND OUR SERVICE OFFERINGS.
We may not be able to install management information and control systems
in an efficient and timely manner, and our current or planned personnel,
systems, procedures and controls may not be adequate to support our future
operations. Failure to manage our future growth effectively could harm our
ability to retain and grow our customer base and expand our service offerings
which would materially and adversely affect our business, prospects, operating
results and financial condition. Our expansion to date has strained our
management, financial controls, operations systems, personnel and other
resources. From time to time, we have had difficulty effectively deploying our
network operations and expanding our network on extremely short deadlines while
providing adequate customer service and efficient provisioning of new customers.
For example, we experienced a 30 day delay in delivery time of network
connections in the Miami region. While this delay did not cause us to lose an
existing customers, it did result in lost revenue for that 30 day period.
Any future rapid expansion will likely increase these strains. If our
marketing strategy is successful, we may experience difficulties responding to
customer demand for services and technical support in a timely manner and in
accordance with customer expectations. Furthermore, we may make mistakes in
operating our business. We may make inaccurate sales forecasts, overtax our most
talented and capable personnel, inadequately test our network deployments or
devote insufficient resources for new markets, material planning and financial
reporting.
OUR ABILITY TO SUSTAIN OR GROW OUR BUSINESS, ESPECIALLY THE DEVELOPMENT OF OUR
CONTENT OFFERINGS, MAY BE HARMED IF WE ARE UNABLE TO MAINTAIN OUR STRATEGIC
RELATIONSHIP WITH NBCI AND ITS AFFILIATES.
Our business, especially the development of our content offerings, is
substantially dependent upon our strategic partnership with NBCi and its
affiliates, which provides for the joint development and design of co-branded
services and content, such as entertainment, electronic commerce, gaming, search
applications and other features designed for broadband users. If NBCi terminates
its agreements or fails to perform its obligations under its agreements, we may
not be able to sustain or grow our business.
- NBCi may terminate its operating agreement with us if one of a number of
named NBC or NBCi competitors acquires more than 33% of us.
- NBCi may terminate the promotional exclusivity provisions of the
operating agreement if certain performance milestones are not met,
including our failure to raise sufficient capital to launch our service
in at least 16 markets by the end of 2000 and 26 markets by the end of
2001, or if Ms. Hart leaves Telocity within three years.
- NBCi or NBC may terminate their advertising agreements with us in the
event of a change in control, an uncured material breach of the
agreements or bankruptcy related events of our company.
For a further discussion of our strategic relationship with NBCi, please
refer to "Business -- Strategic Partnership with NBCi and Affiliates" and
"Related Transactions -- Strategic Relationship with NBCi and Affiliates."
If our relationships with NBCi or its affiliates are terminated, we will
need to seek out and develop other strategic relationships. We may not be able
to form other strategic relationships in the future, and even if we do, the
strategic agreements we enter into may not be successful. Also, the amount and
timing of resources that our strategic partners devote to our business is not
within our control. Our strategic partners may not perform their obligations as
expected. We cannot be certain that any revenue will be derived from these
strategic relationships.
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IF WE FAIL TO MAKE SIGNIFICANT SALES OF OUR PREMIUM OR VALUE-ADDED SERVICES AND
CONTENT TO OUR CUSTOMERS, OUR OPERATING MARGINS MAY SUFFER.
We have based our business model upon our customers purchasing premium or
value-added services and content from us. These value-added services and content
will allow us to generate greater financial margins for each customer. If our
customers only pay for our basic services, our operating results will suffer.
BECAUSE OUR CUSTOMER ACQUISITION COSTS ARE HIGH, IF WE FAIL TO RETAIN CUSTOMERS
LONG ENOUGH TO PAY BACK OUR UP FRONT INVESTMENT, WE MAY NOT ACHIEVE
PROFITABILITY.
Our customer acquisition costs comprise a significant portion of our
operating costs, including advertising, order fulfillment, installation,
customer care and the cost of our residential gateway. Because of our
significant up from investment in each customer, if our customers fail to renew
their subscriptions with us or otherwise terminate their relationships with us
before we recover our up front costs, we may fail to generate a profit. In
addition, if we fail to reduce our customer acquisition costs, including by
increasing the efficiency of our customer care organization and reducing the
costs associated with our gateways, our operating results will suffer.
IF WE CANNOT CONTROL THE COSTS OF GOODS AND SERVICES WE RECEIVE FROM OUR
SUPPLIERS, WE MAY INCUR LOSSES OR PASS ALONG HIGHER COSTS TO OUR CUSTOMERS.
We expand significant capital on our residential gateway, on the
installation charges for our customers who cannot self install their residential
gateway on their existing telephone lines and on the order fulfillment fees that
we pay to our DSL access providers. If we fail to reduce the overall
manufacturing and components costs, installation fees and order fulfillment
expenses charged to us by our suppliers, we may be forced either to accept
operating losses or pass along greater up front activation and other
installation fees to our customers, which would harm our ability to compete in
our market.
OUR MANAGEMENT TEAM IS NEW AND, IF THEY ARE UNABLE TO WORK TOGETHER EFFECTIVELY,
OUR BUSINESS COULD BE SERIOUSLY HARMED.
Our productivity and the quality of our services and content may be
adversely affected if our team does not learn to work together quickly and
effectively. We employed only four members of our current management team at the
beginning of 1999. In particular, Patti Hart, our President and CEO, joined us
in June 1999, Jim Morrissey, our Executive Vice President and Chief Marketing
Officer, joined us in September 1999, Scott Martin, our Executive Vice President
and Chief Administrative Officer, joined us in December 1999 and Edward Hayes,
our Executive Vice President of Finance and Chief Financial Officer, joined us
in January 2000. These individuals have not previously worked together as a
management team and have had only limited experience managing a rapidly growing
company.
OUR GROWTH DEPENDS ON OUR ABILITY TO HIRE AND RETAIN HIGHLY QUALIFIED EMPLOYEES
AND SENIOR EXECUTIVES.
The loss of the services of any of our senior management team, all but one
of whom are at-will employees, or the failure to attract and retain additional
key employees could harm the deployment of our services and content, the
marketing of our services and the development of our brand and our strategy. Our
future growth and ability to sustain this growth depends upon the continued
service of our executive officers and other key engineering, sales, operations,
marketing and support personnel. Competition for qualified personnel in our
industry and in the San Francisco Bay Area, as well as the other geographic
markets in which we recruit, is extremely intense and characterized by rapidly
increasing salaries and equity positions, which may increase our operating
expenses or hinder our ability to recruit qualified candidates. Furthermore, we
must compete with companies in earlier stages of their development, that can
offer substantially greater equity positions to current and potential employees.
For these reasons, we may be unable to retain or recruit qualified candidates,
much less the most highly qualified.
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WE MAY EXPERIENCE DIFFICULTIES IN THE INTRODUCTION OF OUR NEXT GENERATION
GATEWAY THAT COULD DELAY THE LAUNCH OF NEW SERVICES THEREBY INCREASING EXPENSES
AND DECREASING REVENUE.
The introduction of our next generation gateway during 2000 will require
us to manage a transition from older equipment and technology, minimize
disruption in customer ordering patterns and ensure that adequate supplies of
new equipment can be delivered to meet anticipated customer demand. Despite
testing, our next-generation residential gateway may contain undetected or
unresolved errors when it is first released. These errors could result in:
- delays in or loss of market acceptance and sales;
- diversion of development resources;
- injury to our reputation; and
- increased service, warranty and other operating expenses.
In general, the development of new or enhanced equipment, systems,
services and content, such as electronic commerce, communications, and utility
services, is a complex and uncertain process requiring the accurate anticipation
of technological and market trends, as well as precise technological execution.
We may experience in the future design, development, implementation or other
difficulties that could delay or prevent our introduction of new or enhanced
services or content. These delays could cause our expense to increase and our
revenues to decline.
OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY FROM PERIOD TO
PERIOD WHICH MAY CAUSE OUR STOCK PRICE TO BE EXTREMELY VOLATILE. WE MAY ALSO
FAIL TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS,
CAUSING OUR STOCK PRICE TO DECLINE.
Our operating results are likely to fluctuate significantly in the future
on a quarterly and an annual basis due to a number of factors, many of which are
outside our control. If we experience such fluctuation, we may fail to meet or
exceed the expectations of securities analysts or investors, causing our stock
price to decline or be extremely volatile.
In addition, most of our operating costs are fixed and based on our
revenue expectations. Therefore, if we have lower revenues than we were
expecting, we may be unable to reduce our expenses in the same period in which
the operating costs were incurred, resulting in lower quarterly operating
results for that period. For example, during 1999 we hired approximately 150
employees, moved into significantly larger facilities and greatly increased our
operating expenses in anticipation of an increase in revenue; however, we do not
know whether our business will grow rapidly enough to absorb these costs.
IF SALES FORECASTED FOR A PARTICULAR PERIOD ARE NOT REALIZED IN THAT PERIOD DUE
TO THE LENGTHY DEVELOPMENT AND TESTING CYCLES OF OUR TECHNOLOGIES AND SERVICES,
OUR OPERATING RESULTS FOR THAT PERIOD WOULD BE ADVERSELY AFFECTED.
We cannot forecast with any degree of accuracy our revenues in future
periods or how quickly customers will select our services, if at all. In view of
these factors, we may not be able to achieve or sustain profitability which
could cause our stock price to decline. Our ability to achieve profitable
operations on a continuing basis will depend on a number of factors, many of
which are beyond our control.
WE MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL IN THE FUTURE TO SUPPORT OUR GROWTH
AND EVEN IF WE ARE ABLE TO RAISE ADDITIONAL CAPITAL, IT MAY BE ON UNACCEPTABLE
TERMS, MAY DILUTE YOUR OWNERSHIP OR MAY RESTRICT OUR FLEXIBILITY IN RUNNING OUR
BUSINESS.
We intend to seek substantial additional financing in the future to fund
the growth of our operations, including funding the significant capital
expenditures and working capital requirements necessary for us to complete our
nationwide rollout and provide services in our targeted markets. In order to
accomplish our nationwide rollout, we must expand our network into geographic
areas throughout the
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country, establish relationships with local access providers in those areas and
launch targeted marketing campaigns in those regions. If we are unable to raise
additional capital or are able to raise capital only on unfavorable terms, we
may not be able to complete our network, develop or enhance our gateway and
services, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements, any or all of which could hurt our
ability to support our growth. We expect that our existing capital resources
coupled with the proceeds of this initial public offering will be sufficient to
meet our cash requirements through September 2001. However, we have a limited
operating history on which to base these estimates. As a result, these estimates
may not be accurate.
If additional capital is raised through the issuance of equity securities
or by incurring convertible debt, the percent ownership of our existing
stockholders will be reduced and those stockholders may experience dilution in
net book value per share. Any debt financing, if available, may involve
covenants limiting or restricting our operations or future opportunities or
pledging our assets as security for borrowings.
RISKS RELATED TO OUR INDUSTRY, TECHNOLOGY AND NETWORK
OUR SERVICES ARE NEW AND CUSTOMERS MAY NOT ACCEPT THESE SERVICES. IF OUR
SERVICES DO NOT GAIN BROAD MARKET ACCEPTANCE, WE WILL NOT BE ABLE TO INCREASE
OUR REVENUES AND BUILD OUR BUSINESS AS ANTICIPATED.
Residential broadband Internet access and the related services we support
through our platform is a new and emerging business, and we cannot guarantee
that our services will attract widespread demand or market acceptance. If this
market fails to develop or develops more slowly than anticipated, we will not be
able to increase our revenues and build our business as anticipated.
THE SCALABILITY, RELIABILITY AND SPEED OF OUR NETWORK REMAIN LARGELY UNPROVEN
AND MAY NOT SATISFY CUSTOMER DEMAND.
We may not be able to scale our network and operational support system to
meet our projected customer numbers while achieving and maintaining superior
performance. This risk will continue to exist as long as we expand our services
geographically to increasing numbers of customers. Our failure to achieve or
maintain high-speed digital transmissions would significantly reduce customer
demand for our services, resulting in decreased revenues and the inability to
build our business as planned. To date, we have deployed our network in more
than 40 metropolitan statistical areas in the Southeast, Northeast, upper
Midwest and Mid-Atlantic states. Most of this deployment has taken place in the
last few months. By the end of 2000, we expect that our targeted national
rollout will cover in total approximately 150 of the nation's metropolitan
statistical areas, which cover approximately 60% of the U.S. population,
including 20 of the 25 most populous metropolitan statistical areas. The ability
of our network and operational support system to connect and manage a
substantial number of online customers at high speeds on a national scale is
still unknown.
FACTORS OUTSIDE OF OUR CONTROL MAY ADVERSELY AFFECT OUR TRANSMISSION SPEED.
LOWER SPEEDS MAY RESULT IN CUSTOMER DISSATISFACTION AND ULTIMATELY A LOSS OF
CUSTOMERS.
Peak digital data transmission speeds currently offered across our
networks when utilizing DSL are 1.5 megabits per second. However, the actual
data transmission speeds over our networks can be significantly slower. These
slower speeds may result in customer dissatisfaction and ultimately in the loss
of customers and revenues. The speeds over our networks depend on a variety of
factors, many of which are out of our control, including:
- the distance an end-user is located from a central office;
- the configuration of the telecommunications line being used;
- the quality of the telephone lines provisioned by traditional telephone
companies;
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- the inside wiring of our customers' homes; and
- the limitations of the customer's computer.
WE FACE INTENSE COMPETITION FROM, AMONG OTHERS, PROVIDERS OF ONLINE SERVICES,
INTERNET SERVICE PROVIDERS, CABLE MODEM SERVICE PROVIDERS AND TELECOMMUNICATIONS
SERVICE PROVIDERS WHICH COULD LIMIT THE NUMBER OF CUSTOMERS WHO CHOOSE AND PAY
US FOR OUR SERVICES.
We experience strong competition in all of our target service areas,
including from providers of online services, Internet service providers, cable
modem service providers, interactive television providers, Internet portal or
content sites, telecommunications service providers, wireless and satellite
service providers, and consumer electronics and appliance manufacturers. We
expect this competition to intensify and we may be unable to generate a
significant number of new customers or retain existing customers. Many of these
competitors have longer operating histories, greater name recognition, better
strategic relationships and significantly greater financial, technical or
marketing resources than we do. As a result, these competitors:
- may be able to develop and adopt new or emerging technologies and
respond to changes in customer requirements or devote greater resources
to the development, promotion and sale of their products and services;
- may form new alliances to rapidly acquire significant market share; and
- may be able to undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and devote substantially more resources to
developing high-speed broadband services.
For example, telecommunications service providers, including traditional
telephone companies and competitive carriers, have an established brand name and
reputation for high quality in their service areas, possess sufficient capital
to deploy DSL equipment rapidly, have their own telephone lines and can bundle
digital data services with their existing analog voice services to achieve
economies of scale in serving customers. Cable modem service providers such as
Excite@Home, and AOL through its merger with Time Warner, may have the ability
to leverage their existing positions in their service markets to exclude
competition. For a further discussion of the competition we face, please refer
to "Business -- Competition."
OUR FAILURE TO ENHANCE OUR EXISTING GATEWAY, DEVELOP OUR NEW GATEWAY OR TO
DEVELOP AND INTRODUCE NEW SERVICES AND CONTENT THAT MEET CHANGING CUSTOMER
REQUIREMENTS AND EMERGING INDUSTRY STANDARDS WOULD LIMIT OUR ABILITY TO ATTRACT
AND RETAIN CUSTOMERS.
The market for high-speed broadband access is characterized by rapidly
changing customer demands and short life cycles for services and content. If
enhancements to our existing services, such as broadband Internet access, e-mail
and storage for web pages, or development of new services, including electronic
commerce, communications and utility services, take longer than planned, the
delay would adversely affect our ability to sell our services and our results of
operations and financial condition would suffer.
The technical innovations required to remain competitive in the broadband
industry are inherently complex, require long development cycles and sometimes
necessitate that we depend on sole-source suppliers. We must continue to invest
in research and development in order to maintain and enhance our existing
technologies and our broadband platform, but we may not have sufficient funds
available to do so. Even if we have sufficient funds, these investments may not
serve the needs of customers or be interoperable with changing technological
requirements or standards. We will have to incur most research and development
expenses before the technical feasibility or commercial viability of enhanced or
new services can be ascertained. Our revenues from future or enhanced services
may not be sufficient to recover our associated development costs.
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WE DEPEND ON SINGLE AND LIMITED SOURCE SUPPLIERS FOR KEY COMPONENTS OF OUR
GATEWAY WHICH MAKES US SUSCEPTIBLE TO SUPPLY SHORTAGES OR PRICE FLUCTUATIONS
THAT COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
We rely on Wellex Corporation to produce our proprietary residential
gateway device and we will not have another supplier for at least five months.
In the event of any significant delay, disruption, capacity constraint or
quality control problem in its manufacturing operations, gateway shipments to
our customers could be delayed, which would negatively affect our net revenues,
competitive position and reputation. Should Wellex cease to be our contract
supplier for any reason, we would then need to qualify a new gateway supplier
and we may be unable to find a gateway supplier that meets our needs or that can
source components as cost-effectively as Wellex. Qualifying a new gateway
supplier and commencing volume production is expensive and time consuming.
Transferring production operations can significantly disrupt gateway supply. If
we are required or choose to change gateway suppliers, we may lose sales and may
experience increased production or component costs, and our customer
relationships may suffer.
If any of our sole-source manufacturers delays or halts production of any
of the components or equipment that we use in our residential gateway we would
be unable to manufacture and ship our gateway, and, as a result, our revenues
and operating results would decline and our customer relationships may suffer.
Furthermore, we expect to incorporate additional sole-source components into our
next-generation gateway planned for release during 2000, thereby increasing our
sole-source supplier risks. We currently depend on single source suppliers for a
number of key components, such as chipsets, processors and unique tooled
plastics. For example, there is only one supplier available for our processor
and our chip set is a specific model which we have designed and is built by a
single manufacturer. Should either of these suppliers become unavailable, we
will be required to undertake a redesign of our gateway such as the layout of
the board or the pin connections.
There are a number of other risks associated with our dependence on a
single third party supplier, including the following:
- reduced control over delivery schedules and quality assurance;
- manufacturing yields and costs;
- the potential lack of adequate capacity during periods of excess demand;
- limited warranties on products supplied to us;
- increases in prices; and
- the potential misappropriation of our intellectual property.
IF WE FAIL TO PREDICT ACCURATELY OUR SUPPLY REQUIREMENTS, WE COULD INCUR
ADDITIONAL COSTS OR EXPERIENCE DELAYS WHICH COULD RESULT IN A SIGNIFICANT
DECREASE IN OUR REVENUES AND GROSS MARGINS.
We provide Wellex with rolling forecasts of our gateway requirements based
on anticipated orders. Wellex uses these forecasts to purchase components for
our gateway. Our component requirement forecasts may not be accurate. If we
overestimate our component requirements, Wellex may have excess inventory, which
would increase our costs. Also, because lead times for materials and components
that we require vary significantly and depend on a variety of factors, if we
underestimate our requirements, Wellex may have inadequate inventory, which
could interrupt their manufacturing of our gateway and result in delays in
system shipments. Any of these events could harm our business and results of
operations.
AT PRESENT, WE CANNOT PROVIDE OUR SERVICES UNLESS DSL ACCESS PROVIDERS SUPPLY US
WITH DSL CONNECTIONS AND COOPERATE WITH US FOR THE TIMELY PROVISION OF DSL
CONNECTIONS FOR OUR CUSTOMERS.
We must obtain DSL connections from traditional telephone companies and
new competitive carriers and have their continuing cooperation for the timely
provision of DSL connections for our customers in order for us to provide our
services. In addition, we depend on traditional telephone companies and new
competitive carriers to test and maintain the quality of the DSL connections
that we
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use. An inability to obtain adequate and timely access to DSL connections on
acceptable terms and conditions from traditional telephone companies and
competitive carriers and to gain their cooperation in the timely provision of
DSL connections for our customers could harm our business, as could their
failure to properly maintain the DSL connection we use.
Because in some instances our suppliers will also provide broadband
Internet access and other services, we will compete with our suppliers. Although
our suppliers are required to provide DSL connections to us on a
non-discriminatory basis under the Telecommunications Act of 1996, they may
nevertheless be reluctant to cooperate with us. Compelling these suppliers to
meet the regulatory requirements may be expensive and time consuming and could
result in delays and increased expenses associated with providing our services
and content on a wider scale, which in turn could harm our business.
OUR SERVICES MAY NOT BE DELIVERED EFFECTIVELY, OR AT ALL, BECAUSE OF THE
PHYSICAL LIMITATIONS OF OUR CUSTOMERS' TELEPHONE LINES, INCLUDING INSIDE WIRING,
OR BECAUSE THE TELEPHONE LINES WE RELY UPON MAY BE UNAVAILABLE OR IN POOR
CONDITION.
Our ability to provide services to potential customers using DSL
connections through the telephone network depends on the length of our
customers' local telephone lines, over which DSL must operate. It also depends
on the quality, physical condition, availability and maintenance of those
telephone lines, which is within the control of traditional telephone companies.
DSL technology is distance sensitive and, in many cases, the homes of our
customers may be located outside the maximum distance from the telephone company
central switching office for the proper function of the DSL technologies we
currently use. We cannot provide our services to customers beyond this maximum
distance. Currently, the homes of many of our potential customers are beyond the
maximum distances. Many traditional telephone companies are rapidly deploying
additional equipment in central offices and we work with our suppliers to
identify new locations in which we would like to offer our services.
Nevertheless, our suppliers may fail to expand their equipment. If the homes of
a significant number of customers that desire our service continue to be located
beyond this maximum distance, it could materially inhibit our ability to deploy
our broadband services to those homes, which would harm our business. Although
we work with our suppliers of local access broadband connections to identify in
advance of accepting orders those customers who are close enough to a central
office, we sometimes find that the information given to us is inaccurate. If we
cannot reduce the numbers of these false positive customer identifications, we
will incur significant expenses that will harm our operating results.
Likewise, the current condition of local telephone lines may be inadequate
to permit us to provide our services to all of our customers utilizing our
current DSL technologies. The copper telephone lines that we rely upon to
provide service to our customers' homes may not be of sufficient quality or they
may not be adequately maintained by the traditional telephone company for proper
DSL functionality, which could significantly inhibit our ability to deploy our
broadband services to those homes, which would harm our business.
Further, some telephone companies use technologies other than copper lines
to provide telephone services between the traditional telephone company central
switching office and the customer's residence and DSL-based services might not
be available to those customers. If a significant number of the homes of
customers that desire our service are connected to the telephone network with
non-copper local access connection, it could materially inhibit our ability to
deploy our broadband services to those homes and would harm our business.
A SYSTEM FAILURE OR BREACH OF NETWORK SECURITY COULD CAUSE DELAYS OR
INTERRUPTIONS OF SERVICE TO OUR CUSTOMERS WHICH COULD HURT OUR BRAND IMAGE, LEAD
TO A LOSS OF CUSTOMERS AND RESULT IN A SIGNIFICANT DECREASE OF REVENUES.
Our operations depend on our ability to avoid damages from fires,
earthquakes, floods, power losses, excessive sustained or peak user demand,
telecommunications failures, network software flaws, transmission
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cable cuts and similar events. The occurrence of a natural disaster or other
unanticipated problem at our network operations center, our backbone or any of
our metropolitan hubs or collocation facilities could cause interruptions in the
services provided by us and these interruptions could result in the loss of
customers and the attendant reduction of revenue. Additionally, if a traditional
telephone company, new competitive carrier or other service provider fails to
provide the communications capacity we require, as a result of a natural
disaster, operational disruption or any other reason, then this failure could
interrupt our services.
Our network may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Providers of Internet services, including us, have in
the past experienced, and may in the future experience, interruptions in service
as a result of accidental or intentional actions of Internet users, current and
former employees and others. For example, we have experienced unintentional down
time as a result of upgrading our services and equipment. Other technologies
similar to our own have been subject to service outages. The consequence of
these interruptions in service may be that some customers terminate our service
and that some potential customers to reject our service. Moreover, we may be
required to give discounts to customers who experience service interruption.
Interruptions of service may therefore result in decreased revenues and customer
base. Unauthorized access could also potentially jeopardize the security of
confidential information stored in the computer systems of our customers, which
might cause us to be liable to our customers, and also might deter potential
customers. Eliminating computer viruses and alleviating other security problems,
including problems created by our or a vendor's employee, may require
interruptions, delays or cessation of service to our customers.
OTHER RISKS RELATED TO OUR BUSINESS
A GENERAL ECONOMIC DOWNTURN COULD RESULT IN CUSTOMERS CANCELING OUR SERVICES AND
CONTENT OR THE DECISION BY PROSPECTIVE CUSTOMERS NOT TO USE OUR SERVICE.
To the extent the general economic health of the United States or of
certain regions in which many of our customers reside declines from recent
historically high levels, or to the extent customers fear a decline is imminent,
these customers may reduce expenditures for services such as ours. Any decline
or concern about an imminent decline could also delay decisions among certain of
our customers to renew our services or to add new services or could delay
decisions by prospective customers to make initial evaluations of our services.
Since many consumers may perceive our services as unnecessary or as a "luxury"
item, we could be particularly hard hit by an economic downturn. Any reduction
of or delays in expenditures would harm our business.
OUR BUSINESS IS SIGNIFICANTLY AFFECTED BY THE LEGISLATIVE, REGULATORY AND
JUDICIAL RULES APPLICABLE TO TELECOMMUNICATIONS SERVICES AND THE BROADBAND
MARKETPLACE.
Changes in existing laws and regulations applicable to our business may
not be favorable to us and may require us to direct time and money toward legal
and regulatory matters. Since 1996, telecommunications laws have been in a state
of particularly rapid change. We rely on our ability to purchase DSL access from
both traditional telephone companies and competitive carriers, vendor channels
that may not remain open to use, or for which prices may rise, if the regulatory
status of these service providers changes in the future. In order to protect our
market options and business flexibility, we may also be required to participate
in legislative, regulatory and judicial proceedings, or proceedings may be
instituted against us by competitors seeking to harm our business, all of which
could entail the diversion of substantial funds and management attention.
Our services might be determined to be subject to price regulation at the
federal or state level and may affect our pricing structure and decrease our
profits.
If the current laws and regulations governing our business change, we may
become subject to price regulation at the state or federal level. Such price
regulation could adversely impact our profitability.
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Federal, state, local or foreign governments may impose taxation on the
Internet and the services we offer, which would decrease our revenues and harm
our operating results.
Future legislation affecting our business could subject us to taxation due
to the services we provide. This taxation may decrease our revenues and harm our
operating results.
The competition among our DSL providers could be adversely affected by changes
in existing laws and regulations and that could increase our costs and lower our
profit margin.
If existing laws and regulations change, the competition among our DSL
providers that we rely on to maintain efficiently priced and high quality DSL
connections, could be adversely affected. In addition, if the Telecommunications
Act of 1996 and recent decisions by the Federal Communications Commission
implementing portions of the Act that have opened the existing telephone network
to competition are stayed, reversed or modified by appellate courts, if the laws
and decisions requiring traditional telephone companies and competitive carriers
to sell DSL connections to companies like our are changed or vacated, or if new
regulatory mandates degrade competition, our costs will increase and we will
have lower profit margins.
AS A PROVIDER OF CONTENT-BASED INTERNET SERVICES, WE MAY FACE POTENTIAL LEGAL
EXPOSURE BECAUSE OF THE NATURE OF SOME OF THE CONTENT WE PROVIDE.
We may be subject to claims for defamation, negligence, copyright or
trademark infringement, including contributory infringement, or other claims
relating to the information contained on our Internet sites, whether written by
us or third parties which could cause us to make unexpected legal expenditures
and significantly increase our costs. These types of claims have been brought
against providers of online services in the past and can be costly to defend
regardless of the merit of the lawsuit. Although recent federal legislation
protects online services from some claims when the material is written by third
parties, this protection is limited. Furthermore, the law in this area remains
in flux and varies from state to state, and from country to country.
We may also face potential legal exposure associated with the provision of
content-based Internet services in such areas as obscenity and indecency,
advertising, gaming, privacy, child Internet privacy, the use of personal
information gathered online and trademark or copyright infringement. Many of the
rules in these areas are ambiguous and rapidly evolving, making definitive
assessment of legal risks difficult. For a discussion of the regulatory
environment in which we operate, please see the section entitled "Business --
Government Regulation."
OUR INTELLECTUAL PROPERTY PROTECTION MAY BE INADEQUATE TO PROTECT OUR
PROPRIETARY RIGHTS WHICH COULD ALLOW COMPETITORS TO DEVELOP TECHNOLOGY SUPERIOR
TO OUR OWN AND ATTRACT CUSTOMERS AWAY FROM US.
The steps we have taken to protect our technology or other intellectual
property may be inadequate. As a result, competitors to develop technology
superior to our own and attract customers away from us. We may be unable to use
intellectual property protection to prevent other companies from competing with
us. While we have developed some proprietary techniques and expertise, we
believe that many of our activities and systems are not protectable as
proprietary intellectual property. Accordingly, we may be unable to prevent
third parties from developing techniques that are similar or superior to our
technology. Likewise, we may be unable to prevent third parties from designing
around our copyrights, patents and trade secrets, or from utilizing our
intellectual property without detection or without adequate remedy.
We claim common law trademark protection for a limited number of marks and
have applied for federal registrations for only two. Our trademark strategy has
shifted in the past and may again in the future as we choose to abandon old
marks and utilize new ones, which might have the effect of diluting our branding
strategy or confusing our customers. Because we have had no systematic process
in the past for the identification of patentable inventions, we may have
overlooked important technologies that could have been, but have not yet been
patented by us. Some of these inventions may no longer be patentable. We have
not undertaken any patent searches to determine whether key patents exist that
might prevent us
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from manufacturing, selling or using our gateway devices or other services. We
therefore might infringe patents of third parties. We also rely on unpatented
trade secrets and know-how to maintain our competitive positions, which we seek
to protect, in part, by confidentiality agreements, strategic alliances and
contracts with employees, consultants and others. The steps we have taken may
not have been adequate to protect these trade secrets.
WE ARE VULNERABLE TO CLAIMS THAT OUR PLATFORM INFRINGES THIRD PARTY INTELLECTUAL
PROPERTY RIGHTS, AND ANY RESULTING CLAIMS AGAINST US COULD BE COSTLY TO DEFEND
OR SUBJECT US TO SIGNIFICANT DAMAGES.
Infringement claims could materially harm our business. From time to time,
we may receive notice of claims of infringement of third parties' proprietary
rights. The fields of telecommunications and Internet communications are filled
with patents, both pending and issued. We may unknowingly infringe such a
patent. We may be exposed to future litigation based on claims that our platform
infringes the intellectual property rights of others, especially patent rights.
Someone, including a competitor, might file a suit with little merit, in order
to harm us commercially, to force us to re-allocate resources to defending such
a claim, or extract a large settlement. In addition, our employees might utilize
proprietary and trade secret information from their former employers without our
knowledge, even though we prohibit these practices.
Any litigation, with or without merit, could be time consuming to defend,
result in high litigation costs, divert our management's attention and resources
or cause us to delay deployment of related technology. A jury or judge may
decide against us even if we had not in fact infringed. If we lose or are forced
to settle, we could be required to remove or replace allegedly infringing
technology, to develop non-infringing technology or to enter into royalty or
licensing arrangements. These royalty or licensing arrangements, if required,
may not be available on terms acceptable to us, or at all.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION.
We may make investments in complementary companies, products or
technologies. Should we do so, our failure to successfully manage future
acquisitions could seriously harm our operating results. In the event of any
future purchases, we will face additional financial and operational risks,
including:
- difficulty in assimilating the operations, technology and personnel of
acquired companies;
- disruption in our business because of the allocation of resources to
consummate these transactions and the diversion of management's
attention from our core business;
- difficulty in retaining key technical and managerial personnel from
acquired companies;
- dilution of our stockholders, if we issue equity to fund these
transactions;
- assumption of operating losses, increased expenses and liabilities; and
- our relationships with existing employees, customers and business
partners may be weakened or terminated as a result of these
transactions.
OUR HEADQUARTERS AND SUPPLIERS ARE ALL LOCATED IN NORTHERN CALIFORNIA WHERE
NATURAL DISASTERS MAY OCCUR WHICH COULD DAMAGE OUR FACILITIES AND RENDER US
UNABLE TO PROVIDE SERVICES TO OUR CUSTOMERS.
Currently, our corporate headquarters, network operations center and the
only supplier of our residential gateway are all located in Northern California.
Northern California historically has been vulnerable to natural disasters and
other risks, such as earthquakes, fires and floods, which at times have
disrupted the local economy and posed physical risks to our property and the
property of the manufacturer of our residential gateway. In the event of such
disaster, our business would suffer. We presently do not have redundant,
multiple site capacity in the event of a natural disaster.
16
<PAGE> 22
RISKS RELATED TO THIS OFFERING
WE MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT INCREASE OUR
PROFITS OR MARKET VALUE.
We have broad discretion in the use of the net proceeds of this offering
and could spend the net proceeds in ways that do not yield a favorable return or
to which stockholders object. Until we need to use the proceeds of this
offering, we may place them in investments that do not produce income or that
lose value. You can read more about our planned use of the net proceeds from
this offering in the section entitled "Use of Proceeds."
INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER US AFTER THIS OFFERING
AND COULD DELAY OR PREVENT OUR ENGAGING IN A CHANGE OF CONTROL TRANSACTION AND
AN OPPORTUNITY FOR YOU TO SELL YOUR STOCK AT A PREMIUM TO ITS THEN CURRENT
MARKET VALUE.
After this offering, we anticipate that our officers, directors and five
percent or greater stockholders will beneficially own or control, directly or
indirectly, approximately 51,776,954 shares of common stock, which in the
aggregate will represent approximately % of the outstanding shares of
common stock. These stockholders, if acting together, will have the ability to
control all matters submitted to our stockholders for approval, including the
election and removal of directors and the approval of any business combinations.
You can read more about the ownership of common stock by our executive officers,
directors and principal stockholders in the section entitled "Principal
Stockholders."
OUR RELATIONSHIP WITH NBCI COULD DELAY OR PREVENT A CHANGE IN OUR ENGAGING IN A
CHANGE OF CONTROL TRANSACTION AND YOUR ABILITY TO REALIZE A PREMIUM ON YOUR
STOCK.
Provisions in our agreements with NBCi and its affiliates could delay or
prevent a change in our control, including a change that shareholders might find
beneficial. As part of our relationship with NBCi, we entered into an investor
rights agreement that provides, among other things, that if we receive an offer
to buy 20% or more of our outstanding shares or we receive a third party offer
to buy all or substantially all of our assets, so long as either NBC or NBCi own
at least 2,500,000 shares of our common stock, we will negotiate exclusively
with either NBC or NBCi with respect to the offer for a period of 30 days and
may not sell our company or our assets to a third party on terms that are more
favorable to us than those last offered by NBC and NBCi. Furthermore, NBCi may
terminate its operating agreement with us if one of a number of named NBCi
competitors acquires more than 33% of us, and NBCi or NBC may terminate their
advertising agreements with us in the event of a change in control of our
company. These provisions may deter someone from acquiring or merging with us,
including a transaction that results in stockholders receiving a premium over
the market price for the shares of common stock held by them.
PROVISIONS OF OUR CHARTER DOCUMENTS MAY HAVE ANTI-TAKEOVER EFFECTS THAT COULD
PREVENT A CHANGE IN OUR CONTROL AND YOUR ABILITY TO REALIZE A PREMIUM ON OUR
STOCK.
Provisions of our amended and restated certificate of incorporation and
bylaws in effect after completion of this offering, and Delaware law, could make
it more difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders. These provisions include:
- authorizing the issuance of blank check preferred stock;
- providing for a classified Board of Directors with staggered, three-year
terms;
- eliminating the ability of stockholders to call a special meeting of
stockholders;
- limiting the removal of directors by the stockholders to removal for
cause; and
- requiring a super-majority stockholder vote to effect certain
amendments.
In addition, provisions of the Delaware General Corporation Law may deter
someone from acquiring or merging with us, including a transaction that results
in stockholders receiving a premium over the market price for the shares of
common stock held by them. Section 203 of the Delaware General Corporation Law
also imposes certain restrictions on mergers and other business combinations
between us and any holder of more than 15% and less than 85% of our common
stock. For more details about these
17
<PAGE> 23
provisions, please see the section entitled "Description of Capital
Stock -- Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions."
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
SHARES.
The initial public offering price is substantially higher than the book
value per share of our outstanding common stock immediately after the offering.
Dilution in net tangible book value per share represents the difference between
the amount per share paid by purchasers of shares of common stock in this
offering and the net tangible book value per share of common stock immediately
after the completion of this offering. Accordingly, if you purchase common stock
in the offering, you will incur immediate dilution of approximately $ in the
net tangible book value per share of our common stock from the price you pay for
our common stock. For additional information on this calculation, see
"Dilution."
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT
OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.
The initial public offering price for our common stock will be determined
through negotiations between the underwriters and us. This initial public
offering price may vary from the market price of our common stock after the
offering. If you purchase shares of common stock, you may not be able to resell
those shares at or above the initial public offering price.
If an active public market for our common stock does not develop, the
liquidity of your investment may be limited, and our stock price may fluctuate
or decline below our initial public offering price. The market price of our
common stock may fluctuate significantly in response to factors, some of which
are beyond our control, include the following:
- actual or anticipated fluctuations in our operating results;
- changes in market valuations of other Internet and technology companies;
- announcements by us or our competitors of significant technical
innovations, contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
- additions or departures of key personnel;
- future sales of common stock;
- any deviations in net revenues or in losses from levels expected by
securities analysts; and
- trading volume fluctuations, which are particularly common among highly
volatile securities of Internet-related companies.
You should read the "Underwriting" section for a more complete discussion
of the factors which were considered in determining the initial public offering
price of our common stock.
THE PRICE OF OUR COMMON STOCK MAY DECLINE DUE TO SHARES ELIGIBLE FOR FUTURE
SALE.
Sales of substantial amounts of common stock in the public market
following this offering, or the appearance that a large number of shares is or
will be available for sale, could adversely affect the market price for our
common stock. The number of shares of common stock available for sale in the
public market is limited by lock-up agreements that were entered into in
connection with our initial public offering and this offering. Under such
lock-up agreements, the holders of approximately % of our outstanding
shares of common stock agreed not to sell or otherwise dispose of any of their
shares until , 2000. However, Merrill Lynch may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to such lock-up agreements. In addition to the adverse effect
a price decline could have on holders of common stock, that decline would likely
impede our ability to raise capital through the issuance of additional shares of
common stock or other equity securities. Please see "Description of Capital
Stock -- Registration Rights" and "Shares Eligible for Future Sale."
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<PAGE> 24
WE HAVE NOT PAID AND DO NOT INTEND TO PAY DIVIDENDS.
We have not paid any dividends, and we do not intend to pay cash dividends
in the foreseeable future.
IF WE ARE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY, WE WOULD BECOME SUBJECT
TO SUBSTANTIAL REGULATION WHICH WOULD INTERFERE WITH OUR ABILITY TO CONDUCT OUR
BUSINESS ACCORDING TO OUR BUSINESS PLAN.
If the Investment Company Act required us to register as an investment
company, we would become subject to substantial regulation with respect to our
capital structure, management, operations, transactions with affiliated persons
and other matters. Application of the provisions of the Investment Company Act
to us would harm our business. As a result of this offering and our previous
financings, we have substantial cash, cash equivalents and short-term
investments. We plan to continue investing the excess proceeds of these
financings in short-term instruments consistent with prudent cash management and
not primarily for the purpose of achieving investment returns.
Investment in securities primarily for the purpose of achieving investment
returns could result in our being treated as an investment company under the
Investment Company Act of 1940. The Investment Company Act requires the
registration of companies that are primarily in the business of investing,
reinvesting or trading securities or that fail to meet certain statistical tests
regarding their composition of assets and sources of income even though they
consider themselves not to be primarily engaged in investing, reinvesting or
trading securities.
We believe that we are primarily engaged in a business other than
investing in or trading securities and, therefore, are not an investment company
within the meaning of the Investment Company Act.
19
<PAGE> 25
OTHER RELEVANT INFORMATION
We use market data and industry forecasts throughout this prospectus,
which we have obtained from internal surveys, market research, publicly
available information and industry publications. Industry publications generally
state that the information they provide has been obtained from sources believed
to be reliable, but that the accuracy and completeness of such information is
not guaranteed. Similarly, we believe that the surveys and market research we or
others have performed are reliable, but we have not independently verified this
information. Neither we nor any of the underwriters represents that this
information is accurate.
We claim common law trademark protection for TELOCITY, TELOCITY TIME,
TELOCITY HIGH-VELOCITY INTERNET, YOU HAVEN'T SEEN THE NET UNTIL YOU'VE SEEN IT
IN TELOCITY TIME and our logo. We have applied for federal trademark
registrations for TELOCITY and our logo.
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of
shares in this offering of approximately $ million (approximately
$ million if the underwriters' over-allotment option is exercised in
full), at an assumed initial public offering price of $ per share,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses.
We intend to use the net proceeds from this offering as follows:
- $108 million for working capital and general corporate purposes,
including expanding our sales and marketing efforts and expanding our
network;
- $22 million for the payment of current and future commitments under
finance lease; and
- $5.4 million for the settlement of notes payable outstanding at December
31, 1999.
We will retain broad discretion in the allocation of the net proceeds of
this offering. In addition, we may use a portion of the net proceeds to acquire
complementary products, technologies or businesses. Pending use of the net
proceeds of this offering, we intend to invest the net proceeds in interest
bearing, investment-grade securities to the extent permitted by the Investment
Company Act of 1940.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We
currently intend to retain any future earnings, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Future dividends, if any, will depend on, among other
things, our results of operations, capital requirements, restrictions in
then-existing loan agreements and on such other factors as our Board of
Directors may, in its discretion, consider relevant.
20
<PAGE> 26
CAPITALIZATION
The following table sets forth our capitalization at December 31, 1999:
- on an actual basis;
- on a pro forma basis to give effect to the conversion of all shares of
our preferred stock into 50,663,879 shares of common stock and the
conversion of our preferred stock warrants to common stock warrants
automatically upon completion of this offering; and
- on a pro forma as adjusted basis to give effect to the sale of
shares of common stock at an assumed initial offering price of
$ per share, less estimated underwriting discounts and
commissions and estimated offering expenses.
You should read this table in conjunction with our Consolidated Financial
Statements and the accompanying Notes, Selected Financial Information, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term obligations, net of current portion............... $ 12,058 $ 12,058
-------- --------
Mandatorily redeemable preferred stock, no par value:
55,253,124 authorized shares; 50,663,879 shares issued and
outstanding, (actual); no shares issued and outstanding
(pro forma and pro forma as adjusted)..................... 147,350 --
Series A, B and C Preferred Stock warrants.................. 8,670 --
-------- --------
156,020 --
-------- --------
Stockholders' equity (deficit):
Preferred stock, $0.001 par value: none authorized (actual
and pro forma) 10,000,000 authorized (pro forma as
adjusted); no shares outstanding (actual, pro forma and
pro forma as adjusted)................................. -- --
Common stock, $0.001 par value: 90,000,000 shares
authorized (actual and pro forma); 250,000,000 shares
authorized (pro forma as adjusted); 20,282,270 issued
and outstanding (actual); 70,946,149 issued and
outstanding (pro forma); issued and
outstanding (pro forma as adjusted).................... 17 68
Additional paid-in capital.................................. 39,478 195,447
Receivable from stockholders................................ (5,457) (5,457)
Unearned stock-based compensation........................... (13,883) (13,883)
Accumulated deficit......................................... (68,437) (68,437)
-------- --------
Total stockholders' equity (deficit)................... (48,282) 107,738
--------
Total capitalization................................... $119,796 $119,796
======== ========
</TABLE>
The data in the table above excludes:
- 1,873,442 shares of common stock issuable upon exercise of options
outstanding as of December 31, 1999, at a weighted average exercise
price of $2.26 per share;
- 1,494,860 shares of common stock available for issuance as of December
31, 1999, under our 1998 Stock Plan;
- 2,900,000 additional shares of common stock available for issuance under
our 2000 Employee Stock Purchase Plan and our 2000 Outside Directors
Stock Plan immediately following the offering; and
- 4,375,274 shares of common stock issuable through the exercise of common
stock warrants and convertible preferred stock warrants outstanding on
December 31, 1999 at a weighted average price per share of $2.76.
For additional information regarding these shares, see
"Management -- Stock Plans," "Related Party Transactions," "Description of
Capital Stock" and Notes 2, 7 and 8 of Notes to Consolidated Financial
Statements.
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<PAGE> 27
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
common stock after this offering. Our pro forma net tangible book value as of
December 31, 1999 was $107.4 million or $1.51 per share of common stock. The pro
forma net tangible book value per share represents the amount of our pro forma
total tangible assets less pro forma total liabilities, divided by the pro forma
number of shares of common stock outstanding. Dilution in pro forma net tangible
book value per share represents the difference between the amount per share paid
by purchasers of shares of common stock in this offering and the pro forma net
tangible book value per share of common stock immediately after the completion
of this offering. After giving effect to the sale of the shares of common
stock in this offering at an assumed public offering price of $ per share,
less underwriting discounts and commissions and estimated offering expenses, our
pro forma as adjusted net tangible book value as of December 31, 1999 would have
been $ or approximately $ per share. This represents an immediate
increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution in net tangible book value of $ per
share to new investors, or approximately [ ]% of the initial public offering
price of $ per share. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share at December
31, 1999............................................... $ 1.51
Increase per share attributable to this offering.......... $
------
Pro forma as adjusted net tangible book value per share
after this offering....................................... $
--------
Dilution per share to new investors......................... $
========
</TABLE>
The following table shows, on a pro forma basis as of December 31, 1999
and after giving effect to this offering, the differences between the existing
holders of common stock and the new investors with respect to the number of
shares of common stock purchased from us, the total consideration paid to us and
the average price per share paid (based on an assumed initial public offering
price of $ per share, before deducting the estimated underwriting
discounts and commissions and estimated offering expenses) (dollars in
thousands, except per share data):
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
-------------------- ----------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.........................
New investors.................................
---------- ----- ------- -----
Total....................................
========== ===== ======= =====
</TABLE>
The discussion and table above are based on actual shares outstanding on
December 31, 1999, giving effect to the issuance of shares after December 31,
1999 and our receipt of the net proceeds. The foregoing discussion assumes no
exercise of any stock options and warrants outstanding as of December 31, 1999.
As of December 31, 1999, there were options and warrants outstanding to purchase
6,248,716 shares of common and convertible preferred stock at a weighted average
exercise price of $2.61 per share. To the extent any of these options are
exercised, there will be further dilution to investors. See "Capitalization,"
"Management -- Stock Plans," "Description of Capital Stock" and Notes 7 and 8 of
Notes to Consolidated Financial Statements.
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<PAGE> 28
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The statement of operations
data for the period from August 18, 1997, the date of incorporation, to December
31, 1997 and the years ended December 31, 1998 and 1999 and the balance sheet
data at December 31, 1998 and 1999 are derived from our consolidated financial
statements included elsewhere in this prospectus, that have been audited by
PricewaterhouseCoopers LLP, independent accountants. The balance sheet data at
December 31, 1997 are derived from our audited consolidated balance sheet not
included in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 18, 1997
(INCORPORATION) YEAR ENDED
TO DECEMBER 31,
DECEMBER 31, ------------------------
1997 1998 1999
--------------- ---------- -----------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.................................................. $ -- $ -- $ 187
Operating expenses:
Network and product costs............................... -- -- 2,080
Sales and marketing..................................... 5 252 13,571
General and administrative.............................. 335 2,018 7,842
Research and development................................ 327 4,744 16,566
Depreciation and amortization........................... 11 424 2,253
---------- ---------- -----------
Total operating expenses............................ 678 7,438 42,312
---------- ---------- -----------
Loss from operations...................................... (678) (7,438) (42,125)
Interest expense.......................................... -- (187) (1,448)
Interest income........................................... -- 35 379
Other income/(expense), net............................... -- -- (225)
---------- ---------- -----------
Net loss.................................................. (678) (7,590) (43,419)
Deemed dividend and accretion on mandatorily redeemable
convertible preferred stock............................. -- -- (16,750)
---------- ---------- -----------
Net loss attributable to common stockholders.............. $ (678) $ (7,590) $ (60,169)
========== ========== ===========
Net loss per share basic and diluted...................... $ (0.56) $ (1.39) $ (7.32)
========== ========== ===========
Shares used in computing Net loss per share basic and
diluted................................................. 1,219,538 5,471,617 8,219,183
========== ========== ===========
Pro forma net loss per share -- basic and diluted
(unaudited)............................................. $ (1.79)
===========
Shares used in computing pro forma net loss per
share -- basic and diluted (unaudited).................. 33,610,291
===========
OTHER CONSOLIDATED FINANCIAL DATA:
Net cash flows provided by (used in):
Operating activities.................................. $ (677) $ (5,356) $ (29,524)
Investing activities.................................. (303) (1,026) (9,104)
Financing activities.................................. 1,001 7,763 104,204
EBITDA (1).................................................. (667) (6,869) (37,009)
Capital expenditures(2)..................................... 303 2,830 22,196
</TABLE>
<TABLE>
<S> <C> <C> <C>
AS OF DECEMBER 31,
-----------------------------------------
1997 1998 1999
--------------- ------- -------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 21 $ 1,402 $ 66,978
Working capital (deficit)................................. 31 (1,204) 53,729
Total assets.............................................. 423 4,697 140,071
Long-term obligations, less current
portion................................................. 1,000 3,490 12,058
Mandatorily redeemable convertible preferred stock........ -- 6,671 156,020
Total stockholders' deficit............................... (677) (8,107) (48,282)
</TABLE>
- ------------------------
(1) EBITDA is the acronym for earnings before interest, taxes, depreciation and
amortization. EBITDA consists of the net loss excluding net interest,
depreciation and amortization of capital assets and deferred compensation
expense. EBITDA is presented to enhance an understanding of our operating
results and is not intended to represent cash flow or results of operations
in accordance with generally accepted accounting principles for the period
indicated and may be calculated differently than EBITDA for other companies.
(2) Total of property and equipment acquired for cash and under capital lease.
23
<PAGE> 29
For an explanation of the determination of the weighted average common and
common equivalent shares used to compute net loss per share refer to Note 2 of
Notes to Consolidated Financial Statements.
24
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Selected Financial Information and our consolidated financial statements and the
related notes included elsewhere in this prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in the forward-looking
statements as a result of certain factors including the risks discussed in "Risk
Factors" and elsewhere in this prospectus.
OVERVIEW
Our goal is to become a leading nationwide provider of broadband access
services, content and home networking services to the residential market. To
achieve this goal, we intend to utilize the technology we have developed to
deliver these services and content over a variety of methods from our nationwide
network to and throughout the home over high-speed, or broadband, connections.
These broadband connections allow our customers to enjoy content and services
that they could not access with traditional slower speed Internet connections.
We currently develop, market and deliver interactive online services and content
under the Telocity brand. We intend to enhance these services and content in the
future through our recent strategic partnership with NBC Internet, Inc., or
NBCi.
In July 1999, we began offering services commercially in Chicago. On
February 16, 2000, we were also serving customers in more than 40 metropolitan
statistical areas in the Southeast, Northeast, upper Midwest and Mid-Atlantic
states, including Miami, Atlanta, Detroit, Philadelphia and New York City. We
currently have approximately customers of which are receiving our
services and have placed orders for our services. By the end of 2000, we
expect that our targeted national rollout will cover in total approximately 150
of the nation's metropolitan statistical areas, which cover approximately 60% of
the U.S. population, including 20 of 25 most populous metropolitan statistical
areas.
Since our incorporation in August 1997, our primary activities have
consisted of:
- developing our residential broadband gateway technology;
- obtaining space and locations for our network equipment;
- deploying and installing our network;
- developing and integrating our operational support system and other back
office systems;
- negotiating and executing network agreements with traditional telephone
companies and new competitive carriers;
- launching service in target markets;
- developing a marketing and branding strategy;
- building our customer service organization;
- negotiating agreements for broadband content;
- hiring management and other personnel; and
- raising capital.
We have incurred operating losses, net losses and negative earnings before
interest, taxes, amortization of stock-based compensation, depreciation and
amortization, or EBITDA, for each month since our formation. As of December 31,
1999, we had revenues of $187,000 and an accumulated deficit of $68.4 million.
We intend to increase substantially our capital expenditures and will incur
higher operating expenses in an effort to build our customer base and our brand
rapidly, as well as expand our infrastructure and network services. We expect to
incur substantial operating losses, net losses and negative EBITDA as we expand
our operations.
25
<PAGE> 31
We incur network and product costs, sales and marketing expenses and
capital expenditures when we enter a new market. Once we have developed our
network in a market, we incur incremental expenditures as we connect new
customers. These incremental expenditures primarily include local access costs
and gateway device costs. In addition to the capital expenditures, we will be
required to fund our operating and cash flow and working capital deficits as we
build our customer base.
RESULTS OF OPERATIONS
Revenues. Initially, we expect to derive a majority of our revenues from
broadband access services. We bill our customers a monthly rate for our
services. In the future we expect to bill our customers for monthly recurring
charges based on the type of access speed and services and content selected by
the customer. We offer our services directly to our customers. In addition to
monthly service fees, our customers are billed for nonrecurring service
activation, gateway and installation charges. To encourage potential customers
to adopt our services, we may in some instances offer reduced monthly prices for
an initial period of time or reduced service activation, gateway, or
installation charges.
As our business develops and we begin to offer additional value-added
services and content, we expect to become less dependent on broadband access
revenues. By providing additional services and content, we expect to enhance our
overall gross margins by adding additional revenues with minimal incremental
fixed costs. We also believe that these additional services will enable us to
build customer loyalty and minimize customer turnover.
We seek to price our services competitively in each market. We typically
enter into a customer service agreement and offer service for $49.95 per month
with no additional per-minute usage charges, a $99 activation fee which may be
waived or modified in selected circumstances. We also charge a $199 cancellation
fee to customers who cancel their subscription before they have paid for a full
year of service. The customer agreement also provides information on
commencement of the service, billing payments, pricing, system requirements and
service termination. During the past several years, market prices for many
telecommunications services have been declining. We expect that, as a result of
competition, prices for broadband access will decline over time. However, we
intend to provide additional value-added services and content to our customers
so as to maintain and potentially increase our price levels.
Our future financial performance and our ability to achieve positive
operating cash flow will depend on a number of factors, some of which we cannot
control. We believe that improvements in our financial performance depend
largely on our ability to:
- deploy our network rapidly and cost-effectively;
- provide high quality services at competitive prices;
- offer additional value-added services and applications;
- acquire customers in a cost-effective manner;
- attract qualified personnel;
- minimize customer turnover;
- manage increased sales and marketing and general and administrative
expenses; and
- identify and integrate the necessary administrative and operations
support systems to manage our growth effectively.
Network and Product Costs. Our network expenses consist of nonrecurring
and monthly recurring charges for the transport elements we choose to lease
rather than own. As we expand our network and our revenue base, we expect that
these costs will increase significantly in the future. Nonrecurring network
expenses include installation fees related to transport and local loop circuits.
We expect these costs will be largely related to the activation of new
customers. Monthly recurring network expenses include transport and backbone
fees, facility rent, power and other fees charged by incumbent carriers,
competitive carriers
26
<PAGE> 32
and other providers. As our customer base grows, we expect the largest element
of network expenses to be carrier charges for local access, which are
approximately $35 per customer per month, depending on the provider, location
and type of local access connectivity. Product costs will be incurred as our
business develops and we begin to offer additional value added services and
content.
Sales and marketing expenses. Our sales and marketing expenses consist
primarily of expenses related to the acquisition of customers and the
development of promotional materials, advertising and branding. We expect that
our marketing expenses will grow significantly as we enter new markets and offer
our services on a nationwide basis.
General and administrative expenses. Our general and administrative
expenses consist primarily of costs related to personnel, customer service,
finance, administrative services, recruiting and legal services. We expect that
our general and administrative costs will grow significantly as we expand our
operations. However, we expect these expenses to decline as a percentage of our
revenue as we build our customer base and the number of customers connected to
our network increases.
Research and development expenses. Research and development expenses
consist primarily of costs related to engineering personnel engaged in research
and development activities, and, to a lesser extent, costs of materials relating
to these activities. We expense research and development costs as we incur them.
Depreciation and amortization expenses. Depreciation and amortization
expenses include: depreciation of network and computer equipment, depreciation
of furniture and fixtures, and the amortization of completed technology and
leasehold improvements. We expect depreciation and amortization expense to
increase significantly as more of our network becomes operational and as we
increase capital expenditures to expand our operations. Depreciation and
amortization is computed on a straight-line basis over estimated useful lives
ranging from two to seven years.
Interest expense. Interest expense arose as a result of our capital lease
lines, notes payable and bridge loan financing.
Stock-based compensation expenses. Stock-based compensation arose as a
result of granting stock awards to employees with purchase or exercise prices
per share subsequently determined to be below the fair values at the purchase or
grant dates. In addition, stock-based compensation arose as a result of stock
option and warrant grants to non-employees in return for services and financing
arrangements. The employee stock-based compensation is being amortized over the
applicable option vesting period (generally four years). The fair value of
non-employee options and warrant grants are amortized over the service period.
In connection with employee stock option grants during the year ended December
31, 1998 and the year ended December 31, 1999, we recorded unearned stock-based
compensation totaling $328,000 and $15.2 million, respectively. Amortization of
stock based compensation awarded to employees and non-employees was $145,000 and
$3.1 million for the periods ended December 31, 1998 and December 31, 1999,
respectively.
Taxation. We have not generated any taxable income to date and therefore
have not paid any federal income taxes since inception. We expect to generate
significant operating loss carryforwards. Use of our net operating loss
carryforwards may be subject to limitations under Section 382 of the Internal
Revenue Code of 1986, as amended. We have recorded a full valuation allowance on
our deferred tax asset, consisting primarily of net operating loss
carryforwards, because of uncertainty regarding its recoverability.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues. During the year ended December 31, 1999, we continued the
development of our business operations, commencing commercial service in the
Chicago market in July. We recorded revenues of $187,000 during this period,
which was primarily from service and installation charges net of discounts given
to customers. We did not offer commercial services in 1998 and, as a result, did
not record any revenues in 1998.
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Network and product costs. For the year ended December 31, 1999, we
recorded network and product costs of $2.1 million. Since we did not offer
commercial services in 1998, we did not record any network and product costs in
1998. We expect network and product costs to increase significantly in future
periods as we expand our network into additional markets.
Sales and marketing expenses. Sales and marketing expenses increased from
$252,000 for the year ended December 31, 1998 to $13.6 million for the year
ended December 31, 1999 inclusive of stock-based compensation of $12,000 and
$490,000, respectively. This increase was primarily due to an increase in
advertising and promotion costs related to the launch of our broadband service
platform in July 1999. We expect sales and marketing expenses to increase
significantly as we incur additional expenses to develop our marketing program
and increase brand awareness and add personnel.
General and administrative expenses. General and administrative expenses
increased from $2.0 million for the year ended December 31, 1998 to $7.7 million
for the year ended December 31, 1999 inclusive of stock-based compensation of
$112,000 and $1.8 million, respectively. This increase was primarily due to the
addition of personnel performing general corporate and customer service. We
expect general and administrative expenses to increase as we add personnel and
incur additional expenses related to the anticipated growth of our business and
our operation as a public company.
Research and development expenses. Research and development expenses
increased from $4.7 million for the year ended December 31, 1998 to $16.6
million for the year ended December 31, 1999 inclusive of stock-based
compensation of $21,000 and $825,000, respectively. This increase was primarily
due to the hiring of additional engineers for increased research and development
activities associated with the development of our broadband platform and
associated services. We expect to continue to make substantial investments in
research and development and anticipate that these expenses will continue to
increase.
Depreciation and amortization expenses. Depreciation and amortization
expenses increased from $424,000 for the year ended December 31, 1998 to $2.3
million for the year ended December 31, 1999. This increase was primarily due to
additional capital expenditures arising from the build out of our managed
network.
Interest expense. Interest expense increased from $187,000 for the year
ended December 31, 1998 to $1.4 million for the year ended December 31, 1999
inclusive of noncash interest expenses of $12,000 and $492,000, respectively.
This increase was primarily due to increased borrowings.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO PERIOD FROM AUGUST 18, 1997
(INCORPORATION) TO DECEMBER 31, 1997
Revenues and network and product costs. There were no revenues or network
and product costs recognized for the periods ended December 31, 1997 and 1998.
Sales and marketing expenses. Sales and marketing expenses increased from
$5,000 in the period ended December 31, 1997 to $252,000, inclusive of
stock-based compensation of $12,000, for the year ended December 31, 1998. This
increase was primarily due to an increase in personnel and costs associated with
sales and marketing.
General and administrative expenses. General and administrative expenses
increased from $335,000 in the period ended December 31, 1997 to $2.0 million,
inclusive of stock-based compensation of $112,000, for the year ended December
31, 1998. These increases were primarily due to the addition of personnel
performing general corporate activities.
Research and development expenses. Research and development expenses
increased from $327,000 in the period ended December 31, 1997 to $4.7 million,
inclusive of stock-based compensation of $21,000, for the year ended December
31, 1998. This increase in research and development expenses was primarily due
to the hiring of additional engineers for increased research and development
activities associated with the development of our broadband platform and
associated services.
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Depreciation and amortization expenses. Depreciation and amortization
expenses increased from $11,000 in the period ended December 31, 1997 to
$424,000 for the year ended December 31, 1998. This increase was primarily due
to additional capital expenditures.
Interest expense. We had no interest expense in 1997. Interest expense
for the year ended December 31, 1998 was $187,000, inclusive of stock-based
compensation of $12,000, and arose from borrowings to finance our operations.
LIQUIDITY AND CAPITAL RESOURCES
From incorporation through December 31, 1999, we financed our operations
primarily through private placements of equity of approximately $149 million in
cash and promotional services, the use of operating equipment leases totaling
$14.7 million and borrowings under notes payable of $9.5 million. Principal due
under notes payable at December 31, 1999 totalled $5.4 million. The notes are
payable to Comdisco, Inc. and MMC/GATX partnership #1, are collateralized by all
tangible assets owned by the Company, bear interest at a weighed average rate of
8.65% and are repayable in installments by January 2002. We intend to use the
proceeds of this offering to pay off these notes prior to their maturity. As of
December 31, 1999, we had an accumulated deficit of $68.4 million and cash and
cash equivalents of $67.0 million.
During the year ended December 31, 1999, the year ended December 31, 1998
and for the period from August 18, 1997 (date of incorporation) to December 31,
1997 the net cash used in our operating activities was $29.5 million, $5.4
million and $677,000, respectively. This cash was used for a variety of
operating purposes, including salaries, consulting and legal expenses, network
operations and overhead expense. Our net cash used for investing activities for
the year ended December 31, 1999, the year ended December 31, 1998 and for the
period from August 18, 1997 (date of incorporation) to December 31, 1997 was
$9.1 million, $1.0 million and $303,000, respectively, and was used primarily
for purchases of property and equipment. Net cash provided by financing
activities for the year ended December 31, 1999, the year ended December 31,
1998 and for the period from August 18, 1997 (date of incorporation) to December
31, 1997 was $104.2 million, $7.8 million and $1.0 million, respectively, and
primarily came from the issuance of preferred stock and notes payable.
At December 31, 1999 we had mandatorily redeemable preferred stock with a
liquidation value of approximately $148.6 million that is redeemable at the
option of the preferred stockholders at any time on or after December 1, 2004.
Preferred stock will be converted to common stock upon the closing of this
offering.
We believe that the net proceeds from this offering, together with our
existing cash balances, will be sufficient to fund our operating losses, capital
expenditures, lease payments and working capital requirements until September
2001. We expect our operating losses and capital expenditures to increase
substantially as we expand our network. We expect that additional financing will
be required in the future. We may attempt to finance our future capital needs
through some combination of commercial bank borrowings, leasing, vendor
financing and the sale of additional equity or debt securities.
Our capital requirements will vary based upon the timing and success of
implementation of our business plan and as a result of competitive,
technological and regulatory developments, or if:
- demand for our services or our cash flow from operations varies from
projections;
- our development plans or projections change or prove to be inaccurate;
- we make any acquisitions; or
- we accelerate deployment of our network or otherwise alter the schedule
or targets of our business plan implementation.
We will be required to raise additional capital to complete our network
deployment. There can be no assurance that additional capital will be available
on terms acceptable to us, or at all. While we would
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be able to sustain some level of operations throughout 2000 absent additional
capital, including the proceeds from this offering, we would be required to
scale back significantly our operations and delay the expansion of our network.
This would have a material adverse effect on our business, financial condition
and results of operations.
YEAR 2000 DISCLOSURE
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. In order to distinguish
21st century dates from 20th century dates, the date code field needed to be
expanded to 4 digits. As a result, many companies' software and computer systems
were upgraded or replaced in order to comply with these Year 2000 requirements.
The use of software and computer systems that are not Year 2000 compliant could
have resulted in system failures or miscalculations resulting in disruptions of
operations, including among other things, a temporary inability to process
transactions, send invoices, or engage in normal business activities.
We have been able to build our internal business systems with Year 2000
compliance in mind and, as a result, to date we have not suffered any
disruptions in our systems when the expanded date code field was first used on
January 1, 2000. In addition, to date, we have not been made aware that any of
our DSL access providers, manufacturer of our gateway or any of our other
suppliers have suffered disruptions in their systems.
RECENT ACCOUNTING PRONOUNCEMENT
In March 1998, the Accounting Standards Executive Committee, or AcSEC
issued Statement of Position, or SOP, No. 98-1, Software for Internal Use, which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. We adopted SOP 98-1 on
January 1, 1999. The adoption of the SOP did not have a material impact on our
consolidated financial statements.
In April 1998, AcSEC issued SOP 98-5, Reporting on the Costs of Start-Up
Activities. This SOP provides guidance on the financial reporting of start-up
costs and organization costs. It requires the costs of start-up activities and
organization costs to be expensed as incurred. The SOP is effective for
financial statements for fiscal years beginning after December 15, 1998. We
adopted SOP 98-5 on January 1, 1999. We have not capitalized such costs, the
adoption of the SOP did not have an impact on our consolidated financial
statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
133 requires that all derivatives be recognized at fair value in the statement
of financial position, and that the corresponding gains or losses be reported
either in the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. SFAS 133, as amended,
will be effective for fiscal years beginning after June 15, 2000. We do not
currently hold derivative instruments or engage in hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 or SAB 101, Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the Commission. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. Management
believes that the impact of SAB 101 will not have a material effect on the
financial position or results of operations of the Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET INTEREST RATE SENSITIVITY
The primary objective of our investment activities is to preserve
principal while at the same time maximizing the income we receive from our
investments without significantly increasing risk. Some of the
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securities that we may invest in may be subject to market risk. This means that
a change in prevailing interest rates may cause the principal amount of the
investment to fluctuate. For example, if we hold a security that was issued with
a fixed interest rate at the then-prevailing rate and the prevailing interest
rate later rises, the principal amount of our investment will probably decline.
To minimize this risk in the future, we intend to maintain our portfolio of cash
equivalents and short-term investments in a variety of securities, including
commercial paper, money market funds, government and non-government debt
securities. In general, money market funds are not subject to market risk
because the interest paid on such funds fluctuates with the prevailing interest
rate. As of December 31, 1999, all of our cash and cash equivalents were in
money market and checking funds.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. These forward-looking
statements address, among other things:
- our platform rollout plans and strategies;
- development and management of our business;
- our ability to attract, retain and motivate qualified personnel;
- success of our strategic partnerships;
- our ability to attract and retain customers;
- the extent of acceptance of our services;
- the market opportunity and trends in the markets for our services;
- our ability to upgrade our technologies;
- prices of telecommunication services;
- the nature of regulatory requirements that apply to us, our
telecommunications vendors and competitors;
- our ability to obtain any required governmental authorizations;
- our future capital expenditures and needs;
- our ability to obtain financing on commercially reasonable terms;
- our ability to compete; and
- the extent and nature of competition.
These statements may be found in this section, in the front inside cover
of this prospectus, in the sections of this prospectus entitled "Summary," "Risk
Factors," "Use of Proceeds" and "Business" and in this prospectus generally.
We have based these forward-looking statements on our current expectations
and projections about future events. However, our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of risks facing us, including risks stated in "Risk Factors," or faulty
assumptions on our part. For example, assumptions that could cause actual
results to vary materially from future results include, but are not limited to:
- our ability to market our services successfully to current and new
customers;
- our ability to generate customer demand for our services in our target
markets;
- the development of our target market and market opportunities;
- market pricing for our services and for competing services;
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- the extent of increasing competition;
- our ability to acquire funds to expand and enhance our platform;
- the ability of our equipment and service supplies to meet our needs;
- trends in regulatory, legislative and judicial developments;
- our ability to manage growth of our operations; and
- our ability to access regions and enter into suitable interconnection
agreements with traditional telephone companies.
In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this prospectus might not occur.
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BUSINESS
BUSINESS OVERVIEW
Our goal is to become a leading nationwide provider of broadband access
services, content and home networking services to the residential market. To
achieve this goal, we intend to utilize the technology we have developed to
deliver these services and content over a variety of methods from our nationwide
network to and throughout the home over high-speed, or broadband, connections.
These broadband connections allow our customers to enjoy content and services
that they could not access with traditional slower speed Internet connections.
We currently develop, market and deliver interactive online services and content
under the Telocity brand. We intend to enhance these services and content in the
future through our recent strategic partnership with NBC Internet, Inc., or
NBCi.
We generate revenue primarily by selling monthly subscriptions that may
include activation and other one-time fees. Revenues from these services for the
year ended December 31, 1999 were $187,000. We currently offer always connected
Internet access, e-mail accounts, storage space and hosting for Web pages and
remote access to the Internet when the customer is away from home. During 2000,
we will release our next-generation gateway and will begin offering the
following additional services and content:
- Electronic commerce, entertainment and media services such as
interactive shopping, online gaming and streaming audio and video
utilizing a full suite of NBCi's entertainment offerings, as well as
financial information, news and weather;
- Communication services such as virtual private networks that enable
customers to telecommute to their workplace securely from home,
voice-enabled features that allow our customers to access online
services through their phones and instant messaging and chat facilities
that allow our customers to interact with each other; and
- Utility services such as home networking of multiple computers and
electronic devices throughout a customer's home, data security systems
that protect a customer's computer from unauthorized access through the
Internet and backup services that allow customers to save data from a
home computer to a secure site outside the home.
We have developed an integrated service deployment system, our platform,
which delivers these broadband online services from our nationwide network
directly to our customers' homes. From a customer's perspective, the first
component of our platform is our proprietary residential gateway. The gateway is
a unique hardware device that combines a digital subscriber line modem, home
networking router, multiple connection ports and network monitoring software.
Our customers can conveniently install the gateway themselves simply by plugging
it into their personal computers, which allows them to connect directly to our
network and the Internet through their telephone lines. This simple,
self-installable plug-and-play solution allows us to connect large numbers of
residential consumers to our network. Once connected to our network, our
customers do not need to dial-up and wait to establish a connection each time
they want to gain access to the Internet or any of the other services we offer;
instead, their connections are always active -- and at speeds up to 50 times
faster than traditional dial-up Internet access.
In addition to our gateway and our network, our service deployment
platform consists of our user interface software, our customer care and support
services and our automated billing and provisioning systems. We designed our
platform so that we can offer a growing suite of services that we can remotely
configure from our network operations center to address each customer's
preferences. We believe our platform allows for the rapid addition of customers
while minimizing our associated costs and overhead.
We have designed our service deployment platform to be flexible and
expandable. Currently, consumers may receive broadband connections to their
household through a number of local access technologies, commonly referred to as
last-mile technologies, including digital subscriber line technology, or DSL,
cable access, wireless access, and satellite access. Each of these local access
broadband technologies delivers connections much faster than traditional dial-up
Internet connections. Although we
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<TABLE>
<S> <C> <C> <C>
</TABLE>
currently deliver our services to our subscribers using DSL technology, we are
not limited to DSL. Indeed, we have the capability to configure our gateway
easily to support all major residential broadband access technologies. We will
choose the most reliable, flexible and cost-effective broadband access
technology available in each local market as we expand our services nationwide.
In July 1999, we began offering services commercially in Chicago. On
February 16, 2000, we were also serving customers in more than 40 metropolitan
statistical areas in the Southeast, Northeast, upper Midwest, and Mid-Atlantic
states, including Miami, Atlanta, Detroit, Philadelphia and New York City. We
currently have approximately customers of which are receiving our
services and have placed orders for our services. By the end of 2000, we
expect that our targeted national rollout will cover in total approximately 150
of the nation's metropolitan statistical areas, which cover approximately 60% of
the U.S. population, including 20 of the 25 most populous metropolitan
statistical areas. As part of providing our services, we have entered into
agreements with BellSouth, Bell Atlantic, SBC, MCI WorldCom, Level 3
Communications and Rhythms NetConnections for Internet access, data transmission
and other infrastructure necessary for our network to operate. We anticipate
signing additional agreements with other regional and national
telecommunications providers over the next several months.
In December 1999, we formed a strategic relationship with NBCi and its
subsidiaries, XOOM.com and Snap.com. Our agreements provide for the joint
development and design of services and content under the brand name of each
company such as entertainment, electronic commerce, gaming, search applications
and other features designed for use exclusively by broadband users. Our
customers will be able to utilize these online services through a Web portal
that we are developing jointly with NBCi. As part of these agreements, NBCi and
its affiliates, GE Capital, NBC and ValueVision, purchased approximately %
of our stock outstanding prior to this offering for $70.5 million, which
consisted of $37.5 million in cash and $33.0 million in promotional advertising
at discounted rates. In addition, after the commercial launch of the Web portal
which is scheduled for release in 2000 we have each agreed to share a portion of
the revenues generated from services, advertising and electronic commerce
activities offered through the portal, including the services we currently
offer.
Our senior management team has extensive experience in consumer,
telecommunications and technology businesses. Our President and Chief Executive
Officer, Patti Hart, was previously the President and Chief Operating Officer of
Sprint Corporation's Long Distance Division. Peter Olson, our Executive Vice
President and Chief Technical Officer, co-founded and was Chief Technical
Officer of Octel Communications. Edward Hayes, our Executive Vice President and
Chief Financial Officer, was previously the Chief Financial Officer of Lucent
Technologies, Inc.'s Global Service Provider Business. Jim Morrissey, our
Executive Vice President and Chief Marketing Officer, was an Executive Creative
Director and Executive Vice President for Grey Advertising.
As of January 31, 2000, our sponsors had invested approximately $149
million in cash and promotional services in connection with issuances of our
capital stock. Our sponsors include NBCi; NBC; GE Capital Equity Investments;
ValueVision International; August Capital; Bessemer Venture Partners; Mohr,
Davidow Ventures; RRE Investors, LLC; Bessemer Holdings, L.P.; Comdisco, Inc.;
Quantum Industrial Partners LDC; and Soros Fund Management LLC.
MARKET OPPORTUNITY
We believe that a substantial business opportunity exists as a result of
the following factors:
- large, growing and underserved market;
- large and unmet demand for residential high-speed Internet connections;
- growing demand for broadband enabled services and content;
- emergence of DSL and other broadband local access technologies; and
- regulatory change that is contributing to the increase in cost-effective
broadband local access.
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Large, Growing and Underserved Market
The Internet is experiencing significant growth and is emerging as a
global medium for communications, entertainment and commerce. According to IDC,
from 1999 through 2003, the annual growth of U.S. households with Internet
access is projected to be 16%, with over 65 million users by the end of 2003. To
date, most of this growing market has been served by Internet service providers,
many of which simply provide narrowband Internet access with limited features
and customer service. We believe that residential users will increasingly demand
advanced telecommunications services and content from a provider that can offer
broadband access, integrate these services for the customer and provide high
quality customer care and support.
Large and Unmet Demand for Residential High-Speed Internet Connections
Demand for high-speed Internet connections is fueled by the demand for
data and Internet services and content. However, unlike business users,
residential users are generally limited to relatively slow dial-up modems or
integrated services digital network, or ISDN, lines to access the Internet and
remote local area networks. For example, according to Jupiter Communications,
97.2% of consumer online subscriptions currently utilize dial-up connections.
Traditional dial-up modems create a bottleneck for the end-user because the data
transfer capacity of the fastest commercially available dial-up modem is only 56
kilobits per second, while the maximum capacity of an integrated services
digital network line is 128 kilobits per second. In addition, although
integrated services digital network technology provides improved capacity
relative to dial-up modems, the cost and complexity of integrated services
digital network connectivity is often prohibitive. As a result, most consumers
spend significant time inefficiently waiting for data transfer during the
dial-up process and once they are online. These access limitations have created
a significant opportunity to provide cost-effective, broadband value-added
communications services to home users, whom we believe increasingly demand the
type of high-speed Internet performance to which many have become accustomed in
the workplace.
Growing Demand for Broadband Enabled Services and Content
Much of the growth of the Internet is expected to result from increased
consumer demand for bandwidth intensive e-mail, electronic commerce and
streaming audio and video services, as well as entertainment and productivity
enhancing services. According to industry sources, it is estimated that data
traffic will exceed voice traffic by a factor of 30 by 2003. IDC predicts that
consumer purchases of goods and services over the Internet will increase from
$26 billion in 1999 to approximately $119 billion in 2003. Additionally,
according to Forrester Research, consumer devices with enhanced feature sets
including Internet access, or ePliances, are expected to reach more than 25
million households in five years. As consumers continue to expand their usage of
advanced services and content provided by the Internet, broadband access and
associated services will become increasingly important to serve their needs.
Emergence of DSL and Other Broadband Local Access Technologies
DSL technology has emerged as a cost-effective means of providing
high-speed, digital communication capabilities. According to IDC, the total DSL
capable access lines in the U.S. will grow from an estimated 20.8 million in
1999 to 67.2 million in 2003. Because DSL technology uses existing telephone
lines, a broad network deployment can be implemented rapidly. In addition to
DSL, alternative broadband local access technologies such as wireless, fixed
wireless, cable modem, fiber and satellite are being deployed nationwide. These
technologies are available to bring broadband Internet content and associated
services to the home.
Regulatory Change that is Contributing to the Increase in Cost-Effective
Broadband Local Access
The Telecommunications Act of 1996 has fostered competition among the
suppliers of broadband local access connections, such as DSL, provided by
traditional and competitive carriers. In the past, a limited number of
traditional telephone companies controlled the telephone lines and facilities
that were
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available to provide broadband connections to homes. The Telecommunications Act
requires the traditional telephone companies to make these lines and facilities
available to new competitive telephone companies so that these carriers may
offer competitive services including broadband connections to the home.
Broadband companies, like us, can now lease these broadband connections to the
home, commonly known as last mile connections, from either traditional telephone
companies or one of a number of these new competitive carriers. For a further
discussion of recent regulatory changes please refer to "Business -- Government
Regulation."
The Federal Communications Commission's recent decisions implementing
various portions of the Telecommunications Act, for instance its December 9,
1999 decision implementing line sharing continues to remove barriers to
competition among our suppliers. By allowing for increased competition, these
decisions should make the pricing, functionality and availability of local
access broadband connections more favorable. The FCC's policy of encouraging the
rapid availability of residential broadband and other advanced consumer
telecommunications services may also increase pressure for open competition
among the broadband technologies not yet addressed under the Telecommunications
Act, such as wireless and cable, although there can be no assurance that either
wireless or cable access will become subject to the Telecommunications Act or
similar legislation.
THE TELOCITY SOLUTION
We believe our current services address many of the residential market's
unmet data communication needs. In addition, through our broadband service
platform and our co-development activities with our partners, including NBCi, we
plan to offer our customers an appealing combination of media, entertainment and
electronic commerce services, communication services and utility services. Our
solution offers:
Broadband Enabled Services and Content
We have designed our platform to offer our customers a large and growing
suite of broadband enabled services and content. Our platform has been designed
to deploy these services effectively and at a low cost. Our current service
offerings include high-speed always connected Internet access, e-mail,
personalized Web pages and remote Internet access. As part of our future
offerings, we intend to develop content and additional broadband enabled
services in the following areas: media, entertainment and electronic commerce
services, communications services and utility services. Specifically, in 2000 we
intend to offer online gaming, streaming audio and video, interactive shopping,
chat facilities, virtual private networks, voice-enabled features, secure online
banking, home networking, home monitoring, home automation and data security,
all of which will only be available to our customers through our gateway. We
intend to develop, augment and refine our broadband enabled services and content
continually to allow our customers to improve their productivity and enhance
their broadband experience at home. In the future, these services will be
available through information appliances and other devices located throughout
the home.
Simple Plug-and-Play Deployment
We developed our service platform to be scalable, cost-effective and
convenient. Our broadband platform allows our customers to sign up through
either our Web page or our toll-free number. Via this automated signup, we
obtain a customer profile, verify service qualification, authenticate credit
information, schedule and track the provisioning of the network elements and
arrange for the shipment of our residential gateway and associated installation
software. At the installation stage, we typically avoid additional cost and
complexity because the gateway can be easily self-installed by the customer.
Additionally, the installation software configures a customer's personal
computer automatically, providing immediate access to the Internet and all of
our services. Furthermore, because we can configure a gateway in a customer's
home through our network operations center, new services and features can be
added to conform to an individual user's preferences, typically without
requiring new equipment or an on-site visit
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by a technician. The combination of these deployment features allows us to add
customers rapidly with minimal human intervention.
Flexible, Always Connected Broadband Internet Access
We have designed our platform to support the delivery of services and
content from our nationwide network to a customer's home through our gateway
over a variety of high-speed local access technologies such as wireless, fixed
wireless, cable modem, fiber and satellite. In each of our markets we will
utilize the most reliable, flexible and cost effective broadband access
technology available to deliver our services to our customers. In our current
markets, we provide our services using DSL technology over existing standard
telephone lines to deliver high-speed always connected local access to the home.
Our gateway currently supports three DSL technologies: asymmetric digital
subscriber line, or ADSL, symmetric digital subscriber line, or SDSL and G.Lite.
In the majority of our markets, we intend to use multiple providers of broadband
local access in our network infrastructure, as they become available.
Scalable Nationwide Network with Enhanced Content Delivery
We have deployed, and will continue to expand, our managed nationwide
Internet protocol-based network. In July 1999, we began offering services
commercially in Chicago. On February 16, 2000, we were also serving customers in
more than 40 metropolitan statistical areas in the Southeast, Northeast, upper
Midwest and Mid-Atlantic states, including Miami, Atlanta, Detroit, Philadelphia
and New York City. We currently have approximately customers of which are
receiving our services and have placed orders for our services. By the
end of 2000, we expect that our targeted national rollout will cover in total
approximately 150 of the nation's metropolitan statistical areas, which cover
approximately 60% of the U.S. population, including 20 of the 25 most populous
metropolitan statistical areas. Our network is designed to be reliable,
responsive and redundant to ensure effective deployment and to provide superior
service. Through our operational support system and network operations center,
we are able to monitor our service throughout the network. Our network will
implement a differentiated-services protocol which will allow either us or our
customers to prioritize the use of available bandwidth among the services we
provide. For example, a customer will be able to prioritize the viewing of video
streams over the downloading of less time-sensitive data. Additionally, we
enhance our delivery of data through our satellite-fed caching system, which
utilizes media servers connected to our network hubs. This system distributes
content rapidly and cost-effectively throughout our nationwide network.
Service Flexibility and Ease-of-Use
We designed our platform to be adaptable and responsive to the needs of
our customers. For example, the deployment, configuration and management of each
customer feature and application is fully automated, allowing for ease of
installation and use. This ease-of-use, along with our remote configuration
capabilities, enhances our ability to provide flexible service and high quality
customer care. Additionally, because the residential gateway remains connected
to our network at all times, we can directly monitor and address service needs
in a timely fashion. Finally, we have implemented comprehensive customer care
and support systems to address customers' needs that cannot be resolved
remotely.
BUSINESS STRATEGY
Our goal is to exploit our advantage as both one of the first companies to
provide residential broadband services and in our proprietary technology in
order to become a nationwide provider of choice for broadband enabled services
and content both to and throughout the home. We intend to implement the
following strategies to achieve our goal:
Capture Our Early Market Entrant and Proprietary Technology Advantage
Currently, most consumers who have Internet connections experience slow
dial-up access, non-customized narrowband content and limited customer service.
The deployment of broadband access
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technology and content addresses those limitations. However, most broadband
providers must invest significant time and capital to extend or upgrade their
network in order to provide this access technology and content to consumers. We
believe that we have a significant time-to-market advantage over those broadband
providers because our platform is designed to use any available broadband access
technology. We designed our proprietary gateway device to be fully configurable,
self-installable, interoperable with multiple technologies and easily
upgradable. In addition, because our customers can easily install our
residential gateway and because our broadband network platform is flexible, we
can add new customers rapidly on a nationwide basis.
Deliver Quality Broadband Services Both to and throughout the Home
We have designed our service deployment platform to deliver high-speed,
always connected Internet access along with associated broadband services
content such as online gaming, streaming audio and video, interactive shopping,
chat facilities, virtual private networks, voice-enabled features and secure
online banking, which are currently scheduled for release during 2000. In
addition, we intend to extend our services and applications to devices
throughout the home. For example, we designed our next-generation residential
gateway to provide home networking capabilities by allowing a customer's
personal computer and other home appliances to connect with the gateway through
wireless technology or through the existing home phone wiring. This
functionality will allow us to provide our customers with additional services to
be offered in 2000, including home monitoring, home automation and data security
features, and will allow our customers to access services from multiple
computers and other devices within the home.
Extend and Develop Strategic Partnerships
We intend to utilize our strategic partnership with NBCi, as well as other
potential strategic partnerships, to accelerate the development and enhance the
breadth and availability of our content offerings and to promote marketing and
branding of our services. Our partnership with NBCi provides for, among other
things: access to multimedia broadband content, development of new online
services and applications, co-development of the Telocity/NBCi branded portal,
promotion of brand awareness and revenue sharing. In addition, we expect to
enter into other strategic relationships both to augment our product portfolio
and to expand our distribution channels.
Expand our Direct Marketing and Branding Efforts
We intend to expand our targeted direct marketing and branding efforts to
attract additional customers. We expect to use a mix of print, direct mail,
radio, television and online advertising media specifically tailored for each
local market. We have designed this marketing program to increase the number of
customers we serve and to build an identifiable nationwide brand. In addition,
we intend to increase our revenue per customer by promoting premium value-added
services and by cross-promoting services.
Deliver High Quality Customer Service and Support
We have established a network operations center and a customer support
system in order to provide our customers with high quality service, support and
care. From our network operations center, we are able to install or upgrade
remotely a customer's desired service and to address any performance inquiries.
Our customer support system provides technical support through an automated
interactive voice response system, a live telephone support line, direct chat
system, online instructions for our product features and e-mail. These systems
enable 24-hour-a-day, 7-day-a-week proactive monitoring and management of our
entire network as well as customer service and technical support. All of these
systems have been designed with significant flexibility and scalability. We
believe that by providing high quality customer service and support we will
enhance the overall customer experience and foster customer loyalty.
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STRATEGIC PARTNERSHIP WITH NBCI AND AFFILIATES
In December 1999, we formed a strategic relationship with NBC, NBCi and
their affiliates, XOOM.com and Snap.com. Our operational agreements with NBC and
NBCi provide for, among other things:
- access to multimedia content;
- development of new online services and applications;
- co-development of the Telocity/NBCi branded portal;
- promotion of brand awareness; and
- revenue sharing.
Our operating agreement with NBCi provides for the joint development of
co-branded services, portal design, content offerings and associated software
and utilities, as well as the joint development of interfaces to deliver
services and content to other devices throughout the home. The operating
agreement also provides that NBCi will be our exclusive provider of Internet
content in the areas of utility, communications, media and entertainment. If
NBCi does not provide content that we request within these categories, we may
obtain this content from a third party other than a competitor identified by
NBCi; however, if the desired content is only available from a sole provider, we
may obtain the content from that sole provider, even if it is a competitor
identified by NBCi. By virtue of this relationship, we will be able to provide a
rich multimedia experience to our customers. Specifically, we will provide
features such as streaming audio and video, utilizing a full suite of NBCi
entertainment offerings. In addition, we intend to develop with NBCi new online
services and content for electronic commerce, gaming, search applications and
other utility features designed for broadband users. This relationship will
allow for significant time-to-market advantages for our content, services and
applications.
Under the operating agreement, we will jointly develop and design a
co-branded portal that provides our customers access to rich multimedia content.
The term of the operating agreement is 15 years, however, NBCi may terminate the
operating agreement if we become insolvent or if a competitor identified by NBCi
acquires more than a 33% interest in us and either party may terminate the
agreement for an uncured material breach. During the term of the operating
agreement, we will work with NBCi to develop a consistent user experience,
whether the customer is using the co-branded portal or other Telocity services.
We expect to extend NBCi's state-of-the-art technologies so that our interfaces
feature common elements across different devices within and throughout the home.
In connection with the operating agreement, we issued NBCi a warrant to purchase
1,039,122 shares of our common stock and NBC a warrant to purchase 850,191
shares of our Series C Preferred Stock. These warrants terminate in December
2004 and have an exercise price of $5.24 per share.
The operating agreement also provides that between December 1999 and
December 2002 NBCi will provide us with online advertising of our services
valued at $5 million. The related advertising agreements provide that between
January 2000 and January 2003 NBC and NBCi will provide us with $28 million of
promotional time on the NBC television network valued at discounted rates of
which $13 million must be used to air co-branded advertising spots.
Additionally, NBCi has agreed that until December 2002, it will not use
television within its control to promote broadband services provided by any of
the competitors we identified to NBCi. These promotional services and our
association with the NBC brand will allow us to penetrate the residential
marketplace faster and more efficiently.
We have agreed with NBCi to share a portion of the revenues that are
generated from our respective services, advertising and electronic commerce
activities provided through the co-branded portal. At the general commercial
launch of the jointly developed Telocity/NBCi interface, NBCi will pay us 40% of
net revenues received by any NBCi entity from advertising to our customers, as
well as from e-mail commerce, subscription and pay-per-view media, including
revenues derived from direct marketing e-mail solicitations to our customers and
advertising placed on the co-branded version of the Snap.com portal. NBCi will
receive 10% of the net revenues generated from subscription fees, value-added
services
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and applications for which NBCi does not offer a similar service or content. If
both parties offer similar services or content, each has agreed to pay the other
party 40% of the net revenue generated from its similar service or content.
Finally, the operating agreement provides that we will pay NBCi 40% of the net
revenues generated from the placement of content provided by third parties.
For a further discussion of our strategic relationship with NBCi please
refer to "Related Transactions -- Strategic Relationship with NBCi and
Affiliates."
SERVICES AND CONTENT
Our platform is capable of delivering a comprehensive suite of broadband
services and content, including high-speed Internet connections and related
value-added services to residential customers through a variety of local access
technologies.
We seek to price our services competitively in each of our markets. We
typically enter into a customer service agreement and charge a monthly fee for
high-speed Internet access with no additional per minute charges. The customer
service agreement also provides information on commencement of the service,
billing, payments, pricing, system requirements and service termination. Our
service currently provides data transfer speeds ranging from 144 kilobits per
second to 1.5 megabits per second; however, we are capable of providing service
at data transfer speeds up to 7.5 megabits per second. The speeds we offer in
any given market are based upon the speed of connectivity we purchase from our
local access provider. Additionally, our platform allows our ADSL customers to
use a single phone line for multiple purposes at once, so that a customer may
have a voice conversation, browse the Internet and download information
simultaneously, thereby eliminating the need for a second phone line.
A customer who subscribes to our service receives our residential gateway
device that, in addition to providing high-speed Internet access, allows us to
provide services and content, including:
- Always Connected Broadband Access. This feature eliminates many
disadvantages of dial-up connections, including busy signals and the
slow dial-up process. Always connected broadband access to the home
significantly enhance various customer-configured information services,
such as instant messaging, e-mail and content related services featuring
information such as stock quotes, real time news, sports and weather.
- Unlimited Access. We provide our customers unlimited access to the
Internet and our services with no per-minute usage charges.
- E-Mail Accounts. We provide our customers three e-mail accounts as part
of our service. If our customers require additional e-mail accounts, we
can provide them for a minimal additional charge.
- Personalized Web Pages. Our service provides up to 10 megabytes of
storage space for each customer to store e-mails or design and host
individual Web pages.
- Remote Access. Our service allows our customers to access the Internet,
their e-mail accounts and other services remotely by using a toll-free
dial-up connection. We provide this service to our customers at no
additional charge for the first 60 minutes of use each month and charge
an incremental fee for each additional minute. This remote access
feature ensures that our customers will be able to connect to the
Internet away from home.
The flexible architecture of our platform enables us to add new functions
and features. Some of these new functions and features will be offered through
upgrades or the addition of new technology to our networks while others will
require the utilization of our next-generation residential gateway, which we
expect to release during 2000. The following are several value-added services
and functions that are currently under development:
- Data Security Systems. We intend to have embedded data access intrusion
detection and prevention technology that will enable us to configure and
monitor a customer's firewall through
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our Operational Support System. This process will be accomplished
without any intervention required on the part of a customer. As a
result, a customer without technical expertise will be able to request
protection through our advanced security and firewall services.
- Backup Services. Through our platform we intend to offer secure backup
of the data located on a customer's personal computer. This feature
allows our customers to backup data automatically to a secure remote
site. We believe this feature is more cost-effective than substitutes
such as tape and disk drives, and has the additional protection of being
stored offsite.
- Virtual Private Networks. Through our platform we intend to automate
and manage virtual private networks for customers who wish to
telecommute to their workplace from home utilizing high-speed access.
Virtual private networks provide a convenient and secure remote access
capability allowing customers secure access to third party networks for
services such as telecommuting, electronic commerce and online banking.
Our next software release for our residential gateway includes
standards-based functionality and encryption technology that will
automate delivery of virtual private networks service.
- Home Networking. Our next-generation broadband gateway will be
compatible with, and able to communicate with, peripheral devices and
products through in-house wiring and wireless technology. These devices
will include flat panel displays, additional personal computers,
cellular phones and personal digital assistants. This feature will allow
our customers to have Internet access from, and distribute information
to, multiple locations within their homes. Different members of the same
family will be able to browse the Internet simultaneously at different
personal computers in their home while digitally displaying other
information elsewhere in their home.
- Home Monitoring and Automation. Because our service is always
connected, the gateway provides a simple home monitoring and automation
solution. This functionality can give the customer, among other things,
a secure password protected Web page where the customer can access
images from a gateway-connected video camera anytime and from remote
locations. The gateway can also be utilized to manage other devices
throughout the home, including lights, thermostats and other electronic
devices.
- Voice Enabled Features. Through our network, our customers will be able
to access a portion of our services through their phones or through
gateway enabled voice over Internet protocol functionalities. This
feature will include access to services via voice, such as e-mail or
home automation controls. Likewise, the gateway can automatically report
problems to our customer care and support system through the standard
circuit-switched voice line.
- Telocity/NBCi Services and Content. We intend to provide rich
multimedia broadband content and to facilitate secure online
transactions and services for our customers. We expect that the
Telocity/NBCi portal will initially emphasize media, entertainment and
electronic commerce services such as online gaming and interactive
shopping; communication services such as chat facilities; and utility
services such as secure online banking. We will provide features such as
streaming audio and video, utilizing a full suite of NBCi's
entertainment offerings, as well as financial information, news and
weather.
We intend to take advantage of our broadband platform and strategic
partnerships to deliver additional value-added services and content. Our goal is
to capitalize on our early market entrant advantage in the residential broadband
services market and our proprietary technological advantage in our gateway
device to become the provider of choice for broadband enabled services and
content both to and throughout the home.
THE TELOCITY BROADBAND PLATFORM
We designed our broadband platform to provide reliable, high-performance
Internet access and to alleviate Internet bottlenecks through an easily deployed
scalable architecture with end-to-end network
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management capabilities. Through our platform we offer a large and growing suite
of services and content that we can remotely configure to each customer's needs.
Our broadband platform consists of the proprietary residential gateway device,
our managed network, our user interface software, our customer care and support
services and our automated billing and provisioning systems.
Our Residential Gateway
We believe that customers find our broadband service easy to use primarily
because of the proprietary device we refer to as our residential gateway. The
gateway combines a DSL modem, a home networking router, multiple connection
ports and network monitoring software in a device that simplifies installation,
customer support and service upgrades. The residential gateway is a standalone
unit that operates independently of the computer's operating system and that
does not require a network interface card to be installed in the computer.
We believe the current version of our residential gateway is the first
integrated device that provides all of the following features:
- always connected, high-speed broadband access to the Internet without
the need to establish a dial-up connection;
- flexible personal computer connectivity with parallel, Ethernet and
universal serial bus, or USB, ports;
- Web-based service management and configuration by the customer;
- Web-based access to account and service information by the customer;
- automated gateway software downloading, which facilitates delivery of
advanced application and service offerings;
- a self-installable, fully configurable modem that is interoperable with
industry standard DSL technologies for asymmetric digital subscriber
line, or ADSL, symmetric digital subscriber line, or SDSL, and G.Lite;
and
- speeds from 144 kilobits per second to 1.5 megabits per second for SDSL,
and up to 7.5 megabits per second for ADSL.
We are currently developing our next-generation gateway which we expect to
release during the first half of 2000. This device will support two individual
phone lines and incorporate several new hardware components that will enable us
to offer additional advanced features and functions. For example, we are adding
technology that will enable home networking through existing telephone wiring,
wireless home networking, home monitoring and automation and will facilitate
voice-enabled services.
Our Managed Network
We have based our network architecture on the operational goals of
responsiveness, reliability and redundancy. Our network begins with the
connection of a customer's personal computer, or home network of computers, to
our residential gateway. In our current markets the connection to the customer
is routed to DSL equipment owned either by the local telephone company or by a
competitive local exchange carrier and located in the local central office. In
the future, we expect our local access connectivity to utilize a variety of
local access technologies in addition to DSL, including wireless and cable
solutions. We aggregate our customer traffic through dedicated circuits into our
local metropolitan hubs currently located in: Atlanta, Miami, Orlando, Los
Angeles, Dallas, McLean (Virginia), New York City, Chicago, Denver,
Philadelphia, Boston and San Diego. These dedicated circuits are located in
secure data-centers where we lease facilities from our carrier partners. Between
our metropolitan hubs, our customer traffic travels on our managed high-speed
backbone. Our backbone is interconnected to the Internet and to other network
providers at Internet exchange points via private and public peering
arrangements. Network peering is the
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process of connecting to other networks at the closest point, thereby ensuring
the least number of connection points in the delivery of data.
Our network has been designed to be secure and reliable. We provide
network monitoring and management 24-hours-a-day, 7-days-a-week from our network
operations center in Cupertino, California. We have engineered our network to
minimize the likelihood of service interruptions via our redundant OC-3
backbone. This secure fiber backbone link has the capacity to transmit 145
megabits of data per second in two directions throughout the network. We intend
to upgrade the transmission capacity of this backbone as dictated by our
customers' requirements to ensure that we continue to provide best-in-class
service. If a failure occurs in either of these fiber links, the other link will
transmit the data with no service loss to our customers. In addition, we have
configured our network to have two domain name system servers and two e-mail
servers in each metropolitan hub. If any of these servers are down, our network
will automatically deliver data to the closest server that is functioning.
Furthermore, we place the Internet protocol addresses for domain name system
servers and e-mail servers on switches that redirect traffic to the nearest
available server.
In order to improve network performance and minimize both delays and
bandwidth availability problems, we move data closer to our customers. We have
implemented this strategy by developing a network architecture that uses Inktomi
technology and Cacheflow caching servers customized for use with our network.
These caching servers are connected not only via the Internet but also via our
satellite content feeds. Additionally, our network directs each customer's data
request to the closest available server containing the requested content,
service or application. This close proximity enhances the delivery of data to
our customers.
Our network design anticipates that not all data is equally important to a
customer or requires the same urgency for delivery. In most cases, data is
transmitted across the Internet on a first in, first out basis. However, to
prioritize time-sensitive or other high priority data traffic our network will
implement a differentiated services protocol from the customer's gateway across
our nationwide network. This differentiated services protocol will allow either
us or our customers to prioritize the use of available bandwidth among the
services we provide. For example, our network will identify less time-sensitive
traffic, such as file transfer protocol, and then prioritize this data delivery
based upon a customer's, or content provider's, preference.
Our User Interface Software
We believe that customers will use our services more frequently and more
effectively if we create an easy-to-use interface that is common to all of our
services. We therefore agreed with our strategic partner NBCi to co-develop a
consistent user experience across all of our combined services. Initially, this
will result in a common user interface whether the customer is using the
co-branded portal or other Telocity services. In the future along with NBCi we
intend to expand this interface capability to other devices beyond the personal
computer, such as televisions, flat panel displays and other information
appliances.
Our Customer Care and Support Services
A high level of continuing service and support is critical to our
objective of developing long-term customer relationships. We emphasize customer
service and technical support to provide our customers with the knowledge and
resources to utilize our online services and content successfully.
We offer customer support 24-hours-a-day, 7-days-a-week. We believe it is
critical to our success to have available the resources necessary to support our
customers through the entire enrollment and fulfillment process, a vital
formative period in each customer's relationship with us. We focus on pre-sales,
loop qualification, technical assistance, phone company provisioning, gateway
shipment and billing to address our customers' needs. Our objective in serving
our customers is to have enough customer service consultants to ensure that our
customers are not placed on hold when they need assistance.
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We employ Telamon-IMS Corporation, a subsidiary of Telamon Corporation, an
experienced company in telecommunications provisioning, as our pre-sales and
enrollment group. Telamon has the ability to scale as our needs for consultants
change. We also employ Sutherland, a technical support help center company, to
respond to and assist our customers with technical issues. Sutherland's call
center processes, technical expertise and scalability help us to provide our
customers with real-time assistance. Telamon and Sutherland ensure that there is
ample coverage during peak hours regardless of where our customers live.
In addition to supporting our customers, Telamon and Sutherland also
assist us in actively monitoring and reviewing customer calls. We combine this
feedback with comments we receive directly, including through our Website, to
address and prevent the recurrence of problems experienced by our customers. We
have our own in-house customer care staff that helps to service the more complex
needs of our customers. We also have a customer recovery unit to address
critical complaints that cannot be solved by Telamon or Sutherland. We have also
implemented an internal technical support unit that responds to technical
difficulties that cannot be resolved by Sutherland. We believe these initiatives
will reduce customer turnover and will increase customer satisfaction. We
actively monitor comments by customers and respond by incorporating their
suggestions into our customer care policies.
Our Automated Billing and Provisioning Systems
We have built our platform to perform metering and billing tasks in the
gateway. This functionality allows us to automate, monitor and conveniently bill
for each customer's services and products with minimal human intervention. This
functionality and minimal human intervention also provides us with scalability
for a number of services. We intend to expand the metering and billing
functionality as a part of our strategic relationship with NBCi.
We developed our billing and provisioning system as a customer focused,
Web-enabled process that ties together all of our customer related processes,
including sales, customer service, marketing, billing, accounting, loop
qualification and order fulfillment. Using our automated back office process,
customers can subscribe to a service without the intervention of a service
representative. Once an order has been placed, the customer information is
disseminated in real-time to all of our key information technology systems. This
reduces costs and helps eliminate service errors. In addition, this real-time
information system provides us with a significant competitive advantage because
it helps us offer new services quickly and respond to changes in our market.
SALES AND MARKETING
Our key sales and marketing objective is to be the leading provider of
broadband services and content to residential customers.
We intend to leverage our platform to capitalize on multiple methods to
attract customers. We are currently undertaking a targeted direct marketing
effort and are formulating private label programs with distribution partners.
Our targeted direct marketing and branding effort uses a mix of print, direct
mail, radio, television and online advertising media specifically tailored for
each local market. We do not employ a salesforce in this marketing effort. We
also attract customers by offering our services and content to partners under
private label programs. Through these programs we will provide all aspects of
the service including use of the network, ordering, installation, billing,
customer care and the delivery of the gateway. A small salesforce is supporting
this distribution method.
SUPPLIERS AND VENDORS
Our engineers are responsible for prototype development of our residential
gateway. However, we outsource the manufacturing of the gateway. Our
manufacturing partner provides materials planning and procurement, final
assembly, testing and quality control under our supervision. Our manufacturing
process enables us to configure our products to meet a wide variety of customer
requirements and respond to future technological and industry developments. We
currently employ Wellex Corporation as the sole
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contract manufacturer of our gateway, but we are in negotiations so that we can
increase the number of manufacturers in the near term.
COMPETITION
The business of broadband and Internet services is highly competitive with
frequent new market entrants, many of whom may be rivals. The principal bases of
competition in our markets include:
- price;
- performance, including breadth of service availability, reliability of
service;
- ease of access and use;
- network security;
- availability and desirability of content;
- customer support;
- brand recognition and market penetration; and
- capital resources.
We anticipate that over the next few years the high-speed broadband market
will become increasingly commoditized, thereby standardizing the price of
broadband access. We believe that those providers who will differentiate
themselves will do so on the basis of value-added services.
We believe America Online, especially after its announced merger with Time
Warner, and Excite@Home represent our most direct source of competition and that
we will face direct and indirect competition from:
- providers of online services;
- Internet service providers;
- cable modem service providers;
- interactive television providers;
- Internet portal or content sites;
- telecommunications service providers;
- wireless and satellite service providers; and
- consumer electronics and appliance manufacturers.
Online Service Providers
Online service providers include companies such as AOL, currently in the
process of merging with Time Warner, Excite@Home, MSN and WebTV, both
subsidiaries of Microsoft. These companies provide services and content over the
Internet and on proprietary online services ranging from news and sports to
video conferencing. In addition, these companies provide Internet connectivity,
ease-of-use and consistency of environment, especially through the development
of their own access networks. After its merger with Time Warner, AOL will have
access to content for its broadband access customers similar to the services we
will provide.
Internet Service Providers
Internet service providers include both national and regional providers,
independent Internet service providers and Internet service providers affiliated
with a telecommunications carrier or a data-centric competitive carrier.
Internet service providers such as Earthlink Networks, which is in the process
of
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acquiring another Internet services provider, Mindspring, Concentric Network,
which is being acquired by Netlink, Verio, Flashcom and PSINet provide Internet
access to residential customers, generally using the existing telephone network.
Many Internet service providers have begun offering DSL-based services.
These competitors have traditionally distinguished themselves from the
online service companies because they provide only Internet access rather than a
collection of proprietary content and services. This distinction has diminished
recently because major online services companies also offer access while many
portal sites actively compete for the chance to provide proprietary content
services to the subscribers of major Internet service providers. Of the
thousands of Internet service providers in the United States, the majority are
relatively small, localized providers.
Cable Modem Service Providers
Providers such as Excite@Home, High Speed Access, SoftNet and RoadRunner
and their respective cable partners are deploying high-speed Internet access
services over hybrid fiber coaxial cable networks. In addition, AT&T in
connection with its acquisition of TCI and Media One has announced that it
intends to become a cable modem service provider as well. Where deployed, these
networks provide similar speed, and when handling a limited amount of traffic
higher speed, Internet access than we provide through DSL. A number of cable
modem service providers have existing local and regional monopolies in their
service markets. In addition, cable modem service providers and their partners
have more direct ties to desirable traditional media and entertainment content,
as well as the size and financial resources to execute exclusive deals for this
content.
Interactive Television Providers
Several companies are developing technologies relevant to interactive
television. For example, Wink and Liberate are software developers that are
working to create interactive television solutions. Microsoft has been active in
many areas of interactive television. Microsoft's wholly-owned subsidiary,
WebTV, offers set-top boxes with Internet access, interactive program listings
and simultaneous television and Internet usage. EchoStar offers WebTV to its
subscribers. Microsoft has also acquired equity interests in several network
operators. These investments give Microsoft influence in the network operator's
choice of interactive software. With its financial, technical and marketing
resources, Microsoft will be a strong competitor in the market for interactive
television operating systems. In addition, many of these companies are working
on standards for interactive television, and we do not know whether our products
will be compatible with the standards developed in the future.
Internet Portal Sites
Internet portal sites such as Yahoo! and Lycos are specialized Websites
that offer an aggregation of content and services either directly or through
hyperlinks to other sites. Internet portal sites typically offer search engines,
navigational aids, directories, chat facilities, classified ads, message boards,
e-mail and other customized content and services. Many sites derive a majority
of their revenues from the display of advertising on the site, but may also
generate revenue from product promotions or redirection of Internet traffic from
the portal to specific sites.
Wireline Telecommunications Service Providers
Telecommunications service providers, including competitive
telecommunications companies, traditional telephone companies, and traditional
and new long distance carriers all pose competition to us because many currently
offer DSL services.
- Traditional Telephone Companies. All of the largest traditional
telephone companies in our target markets have begun offering DSL
services or have announced their intention to provide DSL services in
the near term. The traditional telephone companies have an established
brand name in their service areas, possess sufficient capital to deploy
DSL equipment rapidly, own the local lines themselves and can bundle
digital data services with their existing voice services to
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<PAGE> 52
achieve economies of scale in serving their customers. Certain of the
traditional telephone companies have aggressively priced their consumer
DSL services as low as $30-$40 per month, placing pricing pressure on
our service.
- Competitive Telecommunications Companies. Many competitive carriers
such as Covad, Rhythms NetConnections and NorthPoint Communications
offer high-speed DSL based services. Companies such as RCN, McLeodUSA
and some subsidiaries of utility companies currently offer or are
beginning to offer voice and data service to the residential market.
- National Long Distance Carriers. Interexchange carriers, such as AT&T,
Sprint and MCI WorldCom, who have announced an agreement to merge, GTE
and Qwest, which is in the process of acquiring U S West have deployed
large-scale Internet access and ATM networks, sell connectivity to
businesses and residential customers, and have brand recognition. They
also have interconnection agreements with many of the traditional
telephone companies and a number of spaces in central offices from which
they are currently offering or could begin to offer competitive DSL
services.
Wireless and Satellite Telecommunications Service Providers
Wireless and satellite telecommunications service providers utilize
wireless and satellite-based networks to provide Internet connectivity. We may
face increasing competition from terrestrial wireless services, including 2
Gigahertz (Ghz) and 28 Ghz wireless cable systems (multi-channel multipoint
distribution system and local multipoint distribution system), and 24 Ghz and 38
Ghz point-to-point microwave systems. For example, the FCC has adopted new rules
to permit multi-channel multipoint distribution system licensees to use their
systems to offer two-way services, including high-speed data, rather than solely
to provide one-way video services. The FCC also recently auctioned spectrum for
local multipoint distribution system services in all markets. This spectrum is
expected to be used for wireless cable and telephony services, including
high-speed digital services. The FCC has announced that it plans to auction off
additional spectrum from time to time for other wireless services. In addition,
companies such as Teligent Inc., Advanced Radio Telecom Corp. and WinStar
Communications, Inc., which are targeted to the business market hold
point-to-point microwave licenses to provide fixed wireless services such as
voice, data and videoconferencing. We also may face increasing competition from
satellite-based systems. Motorola Satellite Systems, Inc., Hughes Communications
(a subsidiary of General Motors Corporation), Teledesic and others have filed
applications with the FCC for global satellite networks which can be used to
provide broadband voice and data services, and the FCC has authorized several of
these applicants to operate their proposed networks.
Consumer Electronics and Appliance Manufacturers
Our broadband platform will support a number of consumer electronic
devices and appliances, including cellular phones, flat panel displays and
personal digital assistants. Consumer electronics companies and manufacturers of
appliances may, in the future, decide to compete with us by bundling their own
software with their hardware products, or by entering into exclusive alliances
with a competitor. In both instances, they might create products that are
incompatible with our systems.
NETWORK AGREEMENTS
The gateway used by our customers is connected to a telephone line and
from there to DSL equipment. This equipment is owned by the traditional
telephone company or the new competitive carrier and is located in the local
central office. We currently have agreements for DSL connectivity with ACI
Corp., a subsidiary of Rhythms NetConnections, Inc., BellSouth, Bell Atlantic
Network Services and Southwestern Bell, Pacific Bell and Nevada Bell.
In June 1999, we entered into a one-year provisioning agreement with ACI
Corp. for DSL lines and connections between our points of presence and ACI Corp.
in the metropolitan Chicago area. This agreement is non-exclusive and gives us
the right to purchase services or products from other providers for
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<PAGE> 53
the Chicago area, although we must offer to purchase certain products and
services from Rhythms first on the same terms. The agreement provides that we
may purchase up to 3,000 lines at costs fixed in the agreement.
In September and October 1999, we entered into a number of non-exclusive
agreements with BellSouth. We entered into a market development agreement with
BellSouth Business Systems, Inc. in which we agreed to market asymmetrical
digital subscriber line service in areas in which BellSouth has asymmetrical
digital subscriber line service available. We also entered into a series of
agreements with BellSouth Telecommunications, Inc. in which we agreed to
purchase asymmetrical digital subscriber line and related telecommunications
services from BellSouth pursuant to its FCC tariffs. The commitments and terms
of our agreements for telecommunications services are for 36 months.
In September 1999, we entered into a five-year agreement with Bell
Atlantic Network Services, Inc. to purchase asymmetrical digital subscriber line
services pursuant to Bell Atlantic's FCC tariffs. In October 1999, we entered
into a 54-month agreement to purchase asymmetrical digital subscriber line
services from Southwestern Bell, Pacific Bell and Nevada Bell pursuant to
applicable FCC tariffs.
In each of the metropolitan hubs of our networks we aggregate our customer
traffic through dedicated circuits. We have agreements for dedicated circuits,
collocation, backbone and peering agreements with Level 3 Communications, LLC
and MCI WorldCom. In October 1999, we entered into agreements with Level 3
terminating in September 2002 that provide us with optical carrier 3, digital
signal, level 1, digital signal, level 3 and other circuits, collocation
throughout the country at Level 3's facilities, roof rights for the location of
our caching satellite dishes, remote hands services and peering arrangements. In
October 1999, we entered into agreements with MCI WorldCom terminating in
September 2002 that provide us with optical carrier 3, digital signal, level 1,
digital signal, level 3 and other circuits as well as collocation space and
peering arrangements.
GOVERNMENT REGULATION
Many of the services and content that we offer are subject to varying
degrees of federal, state and local regulation. Future regulations and
legislation may be less favorable to us than current regulation and legislation.
In addition, we may expend significant financial and managerial resources to
participate in proceedings setting rules at either the federal or state level,
without achieving a favorable result.
Communications Regulation
The Telecommunications Act of 1996 substantially departs from prior
legislation in the telecommunications industry by establishing local
telecommunications competition as a national policy. The Telecommunications Act
removes state regulatory barriers to competition and overrules state and local
laws restricting competition for telecommunications services. In general, by
accelerating competitive entry into the telecommunications market, including new
DSL services offered by competitive carriers, the Telecommunications Act
establishes a market structure in which the network infrastructure and services
we purchase are now available from a variety of providers in addition to
traditional telephone companies. As a result, our business options and choice of
vendors, along with the quality and price of facilities and services we buy from
telecommunications carriers, are becoming more favorable and yet are
substantially dependent on successful implementation of the Telecommunications
Act by the FCC and other regulatory agencies.
Although some of the Telecommunications Act is self-executing, the FCC has
issued a variety of regulations upon which we and other broadband competitors
rely. We believe that the FCC's regulations and decisions have generally favored
competition and the wide availability of DSL connectivity which we purchase in
order to provide broadband services to our customers. However, these regulations
and decisions may be appealed by one or more traditional telephone companies or
other parties, which may lead to uncertainty and delays in implementation of
regulations favorable to us, or which may adversely affect our business and
financial prospects.
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In November 1998, the FCC ruled that DSL services provided as dedicated
access services in connection with Internet access are interstate services
subject to the FCC's jurisdiction. Since early 1998, the FCC has been
considering broad issues related to competition in the advanced services market.
Several former Bell companies petitioned the FCC to be relieved of certain
regulatory requirements applicable to their own DSL services, including
obligations to unbundle DSL facilities and services, and to resell DSL
connectivity to companies like ours. In October 1998, the FCC denied the former
Bells' petitions, ruling that DSL services are telecommunications services
subject to the unbundling and resale requirements of the Telecommunications Act.
These decisions favored competition among our local access suppliers. However,
they are subject to appeal. The final outcome of these appeals, along with
subsequent FCC proceedings interpreting the requirements of the
Telecommunications Act could significantly affect our business.
Most recently, on December 9, 1999, the FCC mandated line sharing, which
allows a competitive carrier to simultaneously provide DSL-based services over
the same telephone line being used by the traditional telephone companies for
basic telephone service. Prior to the line sharing decision, only the
traditional telephone companies could provide broadband service on the existing
line. Line sharing removes a significant barrier to competition among our
suppliers. The line sharing decision also addressed the control of technical
standards for the DSL solutions that we purchase from our local access
suppliers. The line sharing decision removed the discretion that many
traditional telephone companies had exercised to prevent the operation of some
DSL technologies on their local telephone loops. Under the FCC's ruling, a DSL
provider may now select the DSL technology it wishes so long as the technology:
- complies with existing industry standards,
- is approved by an industry standards body, the FCC, or any state
commission, or
- has been successfully deployed by any carrier without significantly
degrading the performance of other services.
However, the order specifically determines that SDSL, a symmetrical digital
subscriber line technology used by some of our vendors, while available to
deliver broadband connectivity, is not eligible for line-sharing because it uses
the frequencies devoted to voice transmissions. Moreover, this decision remains
to be implemented and is subject to reconsideration and appeal.
DSL and broadband services have also been addressed in two recent
proceedings in which the FCC required SBC, Ameritech and Bell Atlantic to
establish separate affiliates for the provision of DSL and other advanced
telecommunications services. The FCC established specific criteria for the
nondiscriminatory availability to competitive carriers of information and
ordering processes necessary for the purchase of unbundled DSL-capable loops. We
believe that the establishment of separate subsidiaries through which DSL
connectivity will be sold to companies like ours will increase the FCC's
ability, as well as that of the state public utilities commissions, to monitor
compliance with the requirements of Telecommunications Act upon which companies
like ours rely. Broadband issues are also the subject of a number of proposed
bills introduced in the U.S. Congress. To varying degrees, proposed legislation
would either reduce or increase open access to the traditional Bell carrier
networks as well as to the cable networks which have yet to be opened to the
type of competition that exists in the telephone network. Many of the largest
providers of broadband and Internet services, including America Online, AT&T and
the Bell companies, have been significantly involved in lobbying for and against
this proposed legislation. Although none of the proposed bills has as yet been
voted out of committee, if enacted, this legislation may affect our business and
financial prospects.
For several years, traditional telecommunications carriers have argued
that the FCC should repeal rules treating Internet service providers as
unregulated providers of enhanced information services. Under this regulatory
paradigm, Internet service providers have been subject to a lesser degree of
regulation and taxation than traditional telephone service providers which is
favorable to us. The FCC has to date resisted all efforts to modify the
unregulated treatment of Internet service providers. However, there may be
increased legal and political pressure on the FCC to modify these policies.
While there is no indication
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that a major change in the FCC's policies is imminent, the imposition on
Internet service providers of access charges, universal service fees and other
elements of traditional telecommunications regulation would require us to review
and possibly change our financial and business models.
Internet Content Regulation
Government regulation of communications and commerce on the Internet
varies greatly from country to country. The United States has not adopted many
laws and regulations applicable to online communications and commerce. However,
it is possible that a number of laws and regulations may be adopted covering
issues such as user privacy, freedom of expression, pricing, content and quality
of products and services, taxation, advertising, gaming, intellectual property
rights, enforceability of contracts and information security.
Recently, sections of the Communications Decency Act of 1996, or the CDA,
that proposed criminal penalties for distributing indecent material to minors
over the Internet were held to be unconstitutional. Other provisions of the CDA
remain in effect, however, and Congress has since passed the Child Online
Protection Act, or COPA, in an effort to remedy the deficiencies the Supreme
Court identified in the CDA. It is unclear whether COPA will survive
constitutional challenges that have been raised. However, indecency legislation
and other government efforts to regulate Internet content could subject us or
our customers to potential liability, which in turn could affect our business.
The adoption of these laws or regulations might also decrease the rate of growth
of Internet use, which in turn could decrease the demand for our services or
increase the cost of doing business or otherwise harm, results of operations,
and financial condition. Likewise, the applicability to the Internet of
traditional property ownership, copyright, taxation, libel and obscenity law is
uncertain.
Likewise, the impact of ongoing discussions of privacy issues and the
Internet remains uncertain. Several U.S. states have proposed, and the European
Union has adopted, limitations on the use of personal information gathered
online. Pursuant to negotiations with the European Union and the United States,
the United States may decide to adopt restrictive laws on the subject of
privacy. The Federal Trade Commission, or FTC, has initiated action and obtained
a consent decree against at least one online service provider regarding the
manner in which personal information is collected from users and provided to
third parties. In 1998, Congress enacted the Child Online Privacy Protection Act
(COPPA) protecting the privacy of children on the Internet and limiting the
information that can be collected from and disseminated to children over the
Internet without parental consent. The FTC promulgated broad new rules
implementing COPPA in late 1999. Changes to existing laws or the passage of new
laws intended to address online privacy and related issues may create
uncertainty in the marketplace or could affect the manner in which we do
business.
We may also be subject to claims for defamation, negligence, copyright or
trademark infringement (including contributory infringement) based upon
information available through our Internet sites, including content created by
third parties. Although recent federal legislation protects online services from
some claims, the law in this area remains in flux and varies by jurisdiction. It
is not possible to develop a business plan that can definitively protect us
against liability for our Internet content, including content on our sites that
we have not written or created. This uncertainty is likely to prevail for some
time, as the laws continue to develop.
EMPLOYEES
As of February 7, 2000 we had 239 full-time employees, all of whom are
based in the United States. We also from time to time employ part-time employees
and have hired a number of independent contractors. Our employees are not
represented by any collective bargaining agreement, and we have never
experienced a work stoppage.
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PROPERTIES
Our corporate headquarters facility of approximately 60,000 square feet is
located in Cupertino, California. We occupy our corporate headquarters facility
pursuant to a lease that expires in June 2005. In early 2000, we will expand
into a second facility of approximately 66,000 square feet located in San Jose,
California. The lease for this additional facility will expire in November 2004.
In addition, we continue to lease our prior facility in San Jose, California
under a lease that expires in October 2002. We intend to continue subleasing
this 13,200 square foot facility through the expiration of the lease term.
We have entered into agreements with both Level 3 and MCI WorldCom for
collocation space throughout the United States. Through Level 3, we currently
have collocation space in Atlanta, Miami, Orlando, Los Angeles, Dallas, McLean
(Virginia), New York City, Chicago, Denver, Philadelphia, Boston and San Diego.
In 2000, we expect to add collocation space through both Level 3 and MCI
WorldCom.
INTELLECTUAL PROPERTY RIGHTS
We claim common law trademark protection for TELOCITY, TELOCITY TIME,
TELOCITY HIGH-VELOCITY INTERNET, YOU HAVEN'T SEEN THE NET UNTIL YOU'VE SEEN IT
IN TELOCITY TIME and our logo. We have applied for federal trademark
registrations for TELOCITY and our logo. We currently have no patents but we
have three patent applications pending. We also rely on unpatented trade secrets
and know-how to maintain our competitive position, which we seek to protect, in
part, by confidentiality agreements, strategic alliances and contracts with
employees, consultants and others. The steps we have taken may not be sufficient
to protect our technology or other intellectual property.
Our products and services consist primarily of commodity hardware and
software components in combination. While we have developed some proprietary
techniques and expertise, most of our activities and systems are not protectable
as proprietary intellectual property. In general, therefore, we have taken only
limited steps to protect our intellectual property. Accordingly, we may be
unable to use our intellectual property rights to prevent other companies from
competing with us. In addition, we may be unable to prevent third parties from
developing techniques that are similar or superior to our technology, or from
designing around our copyrights, patents and trade secrets, or from
misappropriating our intellectual property without detection or without adequate
remedy. Failure to protect our intellectual property could materially harm our
business.
Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets, or to determine the validity and
scope of the proprietary rights of others. Litigation could result in
substantial costs and diversion of our resources and could materially harm our
business. From time to time, we may receive notice of claims that we have
infringed proprietary rights of third parties. Infringement or other claims
could be asserted against us in the future, and it is possible that these
assertions or prosecutions could harm our business. Any claims of this kind,
with or without merit, could be time-consuming, result in costly litigation and
diversion of technical and management personnel, cause delays in the development
and release of our products, or require us to develop non-infringing technology
or enter into royalty or licensing arrangements. These royalty or licensing
arrangements, if required, may not be available on terms acceptable to us, or at
all. For these reasons, infringement claims could materially harm our business.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to our
directors, executive officers and other key employees as of February 15, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Patti Hart................................ 43 President, Chief Executive Officer and
Director
Peter Olson............................... 57 Executive Vice President, Chief Technical
Officer and Director
Edward Hayes.............................. 44 Executive Vice President and Chief
Financial Officer
Jim Morrissey............................. 50 Executive Vice President and Chief
Marketing Officer
James Rohrer.............................. 58 Executive Vice President and Customer Care
Officer
Scott Martin.............................. 43 Executive Vice President, Chief
Administrative Officer and Corporate
Secretary
Kevin Grundy.............................. 42 Senior Vice President, Engineering
Thomas Obenhuber.......................... 44 Senior Vice President, Business and
Product Planning
Matthew Stepovich......................... 36 Senior Vice President, Legal and
Regulatory Affairs
Regina Wiedemann.......................... 38 Senior Vice President, Business
Development
Jef Raskin................................ 56 Vice President, Human Interaction
Andrew Robinson........................... 32 Vice President, Operations
David Cowan............................... 33 Director
Andrew Rappaport.......................... 42 Director
Edmond Sanctis............................ 37 Director
Michael Solomon........................... 47 Director
Randall Strahan........................... 47 Director
</TABLE>
Patti Hart has served as our President, Chief Executive Officer and as a
member of our Board of Directors since June 1999. From February 1994 through
April 1999 Ms. Hart was at Sprint Corporation, where she most recently served as
President and Chief Operating Officer of Sprint Corporation's Long Distance
Division. At Sprint, Ms. Hart also served as President of Sprint Business,
President of Sales and Marketing, and President of the Business Services Group.
Ms. Hart is a member of the board of directors of Vantive Corp. and Premisys
Corp.
Peter Olson, one of our founders, has served as our Executive Vice
President and Chief Technical Officer since July 1998. Previously, Mr. Olson
served as our President and Chief Executive Officer from our incorporation in
August 1997 until July 1998. From June 1982 through December 1994 Mr. Olson
served as Chief Technical Officer of Octel Communications Corporation, a company
he co-founded. Mr. Olson is a member of the board of directors of Flycast
Communications Corp., IMP, Inc. and Netpulse Communications, Inc.
Edward Hayes has served as our Executive Vice President and Chief
Financial Officer since January 2000. From July 1996 through December 1999, Mr.
Hayes worked at Lucent Technologies Inc., where from July 1997 he served as
Financial Vice President and Chief Financial Officer of Lucent's Global Service
Provider Business. From July 1995 through July 1996, Mr. Hayes worked at Unisys
Corporation, where from November 1995 he served as Vice President, Chief
Financial Officer and Chief Information Officer of Unisys' Global Professional
Services Division. From April 1990 through July 1995 Mr. Hayes worked at ASEA
Brown Boveri (ABB), Inc. the U.S. subsidiary of the joint venture between ASEA
and BBC Brown Boveri, where from September 1993 he served at Vice President,
Chief Financial Officer and Chief Information Officer of ABB Nuclear Operations.
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Jim Morrissey has served as our Executive Vice President and Chief
Marketing Officer since September 1999. From January 1980 through September 1999
Mr. Morrissey held various positions at Grey Advertising, including Executive
Creative Director and Executive Vice President from December 1995.
James Rohrer has served as our Executive Vice President and Customer Care
Officer since August 1999. From January 1996 through August 1998 Mr. Rohrer
served as Chief Operating Officer of Innovative Services of America, a customer
service outsourcing firm specializing in customer care for large companies. From
November 1967 through December 1995 Mr. Rohrer worked at Sears Roebuck & Co.,
where he most recently served as Vice President of Customer Satisfaction and
Vice President, Automotive Division. Mr. Rohrer is a member of the board of
directors of Alpine Access, L.L.C., a customer care outsourcing company.
Scott Martin has served as our Chief Administrative Officer, Executive
Vice President and Corporate Secretary since December 1999. From October 1982
through August 1999 Mr. Martin held various positions at Van Kampen Investments
Inc., including Senior Vice President and Deputy General Counsel from January
1995.
Kevin Grundy, one of our founders, has served as our Senior Vice
President, Engineering since December 1997. From February 1997 through November
1997 Mr. Grundy served as President and CEO of Aspen Internet Systems, Inc., a
DSL modem company. From June 1995 through August 1997 Mr. Grundy served as Vice
President of Engineering and Operations at Minerva Systems, an MPEG encoder
company. From June 1994 through June 1995 Mr. Grundy was Director of Engineering
at Auspex Systems, Inc., a high reliability network data storage company.
Previously, Mr. Grundy worked at NeXT, Incorporated as Executive Director,
Manufacturing Engineering and Production, where he was responsible for all
hardware engineering, manufacturing and support.
Thomas Obenhuber, one of our founders, has served as our Senior Vice
President, Business and Product Planning since August 1997. From January 1995
through July 1997 Mr. Obenhuber served as Vice President, Operations and
Engineering at Genuity, a national backbone Internet service provider that he
co-started. From July 1990 through January 1995 Mr. Obenhuber worked at Sun
Microsystems where he most recently served as Director, System Architecture.
Matthew Stepovich, one of our founders, has served as our Senior Vice
President, Legal and Regulatory Affairs since our incorporation in August 1997.
From October 1996 through April 1997 Mr. Stepovich served as Co-Founder and
Executive Vice President at Media Lane Development Group, an Internet commerce
design and implementation firm. From December 1995 through September 1996 Mr.
Stepovich was a corporate lawyer with Weissburg and Aronson, Inc. From August
1991 through November 1995 Mr. Stepovich was a corporate and regulatory lawyer
with Gray Cary Ware & Freidenrich LLP.
Regina Wiedemann has served as our Senior Vice President, Business
Development since October 1999. From June 1999 through September 1999 Ms.
Wiedemann served as Vice President of Business Development for Notify Technology
Corp., a consumer telephony and Internet notification device company. From
August 1997 through October 1998 Ms. Wiedemann was Vice President of Commercial
Services for Infonet, a global data communications company. From January 1996
through July 1997 Ms. Wiedemann served as Vice President of Sales and Channel
Management at Pacific Bell Internet. From February 1988 through December 1995
Ms. Wiedemann worked at Sprint, where her most recent position was Executive
Assistant to the President of Multimedia.
Jef Raskin has served as our Vice President, Human Interaction since
November 1999. From January 1994 through November 1999 Mr. Raskin worked as a
consultant, primarily in the field of user interfaces. Previously, Mr. Raskin
served as Manager of Advanced Systems at Apple Computer where he created the
Macintosh project, including the Macintosh user interface.
Andrew Robinson joined us in March 1999 as Director of ISP Services and
Business Development and was promoted to Vice President of Operations in
September 1999. From April 1998 to March 1999 Mr. Robinson was the Chief
Operating Officer for Creative Net Internet Services, an Internet service
provider. From December 1996 through March 1998, Mr. Robinson served as
President and Chief
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Operating Officer of Grin Net, an Internet service provider he founded. Mr.
Robinson is a charter member of the Internet Service Provider Consortium.
David Cowan has served on the board of directors since July 1998. Mr.
Cowan is the Managing General Partner of Bessemer Venture Partners, which he
joined in August 1992. From August 1996 through May 1997 he served as Chief
Executive Officer of Visto Corporation, an Internet-based personal information
company. From March 1995 through December 1996 he served as Chairman and Chief
Financial Officer of VeriSign, Inc. Mr. Cowan is a member of the boards of
directors of Flycast Communications Corp., Keynote Systems, Inc., VeriSign,
Inc., Worldtalk Communications Corp., and several private companies.
Andrew Rappaport has served on our Board of Directors since October 1997.
Mr. Rappaport has been a general partner at August Capital since August 1996.
From August 1984 through July 1996 Mr. Rappaport was President of The Technology
Research, Inc. Mr. Rappaport is a member of the board of directors of Silicon
Image, Inc. and MMC Networks, Inc., as well as several private corporations.
Edmond Sanctis has served on our Board of Directors since December 1999.
Mr. Sanctis has served as President and Chief Operating Officer of NBC Internet,
Inc. since October 1999. From July 1998 to October 1999 Mr. Sanctis served as
the Chief Operating Officer of Snap.com. Prior to that, Mr. Sanctis held several
positions at NBC, including Senior Vice President and General Manager of Digital
Productions from September 1996 to July 1998, Senior Vice President and
Executive Producer of Digital Productions from November 1995 through September
1996, and Director of Business Development from May 1994 through November 1995.
Michael Solomon, one of our founders, has served on our Board of Directors
since we were incorporated in August 1997 and served as our Interim CEO from
June 1998 through July 1999. Mr. Solomon has been at Mohr, Davidow Ventures
since March 1996. From July 1994 through September 1999 Mr. Solomon also worked
as an advisor and consultant. Mr. Solomon is a member of the board of directors
of Flycast Communications Corp. and several private corporations.
Randall Strahan has served on our Board of Directors since December 1998.
From January 1999 through December 1999 Mr. Strahan served as President and
Chief Executive Officer of Telmax Communications Corporation, a DSL equipment
company, and is currently chairman of its board of directors. Since November
1999 Mr. Strahan has served as a Venture Partner at Mohr, Davidow Ventures. From
November 1978 through January 1998, Mr. Strahan was at Pacific Bell, where he
most recently held the position of President, Service Operations.
BOARD OF DIRECTORS
Our Board of Directors currently consists of seven members. Each director
holds office until his or her term expires or until his or her successor is duly
elected and qualified. Upon completion of this offering, our amended and
restated certificate of incorporation and bylaws provide that our Board of
Directors will be divided into three classes. The terms of each class will
expire at different times. The three classes will be comprised of the following
directors:
- Class I consists of Mr. Olson, Mr. Cowan, and Mr. Solomon, who will
serve until the annual meeting of stockholders to be held in 2000;
- Class II consists of Ms. Hart, Mr. Rappaport, and Mr. Strahan, who will
serve until the annual meeting of stockholders to be held in 2001; and
- Class III consists of Mr. Sanctis, who will serve until the annual
meeting of stockholders to be held in 2002.
At each annual meeting of stockholders beginning with the 2000 annual
meeting, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election and until their successors have been duly
elected and qualified. 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 an equal number of directors.
Our non-
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employee directors devote such time to our affairs as is necessary to discharge
their duties. There are no family relationships among any of our directors,
officers or key employees.
Board Committees
Our Board of Directors has an audit committee and a compensation
committee. The audit committee consists of Messrs. Rappaport and Strahan. The
audit committee reviews our internal accounting procedures, consults with and
reviews the services provided by our independent accountants and makes
recommendations to the Board of Directors regarding the selection of independent
accountants. The compensation committee consists of Messrs. Cowan and Solomon.
The compensation committee reviews and recommends to the Board of Directors the
salaries, incentive compensation and benefits of our officers and employees and
administers our stock plans and employee benefit plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Board of Directors established the compensation committee in December
1999. Prior to establishing the compensation committee, our Board of Directors
as a whole performed the functions delegated to the compensation committee. No
member of our compensation committee has served as a member of the Board of
Directors or compensation committee of any entity that has one or more executive
officers serving as a member of our Board of Directors or compensation
committee. Since the formation of the compensation committee, none of its
members has been our officer or employee.
Compensation of Directors
In December 1999, our Board of Directors approved compensation guidelines
for directors who are not our officers or employees. The compensation guidelines
provide that these directors will be reimbursed for expenses they incur in
attending any Board of Directors or committee meeting. Directors who are also
our officers or employees will not receive reimbursement for expenses incurred
in attending Board of Directors or committee meetings. Effective upon the
closing of this offering, our non-employee directors also will be eligible to
participate in our 2000 Outside Directors Stock Plan. Employee directors,
including Ms. Hart and Mr. Olson, are eligible to participate in our 2000
Employee Stock Purchase Plan and to receive discretionary grants under our 1998
Stock Plan.
EXECUTIVE OFFICERS
Our executive officers are appointed by our Board of Directors and serve
until their successors are elected or appointed.
SUMMARY COMPENSATION INFORMATION
The following table sets forth all compensation paid or accrued during the
year ended December 31, 1999 to all individuals serving as our President and
Chief Executive Officer, and each of our four other most highly compensated
officers whose compensation exceeded $100,000 for the period. The compensation
described in this table does not include perquisites and other personal benefits
received by the executive officers named in the table below which do not exceed
$50,000 or 10% of the total salary and bonus reported for these officers,
whichever is lower. For the individuals then employed by us, the table also
includes the same information for 1998 and 1997, the year in which we were
founded.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS YEAR SALARY COMPENSATION(1) OPTIONS COMPENSATION
- ---------------------------- ---- -------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Patti Hart.................................... 1999 $140,000 $ 3,097 3,226,274 $150,000(2)
President and CEO (began June 1999)
Michael Solomon............................... 1999 -- 70,665(3) 0 --
Interim President and CEO (ended 1998 -- 80,000(3) 0 --
June 1999)
</TABLE>
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<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS YEAR SALARY COMPENSATION(1) OPTIONS COMPENSATION
- ---------------------------- ---- -------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Jim Morrissey................................. 1999 77,211 80,939(4) 800,000 357,992(5)
Executive Vice President and
Chief Marketing Officer
Peter Olson................................... 1999 223,333 9,961 7,714 --
Executive Vice President and 1998 135,000 7,485 82,286 --
Chief Technology Officer 1997 75,000 -- 0 --
Kevin Grundy.................................. 1999 161,667 7,854 0 --
Senior Vice President, Engineering 1998 170,000 7,493 0 --
1997 10,000 613 0 --
Thomas Obenhuber.............................. 1999 161,667 2,284 5,142 --
Senior Vice President, Product and 1998 90,000 2,129 54,858 --
Business Planning 1997 50,000 428 0 --
</TABLE>
- ---------------
(1) Includes only health insurance premiums paid by us unless otherwise noted.
(2) We paid Ms. Hart a $150,000 signing bonus pursuant to her employment
agreement.
(3) We paid these amounts to Mr. Solomon as our Interim President and CEO
pursuant to a consulting arrangement.
(4) Includes $1,422 in health insurance premiums paid by us. Also includes
$79,517 in debt forgiveness pursuant to Mr. Morrissey's employment
agreement.
(5) We paid Mr. Morrissey a $150,000 signing bonus pursuant to his employment
agreement. Also includes $147,992 payment for closing costs related to the
sale of Mr. Morrissey's house, which includes a $66,918 gross up component
to cover Mr. Morrissey's additional taxes and $60,000 in contingent
compensation for an allowance that Mr. Morrissey will repay to us if our
stock trades at $20 or more per share on October 1, 2001, all of which we
paid pursuant to Mr. Morrissey's employment agreement.
OPTION GRANTS IN 1999
The following table sets forth information concerning grants of stock
options to the executive officers named in the summary compensation table above
who received stock options during 1999. All options granted to executive
officers in the last fiscal year were granted under the 1998 Stock Plan. The
percent of the total options set forth below is based on an aggregate of
10,595,660 options granted to employees during the period ended December 31,
1999. All options were granted at the fair market value as determined by our
Board of Directors on the date of grant.
Potential realizable value represents hypothetical gains that could be
achieved for the options if exercised at the end of the option term assuming
that the fair market value of our common stock appreciates at 5% and 10% over
the option term of five years and that the option is exercised and sold on the
last day of its option term for the appreciated stock price. The assumed 5% and
10% rates of stock price appreciation are provided in accordance with rules of
the SEC and do not represent our estimate or projection of our future common
stock price. The price used to calculate the assumed 5% and 10% rates of stock
price appreciation was the exercise price per share for each grant, which was
the fair market value of the option as determined by our Board of Directors at
the time of the grant. Actual gains, if any, on stock option exercises will
depend on the future performance of our common stock.
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<TABLE>
<CAPTION>
INDIVIDUAL GRANT POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES PRICE EXPIRATION ----------------------
NAME GRANTED DURING PERIOD PER SHARE DATE 5% 10%
- ---- ---------- ------------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Patti Hart........... 3,226,274 30.4% $0.350 4/30/09 $710,145 $1,799,648
Jim Morrissey........ 800,000 7.5 0.750 9/10/09 377,336 956,245
Peter Olson.......... 7,714 -- 0.575 6/25/09 2,789 7,069
Thomas Obenhuber..... 5,142 -- 0.575 6/25/09 1,859 4,712
</TABLE>
OPTION EXERCISES IN 1999 AND VALUES AT DECEMBER 31, 1999
The following table sets forth information concerning option exercises in
1999 by the executive officers named in the summary compensation table above.
The options for Ms. Hart and Mr. Morrissey vest over four years, while the
options to Messrs. Olson and Obenhuber are all fully vested. All options
otherwise generally conform to the terms of our 1998 Stock Plan. There was no
value realized for any of the option exercises as the options were immediately
exercisable and were exercised when the exercise price equaled the fair market
value price.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1999 AT DECEMBER 31, 1999
SHARES ACQUIRED VALUE --------------------------- ---------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Patti Hart.................. 3,226,274 -- -- -- -- --
Jim Morrissey............... 800,000 -- -- -- -- --
Peter Olson................. 7,714 -- -- -- -- --
Thomas Obenhuber............ 5,142 -- -- -- -- --
</TABLE>
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with all of our current
executive officers. All of our executive officers have signed employee
inventions and proprietary rights assignment agreements that provide, among
other things, that the officer will not solicit any of our employees for two
years after their employment with us.
On May 5, 1999, we entered into an at will employment agreement with Ms.
Hart, under which Ms. Hart receives a salary of $300,000 per year. Ms. Hart also
received a signing bonus of $150,000 and is guaranteed a bonus of $100,000 at
the end of her first year of service as our Chief Executive Officer. After two
years of service as our Chief Executive Officer and for each year of employment
with us after that, Ms. Hart is eligible under her agreement to earn a
performance bonus in accordance with a performance bonus plan. The agreement
also provides for a stock grant pursuant to our 1998 Stock Plan for the purchase
of up to 3,226,274 shares of our common stock, which Ms. Hart exercised in full
on June 22, 1999 at a price of $0.35 per share. Ms. Hart's exercise of her
option is subject to our right to repurchase her shares at the exercise price, a
right that lapses as the shares vest at a rate of 1/48 per month. Upon Ms.
Hart's resignation for good cause upon a change of control, Ms. Hart shall vest
one half of any unvested shares. If we terminate Ms. Hart's employment without
cause, she will receive a severance package, as described in her employment
agreement.
Effective January 1, 1998, we entered into at will employment agreements
with Messrs. Olson, Obenhuber and Stepovich, under which they were to receive
salaries of $180,000, $120,000 and $96,000 per year, respectively; their current
salaries are $280,000, $200,000 and $150,000 per year. In addition, under their
agreements, Messrs. Olson, Obenhuber, and Stepovich are each eligible for a
performance bonus for each year based upon achievement of performance
objectives. The amount of these bonuses, is to be negotiated annually. If we
terminate Messrs. Olson, Obenhuber or Stepovich without cause or if any of them
resign for good reason, the individual will receive his compensation, including
pro-rated bonuses,
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and benefits for three months following termination, plus continued vesting of
shares for six months. Effective February 25, 1998, we entered into an
employment agreement with Mr. Grundy with the same major conditions, except that
Mr. Grundy was to receive a salary of $120,000 per year. Mr. Grundy's current
salary is $200,000. We also entered into Founder Stock Purchase Agreements with
each of these employees, which contain change of control provisions, as
described below.
On December 10, 1999, we entered into an at will employment agreement with
Mr. Hayes, under which Mr. Hayes receive a salary of $250,000 per year. Within
30 days of the signing of the agreement, we will pay Mr. Hayes a signing bonus
of $325,000. The agreement also provides for a stock option grant pursuant to
our 1998 Stock Plan for the purchase of up to 370,000 shares of our common
stock. Mr. Hayes exercised all his options on January 5, 2000 at a price of
$3.00 per share. Mr. Hayes' exercise of his option is subject to our right to
repurchase his shares at the exercise price, a right that lapses as the shares
vest. Mr. Hayes' shares vest 1/4 after 12 months, then subsequently at a rate of
1/48 of the original grant per month. If we terminate Mr. Hayes without cause or
he resigns for good reason, as both terms are defined in his agreement, we will
pay Mr. Hayes a lump sum severance payment equal to 12 months of salary and
target incentive bonus, remove any vesting cliff and immediately vest the
greater of one half of his unvested stock options or an amount equivalent to an
additional six months vesting or accelerate his vesting six months.
On September 14, 1999, we entered into an at will employment agreement
with Mr. Morrissey, under which Mr. Morrissey receives a salary of $275,000 per
year. Mr. Morrissey received a signing bonus of $150,000. On January 4, 2000,
Mr. Morrissey received an additional bonus of $150,000 as required by his
employment agreement. Upon our initial public offering or our acquisition, Mr.
Morrissey will receive a bonus of $150,000, provided that certain objectives
have been met. In the event of certain payments under his agreement, Mr.
Morrissey is entitled to receive gross up payments. The agreement also provides
for a stock option grant pursuant to our 1998 Stock Plan for the purchase of up
to 800,000 shares of our common stock. Mr. Morrissey exercised all of his
options on September 14, 1999 at a price of $0.75 per share. Mr. Morrissey's
exercise of his option is subject to our right to repurchase his shares at the
exercise price, a right that lapses as the shares vest. Mr. Morrissey's shares
vest 1/4 after one year, then subsequently at a rate of 1/48 of the original
grant per month. In order to leave his previous employment, Mr. Morrissey was
required to make payments to his former employer. To facilitate his departure,
we loaned Mr. Morrissey $2 million: on December 6, 1999 we provided him with a
$900,000 loan and on January 5, 2000 we provided him with a $1,100,000 loan, the
principal and interest of both we will forgive at a rate of 1/36 per month over
three years beginning on September 20, 1999 and January 1, 2000, respectively.
Under Mr. Morrissey's agreement we provide to him a monthly housing allowance of
$20,000 for 24 months beginning on October 1, 1999. If our stock trades at $20
or more on October 1, 2001, then Mr. Morrissey will repay the allowance;
otherwise, we will forgive his allowance. Upon Mr. Morrissey's termination for
cause or his voluntary resignation other than for good reason, the loans become
due within 90 days. If we terminate Mr. Morrissey without cause or he resigns
with good reason, he will receive his base salary for one year, continued
payment of his housing allowance for one year, discharge of any of his
obligations to repay loans or his housing allowance to us, and removal of any
vesting cliff plus six months acceleration of his option vesting. Upon a change
of control (which includes Ms. Hart's termination as our CEO), within one year,
Mr. Morrissey will also receive additional accelerated vesting.
On August 24, 1999, we entered into a one year employment agreement with
Mr. Rohrer, under which Mr. Rohrer was to receive a salary of $160,000 per year.
Mr. Rohrer's current salary is $180,000. The agreement also provides for a stock
grant pursuant to our 1998 Stock Plan for the purchase of up to 100,000 shares
of our common stock. Mr. Rohrer exercised all of his options on September 20,
1999 at a price of $0.75 per share. We subsequently granted to Mr. Rohrer an
option for an additional 100,000 shares, which he exercised on December 2, 1999
at a price of $1.50 per share. Mr. Rohrer's exercise of his options is subject
to our right to repurchase his shares at the exercise price, a right that lapses
as the shares vest. Mr. Rohrer's 200,000 shares vest 1/8 six months after
commencement of his employment, then subsequently at a rate of 1/48 of the total
grant per month. Mr. Rohrer's initial option grant will fully vest upon the
completion of milestones described in his employment agreement. Mr. Rohrer's
employment agreement is for one year, during which
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<PAGE> 64
time we can only terminate Mr. Rohrer for cause. If we terminate Mr. Rohrer
without cause during this time, the options he would have received through the
first year fully vest. Either party may terminate the agreement at the end of
one year.
On December 8, 1999, we entered into an at will employment agreement with
Mr. Martin, under which Mr. Martin receives a salary of $190,000 per year.
Within 30 days of the signing of the agreement, we will pay Mr. Martin a signing
bonus of $150,000, which he will repay if he resigns within one year for other
than good reason. The agreement also provides for a stock option grant pursuant
to our 1998 Stock Plan for the purchase of 245,000 shares of our common stock.
Mr. Martin exercised all his options on December 16, 1999 at a price of $3.00
per share. Mr. Martin's exercise of his option is subject to our right to
repurchase his shares at the exercise price, a right that lapses as the shares
vest. Mr. Martin's shares vest 1/8 after six months, then subsequently at a rate
of 1/48 of the original grant per month. Upon a change in control, if we
terminate Mr. Martin without cause, or he resigns for good reason, we will
continue to pay Mr. Martin his base salary for six months, remove any vesting
cliff and immediately vest one half of his unvested stock options. If we
terminate Mr. Martin without cause or he resigns for good reason without a
change in control, we will remove any vesting cliff, pay Mr. Martin a lump sum
of $150,000 and make continued medical and dental benefits to Mr. Martin for six
months.
On September 13, 1999, we entered into an at will employment agreement
with Ms. Wiedemann, under which Ms. Wiedemann was to receive a salary of
$140,000 per year. Ms. Wiedemann's current salary is $180,000. The agreement
also provides for a stock grant pursuant to our 1998 Stock Plan for the purchase
of up to 240,000 shares of our common stock. Ms. Wiedemann exercised all of her
options on October 26, 1999 at a price of $1.50 per share. Ms. Wiedemann's
exercise of her option is subject to our right to repurchase her shares at the
exercise price, a right that lapses as the shares vest. Ms. Wiedemann's shares
vest 1/8 after six months, then subsequently at a rate of 1/48 of the original
grant per month. If, following a change of control, we terminate Ms. Wiedemann
or she resigns for good cause, Ms. Wiedemann shall receive an additional six
months of salary, benefits and vesting, including removal of the one year
vesting cliff, if applicable.
On November 11, 1999, we entered into an at will employment agreement with
Mr. Raskin, under which Mr. Raskin receives a salary of $160,000 per year. The
agreement also provides for a stock grant pursuant to our 1998 Stock Plan for
the purchase of up to 120,000 shares of our common stock. Mr. Raskin's exercise
of his option is subject to our right to repurchase his shares at the exercise
price, a right that lapses as the shares vest. Mr. Raskin's shares vest 1/4
after one year, then subsequently at a rate of 1/48 of the original grant per
month.
On April 1, 1999, we entered into an at will employment agreement with Mr.
Robinson, under which Mr. Robinson was to receive a salary of $130,000 per year.
Mr. Robinson's current salary is $150,000. Mr. Robinson also will receive a
one-time stock bonus of 10,000 shares and a $20,000 bonus at the conclusion of
his first year of service provided that certain milestones have been met. The
agreement also provides for a stock grant pursuant to our 1998 Stock Plan for
the purchase of up to 100,000 shares of our common stock. We subsequently
granted to Mr. Robinson an option to purchase an additional 100,000 shares of
our common stock. Mr. Robinson's exercise of his options is subject to our right
to repurchase his shares at the exercise price, a right that lapses as the
shares vest. Mr. Robinson's shares vest 1/4 after one year of the date of grant,
then subsequently at a rate of 1/48 of the original grant per month. Mr.
Robinson exercised his options for all 200,000 shares on June 18, October 22 and
December 9, 1999 at an average price per share of $0.925. We had previously
granted to Mr. Robinson an option to purchase 20,000 shares of our common stock
for his performance of consulting work before he was our employee. Mr. Robinson
exercised his option to purchase these shares on June 23, 1999 at a price of
$0.175 per share. All 20,000 of these shares were fully vested on the grant
date. We also paid Mr. Robinson $40,000 for moving expenses.
INCENTIVE BONUS PROGRAM
We have established an Incentive Bonus Program to begin in 2000 in order
to reward our employees for their contributions. We will distribute bonuses
quarterly, in January, April, July and
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October. Executive Officers, including Ms. Hart, all executive vice presidents,
senior vice presidents, vice presidents and all director-level managers are
eligible for a yearly accumulated bonus of up to 50% of annual salary. For these
employees, we will award incentive bonuses based 70% upon our performance as a
company and 30% upon the accomplishment of predetermined, specific individual
objectives.
LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
Our amended and restated certificate of incorporation to be filed prior to
completion of this offering limits the liability of our directors to the maximum
extent permitted by Delaware law. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except liability associated with any of the
following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemption; or
- any transaction from which the director derived an improper personal
benefit.
The limitation of our director's liability does not apply to liabilities
arising under the federal securities laws and does not affect the availability
of equitable remedies such as injunctive relief or rescission.
Our amended and restated certificate of incorporation and bylaws also
provide that we shall indemnify our directors and executive officers and may
indemnify our other officers and employees and other agents to the fullest
extent permitted by law. We believe that indemnification under our bylaws covers
at least negligence and gross negligence on the part of indemnified parties. Our
bylaws also permit us to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
his or her capacity, regardless of whether our bylaws would permit
indemnification.
We have entered into indemnification agreements with each of our officers
and directors containing provisions that require us to, among other things,
indemnify our officers and directors against liabilities that may arise by
reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to cover our directors and officers under any of
our liability insurance policies applicable to our directors and officers. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
STOCK PLANS
2000 Equity Incentive Plan
Our 2000 Equity Incentive Plan was adopted by our Board of Directors in
January 2000 as an amendment and restatement of our 1998 Stock Option Plan,
originally approved by the Board in January 1998 and our stockholders in
February 1998. We anticipate stockholder approval of the 2000 Equity Incentive
Plan in February 2000. A total of 24,000,000 shares of our common stock are
authorized and reserved for issuance under the 2000 Equity Incentive Plan,
including 13,950,000 shares that were authorized and reserved under our 1998
Stock Option Plan prior to its restatement. As of December 31, 1999, options to
purchase 1,873,442 shares of common stock were outstanding under the 1998 Stock
Option Plan, 10,581,698 shares had been issued upon exercise of options, net of
repurchases, and 1,494,860 shares were available for future grant. The
cumulative number of shares authorized for issuance under the 2000 Equity
Incentive Plan will be increased automatically on January 1, 2001 and each
January 1 thereafter during the term of the plan by an amount equal to the
lesser of:
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- 5% of the outstanding shares of our common stock on the immediately
preceding December 31; or
- a lesser amount determined by our Board of Directors.
However, the portion of each annual increase that may be issued upon the
exercise of incentive stock options may not exceed 5,000,000 shares. Appropriate
adjustments will be made to the foregoing limits and to awards outstanding under
the plan in the event of any change in our capital structure. If any award
granted under the 2000 Equity Incentive Plan expires or terminates or if we
repurchase any shares issued pursuant to an award, the shares subject to the
terminated portion and any repurchased shares will again become available for
issuance under the plan.
The 2000 Equity Incentive Plan is administered by our Board of Directors
or by a committee of the Board, who determine, consistent with the provisions of
the plan, the persons to whom awards are granted and all of the terms and
conditions of those awards. The administrator has the authority to construe and
interpret the terms of the plan and the awards granted under it and has the
authority to amend or terminate the plan, subject to stockholder approval of any
amendment increasing the maximum number of shares issuable under the plan or as
otherwise required by law. Generally, no amendment or termination may adversely
affect any outstanding award without the consent of the affected participant.
Unless terminated sooner by the Board of Directors, the 2000 Equity Incentive
Plan will terminate automatically in 2010 on the tenth anniversary of its
adoption by the Board.
The 2000 Equity Incentive Plan authorizes the administrator to grant
awards in the form of incentive stock options, within the meaning of Section 422
of the United States tax code, nonstatutory stock options, restricted stock
purchase rights and bonuses, performance shares and performance units. While
incentive stock options may be granted only to employees, including officers and
employee directors, all other awards may be granted to employees, consultants
and non-employee directors.
The exercise price per share of incentive stock options granted under the
2000 Equity Incentive Plan must be at least equal to the fair market value of a
share of our common stock on the date of grant, while the exercise price per
share of nonstatutory stock options must be at least 85% of such fair market
value. However, the exercise price per share of an incentive stock option
granted to any participant who owns stock possessing more than 10% of the voting
power of all classes of our outstanding capital stock or that of any subsidiary
corporation must equal at least 110% of the fair market value of a share of our
common stock on the grant date, and the term of such incentive stock option must
not exceed five years. The terms of all other options granted under the 2000
Equity Incentive Plan may not exceed ten years. The aggregate fair market value
(determined as of the date of grant) of our common stock for which incentive
stock options may become exercisable for the first time by any optionee may not
exceed $100,000 in any calendar year. The administrator has the discretion to
determine the vesting provisions and exercise requirements, if any, of all
options granted under the plan. Unless longer periods are authorized by the
administrator, options granted under the 2000 Equity Incentive Plan generally
must be exercised, if at all, within six months after an optionee's termination
of service due to death or disability and otherwise within 30 days after an
optionee's termination of service, but in no event later than the expiration of
the option's term. Options granted under the plan generally are not transferable
by an optionee other than by will or the laws of descent and distribution,
except that, with the consent of the administrator, an optionee may transfer a
nonstatutory stock option to certain family members or entities established for
their benefit.
Awards of restricted stock may be made under the 2000 Equity Incentive
Plan either in the form of a restricted stock purchase right or a restricted
stock bonus. Restricted stock purchase rights are exercisable at prices
determined by the administrator, while restricted stock bonuses are granted in
consideration of services rendered to us. Awards of restricted stock may be made
subject to vesting restrictions and other conditions as established by the
administrator and are not transferable by the participant until vested. Vesting
may be based on the participant's continued service with us or the attainment of
one or more performance goals established by the administrator, similar to those
described below in connection with performance shares and units. While the
participant will have voting rights and the right to receive dividends or other
distributions paid with respect to the restricted stock, any dividends
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or distributions paid in stock are subject to the same vesting restrictions as
the original award. Unless otherwise provided by the administrator, if a
participant's service with us terminates for any reason, the participant will
forfeit any then unvested shares acquired as a restricted stock bonus, and we
will have the option to repurchase for the amount of the participant's original
purchase price any then unvested shares acquired by exercise of a restricted
stock purchase right.
The administrator may grant performance shares and performance units under
the 2000 Equity Incentive Plan that are subject to the attainment of such
performance goals measured over such periods as the administrator determines. A
performance share is an unfunded bookkeeping entry generally having an initial
value equal to the fair market value of one share of our common stock, while a
performance unit is an unfunded bookkeeping entry generally having an initial
value of $100. The final value of an award of performance shares or units is
determined by the administrator at the end of the specified performance period
on the basis of the extent to which one or more predetermined performance goals
have been attained. In granting a performance share or unit award, the
administrator establishes the performance goals applicable to the award based on
certain measures of business performance specified in the 2000 Equity Incentive
Plan, such as revenue, operating income, gross margin, cash flow or numbers of
customers. To the extent earned, performance share and unit awards may be
settled in cash, shares of our common stock (including restricted stock) or any
combination of these. Payments may be made in lump sum or on a deferred basis.
If payments are to be made on a deferred basis, the administrator may provide
for the payment of dividend equivalents or interest during the deferral period.
Unless otherwise determined by the administrator, if a participant's service
terminates due to death or disability prior to completion of the applicable
performance period, the final award value is determined at the end of the period
on the basis of the performance goals attained during the entire period, but
payment is prorated for the portion of the period during which the participant
remained in service. Except as otherwise provided by the plan, if a
participant's service terminates for any other reason, the participant's
performance shares or units are forfeited. Prior to their payment, performance
share and unit awards are not transferable by a participant other than by will
or the laws of descent and distribution.
In the event of our merger with another corporation or another change in
control event, the surviving corporation may assume outstanding awards or
substitute new awards of equivalent value. The 2000 Equity Incentive Plan
authorizes the administrator to grant stock options providing for the
acceleration of vesting and exercisability to such extent and upon such terms as
the administrator determines if the surviving corporation refuses to assume or
substitute for the options or if, within a specified period of time following
the change in control, the optionee is terminated without cause or resigns for
good reason, as defined in the award. Any stock options not assumed by the
surviving corporation or exercised prior to a change in control will terminate
upon the change in control. The plan further authorizes the administrator to
provide in any restricted stock award for acceleration of vesting in connection
with a change in control to such extent and upon as terms as the administrator
determines. In addition, the administrator may provide in any performance share
or unit award that in the event of a change in control, the award will become
payable in full.
2000 Employee Stock Purchase Plan
Our 2000 Employee Stock Purchase Plan was adopted by our Board of
Directors in January 2000, and we anticipate stockholder approval in February
2000. A total of 2,500,000 shares of our common stock are authorized and
reserved for issuance under the plan, cumulatively increased on January 1, 2001
and each January 1 thereafter through January 1, 2010 by an amount equal to the
lesser of:
- 1% of the outstanding shares of our common stock on the immediately
preceding December 31;
- 1,000,000 shares; or
- a lesser amount determined by our Board of Directors.
Appropriate adjustments will be made to these limits and to purchase
rights outstanding under the plan in the event of any change in our capital
structure. If any purchase right granted under the 2000
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Employee Stock Purchase Plan expires or terminates, the shares subject to the
unexercised portion will again become available for issuance under the plan.
The 2000 Employee Stock Purchase Plan is intended to qualify under Section
423 of the United States tax code. It will be administered by our Board of
Directors or by a committee of the Board, who have the authority to interpret
and apply its provisions. The plan will generally be implemented through
consecutive six-month offering periods, although offering periods of up to 27
months are permitted. Offering periods generally start on the first trading day
on or after May 1 and December 1 of each year, except that the first offering
period will commence on the effective date of this offering and end on or about
November 30, 2000.
Employees, including officers and employee directors, are eligible to
participate in the 2000 Employee Stock Purchase Plan if they are customarily
employed by us or any participating subsidiary for more than 20 hours per week
and more than five months in any calendar year. However, any employee who
immediately after receiving the grant of a purchase right would own or hold
options to purchase stock possessing 5% or more of the total combined voting
power or value of all classes of our capital stock may not be granted a purchase
right under the plan. Furthermore, no employee may accrue rights to purchase
shares under the plan at a rate that exceeds $25,000 worth of stock, measured at
the beginning of the offering period, for each calendar year in which the
purchase right is outstanding at any time. Purchase rights granted under the
2000 Employee Stock Purchase Plan are not transferable by a participant other
than by will or the laws of descent and distribution.
The plan permits participants to purchase common stock through payroll
deductions of up to 20% of the participant's base salary and commissions. Such
amounts are applied to the purchase from us of shares of our common stock at the
end of each offering period at a price which is generally 85% of the lower of
the fair market value of the common stock on either the first or last day of the
offering period. The maximum number of shares a participant may purchase in any
six-month offering period is the lesser of 1,000 shares or a number of shares
determined by dividing $12,500 by the fair market value of a share of our common
stock at the beginning of the offering period. Participants may voluntarily end
their participation at any time during an offering period, and participation
ends automatically upon termination of employment with us.
The plan provides that, in the event of our merger with another
corporation or another change in control event, each outstanding purchase right
may be assumed by the surviving corporation. If the surviving corporation
refuses to assume the outstanding purchase rights, the offering period then in
progress will be shortened and a new purchase date will be set prior to the
change in control. The 2000 Employee Stock Purchase Plan will terminate when all
of the authorized shares have been issued, unless terminated earlier by our
Board of Directors. The Board of Directors has the authority to amend or
terminate the plan, subject to stockholder approval of any amendment increasing
the maximum number of shares issuable under the plan or as otherwise required by
law. Generally, no amendment or termination of the plan may adversely affect any
outstanding purchase right without the consent of the affected participant.
2000 Outside Directors Stock Plan
Our 2000 Outside Directors Stock Plan was adopted by our Board of
Directors in January 2000, and we anticipate stockholder approval in February
2000. The purpose of the plan is to attract and retain the best available
non-employee directors, to provide them additional incentives and, therefore, to
promote the success of our business. A total of 400,000 shares of our common
stock are authorized and reserved for issuance under the plan, cumulatively
increased on January 1, 2001 and each January 1 thereafter by an amount equal to
the lesser of:
- 0.20% of the outstanding shares of our common stock on the immediately
preceding December 31;
- 150,000 shares; or
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- a lesser amount determined by our Board of Directors.
Appropriate adjustments will be made to these limits, to the award
formulas described below and to awards outstanding under the plan in the event
of any change in our capital structure. If any award granted under the 2000
Outside Directors Stock Plan expires or terminates, or if we repurchase any
shares issued pursuant to an award, the shares subject to the terminated portion
and any repurchased shares will again become available for issuance under the
plan. No awards will be made under the 2000 Outside Directors Stock Plan prior
to the effective date of this offering.
The 2000 Outside Directors Stock Plan establishes an initial, automatic
grant of an option to purchase 40,000 shares of our common stock to each
non-employee director who is first elected to our Board of Directors after the
effective date of this offering. The plan also provides that upon the date of
each annual stockholders' meeting, each non-employee director who has been a
member of our Board of Directors for at least six months, including our current
non-employee directors, will receive an automatic grant of an option to purchase
10,000 shares of our common stock. Each initial and annual option will have an
exercise price per share equal to the fair market value of a share of our common
stock on the date of grant and will have a term of ten years. Initial options
granted to newly elected non-employee directors will vest and become exercisable
in four equal annual installments, while annual options granted to continuing
non-employee directors will vest and become exercisable in full on the day
immediately preceding the date of the first annual stockholders' meeting
following the date of grant. All options granted under the 2000 Outside
Directors Stock Plan will be nonstatutory stock options. They must be exercised,
if at all, within 12 months after a non-employee director's termination service
with us by reason of death or disability and otherwise within six months after
termination of service, but in no event later than the expiration of the
option's term.
In addition to the foregoing automatic stock option grants, the 2000
Outside Directors Stock Plan permits each non-employee director to elect to
receive additional equity awards in lieu of from 25% to 100% of the cash
compensation otherwise payable to the director for service on our Board of
Directors, beginning with the first full calendar quarter commencing after the
effective date of this offering. Non-employee directors' elections generally
must be made prior to the beginning of each calendar year, with exceptions for
initial elections by newly-elected non-employee directors and the commencement
of the plan. These additional equity awards may take the form of either a stock
option or a grant of stock units, as determined by the non-employee director's
prior election. The awards are granted automatically on the last day of each
calendar quarter in lieu of payment of that portion of a non-employee director's
cash compensation earned during the quarter and previously designated by the
director's election.
Stock options granted in lieu of a non-employee director's quarterly cash
compensation will be for a number of shares determined by dividing the amount of
such compensation by 50% of the fair market value of a share of our common stock
on the date of grant and will have an exercise price equal to 50% of such fair
market value. These options will have a term of ten years and will be
immediately vested and exercisable in full.
Each stock unit granted in lieu of a non-employee director's quarterly
cash compensation will represent the right to receive, without further payment,
one share of our common stock within 30 days following the earlier of a date
specified in the director's advance election or the director's termination of
service with us. The number of stock units subject to an award will be
determined by dividing the amount of the non-employee director's quarterly cash
compensation in lieu of which the stock units are awarded by the fair market
value of a share of our common stock on the date of grant. These stock units
will be fully vested upon grant. If we pay a cash dividend on our common stock,
a director who has previously received stock units will receive dividend
equivalents in the form of additional whole and fractional stock units. The
number of such additional stock units will be determined by dividing the amount
of the cash dividend that would be paid on the number of shares of common stock
represented by the director's stock units by the fair market value of a share of
our common stock on the dividend payment date. Upon settlement, the fair market
value of any fractional stock unit will be paid in cash.
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Stock options and stock units granted under the 2000 Outside Directors
Stock Plan generally are not transferable by a director other than by will or
the laws of descent and distribution, except that, with the consent of our Board
of Directors, a director may transfer stock options to certain family members or
entities established for their benefit. In the event of our merger with another
corporation or another change in control event, each outstanding initial and
annual option will become fully vested and exercisable. The plan provides that
the surviving corporation may assume outstanding awards or substitute new awards
of equivalent value. However, if the acquiring corporation refuses to assume or
substitute for outstanding awards, then outstanding stock units will be settled
in shares of our common stock immediately prior to the change in control and
outstanding options will terminate upon the change in control to the extent not
previously exercised.
The 2000 Outside Directors Stock Plan will be administered by our Board of
Directors or by a committee of the Board in a manner intended to permit
non-employee director awards to be exempt from Section 16(b) of the Securities
Exchange Act of 1934 in accordance with Rule 16b-3 thereunder. The administrator
will approve forms of award agreements for use under the plan, determine the
terms and conditions of awards consistent with the requirements of the plan, and
construe and interpret the terms of the plan and awards granted under it.
Unless terminated sooner by our Board of Directors, the 2000 Outside
Directors Stock Plan terminates automatically when all shares available for
issuance under the plan have been issued. Our Board of Directors has the
authority to amend or terminate the plan, subject to stockholder approval of any
amendment increasing the maximum number of shares issuable under the plan or as
otherwise required by law. Generally, no amendment or termination may adversely
affect any outstanding award without the consent of the affected director.
Consultants Stock Option Plan
Our Consultants Stock Option Plan was adopted by our Board of Directors in
January 1998 and approved by stockholders in February 1998. A total of 220,000
shares of our common stock are authorized and reserved for issuance under the
plan. Appropriate adjustments will be made to the share reserve and to options
outstanding under the plan in the event of any change in our capital structure.
If any option granted under the Consultants Stock Option Plan expires or
terminates, or if we repurchase any shares issued upon exercise of an option,
the shares subject to the terminated portion and any repurchased shares will
again become available for issuance under the plan. As of December 31, 1999,
options to purchase 100,972 shares of common stock were outstanding under the
Consultants Stock Option Plan, 20,000 shares had been issued upon exercise of
options, net of repurchases, and 119,028 shares were available for future grant.
The Consultants Stock Option Plan is administered by our Board of
Directors or by a committee of the Board, who determine, consistent with the
provisions of the plan, the persons to whom awards are granted and all of the
terms and conditions of such awards. The administrator has the authority to
construe and interpret the terms of the plan and awards granted under it and to
amend or terminate the plan, subject to stockholder approval of any amendment
for which such approval is required by law. Generally, no amendment or
termination may adversely affect any outstanding option without the consent of
the optionee. Unless terminated sooner by the Board of Directors, the
Consultants Stock Option Plan will terminate automatically in 2008 on the tenth
anniversary of its adoption by the Board.
The Consultants Stock Option Plan authorizes the grant of nonstatutory
stock options to persons engaged by us as independent contractors and not as
employees. The exercise price of any option and its vesting and exercise terms
are established in the sole discretion of the administrator. Unless otherwise
determined by the administrator, an option granted under the plan will have a
term of ten years. Subject to earlier termination as provided by the plan or as
otherwise provided by the administrator, options granted under the Consultants
Stock Option Plan generally must be exercised, if at all, within one month
following an optionee's termination of service with us. Options granted under
the plan are not assignable or transferable by the optionee.
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In the event of our merger with another corporation or another change in
control event, the surviving corporation may assume options outstanding under
the Consultants Stock Option Plan or substitute new options of equivalent value.
However, if the acquiring corporation refuses to assume or substitute for the
outstanding options, then the outstanding options will terminate upon the change
in control to the extent not previously exercised.
401(k) Plan
We have established an employee savings and retirement plan commonly known
as a 401(k) plan. The 401(k) plan provides that each participant may contribute
between 1% and 20% of her or his pre-tax gross compensation, up to a statutorily
prescribed annual limit of $10,500 in 2000. The 401(k) plan is intended to
qualify under Section 401(k) of the United States tax code, so that
contributions to the 401(k) plan by employees or by us and the investment
earnings on those contributions are not taxable to the employees until
withdrawn. Employees are eligible to participate on the first day of the first
month following commencement as an employee. All amounts contributed by employee
participants and earnings on these contributions are fully vested at all times.
Employee participants may elect to invest their contributions in various
established funds. While we have the option of matching our employee's
contributions with a discretionary employer contribution, we currently do not do
so. If our 401(k) plan qualifies under Section 401(k) of the United States tax
code, any contributions we make will be deductible by us.
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RELATED PARTY TRANSACTIONS
Other than compensation agreements and other arrangements, which are
described in the section entitled "Employment Agreements" under the heading
"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 exceeded or will exceed $60,000; and
- in which any director, executive officer, holder of more than 5% or our
common stock on an as-converted basis or any member of their immediate
family had or will have a direct or indirect material interest.
We believe that each of the transactions described below were on terms no
less favorable than could have been obtained from unaffiliated third parties.
All future transactions between us and any director or executive officer will be
subject to approval by a majority of the disinterested members of our Board of
Directors.
PREFERRED STOCK SALES TO DIRECTORS, OFFICERS AND 5% STOCKHOLDERS
On July 8, 1998, we sold an aggregate of 13,150,000 shares of our series A
preferred stock at a purchase price of $0.50 per share. On February 16 and March
26, 1999, we sold an aggregate of 13,181,818 shares of our series B preferred
stock at a purchase price of $1.10 per share. On December 13, 1999 we sold an
aggregate of 24,332,061 shares of our series C preferred stock at a purchase
price of $5.24 per share. The following officers, directors and 5% stockholders
purchased shares in these financings:
<TABLE>
<CAPTION>
SHARES OF SHARES OF SHARES OF
PURCHASER SERIES A STOCK SERIES B STOCK SERIES C STOCK
- --------- -------------- -------------- --------------
<S> <C> <C> <C>
NBC and General Electric Entities(1):
National Broadcasting Company, Inc............... -- -- 6,679,389
GE Capital Equity Investments, Inc............... -- -- 1,049,618
NBC Internet, Inc.(2).............................. -- -- 5,343,511
August Capital, L.P. Entities(3):
August Capital, L.P.............................. 6,539,100 3,229,838 618,321
August Capital Strategic Partners, L.P........... 227,200 112,220 --
August Capital Associates, L.P................... 333,700 164,824 --
August Capital II, L.P........................... -- -- 1,908,397
Bessemer Venture Partners Entities(4):
Bessemer Venture Partners IV L.P................. 2,633,900 1,172,716 870,229
Bessec Ventures IV L.P........................... 1,686,100 746,272 580,153
Bessemer Venture Investors L.P................... 480,000 213,220 --
Mohr, Davidow Ventures Entities(5):
Mohr, Davidow Ventures V, L.P.................... -- 4,227,274 354,961
Mohr, Davidow Ventures V, L.P. (6)............... -- 318,182 26,718
Mohr, Davidow Ventures V-L, L.P.................. -- -- 1,717,558
Michael Solomon.................................. 410,000 139,662 --
Patti Hart......................................... -- -- 381,679
Peter Olson........................................ 320,000 -- 588,022
Kevin Grundy....................................... 70,000 -- 1,908
</TABLE>
- ---------------
(1) National Broadcasting Company, Inc. and GE Capital Equity Investments, Inc.
are affiliated entities and are together considered a 5% stockholder.
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(2) NBC Internet, Inc. is a 5% stockholder. Mr. Sanctis, one of our directors,
is President and Chief Operating Officer of NBC Internet, Inc.
(3) August Capital, L.P., August Capital Strategic Partners, L.P. and August
Capital Associates, L.P. are affiliated entities and are together considered
a 5% stockholder. Mr. Rappaport, one of our directors, is a member of August
Capital Management and has shared voting and investment power over these
entities.
(4) Bessemer Venture Partners IV L.P., Bessec Ventures IV L.P., Bessemer Venture
Investors L.P., Besstel LLC and Bessemer Capital are all affiliated entities
and are together considered a 5% stockholder. Mr. Cowan, one of our
directors, is the Managing General Partner of Bessemer Venture Partners.
(5) Mohr, Davidow Ventures V, L.P., MDV Entrepreneurs' Network Fund II (A),
L.P., MDV Entrepreneurs' Network Fund II (B), L.P., and Mr. Solomon are
affiliated entities and are together considered a 5% stockholder. Mr.
Solomon, one of our directors and our former CEO and President, is a member
of Fifth MDV Partners, the General Partner of Mohr, Davidow Ventures V, L.P.
Mr. Strahan, one of our directors, is a Venture Partner at Mohr, Davidow.
(6) Includes those shares held by Mohr, Davidow Ventures V, L.P. as nominee for
MDV Entrepreneurs' Network Fund II (A), L.P. and MDV Entrepreneurs' Network
Fund II (B), L.P.
STRATEGIC RELATIONSHIP WITH NBCI
In December 1999, we entered into a number of strategic agreements with
NBCi and its affiliates. These agreements include:
- an operating agreement;
- two advertising agreements;
- a Series C Preferred Stock Purchase Agreement; and
- an investor rights agreement.
Our operating agreement with NBCi provides for the joint development of
co-branded services, portal design, content offerings and associated software
and utilities, as well as the joint development of interfaces to deliver
services and content to other devices throughout the home. The operating
agreement also provides that NBCi will be our exclusive provider of Internet
content in the areas of utility, communications, media and entertainment. If
NBCi does not provide content that we request within these categories, we may
obtain this content from a third party other than a competitor of NBCi; however,
if the desired content is only available from a sole provider, we may obtain the
content from that sole provider, even if it is a competitor of NBCi. The
operating agreement also provides that we must negotiate with GE Americom for a
period of 30 days before we negotiate with any other satellite connectivity
provider. The term of the operating agreement is 15 years; however, either party
may terminate the agreement for an uncured material breach and NBCi may
terminate the operating agreement if we become insolvent or if an NBCi
competitor listed in the agreement acquires more than a 33% interest in us.
At the general commercial launch of the jointly developed Telocity/NBCi
interface, NBCi will pay us 40% of net revenues received by any NBCi entity from
advertising to our customers, as well as from e-mail commerce, subscription and
pay-per-view media, including revenues derived from direct marketing e-mail
solicitations to our customers and advertising placed on the co-branded version
of the Snap.com portal. NBCi will receive 10% of the gross revenues generated
from subscription fees, value-added services and applications for which NBCi
does not offer a similar service or content. If both parties offer similar
services or content, each has agreed to pay the other party 40% of the net
revenue generated from its similar service or content. Finally, the operating
agreement provides that we will pay NBCi 40% of the revenues generated from the
placement of content provided by third parties.
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The operating agreement also provides that between December 1999 and
December 2002 NBCi will provide us with online advertising of our services
valued at $5 million. The related advertising agreements provide that during
calendar years 2000, 2001 and 2002 NBC and NBCi will provide us with $28 million
in promotional time on the NBC television network at discounted rates of which
$13 million must be used to air co-branded advertising spots. Additionally, NBCi
has agreed that until December 2002, it will not use television within its
control to promote broadband services provided by any of the competitors we
identified to NBCi. NBCi has the right to terminate this promotional exclusivity
if we fail to launch our service in at least 16 markets by the end of 2000 and
26 markets by the end of 2001, if Patti Hart leaves Telocity or if we fail to
obtain sufficient financing to support our expansion plans by June 2001. In
addition, if either the promotional exclusivity or the operating agreement is
terminated, NBCi may terminate its advertising agreement with us and provide us
with cash for the unused portion of advertising or provide us with advertising
credit for spots that do not have to be co-branded.
In connection with the operating agreement, we issued NBCi a warrant to
purchase 1,039,122 shares of our common stock and NBC a warrant to purchase
850,191 shares of our Series C Preferred Stock. These warrants terminate in
December 2004 and have an exercise price of $5.24 per share. In addition, in
connection with this transaction we entered into a stock purchase agreement
pursuant to which we issued to GE Capital, NBC, NBCi and ValueVision, an
affiliate of NBCi, a total of 13,454,198 shares of our Series C Preferred Stock
in exchange for a cash payment of $37.5 million and $33 million in advertising
credit provided through the operating agreement and the advertising agreements.
In connection with the sale of our stock we entered into an amended and
restated investor rights agreement that provides for registration rights for all
of our preferred stockholders, including NBCi and its affiliates. The investor
rights agreement also provides that for a period of two years following the
closing of this offering our founders and preferred stockholders agree to vote
their shares to elect a designee of NBC to the Board of Directors, so long as
NBC holds at least two-thirds of the shares which it initially purchased, and a
designee of NBCi to the Board of Directors. In addition, so long as NBC or NBCi
and their affiliates collectively own at least 2,500,000 shares of our common
stock and neither party has terminated the operating agreement, we have agreed
to negotiate exclusively with either NBC or NBCi for a period of 30 days for the
purchase of Telocity if we decide to sell our company or we receive a third
party offer to buy a 20% or greater interest in our company and we may not sell
our company or our assets to a third party on terms that are more favorable to
us than those last offered by NBC or NBCi.
LOANS TO OFFICERS AND DIRECTORS
The following officers and directors have executed Recourse Promissory
Note and Pledge Agreements in order to finance the exercise of their stock
options. As collateral, the holder of the shares of stock purchased through each
Note pledges the stock to us. Each Note represents a debt to us that the holder
must repay, with interest, and the interest accrues and shall be payable to us
on the anniversary date of the Note. Except for Ms. Hart and Mr. Morrissey, each
holder must repay us by the earliest of:
- the maturity date of the Note,
- the termination of the holder's employment with us,
- a default in the payment of any installment of principal or interest
when due,
- a sale of the stock pledged as collateral or
- any other such acceleration reasonably necessary for us to comply with
any regulations promulgated by the Board of Governors of the Federal
Reserve System affecting the extension of credit in connection with our
securities.
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The terms of the Notes with Ms. Hart and Mr. Morrissey provide that they
must repay us by the earliest of:
- the maturity date of the Note,
- the date of termination of their employment with us for any reason or
- the date occurring 12 months after they are first eligible to sell
shares of our stock following an initial public offering, provided,
however, that should they be terminated without cause, as that term is
defined in their Notes, they would not be required to repay upon their
termination, but instead upon the earlier occurrence of conditions (a)
or (c).
<TABLE>
<CAPTION>
PLEDGED STOCK MATURITY DATE
NOTE HOLDER DATE OF NOTE AMOUNT INTEREST RATE AS COLLATERAL OF NOTE
- ----------- ------------------ ------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Patti Hart............. June 22, 1999 $1,029,196.00 5.22% 2,940,560 May 5, 2004
June 22, 1999 99,999.90 5.22 285,714 May 5, 2004
Edward Hayes........... January 5, 2000 1,010,001.00 5.82 336,667 January 5, 2005
January 5, 2000 99,999.00 5.82 33,333 January 5, 2005
Jim Morrissey.......... September 21, 1999 500,001.00 5.82 666,668 October 1, 2004
September 21, 1999 99,999.00 5.82 133,332 October 1, 2004
Scott Martin........... December 16, 1999 635,001.00 5.82 211,667 December 16, 2004
December 16, 1999 99,999.00 5.82 33,333 December 16, 2004
Regina Wiedemann....... October 26, 1999 360,000.00 5.82 240,000 October 26, 2004
James Rohrer........... September 20, 1999 75,000.00 5.82 100,000 September 20, 2004
December 2, 1999 150,000.00 5.82 100,000 December 2, 2004
Andrew Robinson........ June 18, 1999 35,000.00 4.51 100,000 June 18, 2004
June 23, 1999 3,500.00 4.51 20,000 June 23, 2004
October 22, 1999 30,000.00 5.82 20,000 October 22, 2004
December 9, 1999 120,000.00 5.82 80,000 December 9, 2004
</TABLE>
In addition, pursuant to our employment agreement with Mr. Morrissey, we
make a monthly home allowance of $20,000 to him for a period of 24 months
beginning October 1, 1999. Also pursuant to his employment agreement, on
December 6, 1999 and January 5, 2000, we loaned him $900,000 and $1,100,000,
respectively, at the AFR, the applicable federal interest rate determined by the
United States Internal Revenue Service. The terms of these loans, including
forgiveness and repayment, are described above in "Management -- Employment
Agreements."
INVESTOR RIGHTS AGREEMENT
We have entered into an agreement with the preferred stockholders
described above pursuant to which these and other preferred stockholders will
have registration rights with respect to their shares of common stock following
this offering. For a description of these registration rights, see "Description
of Capital Stock." Upon the completion of this offering, all shares of our
outstanding preferred stock will be automatically converted into an equal number
of shares of common stock.
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STOCK OPTION GRANTS TO DIRECTORS AND OFFICERS
During 1999, we granted the following options to purchase our common stock
to our officers, directors and stockholders who beneficially own 5% or more of
our common stock. These options were granted under the 1998 Stock Plan, which is
more fully described in the section entitled "Management -- Stock Plans."
<TABLE>
<CAPTION>
EXERCISE PRICE
NAME DATE OF GRANT OPTIONS PER SHARE
- ---- ------------------ ---------- --------------
<S> <C> <C> <C>
Patti Hart................................ April 30, 1999 3,226,274 $0.350
Peter Olson............................... June 25, 1999 7,714 0.575
Edward Hayes.............................. December 15, 1999 370,000 3.000
Jim Morrissey............................. September 10, 1999 800,000 0.750
James Rohrer.............................. August 26, 1999 100,000 0.750
November 15, 1999 100,000 1.500
Scott Martin.............................. December 15, 1999 245,000 3.000
Thomas Obenhuber.......................... June 25, 1999 5,142 0.575
Regina Wiedemann.......................... September 28, 1999 240,000 1.500
Jef Raskin................................ November 15, 1999 120,000 1.500
Andrew Robinson........................... March 12, 1999 20,000 0.175
April 30, 1999 100,000 0.350
September 28, 1999 20,000 1.500
November 15, 1999 80,000 1.500
Randall Strahan........................... January 20, 1999 200,000 0.050
</TABLE>
FOUNDER STOCK PURCHASE AND REPURCHASE AGREEMENTS
On December 23, 1997, we entered into Founder Stock Purchase Agreements
with Messrs. Olson, Solomon, Obenhuber and Stepovich. In these agreements, the
founders agreed to purchase shares of our common stock at a price of $0.0005 per
share, as set forth in the table below. Each founder's purchase of his shares is
subject to our right to repurchase his shares at the exercise price, which right
lapses as the shares vest. 11/32 of each of the founder's shares vested
immediately and the remaining vest subsequently at a rate of 1/42 per month of
the remaining total so long as the founder is continuously employed by us. Our
option to repurchase the unvested options may terminate upon a transfer of
control, as defined and set forth in the agreements. The agreements give us a
right of first refusal before a founder may transfer or sell any of his shares.
The agreements also provide each founder piggyback registration rights as set
forth in the agreements.
In order to reallocate our founders' stock, we entered into agreements to
repurchase, then redistribute certain founders' shares. On June 1, 1998, we
entered into Founder Stock Repurchase Agreements with Mr. Olson and Mr. Solomon
to repurchase 2,662,000 shares of our common stock from Mr. Olson at a price of
$0.0005 per share and 154,000 shares of our common stock from Mr. Solomon at a
price of $0.0005 per share. The table below sets forth the adjusted grants to
Mr. Olson and Mr. Solomon, which gives effect to our repurchase of some of their
shares. On June 10, 1998, we entered into supplemental Founder Stock Purchase
Agreements with Messrs. Obenhuber, Grundy and Stepovich, whereby each was
granted shares of our common stock. In these agreements, Messrs. Obenhuber,
Grundy and Stepovich agreed to purchase shares of our common stock at a price of
$0.005 per share, as also set forth in the table below. Each founder's purchase
of his shares is subject to our right to repurchase his shares at the exercise
price, which right lapses as the shares vest. 7/48 of each of the supplemental
founders' shares vested immediately and the remaining subsequently at a rate of
1/42 per month of the remaining total so long as the founder is continuously
employed by us. Our option to repurchase the unvested options may terminate upon
a transfer of control, as defined and set forth in the supplemental agreements.
The supplemental agreements give us a right of first refusal before a founder
may transfer or
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sell any of his shares. The supplemental agreements also provide each founder
piggyback registration rights as set forth in the agreements.
<TABLE>
<CAPTION>
REMAINING
MONTHLY
TOTAL SHARES AND PRICE INITIAL SHARE VESTING SHARE VESTING
------------------------ --------------------------------- -----------------
INITIAL PORTION NUMBER PORTION NUMBER
TOTAL NUMBER PRICE PER VESTING VESTED VESTED VESTING VESTING
OF SHARES SHARE DATE INITIALLY INITIALLY MONTHLY MONTHLY
------------ --------- --------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael Solomon.......... 1,400,000 $0.0005 10/3/97 11/32 481,250 1/42 21,876
Peter Olson.............. 2,000,000 0.0005 10/3/97 11/32 687,500 1/42 31,250
Kevin Grundy............. 1,600,000 0.0050 12/3/97 7/48 233,328 1/42 33,328
Thomas Obenhuber......... 480,000 0.0005 12/3/97 1/8 60,000 1/42 10,000
1,120,000 0.0050 12/3/97 7/48 163,332 1/42 23,334
Matthew Stepovich........ 144,000 0.0005 12/3/97 1/8 18,000 1/42 3,000
356,000 0.0050 12/3/97 7/48 51,916 1/42 7,416
</TABLE>
ACQUISITION OF TECHNOLOGY AND INTELLECTUAL PROPERTY OF ASPEN INTERNET SYSTEMS,
INC.
On October 3, 1997, we entered into a Common Stock Purchase Agreement with
Aspen Internet Systems, Inc. in which we granted to Aspen the option to purchase
504,000 shares of our common stock at a price of $0.0005 per share in exchange
for the execution of a patent license agreement. In the first quarter of 1998 we
acquired assets constituting certain completed technology that has been
incorporated in our residential gateway in exchange for the following
consideration:
- promissory notes with an aggregate principal amount of $405,000 bearing
a 6.0% annual interest rate;
- an aggregate of 40,572 shares of our common stock;
- cash in the amount of $80,000; and
- options to purchase 280,000 shares of our common stock.
Mr. Grundy was a founder of Aspen and had served as its President and
Chief Executive Officer until our acquisition of Aspen. Mr. Grundy currently
holds the positions of President, Secretary and Chief Financial Officer of
Aspen. Mr. Olson and Mr. Solomon both had served on the board of directors of
Aspen until April 2, 1998, when Mr. Stepovich became its sole director.
BRIDGE LOANS
On November 15, 1999, in advance of the close of our Series C preferred
stock financing, we entered into convertible bridge loan transactions with Ms.
Hart and Mr. Olson. Each bridge loan was made at an annual interest rate of
12.0%, due within 60 days, required 5.0% warrant coverage and was to be
converted upon the close of our Series C preferred stock financing. Ms. Hart's
loan was for $2,000,000 and Mr. Olson's loan was for $3,000,000. When we closed
our Series C preferred stock financing on December 13, 1999, Ms. Hart's loan was
converted into 381,679 shares of Series C preferred stock and Mr. Olson's loan
was converted into 572,519 shares of Series C preferred stock. In connection
with the loans we paid $21,041 and $31,562 in interest to Ms. Hart and Mr.
Olson, respectively. In addition to the 5.0% warrant coverage, Ms. Hart and Mr.
Olson own warrants for 19,084 shares and 28,626 shares, respectively, for the
purchase of our preferred stock at an exercise price of $5.24 per share.
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<PAGE> 78
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of December 31, 1999 and as adjusted
to reflect the sale of common stock offered hereby by the following:
- each stockholder known by us to own beneficially more than 5% of our
common stock;
- each of our executive officers named in the compensation table in the
section entitled "Management;"
- each of our directors; and
- all directors and executive officers as a group.
The address for those individuals for which an address is not otherwise
indicated is 10355 North De Anza Boulevard, Cupertino, California 95014.
The number of shares beneficially owned and the percent of shares
outstanding are based on (a) 70,946,149 shares outstanding as of December 31,
1999 and (b) shares outstanding after completion of this offering, assuming
no exercise of the underwriters' over-allotment option. Beneficial ownership is
determined in accordance with the rules of the SEC and generally includes voting
or investment power with respect to securities. All shares of common stock
subject to options exercisable within 60 days following December 31, 1999 are
deemed to be outstanding and beneficially owned by the person holding those
options for the purpose of computing the number of shares beneficially owned and
the percent of ownership of that person. They are not, however, deemed to be
outstanding and beneficially owned for the purpose of computing the percent
ownership of any other person. Except as indicated in the other footnotes to the
table and subject to applicable community property laws, based on information
provided by the persons named in the table, these persons have sole voting and
investment power with respect to all shares of the common stock shown as
beneficially owned by them.
<TABLE>
<CAPTION>
PERCENT OF SHARES
SHARES OUTSTANDING(1) SHARE SUBJECT
BENEFICIALLY -------------------- TO RIGHT OF
OWNED PRIOR PRIOR TO AFTER REPURCHASE AS
NAME OR GROUP OF BENEFICIAL OWNERS TO OFFERING(1) OFFERING OFFERING OF 12/31/99
- ---------------------------------- -------------- -------- -------- --------------
<S> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
David Cowan(1)................................. 9,050,088 12.8% %
Bessemer Ventures Partners
535 Middlefield Road, Suite 245
Menlo Park, California 94025
Patti Hart..................................... 3,613,037 5.1 2,822,990
Peter Olson.................................... 2,426,648 3.4 500,000
Andrew Rappaport(2)............................ 15,026,102 21.2
August Capital
2480 Sand Hill Road, Suite 101
Menlo Park, California 94025
Edmond Sanctis(3).............................. 6,382,632 8.9
NBC Internet, Inc.
225 Bush Street
San Francisco, California 94104
Michael Solomon(4)............................. 8,538,355 12.0
Mohr, Davidow Ventures
2775 Sand Hill Road
Menlo Park, California 94025
</TABLE>
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<PAGE> 79
<TABLE>
<CAPTION>
PERCENT OF SHARES
SHARES OUTSTANDING(1) SHARE SUBJECT
BENEFICIALLY -------------------- TO RIGHT OF
OWNED PRIOR PRIOR TO AFTER REPURCHASE AS
NAME OR GROUP OF BENEFICIAL OWNERS TO OFFERING(1) OFFERING OFFERING OF 12/31/99
- ---------------------------------- -------------- -------- -------- --------------
<S> <C> <C> <C> <C>
Randall Strahan(5)............................. 6,914,693 9.7
Mohr, Davidow Ventures
2775 Sand Hill Road
Menlo Park, California 94025
Kevin Grundy................................... 1,618,908 2.3 566,800
Jim Morrissey.................................. 800,000 1.1 800,000
Thomas Obenhuber............................... 1,600,000 2.3 576,552
All directors and officers as a group (17
persons)(6).................................. 51,776,954 71.6
5% STOCKHOLDERS:
Entities affiliated with August Capital,
L.P.(2)...................................... 15,026,102 21.2
2480 Sand Hill Road, Suite 101
Menlo Park, California 94025
NBC Internet, Inc.(3).......................... 6,382,632 8.9
225 Bush Street
San Francisco, California 94104
Entities affiliated with National Broadcasting
Company Inc.(7).............................. 8,579,198 11.9
30 Rockefeller Plaza
New York, NY 10112
Entities affiliated with Bessemer Venture
Partners(1).................................. 9,050,088 12.8
1400 Old Country Road, Suite 407
Westbury, New York 11590
Entities affiliated with Mohr, Davidow
Ventures(7).................................. 8,808,355 12.4
2775 Sand Hill Road
Menlo Park, California 94025
</TABLE>
- ---------------
(1) Includes:
- 5,043,123 shares held by Bessemer Venture Partners IV L.P.;
- 3,246,997 shares held by Bessec Ventures IV L.P.; and
- 759,968 shares held by Bessemer Venture Investors L.P.
The general partner of Bessemer Venture Partners IV L.P. is David Cowan. In
this capacity, Mr. Cowan, through an executive committee, exercises sole
voting and investment power with respect to all shares held of record by
the named investment partnerships; individually, no stockholder, director
or officer of Bessemer Venture Partners IV L.P. has or shares such voting
or investment power. Mr. Cowan disclaims beneficial ownership of shares
held by these entities except to the extent of his pecuniary interest in
these entities.
(2) Includes:
- 12,130,253 shares held by August Capital, L.P.;
- 399,980 shares held by August Capital Strategic Partners, L.P.;
- 587,472 shares held by August Capital Associates, L.P.; and
- 1,908,397 shares held by August Capital II, L.P.
The general partner of August Capital L.P. is Andrew Rappaport. In this
capacity, Mr. Rappaport, through an executive committee, exercises sole
voting and investment power with respect to all
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<PAGE> 80
shares of record by the named investment partnerships; individually, no
stockholder, director or officer of August Capital L.P. has or shares such
voting or investment power. Mr. Rappaport disclaims beneficial ownership of
shares held by these entities except to the extent of his pecuniary
interest in these entities.
(3) Includes 5,343,510 shares held by NBC Internet, Inc. Also includes warrants
to purchase 1,039,122 shares held by NBC Internet, Inc., all of which are
exercisable at $5.24 a share. Mr. Sanctis disclaims beneficial ownership of
these shares except to the extent of his pecuniary interest in NBC
Internet, Inc.
(4) Includes 4,582,235 shares held by Mohr, Davidow Ventures V, L.P., 344,900
shares held by Mohr, Davidow Ventures V, L.P. as nominee for MDV
Entrepreneurs' Network Fund II (A), L.P. and MDV Entrepreneurs' Network
Fund II (B), L.P. and 1,717,558 shares held by Mohr, Davidow Ventures V-L,
L.P.
Mr. Solomon is a member of Fifth MDV Partners, the General Partner of Mohr,
Davidow Ventures V, L.P. In this capacity, Mr. Solomon, through an
executive committee, exercises sole voting and investment power with
respect to all shares held of record by the named investment partnerships;
individually, no stockholder, director or officer of Mohr Davidow Ventures
V L.P. has or shares such voting or investment power. Mr. Solomon disclaims
beneficial ownership of shares held by these entities except to the extent
of his pecuniary interest therein. In addition to the 6,644,693 shares held
by the entities affiliated with Mohr, Davidow Ventures, Mr. Solomon
personally also holds 1,893,662 shares, which includes 349,974 shares
subject to our right of repurchase as of December 31, 1999, which lapses
over time so long as Mr. Solomon continues to serve as an advisor to us.
(5) Includes:
- 4,582,235 shares held by Mohr, Davidow Ventures V, L.P., 344,900 shares
held by Mohr, Davidow Ventures V, L.P. as nominee for MDV Entrepreneurs'
Network Fund II (A), L.P. and MDV Entrepreneurs' Network Fund II (B),
L.P.; and
- 1,717,558 shares held by Mohr, Davidow Ventures V-L, L.P. Mr. Strahan is
a Venture Partner with Mohr, Davidow Ventures.
In this capacity, Mr. Strahan, through an executive committee, exercises
sole voting and investment power with respect to all shares held of record
by the named investment partnerships; individually, no stockholder,
director or officer of Mohr Davidow Ventures has or shares such voting or
investment power. Mr. Strahan disclaims beneficial ownership of shares held
by these entities except to the extent of his pecuniary interest therein.
In addition to the 6,644,693 shares held by the entities affiliated with
Mohr, Davidow Ventures, Mr. Strahan personally also holds 270,000 shares.
(6) Includes the shares beneficially owned by the persons and entities
described in footnotes (1), (2), (3), (4) and (5). Also includes 600,000
shares over which Mr. Stepovich holds voting and investment power solely as
Trustee of the Olson 1999 Childrens Trust; Mr. Stepovich disclaims
beneficial ownership of these shares. Although Mr. Hayes did not begin his
employment with us until January 3, 2000, these numbers include Mr. Hayes
as an officer and those shares he subsequently exercised on January 5, 2000
as shares exercisable within 60 days of December 31, 1999.
(7) Includes:
- 6,679,389 shares held by NBC-TLCT Holding, Inc. and
- 1,049,618 shares held by GE Capital Equity Investments, Inc.
Also includes warrants to purchase 850,191 shares held by NBC-TLCT Holding,
Inc., all of which are exercisable at $5.24 a share.
(8) Includes:
- 4,582,235 shares held by Mohr, Davidow Ventures V, L.P.;
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<PAGE> 81
- 344,900 shares held by Mohr, Davidow Ventures V, L.P. as nominee for MDV
Entrepreneurs' Network Fund II (A), L.P. and MDV Entrepreneurs' Network
Fund II (B), L.P.; and
- 1,717,558 shares held by Mohr, Davidow Ventures V-L, L.P.
Also includes 1,893,662 shares held by Mr. Solomon personally and 270,000
shares held by Mr. Strahan personally.
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<PAGE> 82
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
260,000,000 shares, $0.001 par value per share, to be divided into two classes
to be designated common stock and preferred stock. Of the shares authorized,
250,000,000 shares shall be designated as common stock and 10,000,000 shares
shall be designated as preferred stock. The following description of our capital
stock is only a summary. You should refer to our certificate of incorporation
and bylaws as in effect upon the closing of this offering, which are included as
exhibits to the registration statement of which this prospectus forms a part,
and by the provisions of applicable Delaware law.
COMMON STOCK
As of December 31, 1999, there were 70,946,149 shares of common stock
outstanding which were held of record by approximately stockholders. There
will be shares of common stock outstanding (assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options after
September 30, 1999) after giving effect to the sale of our common stock in this
offering. There are outstanding unexercised options to purchase a total of
1,873,442 shares of our common stock.
The holders of our common stock are entitled to one vote per share held of
record on all matters submitted to a vote of the stockholders. Our amended and
restated certificate of incorporation to be filed concurrently with completion
of this offering does not provide for cumulative voting in the election of
directors. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by our Board of
Directors out of funds legally available for that purpose. In the event of our
liquidation, dissolution or winding up, holders of our common stock are entitled
to share ratably in all assets remaining after payment of liabilities, subject
to prior distribution rights of preferred stock, if any, then outstanding.
Holders of our common stock have no preemptive or other subscription or
conversion rights. There are no redemption or sinking fund provisions applicable
to our common stock.
PREFERRED STOCK
Upon the completion of this offering and filing of our amended and
restated certificate of incorporation, our Board of Directors will be
authorized, without action by the stockholders, to issue 10,000,000 shares of
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions of these shares. These rights, preferences and
privileges may include dividend rights, conversion rights, voting rights, terms
of redemption, liquidation preferences, sinking fund terms and the number of
shares constituting any series or the designation of any series, all or any of
which may be greater than the rights of the common stock. It is not possible to
state the actual effect of the issuance of all shares of preferred stock upon
the right of holders of our common stock until our Board of Directors determines
the specific rights of the holders of any preferred stock that may be issued.
However, the effect might include, among other things:
- restricting dividends on the common stock,
- diluting the voting power of the common stock,
- impairing the liquidation rights of the common stock and
- delaying or preventing a change in our control without further action by
the stockholders.
Upon the closing of this offering, no shares of preferred stock will be
outstanding and we have no present plans to issue any shares of preferred stock.
REGISTRATION RIGHTS
The holders of approximately 50,663,879 shares of preferred stock 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.
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<PAGE> 83
Demand registration rights
- At any time after the earlier of February 16, 2002 and six months after
the closing of this offering the holders of at least 10% of the shares
having registration rights have the right to demand on four separate
occasions that we file a registration statement on a form other than
Form S-3 so that they can publicly sell their shares, as long as the
aggregate market value of the shares to be sold under the registration
statement exceeds $5 million. The underwriters of any underwritten
offering will have the right to limit the number of shares to be
included in the registration.
- If we are eligible to file a registration statement on Form S-3, holders
of at least 10% of the shares having registration rights have the right
to demand at any time more than six months following the closing of a
registration that we file a registration statement on Form S-3, as long
as the aggregate market value of the shares to be sold under the
registration statement exceeds $1 million. The underwriters of any
underwritten offering will have the right to limit the number of shares
to be included in the registration.
Piggyback registration rights
If we register any shares for public sale, stockholders with registration
rights will have the right to include their shares in the registration. The
underwriters of any underwritten offering will have the right to limit the
number of shares to be included in the registration; provided that the number of
shares to be included by holders with registration rights in the registration
shall not be reduced below 50% of the total number of shares to be included in
the registration. In addition, the underwriters of this offering have the right
to exclude all shares held by holders with registration rights.
Expenses of registration
We will pay all expenses relating to any demand or piggyback registration.
However, we will not pay for the 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 seven years after this
offering is completed. The registration rights will terminate earlier for a
particular stockholder if that holder can resell all of its shares pursuant to
Rule 144 of the Securities Act.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of Delaware law and our certificate of incorporation
and bylaws could make our acquisition more difficult by means of a tender offer,
a proxy contest or otherwise and could also make the removal of incumbent
officers and directors more difficult. These provisions, summarized below, are
expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
us to first negotiate with us. We believe that the benefits of increased
protection of our potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure us outweighs the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms. The
amendment of any of the following provisions would require approval by holders
of at least 66 2/3% of our outstanding common stock.
BOARD OF DIRECTORS
Effective with the first annual meeting of stockholders following
completion of this offering, our amended and restated bylaws provide for the
division of our Board of Directors into three classes, as nearly equal in number
as possible, with the directors in each class serving for a three-term, and one
class being
78
<PAGE> 84
elected each year by our stockholders. 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 and may maintain the incumbency of
the Board of Directors, as it generally makes it more difficult for stockholders
to replace a majority of the directors. Further, our amended and restated
certificate of incorporation filed in connection with this offering and restated
bylaws do not provide for cumulative voting in the election of directors.
STOCKHOLDER MEETINGS
Under our amended and restated certificate of incorporation and amended
and restated bylaws, only our Board of Directors, Chairman of the Board or Chief
Executive Officer may call special meetings of stockholders. Our restated bylaws
establish advance notice procedures with respect to stockholder proposals and
the nomination of candidates for election as directors, other than nominations
made by or at the direction of the Board of Directors or a committee of the
Board of Directors.
UNDESIGNATED PREFERRED STOCK
The authorization of undesignated preferred stock makes it possible for
the Board of Directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to effect a change of
control of us. These and other provisions may have the effect of deferring
hostile takeovers or delaying changes in control or management.
SECTION 203
We are subject to Section 203 of the Delaware General Corporation Law. In
general, the statute prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the date that the stockholder became an interested stockholder unless:
- prior to the date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who
are directors and also officers, and employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
- on or subsequent to the date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by
the interested stockholder.
Section 203 defines "business combination" to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
- subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
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<PAGE> 85
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C.
NASDAQ STOCK MARKET NATIONAL MARKET LISTING
We have applied to have our common stock quoted on The Nasdaq Stock
Market's National Market under the symbol "TLCT."
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<PAGE> 86
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of our common stock in the
public market could adversely affect the market price of our common stock.
Upon completion of this offering, based on shares outstanding as of
December 31, 1999, we will have outstanding shares of common stock, assuming
(1) the issuance of shares of common stock in this offering, (2) no exercise
of the underwriters' over-allotment option, and (3) no exercise of options after
December 31, 1999.
All of the shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act. However, the sale
of any of these share if purchased by "affiliates" as that term is defined in
Rule 144 are subject to certain limitations and restrictions that are described
below.
The remaining 70,946,149 shares of common stock and mandatorily redeemable
convertible preferred stock held by existing stockholders were issued and sold
by us in reliance on exemptions from the registration requirements of the
Securities Act. These shares are "restricted shares" as that term is defined in
Rule 144 and therefore may not be sold publicly unless they are registered under
the Securities Act or are sold pursuant to Rule 144 or another exemption from
registration. In addition, our directors and officers as well as other
stockholders and optionholders have entered into "lock-up agreements" with the
underwriters. These lock-up agreements provide that, except under limited
exceptions, the stockholder may not offer, sell, contract to sell, pledge or
otherwise dispose of any of our common stock or securities that are convertible
into or exchangeable for, or that represent the right to receive, our common
stock for a period of 180 days after the date of this prospectus. Merrill Lynch,
Pierce, Fenner & Smith Incorporated, however, may in its sole discretion, at any
time without notice, release all or any portion of the shares subject to lock-up
agreements. Accordingly, of the remaining 70,946,149 shares, shares will
become eligible for sale 180 days after the effective date subject to Rules 144
and 701.
As of December 31, 1999, there were a total of 1,873,442 shares of common
stock subject to outstanding options, 123,158 of which were vested, and nearly
all of which are subject to lock-up agreements. Immediately after the completion
of the offering, we intend to file registration statements on Form S-8 under the
Securities Act to register all of the shares of common stock issued or reserved
for future issuance under our 1998 Stock Plan, our 2000 Employee Stock Purchase
Plan and our 2000 Outside Directors Stock Plan. On the date 180 days after the
effective date of the offering, the date that the lock-up agreements expire, a
total of shares of our common stock subject to outstanding options will be
vested. After the effective dates of the registration statements on Form S-8,
shares purchased upon exercise of options granted pursuant to our 1998 Stock
Plan, our 2000 Employee Stock Purchase Plan and our 2000 Outside Directors Stock
Plan generally would be available for resale in the public market.
RULE 144
In general, under Rule 144 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 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
Stock Market's National Market during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain other requirements
regarding the manner of sale, notice filing and the availability of current
public information about us.
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<PAGE> 87
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have 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,
generally including the holding period of any prior owner other than an
"affiliate," is entitled to sell such shares without complying with the manner
of sale, notice filing, volume limitation or notice provisions of Rule 144.
Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately
upon the completion of this offering.
RULE 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to resell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with certain restrictions, including the holding period, contained in
Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of such options (including exercises after the date of this
prospectus). Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual lock-up restrictions described above, beginning
90 days after the date of this prospectus, may be sold by persons other than
"affiliates," as defined in Rule 144, subject only to the manner of sale
provisions of Rule 144. Securities issued in reliance on Rule 701 may be sold by
"affiliates" under Rule 144 without compliance with its one-year minimum holding
period requirement.
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UNDERWRITING
GENERAL
We intend to offer our common stock in the United States through a number
of underwriters. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit
Suisse First Boston Corporation and Donaldson, Lufkin & Jenrette Securities
Corporation are acting as representatives of each of the underwriters named
below. Subject to the terms and conditions set forth in a purchase agreement
among our company and the underwriters, we have agreed to sell to the
underwriters, and each of the underwriters severally and not jointly has agreed
to purchase from us, the number of shares of common stock set forth opposite its
name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ------------------------------------------------------------ ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Credit Suisse First Boston Corporation......................
Donaldson, Lufkin & Jenrette Securities Corporation.........
--------
Total..........................................
--------
</TABLE>
In the purchase agreement, the underwriters have agreed to purchase all of
the shares being sold if any of the shares being sold are purchased. In the
event of a default by an underwriter, the purchase agreement provides that, in
certain circumstances, the purchase commitments by the nondefaulting
underwriters may be increased or the purchase agreement may be terminated.
We have agreed to indemnify the underwriters against some liabilities
under the Securities Act, or to contribute to payments the underwriters may be
required to make in respect of those liabilities.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the underwriters and certain
other conditions. The underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part.
COMMISSIONS AND DISCOUNTS
The representatives have advised us that the underwriters propose
initially to offer the shares of common stock to the public at the public
offering price set forth on the cover page of this prospectus, and to certain
dealers at such price less a concession not in excess of $ per share of
common stock. The underwriters may allow, and such dealers may reallow, a
discount not in excess of $ per share of common stock to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The following table shows the per share and the total public offering
price, the underwriting discount to be paid by us to the underwriters and the
proceeds before expenses to us. This information is presented assuming either no
exercise or full exercise by the underwriters of their over-allotment options.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price...................... $ $ $
Underwriting discount...................... $ $ $
Proceeds, before expenses, to Telocity..... $ $ $
</TABLE>
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $ million and are payable by us.
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<PAGE> 89
OVER-ALLOTMENT OPTION
We have granted an option to the underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of
additional shares of our common stock at the public offering price set forth on
the cover page of this prospectus, less the underwriting discount. The
underwriters may exercise this option solely to cover over-allotments, if any,
made on the sale of our common stock offered hereby. To the extent that the
underwriters exercise this option, each underwriter will be obligated, subject
to certain conditions, to purchase a number of additional shares of our common
stock proportionate to such underwriter's initial amount reflected in the
foregoing table.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to % of the shares offered by this prospectus to
be sold to some of our employees, officers, directors and their immediate family
members. The number of shares of our common stock available for sale to the
general public will be reduced to the extent that those persons purchase the
reserved shares. Any reserved shares which are not orally confirmed for purchase
within one day of the pricing of the offering will be offered by the
underwriters to the general public on the same terms as the other shares offered
by this prospectus.
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors and all of our existing
stockholders have agreed, with certain exceptions, without the prior written
consent of Merrill Lynch on behalf of the underwriters for a period of 180 days
after the date of this prospectus, not to directly or indirectly
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, lend or otherwise dispose of or
transfer any shares of our common stock or securities convertible into
or exchangeable or exercisable for or repayable with our common stock,
whether now owned or later acquired by the person executing the
agreement or with respect to which the person executing the agreement
later acquires the power of disposition, or file a registration
statement under the Securities Act relating to any shares of our common
stock; or
- enter into any swap or other agreement that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of
our common stock whether any such swap or transaction is to be settled
by delivery of our common stock or other securities, in cash or
otherwise.
QUOTATION ON THE NASDAQ NATIONAL MARKET
We expect the shares to be approved for quotation on the Nasdaq National
Market under the symbol "TLCT."
Before this offering, there has been no public market for our common
stock. The initial public offering price will be determined through negotiations
between us and the representatives. Among the factors considered in determining
the initial public offering price, in addition to prevailing market conditions,
were the valuation multiples of publicly traded companies that the
representatives believed to be comparable to us, certain of our financial
information, the history of, and the prospects for, our company and the industry
in which we compete, and an assessment of our management, our past and present
operations, the prospects for, and timing of, future revenue of our company, the
present state of our development, and the above factors in relation to market
values and various valuation measures of other companies engaged in activities
similar to ours. There can be no assurance that an active trading market will
develop for our common stock or that our common stock will trade in the public
market subsequent to the offering at or above the initial public offering price.
84
<PAGE> 90
The underwriters have advised us that they do not expect sales of the
common stock to any accounts over which they exercise discretionary authority to
exceed 5% of the number of shares being offered in this offering.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of our common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
certain selling group members to bid for and purchase our common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of our common stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of our common stock.
If the underwriters create a short position in our common stock in
connection with the offering, i.e., if they sell more shares of our common stock
than are set forth on the cover page of this prospectus, the representatives may
reduce that short position by purchasing our common stock in the open market.
The representatives may also elect to reduce any short position by exercising
all or part of the over-allotment option described above.
The representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares of
our common stock in the open market to reduce the underwriters' short position
or to stabilize the price of our common stock, they may reclaim the amount of
the selling concession from the underwriters and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of our common stock to the extent that it
discourages resales of our common stock.
Neither our company nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of our common stock. In
addition, neither our company nor any of the underwriters makes any
representation that the representatives will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
Some of the underwriters and their affiliates may engage in other
transactions with, and perform services for, our company in the ordinary course
of business and have engaged, and may in the future engage, in commercial
banking and investment banking transactions with our company, for which they may
receive customary compensation.
85
<PAGE> 91
LEGAL MATTERS
The validity of the common stock we offer will be passed upon for us by
Gray Cary Ware & Freidenrich LLP, Palo Alto, California. Legal matters will be
passed upon for the underwriters by Baker & McKenzie, New York, New York. As of
the date of this prospectus, Gray Cary Ware & Freidenrich LLP, GCWF Investment
Partners, an investment partnership composed of some current and former members
of and persons associated with Gray Cary Ware & Freidenrich LLP, and some
individual members of Gray Cary Ware & Freidenrich LLP, beneficially own an
aggregate of 98,168 shares of our common stock. Regulatory matters will be
passed upon for us by Patton Boggs LLP, Washington, D.C. As of the date of this
prospectus, one member of Patton Boggs LLP owns an aggregate of 1,051 shares of
our common stock.
EXPERTS
The financial statements as of December 31, 1997 and 1998, and for the
period August 18, 1997, the date of incorporation, to December 31, 1997, year
ended December 31, 1998 and 1999 and the period August 18, 1997 to December 31,
1999 included in this prospectus are included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on their authority as
experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington,
D.C., a registration statement on Form S-1 under the Securities Act with respect
to the shares of common stock offered hereby. This prospectus does not contain
all the information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to us and our common
stock, reference is made to the registration statement and to the exhibits and
schedules filed therewith. Statements contained in this prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of the contract or
other document filed as an exhibit to the registration statement. A copy of the
registration statement may be inspected by anyone without charge at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of all or any portion of the
registration statement may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
prescribed fees. The Commission maintains a Website at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
86
<PAGE> 92
TELOCITY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Deficit............ F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 93
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Telocity, Inc.
The reincorporation described in Note 1 to the consolidated financial
statements has not been consummated at January 28, 2000. When it has been
consummated, we will be in a position to furnish the following report assuming
that from January 28, 2000 to the date of such reincorporation, no other
material events have occurred that would affect the accompanying consolidated
financial statements or require disclosure therein:
"In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' deficit and
of cash flows present fairly, in all material respects, the financial
position of Telocity, Inc. at December 31, 1998 and 1999, and the results
of their operations and their cash flows for the period from August 18,
1997 (date of incorporation) to December 31, 1997, the year ended December
31, 1998 and the year ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States, which
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, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above."
San Jose, California
January 28, 2000
F-2
<PAGE> 94
TELOCITY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31,
------------------ 1999
1998 1999 (SEE NOTE 12)
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 1,402 $ 66,978 $ 66,978
Accounts receivable..................................... -- 13 13
Prepaid expenses and other current assets............... 37 7,013 7,013
------- -------- --------
Total current assets............................... 1,439 74,004 74,004
Property and equipment, net................................. 2,740 22,272 22,272
Intangibles, net............................................ 467 380 380
Other assets................................................ 51 43,415 43,415
------- -------- --------
Total assets....................................... $ 4,697 $140,071 $140,071
------- -------- --------
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................ 1,588 9,141 9,141
Accrued liabilities..................................... 130 4,383 4,383
Deferred revenue........................................ 33 33
Notes payable, current.................................. 562 2,292 2,292
Capital lease obligations, current...................... 363 4,426 4,426
------- -------- --------
Total current liabilities.......................... 2,643 20,275 20,275
Notes payable, net of current portion....................... 2,139 3,135 3,135
Capital lease obligations, net of current portion........... 1,351 8,859 8,859
Other liabilities........................................... -- 64 64
------- -------- --------
Total liabilities.................................. 6,133 32,333 32,333
------- -------- --------
Mandatorily redeemable convertible preferred stock:
Series A; no par value, 13,553,126 authorized shares;
issued and outstanding: 13,150,000 in 1998 and 1999 and
zero pro forma (unaudited) (Liquidation value:
$6,575)................................................. 6,565 6,567 --
Series A warrants......................................... 106 106 --
Series B; no par value, 14,699,998 authorized shares;
issued and outstanding: zero in 1998, 13,181,818 in 1999
and zero pro forma (unaudited) (Liquidation value:
$14,500)................................................ -- 14,490 --
Series B warrants......................................... -- 1,431 --
Series C; no par value, 27,000,000 authorized shares;
issued and outstanding: zero in 1998, 24,332,061 in 1999
and zero pro forma (unaudited) (Liquidation value:
$127,500)............................................... -- 126,293 --
Series C warrants......................................... -- 7,133 --
------- -------- --------
Total mandatorily redeemable convertible preferred
stock............................................. 6,671 156,020 --
------- -------- --------
Commitments (Note 6)
Stockholders' equity (deficit):
Common Stock: $0.001 par value, 40,000,000 shares
authorized 1998; 90,000,000 shares authorized in 1999;
issued and outstanding: 11,877,506 in 1998 and
20,282,270 in 1999 and 70,946,149 pro forma
(unaudited)............................................. 8 17 68
Additional paid-in capital................................ 586 39,478 195,447
Receivable from stockholders.............................. (118) (5,457) (5,457)
Unearned stock-based compensation......................... (315) (13,883) (13,883)
Accumulated deficit....................................... (8,268) (68,437) (68,437)
------- -------- --------
Total stockholders' equity (deficit)............... (8,107) (48,282) 107,738
------- -------- --------
Total liabilities, mandatorily redeemable
convertible preferred stock and stockholders'
equity (deficit).................................. $ 4,697 $140,071 $140,071
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 95
TELOCITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
AUGUST 18,
1997 (DATE OF
INCORPORATION)
TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999
--------------- ------------ ---------------
<S> <C> <C> <C>
Revenues................................................ $ -- $ -- $ 187
Operating expenses:
Network and product costs............................. -- -- 2,080
Sales and marketing................................... 5 252 13,571
General and administrative............................ 335 2,018 7,683
Research and development.............................. 327 4,744 16,725
Depreciation and amortization......................... 11 424 2,253
---------- ---------- -----------
Total operating expenses...................... 678 7,438 42,312
---------- ---------- -----------
Loss from operations.................................... (678) (7,438) (42,125)
Interest expense........................................ -- (187) (1,448)
Interest income......................................... -- 35 379
Other income/(expense), net............................. -- -- (225)
---------- ---------- -----------
Net loss................................................ (678) (7,590) (43,419)
Deemed dividend and accretion on mandatorily redeemable
convertible preferred stock........................... -- -- (16,750)
---------- ---------- -----------
Net loss attributable to common stockholders............ $ (678) $ (7,590) $ (60,169)
========== ========== ===========
Net loss per share -- basic and diluted................. $ (0.56) $ (1.39) $ (7.32)
========== ========== ===========
Shares used in computing basic and diluted net loss per
share................................................. 1,219,538 5,471,617 8,219,183
========== ========== ===========
Pro forma net loss per share -- basic and diluted
(unaudited)........................................... $ (1.79)
===========
Shares used in computing pro forma net loss per share
basic and diluted (unaudited)......................... 33,610,291
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 96
TELOCITY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RECEIVABLE UNEARNED TOTAL
-------------------- PAID-IN FROM STOCK-BASED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION DEFICIT DEFICIT
----------- ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock at
$0.0005 per share in October
1997............................ 2,560,000 $ 1 $ -- $ -- $ -- $ -- $ 1
Issuance of common stock at
$0.0005 for completed technology
in October 1997................. 504,000 -- -- -- -- -- --
Issuance of common stock at
$0.0005 per share in December
1997............................ 6,840,000 3 -- (3) -- -- --
Net loss.......................... -- -- -- -- -- (678) (678)
----------- --- ------- ------- -------- -------- --------
Balances, December 31, 1997....... 9,904,000 4 -- (3) -- (678) (677)
Warrants issued for services in
September 1998.................. -- -- 92 -- -- -- 92
Issuance of common stock for
purchase acquisition at $0.0005
per share in March 1998......... 40,572 -- -- -- -- -- --
Issuance of common stock options
for purchase acquisition in
March 1998...................... -- -- 7 -- -- -- 7
Repurchase of common stock for
completed technology in March
1998............................ (504,000) -- -- -- -- -- --
Issuance of common stock at $0.005
per share in June 1998.......... 3,076,000 3 12 (15) -- -- --
Repurchase of common stock at
$0.0005 per share in June
1998............................ (2,816,000) (1) -- 1 -- -- --
Issuance of common stock upon
exercise of stock options....... 2,176,934 2 107 (101) -- -- 8
Common stock options issued for
services in July to December
1998............................ -- -- 40 -- -- -- 40
Unearned stock-based
compensation.................... -- -- 328 -- (328) -- --
Amortization of stock-based
compensation.................... -- -- -- -- 13 -- 13
Net loss.......................... -- -- -- -- -- (7,590) (7,590)
----------- --- ------- ------- -------- -------- --------
Balances, December 31, 1998....... 11,877,506 8 586 (118) (315) (8,268) (8,107)
Warrants issued in connection with
property lease in March and
November 1999................... -- -- 85 -- -- -- 85
Warrants issued for services in
June 1999....................... -- -- 247 -- -- -- 247
Warrants issued in connection with
licensing agreement in November
1999............................ -- -- 79 -- -- -- 79
Issuance of common stock upon
exercise of stock options....... 9,693,062 10 5,628 (5,455) -- -- 183
Common stock options issued for
services in January to December
1999............................ -- -- 1,097 -- (177) -- 920
Repurchase of common stock........ (1,288,298) (1) (115) 116 -- -- --
Unearned stock-based
compensation.................... -- -- 15,195 -- (15,195) -- --
Amortization of stock-based
compensation.................... -- -- -- -- 1,804 -- 1,804
Deemed dividend on issuance of
Series C preferred stock in
December 1999................... -- -- 16,676 -- -- (16,676) --
Accretion on mandatorily
redeemable convertible preferred
stock........................... -- -- -- -- -- (74) (74)
Net loss.......................... -- -- -- -- -- (43,419) (43,419)
----------- --- ------- ------- -------- -------- --------
Balances, December 31, 1999....... 20,282,270 $17 $39,478 $(5,457) $(13,883) $(68,437) $(48,282)
=========== === ======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 97
TELOCITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
AUGUST 18,
1997 (DATE OF
INCORPORATION)
TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999
-------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (678) $(7,590) $(43,419)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 11 424 2,253
Amortization of stock-based compensation................ -- 13 1,804
Issuance of common stock options in exchange for
services.............................................. -- 40 920
Warrant related non-cash interest expense............... -- 12 492
Warrant related non-cash general and administrative
expense............................................... -- 92 332
Warrant related non-cash sales and marketing expense.... -- -- 39
Loss on sale of fixed assets............................ -- -- 225
Change in operating assets and liabilities:
Accounts receivable................................... -- -- (13)
Prepaid expenses and other assets..................... (110) 73 1,584
Other assets.......................................... -- (51) 2,487
Accounts payable...................................... 100 1,487 7,553
Accrued liabilities................................... -- 144 4,264
Deferred revenue...................................... -- -- 33
Other liabilities..................................... -- -- 64
------ ------- --------
Net cash used in operating activities.............. (677) (5,356) (29,524)
------ ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of assets............................. -- -- 288
Acquisition of intangibles................................ -- -- (15)
Acquisition of subsidiary, net of cash acquired........... -- (51) --
Purchase of property and equipment........................ (303) (975) (9,377)
------ ------- --------
Net cash used in investing activities.............. (303) (1,026) (9,104)
------ ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of mandatorily redeemable
convertible preferred stock, net of issuance costs...... -- 4,050 96,876
Proceeds from exercise of common stock options............ -- 8 183
Proceeds from issuance of common stock.................... 1 -- --
Proceeds from issuance of warrants for preferred stock.... -- 67 --
Proceeds from the issuance of notes payable............... 1,000 3,924 13,000
Repayment of notes payable................................ -- (178) (4,757)
Principal payments on capital lease obligations........... -- (108) (818)
Restriction of cash related to letter of credit........... -- -- (280)
------ ------- --------
Net cash provided by financing activities.......... 1,001 7,763 104,204
------ ------- --------
Net increase in cash and cash equivalents................... 21 1,381 65,576
Cash and cash equivalents, beginning of period.............. -- 21 1,402
------ ------- --------
Cash and cash equivalents, end of period.................... $ 21 $ 1,402 $ 66,978
====== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 98
TELOCITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- FORMATION AND BUSINESS OF THE COMPANY:
Telocity, Inc. (the "Company") develops, markets, integrates and operates
interactive online services to the residential market over high-speed, or
broadband, connections. The Company has a single operating segment and has no
organizational structure dictated by product lines, geography or customer type.
All revenues earned to date have been generated from U.S. based customers.
The Company was in the development stage at December 31, 1998. The Company
began offering services commercially in Chicago in July 1999 and in February
2000, its commercial services were extended to more than 40 metropolitan
statistical areas in the Southeast, Northeast, upper Midwest and Mid-Atlantic
states, including Atlanta, Miami, Detroit, Philadelphia and New York City.
In January 2000, the Company approved the reincorporation of the Company
from California to Delaware. The reincorporation to Delaware will result in a
change in par value and an increase in authorized shares. All share data and
stock option plan information in the consolidated financial statements and notes
herein have been restated to reflect the reincorporation.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
These consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All significant intercompany balances
and transactions have been eliminated.
Use of estimates
Preparation of the accompanying financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments with original or
remaining maturities of three months or less at the date of purchase to be cash
equivalents. The Company has restricted cash of $279,585 related to a letter of
credit facility with a finance company, which has a term of six years. This
amount has been included in other assets.
Certain risks and concentrations
The Company's financial instruments that are exposed to concentration of
credit risk consist primarily of cash and cash equivalents and accounts
receivable.
The Company's cash and cash equivalents are deposited with major financial
institutions in the United States. At times, such deposits may be in excess of
the amount of insurance provided on such deposits. The Company has not
experienced any losses on its deposits of cash and cash equivalents.
The Company performs ongoing credit evaluations but does not require
collateral. Five customers account for 35%, 16%, 14%, 13% and 11% of total
revenues, respectively.
The success of the Company's business is substantially dependent upon its
ability to develop strategic partnerships for content, develop a recognizable
brand, secure distribution channels for its subscriber-based broadband services
and the continued supply of gateways from its sole contract manufacturer.
F-7
<PAGE> 99
TELOCITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair value of financial instruments
The fair value of the Company's cash and cash equivalents, accounts
receivable, accounts payable and notes payable approximate their carrying value
due to the short maturity or market rate structure of those instruments.
Property and equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets,
generally two to seven years. Leasehold improvements are amortized over the
related lease term or the useful life of the improvement.
Intangibles
Intangible assets consist of completed technology. These assets are being
amortized using the straight-line method over their estimated useful life of
five years.
Accounting for long-lived assets
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" ("SFAS 121"). SFAS 121 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets.
Revenue recognition
The Company generates revenue from the provision of broadband services and
applications. Revenues are derived from an initial non-recurring charge and
monthly recurring charges for services. The initial charge is related to the
provision of a residential gateway, a high speed digital subscriber line and
service activation. All revenues, including the initial and monthly service
charges, are recognized ratably over the term of the service.
Research and development
Research and development costs are expensed as incurred, except for
certain software development costs. In January 1999, the Company adopted
Statement of Position ("SOP") 98-1, which requires software development costs
associated with internal use software to be charged to operations until certain
capitalization criteria are met. For the year ended December 31, 1999, software
development costs of approximately $1,342,000 were capitalized and included in
property and equipment.
Advertising costs
Advertising costs are expensed the first time the advertising takes place.
Included in prepaid expenses and other current assets and other assets at
December 31, 1999 is $38,823,530 related to advertising to be received in the
future. There was no advertising expense for the period from August 18, 1997
(date of incorporation) to December 31, 1997. Advertising expense for the years
ended December 31, 1998 and 1999 was $44,000 and $7,941,000.
Stock-based compensation
The Company has elected to continue accounting for stock-based
compensation issued to employees using the intrinsic value method of Accounting
Principles Board Opinion No. 25, "Accounting for Stock
F-8
<PAGE> 100
TELOCITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Issued to Employees," and, accordingly, presents disclosure of pro forma
information required under Financial Accounting Standards Board Statement No.
123 or SFAS 123, "Accounting for Stock-Based Compensation." Stock and other
equity instruments issued to non-employees have been accounted for in accordance
with SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18 and valued
using the Black-Scholes model.
Income taxes
The Company accounts for its income taxes in accordance with the liability
method. Under this method, deferred tax assets and liabilities are determined
based on temporary differences between the financial reporting and tax basis of
assets and liabilities, measured at tax rates that will be in effect for the
year in which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Comprehensive income (loss)
The Company has adopted the provisions of SFAS No. 130, or SFAS 130,
"Reporting Comprehensive Income." SFAS 130 establishes standards for reporting
comprehensive income (loss) and its components in financial statements.
Comprehensive income (loss), as defined, includes all changes in equity during a
period from non-owner sources. There has been no difference between the
Company's net loss and its total comprehensive loss through December 31, 1999.
Stock split
On October 13, 1999, the Company effected a 2:1 common and preferred stock
split. All share information in the consolidated financial statements and notes
has been restated to reflect the stock split.
F-9
<PAGE> 101
TELOCITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net loss per common share
Basic net loss per common share is computed by dividing the net loss
available to common stockholders for the period by the weighted average number
of common shares outstanding for the period net of common shares subject to
repurchase. Diluted net loss per common share is computed by dividing the net
loss for the period by the weighted average number of common and common
equivalent shares outstanding during the period net of common shares subject to
repurchase. Common equivalent shares, composed of common shares issuable upon
exercise of stock options and warrants and upon conversion of Series A, Series B
and Series C mandatorily redeemable convertible preferred shares are included in
the diluted net loss per share computation to the extent such shares are
dilutive. A reconciliation of the numerator and denominator used in the
calculation of basic and diluted net loss per common share follows (in
thousands, except share and per share data):
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
AUGUST 18,
1997 (DATE OF
INCORPORATION)
TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999
--------------- ------------ ------------
<S> <C> <C> <C>
Numerator:
Net loss attributable to common
stockholders.......................... $ (678) $ (7,590) $ (60,169)
========== =========== ===========
Denominator:
Weighted average common shares -- basic
and diluted........................... 1,924,333 10,111,750 17,792,602
Weighted average shares subject to
repurchase............................ (704,795) (4,640,133) (9,573,419)
---------- ----------- -----------
Denominator for basic and diluted
calculation........................... 1,219,538 5,471,617 8,219,183
========== =========== ===========
Net loss per common share-basic and
diluted............................... $ (0.56) $ (1.39) $ (7.32)
========== =========== ===========
</TABLE>
Diluted net loss per share does not include the effect of the following
antidilutive common equivalent shares:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
AUGUST 18,
1997 (DATE OF
INCORPORATION)
TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999
--------------- ------------ ------------
<S> <C> <C> <C>
Common stock options and warrants........... -- 1,858,363 2,992,316
Convertible preferred stock................. -- 13,150,000 50,663,878
Convertible preferred stock warrants........ -- 403,125 3,256,400
-- ---------- ----------
-- 15,411,488 54,912,594
== ========== ==========
</TABLE>
Recent accounting pronouncements
In April 1998, AcSEC issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." This SOP provides guidance on the financial reporting of start-up
costs and organization costs. It requires the costs of start-up activities and
organization costs to be expensed as incurred. The SOP is effective for
F-10
<PAGE> 102
TELOCITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial statements for fiscal years beginning after December 15, 1998. The
Company adopted SOP 98-5 on January 1, 1999. As the Company has not capitalized
such costs, the adoption of the SOP did not have an impact on its consolidated
financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
133 requires that all derivatives be recognized at fair value in the statement
of financial position, and that the corresponding gains or losses be reported
either in the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. SFAS 133, as amended,
will be effective for fiscal years beginning after June 15, 2000. The Company
does not currently hold derivative instruments or engage in hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 or SAB 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. Management
believes that the impact of SAB 101 will not have a material effect on the
financial position or results of operations of the Company.
NOTE 3 -- ACQUISITIONS AND RELATED PARTY TRANSACTIONS:
On March 27, 1998 the Company acquired Aspen Internet Systems, Inc., in
which two of the Company's founders held a minority interest, for an aggregate
purchase price of $509,000. This constituted an asset acquisition of completed
technology that has been incorporated into the Company's residential gateway.
NOTE 4 -- BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1998 1999
---- -------
(IN THOUSANDS)
<S> <C> <C>
PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid advertising....................................... $-- $ 5,220
Other prepaid expenses.................................... 31 1,362
Other receivables......................................... 6 431
--- -------
$37 $ 7,013
=== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------ -------
(IN THOUSANDS)
<S> <C> <C>
PROPERTY AND EQUIPMENT, NET:
Network software and equipment............................ $2,727 $18,104
Furniture and fixtures.................................... 130 495
Leasehold improvements.................................... 276 762
Subscriber based broadband gateways....................... -- 5,455
------ -------
3,133 24,816
Less: accumulated depreciation and amortization........... (393) (2,544)
------ -------
$2,740 $22,272
====== =======
</TABLE>
Property and equipment includes $1,855,203 and $14,674,318 under capital
leases at December 31, 1998 and December 31, 1999. Accumulated amortization of
assets under capital leases totaled $245,476
F-11
<PAGE> 103
TELOCITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and $1,326,483 at December 31, 1998 and 1999. Depreciation and amortization
expense for the period from August 18, 1997 (date of incorporation) to December
31, 1997 and the years ended December 31, 1998 and 1999 was $10,906, $382,577
and $2,150,959, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1998 1999
----- ------
(IN THOUSANDS)
<S> <C> <C>
Intangibles, net:
Completed technology...................................... $509 $ 524
Less: accumulated amortization............................ (42) (144)
---- -----
$467 $ 380
==== =====
</TABLE>
Amortization expense for the years ended December 31, 1998 and 1999 was
$41,808 and $101,767, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1998 1999
---- -------
(IN THOUSANDS)
<S> <C> <C>
Other assets:
Prepaid advertising....................................... $-- $33,604
Deferred warrant costs.................................... -- 6,993
Other prepaid expenses and deferred costs................. 51 2,538
Restricted cash........................................... -- 280
--- -------
$51 $43,415
=== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1999
---- ------
(IN THOUSANDS)
<S> <C> <C>
Accrued liabilities:
Accrued advertising....................................... $ 9 $1,453
Other accrued liabilities................................. 121 2,930
---- ------
$130 $4,383
==== ======
</TABLE>
NOTE 5 -- BORROWINGS:
During the period ended December 31, 1997, the Company issued a $1,000,000
convertible note payable for cash to August Capital, L.P. This unsecured note
bore interest at an annual rate of 6% and there were no fixed terms of payment.
In August 1998, the note payable was converted into Series A mandatorily
redeemable convertible preferred stock.
During the years ended December 31, 1998 and 1999 the Company issued notes
payable to Comdisco, Inc., and MMC/GATX Partnership #1, with detachable warrants
to acquire Series A and Series B mandatorily redeemable convertible preferred
stock. The notes are collateralized by all tangible assets owned by the Company,
bear interest at a weighted average rate of 8.65% and are repayable in
installments between May 1998 and January 2002.
F-12
<PAGE> 104
TELOCITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate principal payments due under these notes subsequent to December
31, 1999 are as follows: (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
<S> <C>
2000........................................................ $ 2,879
2001........................................................ 2,724
2002........................................................ 1,372
-------
Total principal payments.................................... 6,975
Less: amount representing finance costs..................... (1,548)
-------
Total notes payable......................................... 5,427
Less: current portion....................................... (2,292)
-------
$ 3,135
=======
</TABLE>
Line of credit
The Company has a $1,000,000 working capital line of credit which bears
interest at a premium of 7.3% over the U.S. dollar risk free interest rate which
expires 36 months from advance date each. No amounts were outstanding at
December 31, 1999.
Bridge financing
In October 1999, the Company entered into a bridge loan transaction with a
financing company for $4,000,000 which bears interest at 12% with a term of 60
days. This loan was repaid in December 1999.
In November 1999, the Company entered into convertible bridge loan
transactions with two of its officers for a combined total of $5,000,000. Each
loan was made at an annual interest rate of 12%. The loans were converted into a
combined total of 954,198 shares of Series C mandatorily redeemable preferred
stock in December 1999.
Capital leases
Future minimum lease payments under capital leases as of December 31, 1999
are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
<S> <C>
2000........................................................ $ 5,521
2001........................................................ 5,372
2002........................................................ 4,169
2003........................................................ 693
-------
Total principal payments.................................... 15,755
Less: amount representing finance costs..................... (2,470)
-------
13,285
Less: current portion....................................... (4,426)
-------
$ 8,859
=======
</TABLE>
NOTE 6 -- COMMITMENTS:
Leases
The Company leased additional office space and equipment under
noncancelable operating leases and entered into certain non-cancelable service
agreements. These agreement have various expiration dates
F-13
<PAGE> 105
TELOCITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
through June 2005. The Company also sublet certain property for the period from
August 1999 to October 2002. Rent expense for the periods ended December 31,
1997, 1998 and 1999 was $50,471, $258,142 and $939,715, respectively.
Future minimum lease payments under noncancelable operating and service
agreements including future minimum sublease rental receipts under noncancelable
operating lease, entered into during 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
LEASES AND
SERVICE SUBLEASE
YEARS ENDED DECEMBER 31, AGREEMENTS INCOME
------------------------ ---------- --------
<S> <C> <C>
2000.................................................... $10,199 $332
2001.................................................... 14,797 339
2002.................................................... 13,531 287
2003.................................................... 4,771 --
2004.................................................... 1,808 --
2005.................................................... 913 --
------- ----
Total minimum lease and service payments and sublease
income................................................ $46,019 $958
======= ====
</TABLE>
Operating agreement
On December 10, 1999, the Company entered into a fifteen year operating
agreement with NBC Internet, Inc ("NBCi"). The agreement provides for the joint
development, design services and content to be owned and branded by both
Companies. The services and content include entertainment, electronic commerce,
games, search applications and other features designed for use exclusively by
broadband users. The Company's customers will be able to utilize these online
services through a Web portal user interface that the Company will develop
jointly with NBCi.
After the general commercial launch of the co-developed interface, which
is expected by June 2000, the Company and NBCi have agreed to share a portion of
revenues that are generated from respective services, advertising and electronic
commerce activities provided through the co-branded portal. The Company will
receive a percentage of net revenues received by any NBCi entity from
advertising placed on the co-branded version of the Snap.com portal, e-commerce,
subscription and pay-per-view media from the Company's customers. The Company
will share gross revenues it generates from subscription fees, less cost of
goods sold, to subscribers from value-added services and applications with NBCi.
The percentage of revenues shared depends on whether NBCi offers a similar
service or application. The Company will also share a percentage of revenues it
generates from the placement of content provided by third parties. The amount
due to NBCi will be recorded in network and product costs.
In December 1999, in connection with the operating agreement, the Company
issued warrants to acquire 1,039,122 and 850,191 shares of Series C preferred
stock to NBC and NBCi, respectively. The fair value of the warrants has been
included in long term other assets and will be amortized over the term of the
operating agreement and included in sales and marketing expenses.
NOTE 7 -- MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Under the Company's Articles of Incorporation, the Company's preferred
stock is issuable in series and the Company's Board of Directors is authorized
to determine the rights, preferences and terms of each
F-14
<PAGE> 106
TELOCITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
share. At December 31, 1999, the amounts and liquidation values of Series A,
Series B and Series C preferred stock are as follows (in thousands, except share
data):
<TABLE>
<CAPTION>
SHARES
SHARES ISSUED AND LIQUIDATION
AUTHORIZED OUTSTANDING VALUE
---------- ----------- -----------
<S> <C> <C> <C>
Series A........................................ 13,553,126 13,150,000 $ 6,575
Series B........................................ 1,469,998 13,181,818 $ 14,500
Series C........................................ 27,000,000 24,332,060 $127,500
</TABLE>
On February 16, 1999 and March 26, 1999, the Company issued 10,727,274
shares and 2,454,544 shares, respectively, of Series B preferred stock at a
purchase price of $1.10 per share.
On December 13, 1999, the Company issued 18,034,351 shares of its Series C
preferred stock at a purchase price of $5.24 per share for cash of $89,500,000
and the conversion of bridge loans with two officers totaling $5,000,000. The
Series C convertible preferred stock converts into common stock on a one for one
basis. The difference between the fair value of the common shares at the date of
grant of $6.16 per share and the purchase price resulted in a beneficial
conversion feature equal to $16,676,470. Under EITF 98-5, the beneficial
conversion feature results in a preferred stock dividend of $16,676,470 for the
year ended December 31, 1999.
The Company also issued 6,297,709 shares of its Series C preferred stock
in exchange for advertising and promotional commitments with a fair value of
$38,823,530 provided by two of the Company's strategic investors, NBC and NBCi.
The rights, preferences and privileges of the preferred shareholders are
as follows:
Dividends
The holders of Series A, Series B and Series C preferred stock are
entitled to receive noncumulative dividends at an annual rate of $0.025 per
share, $0.055 per share and $0.262 per share, respectively, when, and if
declared by the Board of Directors. After payment of the above dividends,
additional dividends declared are to be paid pro-rata to both the holders of
common stock and preferred stock (treated as if converted). No dividends have
been declared through December 31, 1999.
Liquidation
The holders of the Series A, Series B and Series C preferred stock are
entitled to a distribution in preference to common shareholders of $0.50, $1.10
and $5.24 per share, respectively, plus any declared but unpaid dividends. After
the payment has been made to the holders of preferred stock for the full amount
to which they are entitled, the holders of the common stock and Series C
preferred stock shall be entitled to share ratably in all remaining assets,
until the holders of Series C preferred stock have received a cumulative amount
of $7.86 per share, if the liquidation event closes on or before June 30, 2000
or $10.48 per share, if the liquidation event closes after June 30, 2000.
Thereafter, holders of common stock will receive any remaining assets.
Conversion
The Series A, Series B and Series C preferred stock is convertible, at the
option of the holder, into common stock on a one-for-one basis, subject to
adjustment for dilution. Conversion is automatic upon the closing of a firm
commitment underwritten public offering of the Company's common stock at an
aggregate offering price of not less that $30,000,000 and at a price per share
of not less than $7.86 if such offering closes on or before June 30, 2000 or
$10.48 if such offering closes after June 30, 2000. In addition, preferred
stockholders have certain registration rights and the right to participate in
future
F-15
<PAGE> 107
TELOCITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
issuances of the Company's stock. A total of 53,920,278 shares of common stock
have been reserved for issuance upon the conversion of mandatorily redeemable
preferred stock.
Voting
Each share of Series A, Series B and Series C preferred stock has voting
rights equal to an equivalent number of shares of Common Stock into which it is
convertible and votes together as one class with the Common Stock.
Redemption
At anytime on or after December 1, 2004, each holder of mandatorily
redeemable convertible preferred stock has the right to cause the Company to
redeem all of the shares held by such stockholder. The redemption price of the
Series A, Series B and Series C preferred stock is $0.50, $1.10 and $5.24 per
share, respectively, plus any declared but unpaid dividends and shall be paid in
three equal annual installments.
Warrants for convertible preferred stock
The Company has issued fully exercised warrants, the fair value of which
has been determined using the Black-Scholes pricing model at the date of grant,
as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES UNDER EXERCISE FAIR
ISSUANCE DATE EXPIRATION DATE THE WARRANTS PRICE VALUE
------------- ---------------- ------------ ------------- ------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
March and September 1998............ September 2008 403,125 $0.50 - $0.80 $ 106
May, August, October and December
31, 1999.......................... November 2004 to 833,498 $1.10 - $5.13 1,197
December 2009
August 1999......................... August 2009 38,126 $1.10 120
October 1999........................ October 2002 44,628 $4.48 114
December 1999....................... December 2004 47,710 $5.24 121
December 1999....................... December 2004 1,889,313 $5.24 7,012
</TABLE>
In connection with notes payable and capital leases, the Company issued
warrants to purchase 403,125 shares of Series A mandatorily redeemable
convertible preferred stock in March 1998 and September 1998, respectively. The
fair value of the warrants is being amortized over the term of the notes and
capital leases. The Company recognized $11,881 and $31,520 as interest expense
associated with these warrants for the year ended December 31, 1998 and 1999
respectively.
In May, August, October, November and December 1999, in connection with
notes payable and capital leases, the Company issued warrants to purchase
833,498 shares of Series B mandatorily redeemable convertible preferred stock.
The fair value of the warrants will be amortized to interest expense over the
term of the notes and capital leases. The Company recognized $218,404 as
interest expense associated with these warrants for the year ended December 31,
1999.
In August 1999, in connection with a line of credit, the Company issued
warrants to purchase 38,126 shares of Series B mandatorily redeemable
convertible preferred stock. The fair value of the warrants will be amortized to
interest expense over the term of the letter of credit. The Company recognized
$6,875 as interest expense associated with these warrants for the year ended
December 31, 1999.
F-16
<PAGE> 108
TELOCITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In October 1999, in connection with a bridge loan the Company issued
warrants to purchase 44,628 shares of Series B mandatorily redeemable
convertible preferred stock. The fair value of the warrants will be amortized to
interest expense over the term of the bridge financing. The Company recognized
$114,021 as interest expense associated with these warrants for the year ended
December 31, 1999.
In December 1999, in connection with bridge loans received from two of its
directors, the Company issued warrants to purchase 47,710 shares of Series C
mandatorily redeemable preferred stock. The fair value of the warrants will be
amortized to interest expense over the term of the bridge loan. The Company
recognized $120,933 as interest expense associated with these warrants for the
year ended December 31, 1999.
In December 1999, in connection with an operating agreement the Company
issued warrants to acquire 1,039,122 and 850,191 shares of Series C preferred
stock to NBCi and NBC, respectively. The fair value of the warrants will be
amortized over the term of the agreement. The Company recognized $19,478 as
sales and marketing expenses associated with these warrants for the year ended
December 31, 1999.
NOTE 8 -- COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 90,000,000 shares of common stock. A portion of the shares sold are
subject to a right of repurchase by the Company subject to vesting, which is
generally over a four year period from the earlier of grant date or employee
hire date, as applicable, until vesting is complete. At December 31, 1997, 1998
and 1999, there were 5,169,730, 5,284,148 and 12,814,213 shares subject to
repurchase, respectively.
In December 1999, the Company approved the issuance and sale of shares of
common stock in an initial public offering.
Common stock warrants
<TABLE>
<CAPTION>
NUMBER OF
SHARES UNDER EXERCISE FAIR
ISSUANCE DATE EXPIRATION DATE THE WARRANTS PRICE VALUE
------------- --------------- ------------ -------- -----
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
September 1998.............. November 2003 765,018 $0.05 $ 91
March and November 1999..... March and November 2004 65,000 $1.10 - $1.50 $ 85
June........................ June 2006 268,856 $0.35 $247
November 1999............... November 2009 20,000 $1.50 $ 79
</TABLE>
The Company issued a warrant to purchase 765,018 shares of common stock in
September to a company with which they were considering developing a strategic
relationship. The Company recognized $91,067 as general and administrative
expenses associated with these warrants for the year ended December 31, 1998.
In March and November 1999, in connection with facility lease financing,
the Company issued warrants to purchase 65,000 shares of common stock. The fair
value of the warrants will be amortized to interest expense over the term of the
capital leases. The Company recognized $84,521 as rent expense in general and
administrative expenses associated with these warrants for the year ended
December 31, 1999.
In June, in connection with professional services received, the Company
issued warrants to purchase 268,856 shares of common stock. The fair value of
the warrants will be recognized as general and administrative expense. The
Company recognized $247,309 as general and administrative expense associated
with these warrants for the year ended December 31, 1999.
F-17
<PAGE> 109
TELOCITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In November 1999, in connection with a license agreement, the Company
issued warrants to purchase 20,000 shares of common stock. The fair value of the
warrants will be recognized as sales and marketing expense over the term of the
license agreement. The Company recognized $19,692 as sales and marketing expense
associated with these warrants for the year ended December 31, 1999.
Stock option plans
In January 1998, the Company adopted the 1998 Stock Option Plan and
Consultants Stock Option Plan (the "Plans"). The Plans provide for the granting
of stock options to employees and consultants of the Company. Options granted
under the Plans may be either incentive stock options or nonqualified stock
options. Incentive stock options ("ISO") may be granted only to Company
employees (including officers and directors who are also employees).
Nonqualified stock options ("NSO") may be granted to Company employees and
consultants. At December 31, 1998 and December 31, 1999, the Company has
reserved 3,530,000 and 13,950,000 shares of Common Stock for issuance under the
Plans, respectively.
Options under the Plans may be granted for a period of up to ten years and
at prices no less than 85% of the estimated fair value of shares on the date of
grant as determined by the Board of Directors, provided, however, that (i) the
exercise price of an ISO and NSO shall not be less that 100% and 85% of the
estimated fair value of the shares on the date of grant, respectively, and (ii)
the exercise price of an ISO and NSO granted to a 10% stockholder shall not be
less than 110% of the estimated fair value of the shares on the date of grant,
respectively. Options are exercisable immediately, subject to repurchase options
held by the Company which lapse over a maximum period of ten years at such times
and under such conditions as determined by the Board of Directors. To date,
options granted generally vest over four years. The following table summarizes
activity under the Plans (in thousands, except share and per share data):
<TABLE>
<CAPTION>
SHARES
AVAILABLE OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE
----------- ----------- --------
<S> <C> <C> <C>
Shares reserved at plan inception................ 1,624,000 --
Additional shares authorized..................... 1,906,000 --
Options granted.................................. (3,270,278) 3,270,278 $0.05
Options exercised................................ (2,176,934) $0.05
----------- ----------
Outstanding and exercisable at December 31,
1998........................................... 259,722 1,093,344 $0.05
Options authorized............................... 10,420,000 --
Options granted.................................. (10,595,660) 10,595,660 $0.93
Options exercised................................ (9,693,062) $0.58
Options cancelled................................ (122,500) 122,500 $0.55
Exercised options forfeited and returned to
plans.......................................... 1,288,298 -- $0.09
----------- ----------
Balances, December 31, 1999...................... 1,494,860 1,873,442 $2.26
=========== ==========
</TABLE>
F-18
<PAGE> 110
TELOCITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The options outstanding and currently exercisable by exercise price at
December 31, 1999 are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING WEIGHTED
EXERCISE NUMBER NUMBER CONTRACTUAL AVERAGE
PRICE OUTSTANDING VESTED LIFE (YEARS) PRICE
-------- ----------- ------- ------------ --------
<S> <C> <C> <C> <C>
$0.05 17,158 17,158 8.75 $0.05
$0.18 12,000 -- 9.21 $0.18
$0.35 96,000 24,000 9.44 $0.35
$0.75 188,000 46,667 9.67 $0.75
$1.50 411,250 17,499 9.85 $1.50
$3.00 1,149,034 17,834 9.96 $3.00
--------- -------
1,873,442 123,158 9.86 $2.26
========= =======
</TABLE>
At December 31, 1998, 243,000 of the options outstanding were vested.
Options granted include options to acquire 240,538 and 392,758 shares of
common stock issued to consultants and other service providers of the Company
during the year ended December 31, 1998 and 1999, respectively. The fair value
of the common stock options was determined to be $40,062 and $1,096,805 for 1998
and 1999, respectively, using the Black-Scholes pricing model. Stock-based
compensation related to stock options granted to consultants is recognized as
earned. At each reporting date, the Company re-values the stock-based
compensation using the Black-Scholes pricing model. As a result, the stock-based
compensation expense will fluctuate as the fair market value of our common stock
fluctuates. In connection with the grant of stock options to consultants and
other service providers, the Company recorded stock-based compensation expense
of $40,062 and $920,198 for the year ended December 31, 1998 and 1999,
respectively. Future stock-based compensation expense from these options is
estimated to be $176,600 at December 31, 1999.
In connection with certain stock option grants to employees during the
year ended December 31, 1998 and 1999, the Company recorded unearned stock-based
compensation totaling $328,374 and $15,285,155, respectively, which is being
amortized over the vesting periods of the related options which is generally
four years using the method set out in FASB Interpretation No. 28 ("FIN 28").
Under the FIN 28 method, each vested tranche of options is accounted for as a
separate option grant awarded for past services. Accordingly, the compensation
expense is recognized over the period during which the services have been
provided. This method results in higher compensation expense in the earlier
vesting periods of the related options. Amortization of this stock-based
compensation recognized during the year ended December 31, 1998 and 1999,
totaled approximately $13,000 and $1,804,000, respectively.
Stock-based compensation for employees was allocated across the relevant
functional expense categories within operating expenses as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ------
<S> <C> <C> <C>
Sales and marketing......................................... $-- $ 12 $ 490
General and administrative.................................. -- 112 1,780
Research and development.................................... -- 21 825
-- ---- ------
$-- $145 $3,095
== ==== ======
</TABLE>
F-19
<PAGE> 111
TELOCITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma stock-based compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock based
Compensation," ("SFAS No. 123") for option grants to employees. Had compensation
cost been determined based on the fair value at the grant date for the awards in
1998 and 1999 consistent with the provisions of SFAS No. 123, the Company's net
loss for 1998 and 1999 would have been as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Net loss -- as reported..................................... $(7,590) $(60,169)
Net loss -- pro forma....................................... $(7,613) $(60,499)
Net loss per common share -- basic and diluted as
reported.................................................. $ (1.39) $ (7.32)
Net loss per common share -- basic and diluted pro forma.... $ (1.39) $ (7.36)
</TABLE>
Such pro forma disclosures may not be representative of future
compensation cost because options vest over several years and additional grants
are made each year.
The weighted average fair value of options issued during 1998 was $0.11
and during 1999 was $1.77. The fair value of each option grant is estimated on
the date of grant using the minimum value method with the following assumptions
used for grants:
<TABLE>
<S> <C>
Risk-free interest rate..................................... 4.221-6.020%
Expected life of option..................................... 5 years
Expected dividends.......................................... 0%
</TABLE>
NOTE 9 -- 401(K):
The Company sponsors an employee savings and retirement plan intended to
qualify under section 401(k) of the Internal Revenue Code. All eligible
employees may contribute up to 20% of compensation, subject to annual
limitations, which are fully vested at all times. The Company retains the
options of matching employees' contributions with a discretionary employer
contribution. To date, no employer contributions have been made.
NOTE 10 -- INCOME TAXES:
No provisions for income taxes have been recorded as the Company has
incurred net losses since inception.
The Company's effective tax rate varies from the statutory rate as
follows:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
U.S. Federal income tax rate........................... (34.0)% (34.0)% (34.0)%
State taxes, net of federal tax benefit................ (5.84) (5.84) (5.84)
Permanent differences.................................. -- -- 14.09
Other.................................................. -- (0.27) (1.23)
Valuation allowance.................................... 39.84% 40.11% 26.98%
------ ------ ------
-- -- --
====== ====== ======
</TABLE>
F-20
<PAGE> 112
TELOCITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred tax asset as of December 31, 1998 and
1999 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------ -------
<S> <C> <C>
Net operating loss carryforwards............................ $3,305 $45,775
Depreciation................................................ (76) (1,436)
Other....................................................... 7 1,116
------ -------
3,236 45,445
Less: valuation allowance................................... (3,236) (45,445)
------ -------
Net deferred tax asset.................................... $ -- $ --
====== =======
</TABLE>
At December 31, 1999, the Company had approximately $45,775,000 of federal
and state net operating loss carryforwards available to offset future taxable
income which expire in varying amounts beginning in 2012 and 2005, respectively.
Under the Tax Reform Act of 1986, the amounts of and benefits from net operating
loss carryforwards may be impaired or limited in certain circumstances. Such
amount, if any, has not been determined. Events which cause limitations in the
amount of net operating losses that the Company may utilize in any one year
include, but are not limited to, a cumulative ownership change of more than 50%,
as defined, over a three year period.
Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax assets such that a full valuation allowance has been recorded.
For the periods ended December 31, 1997, 1998 and 1999, the valuation allowance
increased by approximately $325,000, $2,911,000 and $42,209,000, respectively.
F-21
<PAGE> 113
TELOCITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM AUGUST 18, 1997 FOR THE YEAR ENDED
(DATE OF INCORPORATION) DECEMBER 31,
TO DECEMBER 31, ------------------
1997 1998 1999
----------------------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest.................................. $-- $ 109 $ 831
-- ------ -------
SUPPLEMENTAL NON CASH INVESTING AND FINANCING ACTIVITY:
Acquisition of subsidiary............................... -- 509 --
Less notes payable issued for acquisition............... -- (405) --
Less common stock options issued in acquisition......... -- (7) --
Net cash payment........................................ -- (51) --
-- ------ -------
Liabilities assumed on acquisition of subsidiary........ $-- $ 46 $ --
-- ------ -------
Property and equipment acquired under capital leases.... $-- $1,855 $12,819
-- ------ -------
Conversion of convertible promissory notes into
mandatorily redeemable preferred stock............... $-- $2,455 $ 5,000
-- ------ -------
Conversion of accrued interest on convertible promissory
notes into mandatorily redeemable preferred stock.... $-- $ 60 $ 11
-- ------ -------
Issuance of warrants in connection with capital
leases............................................... $-- $ 39 $ 547
-- ------ -------
Issuance of warrants in connection with borrowings...... $-- $ -- $ 1,005
-- ------ -------
Issuance of warrants in connection with facilities lease
and other services................................... $-- $ 92 $ 411
-- ------ -------
Issuance of warrants in connection with operating
agreement............................................ $-- $ -- $ 7,012
-- ------ -------
Advertising received for Series C mandatorily
convertible redeemable preferred stock............... $-- $ -- $38,824
-- ------ -------
Deemed dividend on issuance Series C preferred stock.... $-- $ -- $16,676
-- ------ -------
Accretion of mandatorily redeemable convertible
preferred stock...................................... $-- $ -- $ 74
-- ------ -------
Unearned stock-based compensation related to common
stock option grants to employees, net of
cancellations........................................ $-- $ 328 $15,195
-- ------ -------
Grant of common stock options for services.............. $-- $ 40 $ 1,097
-- ------ -------
</TABLE>
NOTE 12 -- UNAUDITED PRO FORMA NET LOSS PER COMMON SHARE AND PRO FORMA
CONSOLIDATED BALANCE SHEET
Upon the closing of the Company's initial public offering, all outstanding
mandatorily redeemable convertible preferred stock will be converted
automatically into common stock and warrants to acquire mandatorily redeemable
convertible preferred stock will be converted automatically into warrants to
acquire common stock. The pro forma effect of this conversion has been presented
as a separate column in the Company's consolidated balance sheet, assuming the
conversion had occurred as of December 31, 1999. Pro forma basic and diluted net
loss per common share have been computed as described in Note 2 and also give
effect to common equivalent shares from preferred stock that will automatically
convert upon the closing of the Company's initial public offering (using the
"as-if-converted method") for the year ended December 31, 1999.
F-22
<PAGE> 114
TELOCITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the numerator and denominator used in the calculation
of pro forma basic and fully diluted net loss per common share follows (in
thousands, except share and per share data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
(UNAUDITED)
<S> <C>
Net loss attributable to common stockholders................ $ (60,169)
===========
Shares used in computing basic and diluted net loss per
share..................................................... 8,219,183
Adjusted to reflect the effect of the assumed conversion of
all convertible preferred stock from date of issuance..... 25,391,108
-----------
Weighted average shares used in computing pro forma basic
and diluted net loss per share............................ 33,610,291
-----------
Pro forma basic and diluted net loss per share.............. $ (1.79)
===========
</TABLE>
NOTE 13 -- SUBSEQUENT EVENTS
Stock option plans
In January 2000, the Company's Board of Directors approved, subject to
shareholder approval, the 2000 Equity Incentive Plan, the 2000 Employee Stock
Purchase Plan and the 2000 Outside Directors Stock Plan. Each plan will be
administered by the Board or by a committee of the Board.
A total of 24,000,000 shares of common stock are authorized and reserved
for issuance under the 2000 Equity Incentive Plan ("Equity Incentive Plan"),
including 13,950,000 shares that were authorized and reserved under our 1998
Stock Option Plan prior to its restatement. As of December 31, 1999, options to
purchase 1,873,442 shares of Common Stock were outstanding under the 1998 Stock
Option Plan, 10,581,698 shares had been issued upon exercise of options, net of
repurchases, and 1,494,860 shares available for future grant. The cumulative
number of shares authorized for issuance will be increased automatically on
January 1, 2001 and each January 1 thereafter. The Equity Incentive Plan allows
awards to be granted in the form of incentive stock options, nonstatutory stock
options, restricted stock purchase rights and bonuses, performance shares and
performance units. Unless terminated sooner by the Board, the Equity Incentive
Plan will terminate automatically in 2009 on the tenth anniversary of its
adoption by the Board.
A total of 2,500,000 shares of common stock are reserved for issuance
under the 2000 Employee Stock Purchase Plan ("ESPP"), cumulatively increased on
January 1, 2001 and each January 1, thereafter. The ESPP permits employees,
including officers and employee directors, to purchase common stock through
payroll deductions of up to 20% of the participant's base salary and
commissions, but not to exceed the established maximum. Such amounts are applied
to the purchase from the Company of shares of common stock at the end of each
offering period at a price which is generally 85% of the lower of the fair
market value of the common stock on either the first or last of the offering
period.
A total of 400,000 shares of common stock are authorized and reserved for
issuance under the 2000 Outside Directors Stock Plan ("Outside Directors Stock
Plan"), cumulatively increased on January 1, 2001 and each January 1 thereafter.
The Outside Directors Stock Plan establishes an initial, automatic grant of an
option to purchase 20,000 shares of our common stock to each non-employee
director who is first elected to our Board of Directors after the effective date
of this offering. The Outside Directors Stock Plan also permits each
non-employee director to elect to receive additional equity awards in lieu of
between 25% to 100% of the cash compensation otherwise payable to the director
for service on the Board.
F-23
<PAGE> 115
TELOCITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock options
In January 1999, the Company issued 414,680 common stock options to
employees and 117,500 to consultants and other service providers with an
exercise price of $9.00 per share.
F-24
<PAGE> 116
BACK COVER (DETAIL OF OUR MANAGED NETWORK):
[Image of greyed-out US network map]
[Image of people at computer]
[Image of gateway]
[Image of satellite]
Personal Computer-
Our network begins with the connection of our customer's personal computer, or
home network of computers, to our residential gateway.
Last Mile Solution -
Our broadband platform is designed to support a variety of high-speed last mile
access technologies, such as xDSL, wireless, fixed wireless, cable modem, fiber,
and satellite.
Metropolitan Hubs -
We aggregate customer traffic in our metropolitan hubs. Our network directs each
customer's data request to the closest available server containing the requested
content, service or application.
Dedicated Circuits -
Customer traffic is aggregated through dedicated, secure circuits into our local
metropolitan hubs.
Our Backbone -
Between our metropolitan hubs, customer traffic travels on our managed
high-speed backbone. The backbone is interconnected to the Internet and to other
network providers at Internet exchange points via private and public peering
arrangements.
Network Operations Center -
Customer activity is managed and monitored 24-hours-a-day, 7-days-a-week
providing secure and reliable service.
Satellite Connection -
Satellite caching feeds enhance the delivery of data to our customers.
<PAGE> 117
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
[ ] SHARES
[TELOCITY LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH & CO.
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 118
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Telocity, Inc. in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $39,600
NASD filing fee............................................. 10,500
Nasdaq National Market listing fee..........................
Printing and engraving costs................................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Blue Sky fees and expenses..................................
Transfer Agent and Registrar fees...........................
Miscellaneous expenses......................................
-------
Total............................................. $
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
The Eighth Article of the Registrant's Restated Certificate of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Delaware law.
Article VIII of the Registrant's Amended and Restated Bylaws provides for
the indemnification of officers, directors and third parties acting on behalf of
the Registrant if such person acted in good faith and in a manner reasonably
believed to be in and not opposed to the best interest of the Registrant, and,
with respect to any criminal action or proceeding, the indemnified party had no
reason to believe his or her conduct was unlawful.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
the Registrant's Amended and Restated Bylaws, and intends to enter into
indemnification agreements with any new directors and executive officers in the
future.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since inception, we have issued unregistered securities to a limited
number of persons as described below. For additional information concerning
these equity investment transactions, reference is made to the information
contained under the caption "Related Party Transactions" in the form of
prospectus included herein.
The sales of the following securities were deemed to be exempt from
registration in reliance on Rule 701 promulgated under Section 3(b) under the
Securities Act as transactions pursuant to a compensatory benefit plan or a
written contract relating to compensation.
(1) From July 1998 through December 31, 1999, the Registrant granted
stock options to purchase an aggregate of 10,615,660 shares of common
stock to employees and consultants with aggregate exercise prices
ranging from $0.05 to $3.00 per share pursuant to the Registrant's
stock option plan. As of December 31, 1999, 9,629,134 shares of
common stock have been issued upon exercise of options.
II-1
<PAGE> 119
(2) An aggregate of 7,100,000 shares of our common stock in December 1997
and June 1998 to Messrs. Olson, Solomon, Obenhuber, Grundy and
Stepovich in connection with Founder Stock Purchase Agreements. The
consideration received for such shares was $17,392.
The sales of the following securities were deemed to be exempt from
registration in reliance on Section 4(2) of the Securities Act as transactions
by an issuer not involving any public offering. The Registrant believes that the
transactions were exempt because the recipients of securities in each such
transaction represented their intention to acquire the securities for investment
only and not with a view to or for sale in connection with any distribution
thereof and appropriate legends were affixed to the share certificates and other
instruments issued in such transactions. All recipients either received adequate
information about Telocity or had access, through employment or other
relationships, to such information.
(1) An aggregate of 2,560,000 shares of common stock was issued in a
private placement in October 1997 to August Capital Associates L.P.
and August Capital Strategic Partners, L.P. in connection with the
Registrant's initial funding. The consideration received for such
shares was $1,280.
(2) An aggregate of 504,000 shares of our common stock in October 1997 to
Aspen Internet Systems, Inc. in exchange for the execution of a
patent license agreement. The consideration received for such shares
was $252.
(3) An aggregate of 13,150,000 shares of Series A preferred stock in a
private placement in July 1999 to entities affiliated with August
Capital L.P. and Bessemer Venture Partners, as well as other
qualified purchasers pursuant to a Series A preferred stock Purchase
Agreement. The consideration received for such shares was $6,575,000.
(4) An aggregate of 13,181,818 shares of Series B preferred stock in a
private placement in February and March 1999 to entities affiliated
with August Capital L.P., Bessemer Venture Partners, Mohr, Davidow
Ventures and RRE Investors, LLC, as well as other qualified
purchasers pursuant to Series B preferred stock Purchase Agreement.
The consideration received for such shares was $14,500,000.
(5) An aggregate of 24,332,061 shares of Series C preferred stock in a
private placement in December 1999 to entities affiliated with NBC
Internet, Inc., August Capital L.P., Bessemer Venture Partners, Mohr,
Davidow Ventures and RRE Investors, LLC, as well as other qualified
purchasers pursuant to a Series C preferred stock Purchase Agreement.
The consideration for such shares was $127,500,000.
(6) From March 1998 through December 1999 the Registrant issued to
Comdisco, Inc. warrants to purchase an aggregate of 1,054,506 shares
of preferred stock with an average exercise price of $1.23 per share
in connection with an equipment lease financing.
(7) In September 1998, the Registrant issued to Citizen's Telecom
Services Company LLC a warrant to purchase 765,018 shares of common
stock at an exercise price of $0.05 per share in connection with a
letter of intent to engage in a joint development effort.
(8) In March 1999, the Registrant issued to Vidovich-Cupertino Limited
Partnership a warrant to purchase 50,000 shares of common stock at an
exercise price of $0.11 per share in connection with a real property
lease.
(9) In May 1999 the Registrant issued to Meier Mitchell & Company a
warrant to purchase 252,272 shares of preferred stock at an exercise
price of $1.10 per share in connection with an equipment lease
financing.
(10) In June 1999, the Registrant issued to Heidrick & Struggles, Inc. a
warrant to purchase 268,856 shares of common stock at an exercise
price of $0.35 per share in connection with an executive search.
II-2
<PAGE> 120
(11) In November 1999, the Registrant issued to Ranbach Music, Ltd. a
warrant to purchase 20,000 shares of common stock at a price of $1.50
per share in connection with a license for the Registrant to use
certain music in connection with its marketing and other efforts.
(12) In November 1999, the Registrant issued to The Sobrato Group a
warrant to purchase 15,000 shares of common stock at an exercise
price of $1.50 per share in connection with a real property lease.
(13) In November 1999, in connection with bridge loans in advance of the
close of the Registrant's Series C preferred stock financing, the
Registrant issued to Ms. Hart and Mr. Olson warrants for 19,084
shares and 28,626 shares of preferred stock, respectively, with an
exercise price of $5.24 per share.
(14) In November 1999 the Registrant issued to Point Financial, Inc. a
warrant to purchase 32,599 shares of preferred stock at an exercise
price of $4.91 per share in connection with an equipment lease
financing.
(15) In December 1999 the Registrant issued to the National Broadcasting
Company, Inc. and NBC Internet, Inc. warrants for 850,191 shares and
1,039,122 shares of preferred stock, respectively, with an exercise
price of $5.24 per share.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
1.1* Form of Underwriting Agreement
3.1 Restated Certificate of Incorporation of Registrant
3.2 Bylaws of Registrant
4.1* Specimen of stock certificates
5.1 Opinion of Gray Cary Ware & Freidenrich LLP
5.2* Opinion of Patton Boggs, LLP
10.1** Form of Indemnification Agreement between Registrant and
each of its directors and officers
10.2 2000 Equity Incentive Plan and form of agreements thereunder
10.3 2000 Employee Stock Purchase Plan
10.4 2000 Outside Directors Stock Plan and form of agreements
thereunder
10.5+** Lease between Registrant and Vidovich-Cupertino Limited
Partnership
10.6+** Lease between Registrant and Lee Li Chun Koo
10.7+** Lease between Registrant and The Sobrato Group
10.8** Second Amended and Restated Investors' Rights Agreement
10.9+** Product Manufacturing Agreement between Registrant and
Wellex Corporation
10.10+** Agreement for Services between Registrant and Telamon-IMS,
Inc.
10.11+** Agreement for Services between Registrant and the Sutherland
Group, Ltd.
10.12** Employment Agreement between Registrant and Patti Hart
10.13** Employment Agreement between Registrant and Peter Olson
10.14** Employment Agreement between Registrant and Jim Morrissey
10.15** Employment Agreement between Registrant and Thomas Obenhuber
10.16** Employment Agreement between Registrant and James Rohrer
10.17** Employment Agreement between Registrant and Matthew
Stepovich
</TABLE>
II-3
<PAGE> 121
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
10.18** Employment Agreement between Registrant and Regina Wiedemann
10.19** Employment Agreement between Registrant and Kevin Grundy
10.20** Employment Agreement between Registrant and Jef Raskin
10.21** Employment Agreement between Registrant and Andrew Robinson
10.22** Employment Agreement between Registrant and Edward Hayes
10.23** Employment Agreement between Registrant and Scott Martin
10.24** Consultants Stock Option Plan and form of agreements
thereunder
10.25+** Market Development Agreement between Registrant and
BellSouth Business Systems, Inc.
10.26+** Private Line Service Level Agreement between Registrant and
Level 3 Communications, LLC
10.27+** Private Line Service Agreement between Registrant and MCI
WorldCom Communications, Inc.
10.28+** Operating Agreement between Registrant and NBC Internet,
Inc.
10.29+** Advertising Agreement between Registrant and the National
Broadcasting Company, Inc.
10.30+** Advertising Agreement between Registrant and NBC Internet,
Inc.
10.31** Founder Stock Purchase Agreement between Registrant and
Peter Olson dated December 23, 1997
10.32** Founder Stock Purchase Agreement between Registrant and
Michael Solomon dated December 23, 1997
10.33** Founder Stock Purchase Agreement between Registrant and
Thomas Obenhuber dated December 23, 1997
10.34** Founder Stock Purchase Agreement between Registrant and
Matthew Stepovich dated December 23, 1997
10.35** Founder Stock Repurchase Agreement between Registrant and
Peter Olson dated June 1, 1998
10.36** Founder Stock Repurchase Agreement between Registrant and
Michael Solomon dated June 1, 1998
10.37** Founder Stock Purchase Agreement between Registrant and
Kevin Grundy dated June 10, 1998
10.38** Founder Stock Purchase Agreement between Registrant and
Thomas Obenhuber dated June 10, 1998
10.39** Founder Stock Purchase Agreement between Registrant and
Matthew Stepovich dated June 10, 1998
10.40* Note with Comdisco, Inc.
10.41* Note with MMC/GATX partnership #1.
21.1** Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.2 Consent of Counsel (see Exhibit 5.1)
24.1** Power of Attorney
27.1 Financial Information Schedules
</TABLE>
- ---------------
+ Confidential treatment has been requested for certain portions of this
exhibit. The omitted portions have been separately filed with the Commission.
* To be filed by amendment.
** Previously filed.
II-4
<PAGE> 122
(B) FINANCIAL STATEMENT SCHEDULES
None.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or 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 by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(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-5
<PAGE> 123
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Cupertino,
State of California, on the 16th day of February 2000.
Telocity, Inc.
By: /s/ EDWARD HAYES
------------------------------------
Edward Hayes, Executive Vice President
and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ PATTI HART* President, Chief Executive February 16, 2000
- --------------------------------------------- Officer and Director
Patti Hart (Principal Executive Officer)
/s/ EDWARD HAYES Executive Vice President and February 16, 2000
- --------------------------------------------- Chief Financial Officer
Edward Hayes (Principal Financial and
Accounting Officer)
/s/ DAVID COWAN* Director February 16, 2000
- ---------------------------------------------
David Cowan
/s/ PETER OLSON* Executive Vice President, Chief February 16, 2000
- --------------------------------------------- Technical Officer and Director
Peter Olson
/s/ ANDREW RAPPAPORT* Director February 16, 2000
- ---------------------------------------------
Andrew Rappaport
/s/ EDMOND SANCTIS* Director February 16, 2000
- ---------------------------------------------
Edmond Sanctis
/s/ MICHAEL SOLOMON* Director February 16, 2000
- ---------------------------------------------
Michael Solomon
/s/ RANDALL STRAHAN* Director February 16, 2000
- ---------------------------------------------
Randall Strahan
*By: /s/ EDWARD HAYES
---------------------------------------
Edward Hayes
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 124
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
1.1* Form of Underwriting Agreement
3.1 Restated Certificate of Incorporation of Registrant
3.2 Bylaws of Registrant
4.1* Specimen of stock certificates
5.1 Opinion of Gray Cary Ware & Freidenrich LLP
5.2* Opinion of Patton Boggs, LLP
10.1** Form of Indemnification Agreement between Registrant and
each of its directors and officers
10.2 2000 Equity Incentive Plan and form of agreements thereunder
10.3 2000 Employee Stock Purchase Plan
10.4 2000 Outside Directors Stock Plan and form of agreements
thereunder
10.5+** Lease between Registrant and Vidovich-Cupertino Limited
Partnership
10.6+** Lease between Registrant and Lee Li Chun Koo
10.7+** Lease between Registrant and The Sobrato Group
10.8** Second Amended and Restated Investors' Rights Agreement
10.9+** Product Manufacturing Agreement between Registrant and
Wellex Corporation
10.10+** Agreement for Services between Registrant and Telamon-IMS,
Inc.
10.11+** Agreement for Services between Registrant and the Sutherland
Group, Ltd.
10.12** Employment Agreement between Registrant and Patti Hart
10.13** Employment Agreement between Registrant and Peter Olson
10.14** Employment Agreement between Registrant and Jim Morrissey
10.15** Employment Agreement between Registrant and Thomas Obenhuber
10.16** Employment Agreement between Registrant and James Rohrer
10.17** Employment Agreement between Registrant and Matthew
Stepovich
10.18** Employment Agreement between Registrant and Regina Wiedemann
10.19** Employment Agreement between Registrant and Kevin Grundy
10.20** Employment Agreement between Registrant and Jef Raskin
10.21** Employment Agreement between Registrant and Andrew Robinson
10.22** Employment Agreement between Registrant and Edward Hayes
10.23** Employment Agreement between Registrant and Scott Martin
10.24** Consultants Stock Option Plan and form of agreements
thereunder
10.25+** Market Development Agreement between Registrant and
BellSouth Business Systems, Inc.
10.26+** Private Line Service Level Agreement between Registrant and
Level 3 Communications, LLC
10.27+** Private Line Service Agreement between Registrant and MCI
WorldCom Communications, Inc.
10.28+** Operating Agreement between Registrant and NBC Internet,
Inc.
10.29+** Advertising Agreement between Registrant and the National
Broadcasting Company, Inc.
10.30+** Advertising Agreement between Registrant and NBC Internet,
Inc.
10.31** Founder Stock Purchase Agreement between Registrant and
Peter Olson dated December 23, 1997
10.32** Founder Stock Purchase Agreement between Registrant and
Michael Solomon dated December 23, 1997
</TABLE>
<PAGE> 125
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
10.33** Founder Stock Purchase Agreement between Registrant and
Thomas Obenhuber dated December 23, 1997
10.34** Founder Stock Purchase Agreement between Registrant and
Matthew Stepovich dated December 23, 1997
10.35** Founder Stock Repurchase Agreement between Registrant and
Peter Olson dated June 1, 1998
10.36** Founder Stock Repurchase Agreement between Registrant and
Michael Solomon dated June 1, 1998
10.37** Founder Stock Purchase Agreement between Registrant and
Kevin Grundy dated June 10, 1998
10.38** Founder Stock Purchase Agreement between Registrant and
Thomas Obenhuber dated June 10, 1998
10.39** Founder Stock Purchase Agreement between Registrant and
Matthew Stepovich dated June 10, 1998
10.40* Note with Comdisco, Inc.
10.41* Note with MMC/GATX partnership #1.
21.1** Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.2 Consent of Counsel (see Exhibit 5.1)
24.1** Power of Attorney
27.1 Financial Information Schedules
</TABLE>
- ---------------
+ Confidential treatment has been requested for certain portions of this
exhibit. The omitted portions have been separately filed with the Commission.
* To be filed by amendment.
** Previously filed.
<PAGE> 1
EXHIBIT 3.1
FORM OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
TELOCITY DELAWARE, INC.
(Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware)
Telocity Delaware, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware on January 14, 2000, (the
"Corporation") certifies as follows:
1. The Corporation's Restated Certificate of Incorporation was duly
adopted by the Board of Directors and sole stockholder by written consent in
accordance with Sections 242 and 245 of the General Corporation Law.
2. The Corporation's Certificate of Incorporation is restated to read in
full as follows:
FIRST: The name of the Corporation is Telocity, Inc.
SECOND: The address of the registered office of the Corporation in the
State of Delaware is Incorporating Services, Ltd., 15 East
North Street, in the City of Dover, County of Kent. The name
of the registered agent at that address is Incorporating
Services, Ltd.
THIRD: The purpose of the Corporation is to engage in any lawful
act or activity for which a corporation may be organized
under the General Corporation Law of Delaware.
FOURTH:
A. The total number of shares of all classes of stock which
the Corporation shall have authority to issue is
314,701,478 consisting of 250,000,000 shares of Common
Stock, par value one-tenth of one cent ($0.001) per share
(the "Common Stock") and shares of 64,701,478 Preferred
Stock, par value one-tenth of one cent ($0.001) per share
(the "Preferred Stock").
B. The Board of Directors is authorized, subject to any
limitations prescribed by law, to provide for the issuance of
the shares of Preferred Stock in series, and by filing a
certificate 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, and to fix the
designation, powers,
1
<PAGE> 2
preferences, and rights of the shares of each such series and
any qualifications, limitations or restrictions thereon. The
number of authorized shares of Preferred Stock may 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 Common Stock without a vote of
the holders of the Preferred Stock, or of any series thereof,
unless a vote of any such holders is required pursuant to the
certificate or certificates establishing the series of
Preferred Stock.
FIFTH: The following provisions are inserted for the management of
the business and the conduct of the affairs of the
Corporation, and for further definition, limitation and
regulation of the powers of the Corporation and of its
directors and stockholders:
A. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of
Directors. In addition to the powers and authority
expressly conferred upon them by statute or by this
Certificate of Incorporation or the Bylaws of the
Corporation, the directors are hereby empowered to exercise
all such powers and do all such acts and things as may be
exercised or done by the Corporation.
B. The directors of the Corporation need not be elected by
written ballot unless the Bylaws so provide.
C. Unless otherwise provided by law, any action which may
otherwise be taken at any meeting of the stockholders may
be taken without a meeting and without prior notice, if a
written consent describing such action or actions is signed
by the holders of outstanding shares having not less than
the minimum number of votes which would be necessary to
authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted.
D. Special meetings of stockholders of the Corporation may be
called only by (1) the Board of Directors pursuant to a
resolution adopted by a majority of the total number of
authorized directors (whether or not there exist any
vacancies in previously authorized directorships at the
time any such resolution is presented to the Board for
adoption) or (2) by the holders of not less than ten
percent (10%) of all of the shares entitled to cast votes
at the meeting.
2
<PAGE> 3
SIXTH:
A. The number of directors shall initially be set at seven (7)
and, thereafter, shall be fixed from time to time exclusively
by the Board of Directors pursuant to a resolution adopted by
a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is
presented to the Board for adoption). Upon the closing of a
firmly underwritten Initial Public Offering (the "IPO"), the
directors shall be divided into three classes with the term of
office of the first class (Class I) to expire at the first
annual meeting of the stockholders following the IPO; the term
of office of the second class (Class II) to expire at the
second annual meeting of stockholders held following the IPO;
the term of office of the third class (Class III) to expire at
the third annual meeting of stockholders; and thereafter for
each such term to expire at each third succeeding annual
meeting of stockholders after such election. Subject to the
rights of the holders of any series of Preferred Stock then
outstanding, a vacancy resulting from the removal of a
director by the stockholders as provided in Article SIXTH,
Section C below may be filled at a special meeting of the
stockholders held for that purpose. All directors shall hold
office until the expiration of the term for which elected, and
until their respective successors are elected, except in the
case of the death, resignation, or removal of any director.
B. Subject to the rights of the holders of any series of
Preferred Stock then outstanding, newly created
directorships resulting from any increase in the authorized
number of directors or any vacancies in the Board of
Directors resulting from death, resignation or other cause
(other than removal from office by a vote of the
stockholders) may be filled only by a majority vote of the
directors then in office, though less than a quorum, and
directors so chosen shall hold office for a term expiring
at the next annual meeting of stockholders at which the
term of office of the class to which they have been elected
expires, and until their respective successors are elected,
except in the case of the death, resignation, or removal of
any director. No decrease in the 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 then outstanding, any directors, or the entire
Board of Directors, may be removed from office at any time,
with or without cause, but only by the affirmative vote of the
holders of at least a majority of the voting power of all of
the then outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of
directors, voting together as a single class. Vacancies in the
Board of Directors resulting from such removal may be filled
by a majority of the directors then in office, though less
than a quorum, or by the stockholders as provided in Article
SIXTH,
3
<PAGE> 4
Section A above. Directors so chosen shall hold office for a
term expiring at the next annual meeting of stockholders at
which the term of office of the class to which they have been
elected expires, and until their respective successors are
elected, except in the case of the death, resignation, or
removal of any director.
SEVENTH: The Board of Directors is expressly empowered to adopt, amend
or repeal Bylaws of the Corporation. Any adoption, amendment
or repeal of Bylaws of the Corporation by the Board of
Directors shall require the approval of a majority of the
total number of authorized directors (whether or not there
exist any vacancies in previously authorized directorships at
the time any resolution providing for adoption, amendment or
repeal is presented to the Board). The stockholders shall also
have power to adopt, amend or repeal the Bylaws of the
Corporation. Any adoption, amendment or repeal of Bylaws of
the Corporation by the stockholders shall require, in addition
to any vote of the holders of any class or series of stock of
the Corporation required by law or by this Certificate of
Incorporation, the affirmative vote of the holders of at least
sixty-six and two-thirds percent (66-2/3%) of the voting power
of all of the then outstanding shares of the capital stock of
the Corporation entitled to vote generally in the election of
directors, voting together as a single class.
EIGHTH: A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involved intentional
misconduct or a knowing violation of law, (iii) under Section
174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper
personal benefit.
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.
Any repeal or modification of the foregoing provisions of this
Article EIGHTH by the stockholders of the Corporation shall
not adversely affect any right or protection of a director of
the Corporation existing at the time of such repeal or
modification.
4
<PAGE> 5
NINTH: The Corporation reserves the right to amend or repeal any
provision contained in this Certificate of Incorporation in
the manner prescribed by the laws of the State of Delaware and
all rights conferred upon stockholders are granted subject to
this reservation; provided, however, that, notwithstanding any
other provision of this Certificate of Incorporation or any
provision of law which might otherwise permit a lesser vote or
no vote, but in addition to any vote of the holders of any
class or series of the stock of this Corporation required by
law or by this Certificate of Incorporation, the affirmative
vote of the holders of at least 60% of the voting power of all
of the then outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of
directors, voting together as a single class, shall be
required to amend or repeal this Article NINTH, Article FIFTH,
Article SIXTH, Article SEVENTH or Article EIGHTH.
IN WITNESS WHEREOF, the Corporation has caused this Restated
Certificate to be signed by a duly authorized officer on this ____ day of
____________, 2000.
TELOCITY DELAWARE, INC.
By:
----------------------------------------
Scott Martin
Vice President and Secretary
5
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
TELOCITY DELAWARE, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I STOCKHOLDERS...............................................................1
Section 1.1 Annual Meeting.......................................................1
Section 1.2 Special Meetings.....................................................1
Section 1.3 Notice of Meetings...................................................1
Section 1.4 Quorum...............................................................2
Section 1.5 Conduct of the Stockholders' Meeting.................................2
Section 1.6 Conduct of Business..................................................2
Section 1.7 Notice of Stockholder Business.......................................2
Section 1.8 Proxies and Voting...................................................3
Section 1.9 Stock List...........................................................3
ARTICLE II BOARD OF DIRECTORS.........................................................4
Section 2.1 Number and Term of Office............................................4
Section 2.2 Vacancies and Newly Created Directorships............................4
Section 2.3 Removal..............................................................4
Section 2.4 Regular Meetings.....................................................5
Section 2.5 Special Meetings.....................................................5
Section 2.6 Quorum...............................................................5
Section 2.7 Participation in Meetings by Conference Telephone....................5
Section 2.8 Conduct of Business..................................................5
Section 2.9 Powers...............................................................5
Section 2.10 Compensation of Directors............................................6
Section 2.11 Nomination of Director Candidates....................................6
ARTICLE III COMMITTEES.................................................................7
Section 3.1 Committees of the Board of Directors.................................7
Section 3.2 Conduct of Business..................................................8
ARTICLE IV OFFICERS...................................................................8
Section 4.1 Generally............................................................8
Section 4.2 Chairman of the Board................................................8
Section 4.3 President............................................................8
Section 4.4 Vice President.......................................................8
Section 4.5 Treasurer............................................................9
Section 4.6 Secretary............................................................9
Section 4.7 Delegation of Authority..............................................9
Section 4.8 Removal..............................................................9
Section 4.9 Action With Respect to Securities of Other Corporations..............9
ARTICLE V STOCK......................................................................9
Section 5.1 Certificates of Stock................................................9
Section 5.2 Transfers of Stock...................................................9
Section 5.3 Record Date..........................................................9
</TABLE>
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<PAGE> 3
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 5.4 Lost, Stolen or Destroyed Certificates..............................10
Section 5.5 Regulations.........................................................10
ARTICLE VI NOTICES...................................................................10
Section 6.1 Notices.............................................................10
Section 6.2 Waivers.............................................................10
ARTICLE VII MISCELLANEOUS.............................................................10
Section 7.1 Facsimile Signatures................................................10
Section 7.2 Corporate Seal......................................................11
Section 7.3 Reliance Upon Books, Reports and Records............................11
Section 7.4 Fiscal Year.........................................................11
Section 7.5 Time Periods........................................................11
ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS.................................11
Section 8.1 Right to Indemnification............................................11
Section 8.2 Right of Claimant to Bring Suit.....................................12
Section 8.3 Non-Exclusivity of Rights...........................................12
Section 8.4 Indemnification Contracts...........................................12
Section 8.5 Insurance...........................................................13
Section 8.6 Effect of Amendment.................................................13
ARTICLE IX AMENDMENTS................................................................13
Section 9.1 Amendment of Bylaws.................................................13
</TABLE>
-ii-
<PAGE> 4
TELOCITY DELAWARE, INC.
A DELAWARE CORPORATION
BYLAWS
ARTICLE I
STOCKHOLDERS
Section 1.1 Annual Meeting. An annual meeting of the stockholders, for
the election of directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held at such place, on such date, and at such time as the Board of
Directors shall each year fix, which date shall be within thirteen months
subsequent to the later of the date of incorporation or the last annual meeting
of stockholders.
Section 1.2 Special Meetings. Special meetings of the stockholders, for
any purpose or purposes prescribed in the notice of the meeting, may be called
by the Board of Directors pursuant to a resolution adopted by a majority of the
total number of authorized directors (whether or not there exists any vacancies
in previously authorized directorships at the time any such resolution is
presented to the Board of Directors for adoption), or by the holders of shares
entitled to cast not less than ten percent (10%) of the votes at the meeting.
Business transacted at special meetings shall be confined to the purpose or
purposes stated in the notice.
Section 1.3 Notice of Meetings. Written notice of the place, date, and
time of all meetings of the stockholders shall be given, not less than ten (10)
nor more than sixty (60) days before the date on which the meeting is to be
held, to each stockholder entitled to vote at such meeting, except as otherwise
provided herein or required by law (meaning, here and hereinafter, as required
from time to time by the Delaware General Corporation Law or the Certificate of
Incorporation of the Corporation).
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than thirty
(30) days after the date for which the meeting was originally noticed, or if a
new record date is fixed for the adjourned meeting, written notice of the place,
date, and time of the adjourned meeting shall be given in conformity herewith.
At any adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 1.4 Quorum. At any meeting of the stockholders, the holders of a
majority of all of the shares of the stock entitled to vote at the meeting,
present in person or by proxy, shall constitute a quorum for all purposes,
unless or except to the extent that the presence of a larger number may be
required by law.
<PAGE> 5
If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote who
are present, in person or by proxy, may adjourn the meeting to another place,
date, or time.
If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, stating that it will be held with
those present constituting a quorum, then except as otherwise required by law,
those present at such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at such meeting.
Section 1.5 Conduct of the Stockholders' Meeting. At every meeting of
the stockholders, the Chairman, if there is such an officer, or if not, the
President of the Corporation, or in his absence the Vice President designated by
the President, or in the absence of such designation any Vice President, or in
the absence of the President or any Vice President, a chairman chosen by the
majority of the voting shares represented in person or by proxy, shall act as
Chairman. The Secretary of the Corporation or a person designated by the
Chairman shall act as Secretary of the meeting. Unless otherwise approved by the
Chairman, attendance at the stockholders' meeting is restricted to stockholders
of record, persons authorized in accordance with Section 8 of these Bylaws to
act by proxy, and officers of the Corporation.
Section 1.6 Conduct of Business. The Chairman shall call the meeting to
order, establish the agenda, and conduct the business of the meeting in
accordance therewith or, at the Chairman's discretion, it may be conducted
otherwise in accordance with the wishes of the stockholders in attendance. The
date and time of the opening and closing of the polls for each matter upon which
the stockholders will vote at the meeting shall be announced at the meeting.
The Chairman shall also conduct the meeting in an orderly manner, rule
on the precedence of and procedure on, motions and other procedural matters, and
exercise discretion with respect to such procedural matters with fairness and
good faith toward all those entitled to take part. The Chairman may impose
reasonable limits on the amount of time taken up at the meeting on discussion in
general or on remarks by any one stockholder. Should any person in attendance
become unruly or obstruct the meeting proceedings, the Chairman shall have the
power to have such person removed from participation. Notwithstanding anything
in the Bylaws to the contrary, no business shall be conducted at a meeting
except in accordance with the procedures set forth in this Section 1.6 and
Section 1.7, below. The Chairman of a meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting and in accordance with the provisions of this Section 1.6 and
Section 1.7, and if he should so determine, he shall so declare to the meeting
and any such business not properly brought before the meeting shall not be
transacted.
Section 1.7 Notice of Stockholder Business. At an annual or special
meeting of the stockholders, only such business shall be conducted as shall have
been properly brought before the meeting. To be properly brought before a
meeting, business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (b)
properly brought before the meeting by or at the direction of the Board of
Directors, (c) properly brought before an annual meeting by a stockholder, or
(d) properly brought before a special meeting by a stockholder, but if, and only
if, the notice of a special
2
<PAGE> 6
meeting provides for business to be brought before the meeting by stockholders.
For business to be properly brought before a meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a stockholder proposal to be presented at an
annual meeting shall be received at the Corporation's principal executive
offices not less than 120 calendar days in advance of the date that the
Corporation's (or the Corporation's predecessor's) proxy statement was released
to stockholders in connection with the previous year's annual meeting of
stockholders, except that if no annual meeting was held in the previous year or
the date of the annual meeting has been changed by more than 30 calendar days
from the date contemplated at the time of the previous year's proxy statement,
or in the event of a special meeting, notice by the stockholder to be timely
must be received not later than the close of business on the tenth day following
the day on which such notice of the date of the meeting was mailed or such
public disclosure was made. A stockholder's notice to the Secretary shall set
forth as to each matter the stockholder proposes to bring before the annual or
special meeting (a) a brief description of the business desired to be brought
before the annual or special meeting and the reasons for conducting such
business at the special meeting, (b) the name and address, as they appear on the
Corporation's books, of the stockholder proposing such business, (c) the class
and number of shares of the Corporation which are beneficially owned by the
stockholder, and (d) any material interest of the stockholder in such business.
Section 1.8 Proxies and Voting. At any meeting of the stockholders,
every stockholder entitled to vote may vote in person or by proxy authorized by
an instrument in writing or by a transmission permitted by law filed in
accordance with the procedure established for the meeting. No stockholder may
authorize more than one proxy for his shares.
Each stockholder shall have one vote for every share of stock entitled
to vote which is registered in his or her name on the record date for the
meeting, except as otherwise provided herein or required by law.
All voting, including on the election of directors but excepting where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefor by a stockholder entitled to vote or his or her proxy, a stock
vote shall be taken. Every stock vote shall be taken by ballots, each of which
shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballots shall be counted by an inspector or inspectors
appointed by the chairman of the meeting.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law, all other matters shall be determined by a
majority of the votes cast.
Section 1.9 Stock List. A complete list of stockholders entitled to vote
at any meeting of stockholders, arranged in alphabetical order for each class of
stock and showing the address of each such stockholder and the number of shares
registered in his or her name, shall be open to the examination of any such
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.
3
<PAGE> 7
The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1 Number and Term of Office. The number of directors shall
initially be eight (8) and, thereafter, shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors whether or not there exist
any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board for adoption. Upon the closing of the first
sale of the Corporation's common stock pursuant to a firmly underwritten
registered public offering (the "IPO"), the directors shall be divided into
three classes, with the term of office of the first class to expire at the first
annual meeting of stockholders held after the IPO, the term of office of the
second class to expire at the second annual meeting of stockholders held after
the IPO, the term of office of the third class to expire at the third annual
meeting of stockholders held after the IPO and thereafter for each such term to
expire at each third succeeding annual meeting of stockholders after such
election. A vacancy resulting from the removal of a director by the stockholders
as provided in Article II, Section 2.3 below may be filled at special meeting of
the stockholders held for that purpose. All directors shall hold office until
the expiration of the term for which elected and until their respective
successors are elected, except in the case of the death, resignation or removal
of any director.
Section 2.2 Vacancies and Newly Created Directorships. Subject to the
rights of the holders of any series of Preferred Stock then outstanding, newly
created directorships resulting from any increase in the authorized number of
directors or any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification or other cause (other than removal
from office by a vote of the stockholders) may be filled only by a majority vote
of the directors then in office, though less than a quorum, and directors so
chosen shall hold office for a term expiring at the next annual meeting of
stockholders. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
Section 2.3 Removal. Subject to the rights of holders of any series of
Preferred Stock then outstanding, any directors, or the entire Board of
Directors, may be removed from office at any time, with or without cause, but
only by the affirmative vote of the holders of at least a majority of the voting
power of all of the then outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class. Vacancies in the Board of Directors resulting from such removal
may be filled by a majority of the directors then in office, though less than a
quorum, or by the stockholders as provided in Article II, Section 2.1 above.
Directors so chosen shall hold office until the new annual meeting of
stockholders.
4
<PAGE> 8
Section 2.4 Regular Meetings. Regular meetings of the Board of Directors
shall be held at such place or places, on such date or dates, and at such time
or times as shall have been established by the Board of Directors and publicized
among all directors. A notice of each regular meeting shall not be required.
Section 2.5 Special Meetings. Special meetings of the Board of Directors
may be called by one-third of the directors then in office (rounded up to the
nearest whole number) or by the chief executive officer and shall be held at
such place, on such date, and at such time as they or he or she shall fix.
Notice of the place, date, and time of each such special meeting shall be given
each director by whom it is not waived by mailing written notice not fewer than
five (5) days before the meeting or by telegraphing or personally delivering the
same not fewer than twenty-four (24) hours before the meeting. Unless otherwise
indicated in the notice thereof, any and all business may be transacted at a
special meeting.
Section 2.6 Quorum. At any meeting of the Board of Directors, a majority
of the total number of authorized directors shall constitute a quorum for all
purposes. If a quorum shall fail to attend any meeting, a majority of those
present may adjourn the meeting to another place, date, or time, without further
notice or waiver thereof.
Section 2.7 Participation in Meetings by Conference Telephone. Members
of the Board of Directors, or of any committee thereof, may participate in a
meeting of such Board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other and such participation shall constitute presence in
person at such meeting.
Section 2.8 Conduct of Business. At any meeting of the Board of
Directors, business shall be transacted in such order and manner as the Board
may from time to time determine, and all matters shall be determined by the vote
of a majority of the directors present, except as otherwise provided herein or
requited by law. Action may be taken by the Board of Directors without a meeting
if all members thereof consent thereto in writing, and the writing or writings
are filed with the minutes of proceedings of the Board of Directors.
Section 2.9 Powers. The Board of Directors may, except as otherwise
required by law, exercise all such powers and do all such acts and things as may
be exercised or done by the Corporation, including, without limiting the
generality of the foregoing, the unqualified power:
(a) To declare dividends from time to time in accordance with
law;
(b) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(c) To authorize the creation, making and issuance, in such form
as it may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
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(d) To remove any officer of the Corporation with or without
cause, and from time to time to devolve the powers and duties of any officer
upon any other person for the time being;
(e) To confer upon any officer of the Corporation the power to
appoint, remove and suspend subordinate officers, employees and agents;
(f) To adopt from time to time such stock, option, stock
purchase, bonus or other compensation plans for directors, officers, employees
and agents of the Corporation and its subsidiaries as it may determine;
(g) To adopt from time to time such insurance, retirement, and
other benefit plans for directors, officers, employees and agents of the
Corporation and its subsidiaries as it may determine; and
(h) To adopt from time to time regulations, not inconsistent with
these bylaws, for the management of the Corporation's business and affairs.
Section 2.10 Compensation of Directors. Directors, as such, may receive,
pursuant to resolution of the Board of Directors, fixed fees and other
compensation for their services as directors, including, without limitation,
their services as members of committees of the Board of Directors.
Section 2.11 Nomination of Director Candidates. Subject to the rights of
holders of any class or series of Preferred Stock then outstanding, nominations
for the election of Directors may be made by the Board of Directors or a proxy
committee appointed by the Board of Directors or by any stockholder entitled to
vote in the election of Directors generally. However, any stockholder entitled
to vote in the election of Directors generally may nominate one or more persons
for election as Directors at a meeting only if timely notice of such
stockholder's intent to make such nomination or nominations has been given in
writing to the Secretary of the Corporation. To be timely, a stockholder
nomination for a director to be elected at an annual meeting shall be received
at the Corporation's principal executive offices not less than 120 calendar days
in advance of the date that the Corporation's (or the Corporation's
Predecessor's) Proxy statement was released to stockholders in connection with
the previous year's annual meeting of stockholders, except that if no annual
meeting was held in the previous year or the date of the annual meeting has been
changed by more than 30 calendar days from the date contemplated at the time of
the previous year's proxy statement, or in the event of a nomination for
director to be elected at a special meeting, notice by the stockholders to be
timely must be received not later than the close of business on the tenth day
following the day on which such notice of the date of the special meeting was
mailed or such public disclosure was made. Each such notice shall set forth: (a)
the name and address of the stockholder who intends to make the nomination and
of the person or persons to be nominated; (b) a representation that the
stockholder is a holder of record of stock of the Corporation entitled to vote
for the election of Directors on the date of such notice and intends to appear
in person or by proxy at the meeting to nominate the person or persons specified
in the notice; (c) a description of all arrangements or understandings between
the stockholder and each nominee and any other person or persons
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(naming such person or persons) pursuant to which the nomination or nominations
are to be made by the stockholder; (d) such other information regarding each
nominee proposed by such stockholder as would be required to be included in a
proxy statement filed pursuant to the proxy rules of the Securities and Exchange
Commission, had the nominee been nominated, or intended to be nominated, by the
Board of Directors; and (e) the consent of each nominee to serve as a director
of the Corporation if so elected.
In the event that a person is validly designated as a nominee in
accordance with this Section 2.11 and shall thereafter become unable or
unwilling to stand for election to the Board of Directors, the Board of
Directors or the stockholder who proposed such nominee, as the case may be, may
designate a substitute nominee upon delivery, not fewer than five days prior to
the date of the meeting for the election of such nominee, of a written notice to
the Secretary setting forth such information regarding such substitute nominee
as would have been required to be delivered to the Secretary pursuant to this
Section 2.11 had such substitute nominee been initially proposed as a nominee.
Such notice shall include a signed consent to serve as a director of the
Corporation, if elected, of each such substitute nominee.
If the chairman of the meeting for the election of Directors determines
that a nomination of any candidate for election as a Director at such meeting
was not made in accordance with the applicable provisions of this Section 2.11,
such nomination shall be void; provided, however, that nothing in this Section
2.11 shall be deemed to limit any voting rights upon the occurrence of dividend
arrearages provided to holders of Preferred Stock pursuant to the Preferred
Stock designation for any series of Preferred Stock.
ARTICLE III
COMMITTEES
Section 3.1 Committees of the Board of Directors. The Board of
Directors, by a vote of a majority of the whole Board, may from time to time
designate committees of the Board, with such lawfully delegable powers and
duties as it thereby confers, to serve at the pleasure of the Board and shall,
for those committees and any others provided for herein, elect a director or
directors to serve as the member or members, designating, if it desires, other
directors as alternate members who may replace any absent or disqualified member
at any meeting of the committee. Any committee so designated may exercise the
power and authority of the Board of Directors to declare a dividend, to
authorize the issuance of stock or to adopt a certificate of ownership and
merger pursuant to Section 253 of the Delaware General Corporation Law if the
resolution which designates the committee or a supplemental resolution of the
Board of Directors shall so provide. In the absence or disqualification of any
member of any committee and any alternate member in his place, the member or
members of the committee present at the meeting and not disqualified from
voting, whether or not he or she or they constitute a quorum, may by unanimous
vote appoint another member of the Board of Directors to act at the meeting in
the place of the absent or disqualified member.
Section 3.2 Conduct of Business. Each committee may determine the
procedural rules for meeting and conducting its business and shall act in
accordance therewith, except as
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otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-third of the authorized members shall
constitute a quorum unless the committee shall consist of one or two members, in
which event one member shall constitute a quorum; and all matters shall be
determined by a majority vote of the members present. Action may be taken by any
committee without a meeting if all members thereof consent thereto in writing,
and the writing or writings are filed with the minutes of the proceedings of
such committee.
ARTICLE IV
OFFICERS
Section 4.1 Generally. The officers of the Corporation shall consist of
a President, one or more Vice Presidents, a Secretary and a Treasurer. The
Corporation may also have, at the discretion of the Board of Directors, a
Chairman of the Board and such other officers as may from time to time be
appointed by the Board of Directors. Officers shall be elected by the Board of
Directors, which shall consider that subject at its first meeting after every
annual meeting of stockholders. Each officer shall hold office until his or her
successor is elected and qualified or until his or her earlier resignation or
removal. The Chairman of the Board, if there shall be such an officer, and the
President shall each be members of the Board of Directors. Any number of offices
may he held by the same person.
Section 4.2 Chairman of the Board. The Chairman of the Board, if there
shall be such an officer, shall, if present, preside at all meetings of the
Board of Directors, and exercise and perform such other powers and duties as may
be from time to time assigned to him by the Board of Directors or prescribed by
these bylaws.
Section 4.3 President. The President shall be the chief executive
officer of the Corporation. Subject to the provisions of these bylaws and to the
direction of the Board of Directors, he or she shall have the responsibility for
the general management and control of the business and affairs of the
Corporation and shall perform all duties and have all powers which are commonly
incident to the office of chief executive or which are delegated to him or her
by the Board of Directors. He or she shall have power to sign all stock
certificates, contracts and other instruments of the Corporation which are
authorized and shall have general supervision and direction of all of the other
officers, employees and agents of the Corporation.
Section 4.4 Vice President. Each Vice President shall have such powers
and duties as may be delegated to him or her by the Board of Directors. One Vice
President shall be designated by the Board to perform the duties and exercise
the powers of the President in the event of the President's absence or
disability.
Section 4.5 Treasurer. Unless otherwise designated by the Board of
Directors, the Chief Financial Officer of the Corporation shall be the
Treasurer. The Treasurer shall have the responsibility for maintaining the
financial records of the Corporation and shall have custody of all monies and
securities of the Corporation. He or she shall make such disbursements of the
funds of the Corporation as are authorized and shall render from time to time an
account of all
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such transactions and of the financial condition of the Corporation. The
Treasurer shall also perform such other duties as the Board of Directors may
from time to time prescribe.
Section 4.6 Secretary. The Secretary shall issue all authorized notices
for, and shall keep, or cause to be kept, minutes of all meetings of the
stockholders, the Board of Directors, and all committees of the Board of
Directors. He or she shall have charge of the corporate books and shall perform
such other duties as the Board of Directors may from time to time prescribe.
Section 4.7 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 4.8 Removal. Any officer of the Corporation may be removed at
any time, with or without cause, by the Board of Directors.
Section 4.9 Action With Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the President or any
officer of the Corporation authorized by the President shall have power to vote
and otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which this Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other corporation.
ARTICLE V
STOCK
Section 5.1 Certificates of Stock. Each stockholder shall be entitled to
a certificate signed by, or in the name of the Corporation by, the President or
a Vice President, and by the Secretary or an Assistant Secretary, or the
Treasurer or an Assistant Treasurer, certifying the number of shares owned by
him or her. Any of or all the signatures on the certificate may be facsimile.
Section 5.2 Transfers of Stock. Transfers of stock shall be made only
upon the transfer books of the Corporation kept at an office of the Corporation
or by transfer agents designated to transfer shares of the stock of the
Corporation. Except where a certificate is issued in accordance with Section 4
of Article V of these bylaws, an outstanding certificate for the number of
shares involved shall be surrendered for cancellation before a new certificate
is issued therefor.
Section 5.3 Record Date. The Board of Directors may fix a record date,
which shall not be more than sixty (60) nor fewer than ten (10) days before the
date of any meeting of stockholders, nor more than sixty (60) days prior to the
time for the other action hereinafter described, as of which there shall be
determined the stockholders who are entitled: to notice of or to vote at any
meeting of stockholders or any adjournment thereof; to receive payment of any
dividend or other distribution or allotment of any rights; or to exercise any
rights with respect to any change, conversion or exchange of stock or with
respect to any other lawful action.
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Section 5.4 Lost, Stolen or Destroyed Certificates. In the event of the
loss, theft or destruction of any certificate of stock, another may be issued in
its place pursuant to such regulations as the Board of Directors may establish
concerning proof of such loss, theft or destruction and concerning the giving of
a satisfactory bond or bonds of indemnity.
Section 5.5 Regulations. The issue, transfer, conversion and
registration of certificates of stock shall be governed by such other
regulations as the Board of Directors may establish.
ARTICLE VI
NOTICES
Section 6.1 Notices. Except as otherwise specifically provided herein or
required by law, all notices required to be given to any stockholder, director,
officer, employee or agent shall be in writing and may in every instance be
effectively given by hand delivery to the recipient thereof, by depositing such
notice in the mails, postage paid, or by sending such notice by prepaid
telegram, mailgram, telecopy or commercial courier service. Any such notice
shall be addressed to such stockholder, director, officer, employee or agent at
his or her last known address as the same appears on the books of the
Corporation. The time when such notice shall be deemed to be given shall be the
time such notice is received by such stockholder, director, officer, employee or
agent, or by any person accepting such notice on behalf of such person, if hand
delivered, or the time such notice is dispatched, if delivered through the mails
or be telegram or mailgram.
Section 6.2 Waivers. A written waiver of any notice, signed by a
stockholder, director, officer, employee or agent, whether before or after the
time of the event for which notice is to be given, shall be deemed equivalent to
the notice required to be given to such stockholder, director, officer, employee
or agent. Neither the business nor the purpose of any meeting need be specified
in such a waiver.
ARTICLE VII
MISCELLANEOUS
Section 7.1 Facsimile Signatures. In addition to the provisions for use
of facsimile signatures elsewhere specifically authorized in these bylaws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.
Section 7.2 Corporate Seal. The Board of Directors may provide a
suitable seal, containing the name of the Corporation, which seal shall be in
the charge of the Secretary. If and when so directed by the Board of Directors
or a committee thereof, duplicates of the seal may be kept and used by the
Treasurer or by an Assistant Secretary or Assistant Treasurer.
Section 7.3 Reliance Upon Books, Reports and Records. Each director,
each member of any committee designated by the Board of Directors, and each
officer of the
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Corporation shall, in the performance of his duties, be fully protected
in relying in good faith upon the books of account or other records of the
Corporation, including reports made to the Corporation by any of its officers,
by an independent certified public accountant, or by an appraiser selected with
reasonable care.
Section 7.4 Fiscal Year. The fiscal year of the Corporation shall be as
fixed by the Board of Directors.
Section 7.5 Time Periods. In applying any provision of these bylaws
which require that an act be done or not done a specified number of days prior
to an event or that an act be done during a period of a specified number of days
prior to an event, calendar days shall be used, the day of the doing of the act
shall be excluded, and the day of the event shall be included.
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 8.1 Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
("proceeding"), by reason of the fact that he or she or a person of whom he or
she is the legal representative, is or was a director, officer or employee of
the Corporation or is or was serving at the request of the Corporation as a
director, officer or employee of another corporation, or of a Partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action in an
official capacity as a director, officer or employee or in any other capacity
while serving as a director, officer or employee, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by Delaware Law, as
the same exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than said Law permitted the Corporation
to provide prior to such amendment) against all expenses, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties,
amounts paid or to be paid in settlement and amounts expended in seeking
indemnification granted to such person under applicable law, this bylaw or any
agreement with the Corporation) reasonably incurred or suffered by such person
in connection therewith and such indemnification shall continue as to a person
who has ceased to be a director, officer or employee and shall inure to the
benefit of his or her heirs, executors and administrators; provided, however,
that, except as provided in Section 8.2 of this Article VIII, the Corporation
shall indemnify any such person seeking indemnity in connection with an action,
suit or proceeding (or part thereof) initiated by such person only if (a) such
indemnification is expressly required to be made by law, (b) the action, suit or
proceeding (or part thereof) was authorized by the Board of Directors of the
Corporation, (c) such indemnification is provided by the Corporation, in its
sole discretion, pursuant to the powers vested in the Corporation under the
Delaware General Corporation Law, or (d) the action, suit or proceeding (or part
thereof) is brought to establish or enforce a right to indemnification under an
indemnity agreement or any other statute or law or otherwise as required under
Section 145 of the Delaware General Corporation Law. Such right shall be a
contract right and shall include the right to be paid by the Corporation
expenses incurred in
11
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defending any such proceeding in advance of its final disposition; provided,
however, that, unless the Delaware General Corporation Law then so prohibits,
the payment of such expenses incurred by a director or officer of the
Corporation in his or her capacity as a director or officer (and not in any
other capacity in which service was or is tendered by such person while a
director or officer, including, without limitation. service to an employee
benefit plan) 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 Section or otherwise.
Section 8.2 Right of Claimant to Bring Suit. If a claim under Section 1
of this Article VIII is not paid in full by the Corporation within ninety (90)
days after a written claim has been received by the Corporation, the claimant
may at any time thereafter bring suit against the Corporation to recover the
unpaid amount of the claim and, if such suit is not frivolous or brought in bad
faith, the claimant shall be entitled to be paid also the expense of prosecuting
such claim. The burden of proving such claim shall be on the claimant. It shall
be a defense to any such action (other then an action brought to enforce a claim
for expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any, has been tendered to this
Corporation) that the claimant has not met the standards of conduct which make
it permissible under the Delaware General Corporation Law for the Corporation to
indemnify the claimant for the amount claimed. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that claimant has not
met the applicable standard of conduct.
Section 8.3 Non-Exclusivity of Rights. The rights conferred on any
person in Sections 1 and 2 shall not be exclusive of any other right which such
persons may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
Section 8.4 Indemnification Contracts. The Board of Directors is
authorized to enter into a contract 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 for indemnification rights equivalent to or, if the
Board of Directors so determinates, greater than, those provided for in this
Article VIII.
Section 8.5 Insurance. The Corporation shall maintain insurance to the
extent reasonably available, at its expense, to protect itself and any such
director, officer, employee or agent of the Corporation or another corporation,
partnership, joint venture, trust or other enterprise against any such expense,
liability or loss, whether or not the Corporation would have
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the power to indemnify such person against such expense, liability or loss under
the Delaware General Corporation Law.
Section 8.6 Effect of Amendment. Any amendment, repeal or modification
of any provision of this Article VIII by the stockholders and the directors of
the Corporation shall not adversely affect any right or protection of a director
or officer of the Corporation existing at the time of such amendment, repeal or
modification.
ARTICLE IX
AMENDMENTS
Section 9.1 Amendment of Bylaws. The Board of Directors is expressly
empowered to adopt, amend or repeal Bylaws of the Corporation. Any adoption,
amendment or repeal of Bylaws of the Corporation by the Board of Directors shall
require the approval of a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously authorized directorships
at the time any resolution providing for adoption, amendment or repeal is
presented to the Board). The stockholders shall also have power to adopt, amend
or repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of
Bylaws of the Corporation by the stockholders shall require, in addition to any
vote of the holders of any class or series of stock of the Corporation required
by law or by this Certificate of Incorporation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class.
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CERTIFICATE OF SECRETARY
I hereby certify that I am the duly elected and acting Secretary of
Telocity Delaware, Inc., a Delaware corporation (the "Corporation"), and that
the foregoing Bylaws, comprising thirteen (13) pages, constitute the Bylaws of
the Corporation as duly adopted on January __ 2000, by the unanimous written
consent of the Board of Directors of the Corporation.
IN WITNESS WHEREOF, I have hereunto subscribed my name on
________________, 2000.
-----------------------------------
Scott Martin
<PAGE> 1
EXHIBIT 5.1
[GRAY CARY WARE & FREIDENRICH LLP LETTERHEAD]
February 16, 2000
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: TELOCITY, INC.
REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
As counsel to Telocity, Inc. (the "Company"), we are rendering this
opinion in connection with a proposed sale of those certain shares of the
Company's newly-issued Common Stock as set forth in the Registration Statement
on Form S-1 to which this opinion is being filed as Exhibit 5.1 (the "Shares").
We have examined all instruments, documents and records which we deemed
relevant and necessary for the basis of our opinion hereinafter expressed. In
such examination, we have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals and the conformity
to the originals of all documents submitted to us as copies.
Based on such examination, we are of the opinion that the Shares
identified in the above-referenced Registration Statement will be, upon
effectiveness of the Registration Statement and receipt by the Company of
payment therefor, validly authorized, legally issued, fully paid, and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
above-referenced Registration Statement and to the use of our name wherever it
appears in said Registration Statement, including the Prospectus constituting a
part thereof, as originally filed or as subsequently amended.
Respectfully submitted,
/s/ Gray Cary Ware & Freidenrich LLP
------------------------------------
GRAY CARY WARE & FREIDENRICH LLP
<PAGE> 1
EXHIBIT 10.2
TELOCITY, INC.
2000 EQUITY INCENTIVE PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Establishment, Purpose and Term of Plan...............................1
1.1 Establishment..................................................1
1.2 Purpose........................................................1
1.3 Term of Plan...................................................1
2. Definitions and Construction..........................................1
2.1 Definitions....................................................1
2.2 Construction...................................................5
3. Administration........................................................5
3.1 Administration by the Committee................................5
3.2 Authority of Officers..........................................5
3.3 Powers of the Committee........................................5
3.4 Administration with Respect to Insiders........................7
3.5 Committee Complying with Section 162(m)........................7
3.6 Indemnification................................................7
4. Shares Subject to Plan................................................7
4.1 Maximum Number of Shares Issuable..............................7
4.2 Adjustments for Changes in Capital Structure...................8
5. Eligibility and Award Limitations.....................................8
5.1 Persons Eligible for Incentive Stock Options...................8
5.2 Persons Eligible for Other Awards..............................9
5.3 Fair Market Value Limitation on Incentive Stock Options........9
5.4 Section 162(m) Award Limits....................................9
6. Terms and Conditions of Options.......................................9
6.1 Exercise Price................................................10
6.2 Exercisability and Term of Options............................10
6.3 Payment of Exercise Price.....................................10
6.4 Effect of Termination of Service..............................12
6.5 Transferability of Options....................................14
7. Terms and Conditions of Restricted Stock Awards......................14
7.1 Purchase Price................................................14
7.2 Purchase Period...............................................15
7.3 Payment of Purchase Price.....................................15
7.4 Vesting and Restrictions on Transfer..........................15
7.5 Voting Rights; Dividends......................................15
7.6 Effect of Termination of Service..............................16
7.7 Nontransferability of Restricted Stock Award Rights...........16
</TABLE>
-i-
<PAGE> 3
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
8. Terms and Conditions of Performance Awards...........................16
8.1 Initial Value of Performance Shares and Performance Units.....17
8.2 Establishment of Performance Goals and Performance Period.....17
8.3 Measurement of Performance Goals..............................17
8.4 Determination of Final Value of Performance Awards............18
8.5 Dividend Equivalents..........................................18
8.6 Payment in Settlement of Performance Awards...................19
8.7 Restrictions Applicable to Payment in Shares..................19
8.8 Effect of Termination of Service..............................19
8.9 Nontransferability of Performance Awards......................20
9. Standard Forms of Award Agreement....................................20
9.1 Award Agreements..............................................20
9.2 Authority to Vary Terms.......................................20
10. Change in Control....................................................20
10.1 Definitions...................................................20
10.2 Effect of Change in Control on Options........................21
10.3 Effect of Change in Control on Restricted Stock Awards........21
10.4 Effect of Change in Control on Performance Awards.............22
11. Compliance with Securities Law.......................................22
12. Tax Withholding......................................................23
12.1 Tax Withholding in General....................................23
12.2 Withholding in Shares.........................................23
13. Termination or Amendment of Plan.....................................23
14. Miscellaneous Provisions.............................................23
14.1 Provision of Information......................................23
14.2 Rights as Employee, Consultant or Director....................24
14.3 Rights as a Stockholder.......................................24
14.4 Beneficiary Designation.......................................24
14.5 Unfunded Obligation...........................................24
15. Continuation of Initial Plan as to Outstanding Options...............25
</TABLE>
-ii-
<PAGE> 4
TELOCITY, INC.
2000 EQUITY INCENTIVE PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. The Telocity, Inc. 1998 Stock Option Plan (the
"INITIAL PLAN") was initially established effective January 31, 1998. The
Initial Plan is hereby amended and restated in its entirety as the Telocity,
Inc. 2000 Equity Incentive Plan (the "PLAN") effective as of January 4, 2000
(the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests
of the Participating Company Group and its stockholders by providing an
incentive to attract, retain and reward persons performing services for the
Participating Company Group and by motivating such persons to contribute to the
growth and profitability of the Participating Company Group. The Plan seeks to
achieve this purpose by providing for Awards in the form of Options, Restricted
Stock Purchase Rights, Restricted Stock Bonuses, Performance Shares and
Performance Units.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued and all
restrictions on such shares under the terms of the Plan and the agreements
evidencing Awards granted under the Plan have lapsed. However, all Awards shall
be granted, if at all, within ten (10) years from the Effective Date.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:
(a) "AWARD" means any Option, Restricted Stock Purchase
Right, Restricted Stock Bonus, Performance Share or Performance Unit granted
under the Plan.
(b) "AWARD AGREEMENT" means a written agreement between
the Company and a Participant setting forth the terms, conditions and
restrictions of the Award granted to the Participant. An Award Agreement may be
an "Option Agreement," a "Restricted Stock Purchase Agreement," a "Restricted
Stock Bonus Agreement," a "Performance Share Agreement," or a "Performance Unit
Agreement."
(c) "BOARD" means the Board of Directors of the Company.
(d) "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
(e) "COMMITTEE" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be
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specified by the Board. If no committee of the Board has been appointed to
administer the Plan, the Board shall exercise all of the powers of the Committee
granted herein, and, in any event, the Board may in its discretion exercise any
or all of such powers.
(f) "COMPANY" means Telocity, Inc., a Delaware
corporation, or any successor corporation thereto.
(g) "CONSULTANT" means a person engaged to provide
consulting or advisory services (other than as an Employee or a Director) to a
Participating Company, provided that the identity of such person, the nature of
such services or the entity to which such services are provided would not
preclude the Company from offering or selling securities to such person pursuant
to the Plan in reliance on registration on a Form S-8 Registration Statement
under the Securities Act.
(h) "DIRECTOR" means a member of the Board or of the board
of directors of any other Participating Company.
(i) "DISABILITY" means the inability of the Participant,
in the opinion of a qualified physician acceptable to the Company, to perform
the major duties of the Participant's position with the Participating Company
Group because of the sickness or injury of the Participant.
(j) "DIVIDEND EQUIVALENT" means a credit, made at the
discretion of the Committee or as otherwise provided by the Plan, to the account
of a Participant in an amount equal to the cash dividends paid on one share of
Stock for each share of Stock represented by an Award of Performance Shares held
by such Participant.
(k) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company and, with respect to any Incentive Stock
Option granted to such person, who is an employee for purposes of Section 422 of
the Code; provided, however, that neither service as a Director nor payment of a
director's fee shall be sufficient to constitute employment for purposes of the
Plan.
(l) "EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended.
(m) "FAIR MARKET VALUE" means, as of any date, the value
of a share of Stock or other property as determined by the Committee, in its
discretion, or by the Company, in its discretion, if such determination is
expressly allocated to the Company herein, subject to the following:
(i) If, on such date, the Stock is listed on a
national or regional securities exchange or market system, the Fair Market Value
of a share of Stock shall be the closing price of a share of Stock (or the mean
of the closing bid and asked prices of a share of Stock if the Stock is so
quoted instead) as quoted on the Nasdaq National Market, The Nasdaq
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SmallCap Market or such other national or regional securities exchange or market
system constituting the primary market for the Stock, as reported in The Wall
Street Journal or such other source as the Company deems reliable. If the
relevant date does not fall on a day on which the Stock has traded on such
securities exchange or market system, the date on which the Fair Market Value
shall be established shall be the last day on which the Stock was so traded
prior to the relevant date, or such other appropriate day as shall be determined
by the Committee, in its discretion.
(ii) If, on such date, the Stock is not listed on a
national or regional securities exchange or market system, the Fair Market Value
of a share of Stock shall be as determined by the Committee in good faith
without regard to any restriction other than a restriction which, by its terms,
will never lapse.
(n) "INCENTIVE STOCK OPTION" means an Option intended to
be (as set forth in the Option Agreement) and which qualifies as an incentive
stock option within the meaning of Section 422(b) of the Code.
(o) "INSIDER" means an officer or a Director of the
Company or any other person whose transactions in Stock are subject to Section
16 of the Exchange Act.
(p) "NONSTATUTORY STOCK OPTION" means an Option not
intended to be (as set forth in the Option Agreement) or which does not qualify
as an Incentive Stock Option.
(q) "OPTION" means a right to purchase Stock (subject to
adjustment as provided in Section 4.2) pursuant to the terms and conditions of
the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory
Stock Option.
(r) "PARENT CORPORATION" means any present or future
"parent corporation" of the Company, as defined in Section 424(e) of the Code.
(s) "PARTICIPANT" means any eligible person who has been
granted one or more Awards.
(t) "PARTICIPATING COMPANY" means the Company or any
Parent Corporation or Subsidiary Corporation.
(u) "PARTICIPATING COMPANY GROUP" means, at any point in
time, all corporations collectively which are then Participating Companies.
(v) "PERFORMANCE AWARD" means an Award of Performance
Shares or Performance Units.
(w) "PERFORMANCE GOAL" means a performance goal
established by the Committee pursuant to Section 8.2.
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(x) "PERFORMANCE PERIOD" means a period established by the
Committee pursuant to Section 8.2 at the end of which one or more Performance
Goals are to be measured.
(y) "PERFORMANCE SHARE" means a bookkeeping entry
representing a right granted to a Participant pursuant to the terms and
conditions of Section 8 to receive a payment equal to the value of a Performance
Share, as determined by the Committee, based on performance.
(z) "PERFORMANCE UNIT" means a bookkeeping entry
representing a right granted to a Participant pursuant to the terms and
conditions of Section 8 to receive a payment equal to the value of a Performance
Unit, as determined by the Committee, based upon performance.
(aa) "RESTRICTED STOCK AWARD" means an Award of a
Restricted Stock Bonus or a Restricted Stock Purchase Right.
(bb) "RESTRICTED STOCK BONUS" means Stock granted to a
Participant pursuant to the terms and conditions of Section 7.
(cc) "RESTRICTED STOCK PURCHASE RIGHT" means a right to
purchase Stock granted to a Participant pursuant to the terms and conditions of
Section 7.
(dd) "RESTRICTION PERIOD" means the period established in
accordance with Section 7.4 during which shares subject to a Restricted Stock
Award are subject to Vesting Conditions.
(ee) "RULE 16b-3" means Rule 16b-3 under the Exchange Act,
as amended from time to time, or any successor rule or regulation.
(ff) "SECTION 162(m)" means Section 162(m) of the Code.
(gg) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(hh) "SERVICE" means a Participant's employment or service
with the Participating Company Group, whether in the capacity of an Employee, a
Director or a Consultant. A Participant's Service shall not be deemed to have
terminated merely because of a change in the capacity in which the Participant
renders Service to the Participating Company Group or a change in the
Participating Company for which the Participant renders such Service, provided
that there is no interruption or termination of the Participant's Service.
Furthermore, a Participant's Service with the Participating Company Group shall
not be deemed to have terminated if the Participant takes any military leave,
sick leave, or other bona fide leave of absence approved by the Company;
provided, however, that if any such leave exceeds ninety (90) days, on the one
hundred eighty-first (181st) day of such leave any Incentive Stock Option held
by such Participant shall cease to be treated as an Incentive Stock Option and
instead shall be treated thereafter as a Nonstatutory Stock Option unless the
Participant's right to
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return to Service with the Participating Company Group is guaranteed by statute
or contract. Notwithstanding the foregoing, unless otherwise designated by the
Company or required by law, a leave of absence shall not be treated as Service
for purposes of determining vesting under the Participant's Award Agreement. A
Participant's Service shall be deemed to have terminated either upon an actual
termination of Service or upon the corporation for which the Participant
performs Service ceasing to be a Participating Company. Subject to the
foregoing, the Company, in its discretion, shall determine whether the
Participant's Service has terminated and the effective date of such termination.
(ii) "STOCK" means the common stock of the Company, as
adjusted from time to time in accordance with Section 4.2.
(jj) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
(kk) "TEN PERCENT OWNER" means a Participant who, at the
time an Option is granted to the Participant, owns stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
a Participating Company within the meaning of Section 422(b)(6) of the Code.
(ll) "VESTING CONDITIONS" mean those conditions
established in accordance with Section 7.4 prior to the satisfaction of which
shares subject to a Restricted Stock Award remain subject to forfeiture or a
repurchase option in favor of the Company.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE COMMITTEE. The Plan shall be
administered by the Committee. All questions of interpretation of the Plan or of
any Award shall be determined by the Committee, and such determinations shall be
final and binding upon all persons having an interest in the Plan or such Award.
3.2 AUTHORITY OF OFFICERS. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, determination or election which is the responsibility
of or which is allocated to the Company herein, provided the officer has
apparent authority with respect to such matter, right, obligation, determination
or election.
3.3 POWERS OF THE COMMITTEE. In addition to any other powers set
forth in the Plan and subject to the provisions of the Plan, the Committee shall
have the full and final power and authority, in its discretion:
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(a) to determine the persons to whom, and the time or
times at which, Awards shall be granted and the number of shares of Stock or
units to be subject to each Award;
(b) to determine the type of Award granted and to
designate Options as Incentive Stock Options or Nonstatutory Stock Options;
(c) to determine the Fair Market Value of shares of Stock
or other property;
(d) to determine the terms, conditions and restrictions
applicable to each Award (which need not be identical) and any shares acquired
pursuant thereto, including, without limitation, (i) the purchase price of any
Stock, (ii) the method of payment for shares purchased pursuant to any Award,
(iii) the method for satisfaction of any tax withholding obligation arising in
connection with Award, including by the withholding or delivery of shares of
Stock, (iv) the timing, terms and conditions of the exercisability or vesting of
any Award or any shares acquired pursuant thereto, (v) the Performance Goals
applicable to any Award and the extent to which such Performance Goals have been
attained, (vi) the time of the expiration of any Award, (vii) the effect of the
Participant's termination of Service on any of the foregoing, and (viii) all
other terms, conditions and restrictions applicable to any Award or shares
acquired pursuant thereto not inconsistent with the terms of the Plan;
(e) to determine whether an Award of Performance Shares or
Performance Units will be settled in shares of Stock, cash, or in any
combination thereof;
(f) to approve one or more forms of Award Agreement;
(g) to amend, modify, extend, cancel or renew any Award or
to waive any restrictions or conditions applicable to any Award or any shares
acquired pursuant thereto;
(h) to accelerate, continue, extend or defer the
exercisability or vesting of any Award or any shares acquired pursuant thereto,
including with respect to the period following a Participant's termination of
Service;
(i) to prescribe, amend or rescind rules, guidelines and
policies relating to the Plan, or to adopt supplements to, or alternative
versions of, the Plan, including, without limitation, as the Committee deems
necessary or desirable to comply with the laws of, or to accommodate the tax
policy or custom of, foreign jurisdictions whose citizens may be granted Awards;
and
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(j) to correct any defect, supply any omission or
reconcile any inconsistency in the Plan or any Award Agreement and to make all
other determinations and take such other actions with respect to the Plan or any
Award as the Committee may deem advisable to the extent not inconsistent with
the provisions of the Plan or applicable law.
3.4 ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to
participation by Insiders in the Plan, at any time that any class of equity
security of the Company is registered pursuant to Section 12 of the Exchange
Act, the Plan shall be administered in compliance with the requirements, if any,
of Rule 16b-3.
3.5 COMMITTEE COMPLYING WITH SECTION 162(m). If the Company is a
"publicly held corporation" within the meaning of Section 162(m), the Board may
establish a Committee of "outside directors" within the meaning of Section
162(m) to approve the grant of any Award which might reasonably be anticipated
to result in the payment of employee remuneration that would otherwise exceed
the limit on employee remuneration deductible for income tax purposes pursuant
to Section 162(m).
3.6 INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as members of the Board or the Committee or as
officers or employees of the Participating Company Group, members of the Board
or the Committee and any officers or employees of the Participating Company
Group to whom authority to act for the Board, the Committee or the Company is
delegated shall be indemnified by the Company against all reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection with
the defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan, or any right
granted hereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such person is liable for gross
negligence, bad faith or intentional misconduct in duties; provided, however,
that within sixty (60) days after the institution of such action, suit or
proceeding, such person shall offer to the Company, in writing, the opportunity
at its own expense to handle and defend the same.
4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be twenty-three million (23,000,000),
cumulatively increased on January 1, 2001 and each January 1 thereafter until
and including January 1, 2010 by a number of shares of Stock (the "ANNUAL
INCREASE") equal to the lesser of (a) five percent (5%) of the number of shares
of Stock issued and outstanding on the immediately preceding December 31 or (b)
an amount determined by the Committee, and shall consist of authorized but
unissued or reacquired shares of Stock or any combination thereof.
Notwithstanding the foregoing, except as adjusted pursuant to Section 4.2, the
portion of each Annual Increase that shall be available for issuance pursuant to
the exercise of Incentive Stock Options shall not exceed five million
(5,000,000) shares (the "ISO SHARE LIMIT"). If an outstanding Award for any
reason expires or is terminated or canceled without having been exercised or
settled in full, or if shares of Stock acquired pursuant to an Award subject to
forfeiture or repurchase are forfeited or repurchased by the Company at the
Participant's purchase price, the shares of Stock allocable to the terminated
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<PAGE> 11
portion of such Award or such forfeited or repurchased shares of Stock shall
again be available for issuance under the Plan.(1)
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, appropriate adjustments shall be made in the number and class of shares
subject to the Plan and to any outstanding Awards, in the ISO Share Limit set
forth in Section 4.1, and in the exercise price per share of any outstanding
Options and Restricted Stock Purchase Rights. If a majority of the shares which
are of the same class as the shares that are subject to outstanding Awards are
exchanged for, converted into, or otherwise become (whether or not pursuant to
an Ownership Change Event, as defined in Section 10.1) shares of another
corporation (the "NEW SHARES"), the Committee may unilaterally amend the
outstanding Awards to provide that such Awards shall be for New Shares. In the
event of any such amendment, the number of shares subject to outstanding Awards
and the exercise price per share of outstanding Options and Restricted Stock
Purchase Rights shall be adjusted in a fair and equitable manner as determined
by the Committee, in its discretion. Notwithstanding the foregoing, any
fractional share resulting from an adjustment pursuant to this Section 4.2 shall
be rounded down to the nearest whole number, and in no event may the exercise
price of any Option or Restricted Stock Purchase Right be decreased to an amount
less than the par value, if any, of the stock subject to such Award. The
adjustments determined by the Committee pursuant to this Section 4.2 shall be
final, binding and conclusive.
5. ELIGIBILITY AND AWARD LIMITATIONS.
5.1 PERSONS ELIGIBLE FOR INCENTIVE STOCK OPTIONS. Incentive Stock
Options may be granted only to Employees. For purposes of the foregoing
sentence, the term "Employees" shall include prospective Employees to whom
Incentive Stock Options are granted in connection with written offers of
employment with the Participating Company Group, provided that any such
Incentive Stock Option shall be deemed granted effective on the date such person
commences Service as an Employee, with an exercise price determined as of such
date in accordance with Section 6.1. Eligible persons may be granted more than
one (1) Incentive Stock Option.
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(1) Until immediately prior to the effective time of the Company's registration
of Stock under Section 12 of the Exchange Act, Section 4.1 shall include the
following:
Notwithstanding the foregoing, at any such time as the offer and sale of
securities pursuant to the Plan is subject to compliance with Section
260.140.45 of Title 10 of the California Code of Regulations ("SECTION
260.140.45"), the total number of shares of Stock issuable pursuant to
the Plan and the total number of shares provided for under any other
stock bonus or similar plan of the Company shall not exceed thirty
percent (30%) (or such other higher percentage limitation as may be
approved by the stockholders of the Company pursuant to Section
260.140.45) of the then outstanding shares of the Company as calculated
in accordance with the conditions and exclusions of Section 260.140.45.
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5.2 PERSONS ELIGIBLE FOR OTHER AWARDS. Awards other than
Incentive Stock Options may be granted only to Employees, Consultants and
Directors. For purposes of the foregoing sentence, "Employees," "Consultants"
and "Directors" shall include prospective Employees, prospective Consultants and
prospective Directors to whom Awards are granted in connection with written
offers of an employment or other service relationship with the Participating
Company Group; provided, however, that no Stock subject to any such Award shall
vest, become exercisable or be issued prior to the date on which such person
commences Service. Eligible persons may be granted more than one (1) Award.
5.3 FAIR MARKET VALUE LIMITATION ON INCENTIVE STOCK OPTIONS. To
the extent that options designated as Incentive Stock Options (granted under all
stock option plans of the Participating Company Group, including the Plan)
become exercisable by a Participant for the first time during any calendar year
for stock having a Fair Market Value greater than One Hundred Thousand Dollars
($100,000), the portions of such options which exceed such amount shall be
treated as Nonstatutory Stock Options. For purposes of this Section 5.3, options
designated as Incentive Stock Options shall be taken into account in the order
in which they were granted, and the Fair Market Value of stock shall be
determined as of the time the option with respect to such stock is granted. If
the Code is amended to provide for a different limitation from that set forth in
this Section 5.3, such different limitation shall be deemed incorporated herein
effective as of the date and with respect to such Options as required or
permitted by such amendment to the Code. If an Option is treated as an Incentive
Stock Option in part and as a Nonstatutory Stock Option in part by reason of the
limitation set forth in this Section 5.3, the Participant may designate which
portion of such Option the Participant is exercising. In the absence of such
designation, the Participant shall be deemed to have exercised the Incentive
Stock Option portion of the Option first. Separate certificates representing
each such portion shall be issued upon the exercise of the Option.
5.4 SECTION 162(m) AWARD LIMITS. If the Company is a "publicly
held corporation" within the meaning of Section 162(m), then, no later than the
first meeting of the stockholders of the Company at which directors are to be
elected that occurs after the close of the third calendar year following the
calendar year in which the Company's initial public offering occurs, the
Committee shall adopt amendments to the Plan setting forth the maximum amount of
performance-based compensation (within the meaning of Section 162(m)) that may
be paid under any Award to any Employee during a specified period and, in the
case of Options, the maximum amount of shares for which Options may be granted
to any Employee during a specified period. The Company shall seek stockholder
approve of such Award limits and any other materials terms of Awards necessary
to qualify the compensation paid with respect to such Awards as
performance-based compensation within the meaning of Section 162(m). This
Section 5.4 shall not apply if, in connection with a prior material modification
to the Plan within the meaning of Section 162(m), the Committee has adopted such
amendments and sought such stockholder approval.
6. TERMS AND CONDITIONS OF OPTIONS.
Options shall be evidenced by Option Agreements specifying the
number of shares of Stock covered thereby, in such form as the Committee shall
from time to time establish.
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No Option or purported Option shall be a valid and binding obligation of the
Company unless evidenced by a fully executed Option Agreement. Option Agreements
may incorporate all or any of the terms of the Plan by reference and shall
comply with and be subject to the following terms and conditions:
6.1 EXERCISE PRICE. The exercise price for each Option shall be
established in the discretion of the Committee; provided, however, that (a) the
exercise price per share for an Incentive Stock Option shall be not less than
the Fair Market Value of a share of Stock on the effective date of grant of the
Option, (b) the exercise price per share for a Nonstatutory Stock Option shall
be not less than eighty-five percent (85%) of the Fair Market Value of a share
of Stock on the effective date of grant of the Option, and (c) no Incentive
Stock Option(2) granted to a Ten Percent Owner shall have an exercise price per
share less than one hundred ten percent (110%) of the Fair Market Value of a
share of Stock on the effective date of grant of the Option. Notwithstanding the
foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock
Option) may be granted with an exercise price lower than the minimum exercise
price set forth above if such Option is granted pursuant to an assumption or
substitution for another option in a manner qualifying under the provisions of
Section 424(a) of the Code.
6.2 EXERCISABILITY AND TERM OF OPTIONS. Options shall be
exercisable at such time or times, or upon such event or events, and subject to
such terms, conditions, performance criteria and restrictions as shall be
determined by the Committee and set forth in the Option Agreement evidencing
such Option; provided, however, that (a) no Option shall be exercisable after
the expiration of ten (10) years after the effective date of grant of such
Option, (b) no Incentive Stock Option granted to a Ten Percent Owner shall be
exercisable after the expiration of five (5) years after the effective date of
grant of such Option, (c) no Option granted to a prospective Employee,
prospective Consultant or prospective Director may become exercisable prior to
the date on which such person commences Service. Subject to the foregoing,
unless otherwise specified by the Committee in the grant of an Option, any
Option granted hereunder shall terminate ten (10) years after the effective date
of grant of the Option, unless earlier terminated in accordance with its
provisions.(3)
6.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the exercise price for the number of shares of Stock
being purchased
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(2) Until immediately prior to the effective time of the Company's registration
of Stock under Section 12 of the Exchange Act, the limitation in Section 6.1(c)
shall apply to all Options.
(3) Until immediately prior to the effective time of the Company's registration
of Stock under Section 12 of the Exchange Act, Section 6.2 shall include the
following:
With the exception of an Option granted to an officer, Director or
Consultant, no Option shall become exercisable at a rate less than
twenty percent (20%) per year over a period of five (5) years from the
effective date of grant of such Option, subject to the Participant's
continued Service.
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pursuant to any Option shall be made (i) in cash, by check or cash equivalent,
(ii) by tender to the Company, or attestation to the ownership, of shares of
Stock owned by the Participant having a Fair Market Value (as determined by the
Company without regard to any restrictions on transferability applicable to such
stock by reason of federal or state securities laws or agreements with an
underwriter for the Company) not less than the exercise price, (iii) by delivery
of a properly executed notice together with irrevocable instructions to a broker
providing for the assignment to the Company of the proceeds of a sale or loan
with respect to some or all of the shares being acquired upon the exercise of
the Option (including, without limitation, through an exercise complying with
the provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System) (a "CASHLESS EXERCISE"), (iv) provided
that the Participant is an Employee (unless otherwise not prohibited by law,
including, without limitation, any regulation promulgated by the Board of
Governors of the Federal Reserve System) and in the Company's sole discretion at
the time the Option is exercised, by delivery of the Participant's promissory
note in a form approved by the Company for the aggregate exercise price,
provided that, if the Company is incorporated in the State of Delaware, the
Participant shall pay in cash that portion of the aggregate exercise price not
less than the par value of the shares being acquired, (v) by such other
consideration as may be approved by the Committee from time to time to the
extent permitted by applicable law, or (vi) by any combination thereof. The
Committee may at any time or from time to time grant Options which do not permit
all of the foregoing forms of consideration to be used in payment of the
exercise price or which otherwise restrict one or more forms of consideration.
(b) LIMITATIONS ON FORMS OF CONSIDERATION.
(i) TENDER OF STOCK. Notwithstanding the foregoing,
an Option may not be exercised by tender to the Company, or attestation to the
ownership, of shares of Stock to the extent such tender or attestation would
constitute a violation of the provisions of any law, regulation or agreement
restricting the redemption of the Company's stock. Unless otherwise provided by
the Committee, an Option may not be exercised by tender to the Company, or
attestation to the ownership, of shares of Stock unless such shares either have
been owned by the Participant for more than six (6) months or were not acquired,
directly or indirectly, from the Company.
(ii) CASHLESS EXERCISE. The Company reserves, at
any and all times, the right, in the Company's sole and absolute discretion, to
establish, decline to approve or terminate any program or procedures for the
exercise of Options by means of a Cashless Exercise.
(iii) PAYMENT BY PROMISSORY NOTE. No promissory
note shall be permitted if the exercise of an Option using a promissory note
would be a violation of any law. Any permitted promissory note shall be on such
terms as the Committee shall determine at the time the Option is granted. The
Committee shall have the authority to permit or require the Participant to
secure any promissory note used to exercise an Option with the shares of Stock
acquired upon the exercise of the Option or with other collateral acceptable to
the Company. Unless otherwise provided by the Committee, if the Company at any
time is subject to the regulations promulgated by the Board of Governors of the
Federal Reserve System or any other
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governmental entity affecting the extension of credit in connection with the
Company's securities, any promissory note shall comply with such applicable
regulations, and the Participant shall pay the unpaid principal and accrued
interest, if any, to the extent necessary to comply with such applicable
regulations.
6.4 EFFECT OF TERMINATION OF SERVICE.
(a) OPTION EXERCISABILITY. Subject to earlier termination
of the Option as otherwise provided herein and unless otherwise provided by the
Committee in the grant of the Option and set forth in the Option Agreement, an
Option granted to a Participant shall be exercisable after the Participant's
termination of Service only during the applicable time period determined in
accordance with this Section 6.4 and thereafter shall terminate:
(i) DISABILITY. If the Participant's Service with
the Participating Company Group terminates because of the Disability of the
Participant, the Option, to the extent unexercised and exercisable on the date
on which the Participant's Service terminated, may be exercised by the
Participant (or the Participant's guardian or legal representative) at any time
prior to the expiration of six (6) months (or such longer period of time as
determined by the Committee, in its discretion) after the date on which the
Participant's Service terminated, but in any event no later than the date of
expiration of the Option's term as set forth in the Option Agreement evidencing
such Option (the "OPTION EXPIRATION DATE").
(ii) DEATH. If the Participant's Service with the
Participating Company Group terminates because of the death of the Participant,
the Option, to the extent unexercised and exercisable on the date on which the
Participant's Service terminated, may be exercised by the Participant's legal
representative or other person who acquired the right to exercise the Option by
reason of the Participant's death at any time prior to the expiration of six (6)
months (or such longer period of time as determined by the Committee, in its
discretion) after the date on which the Participant's Service terminated, but in
any event no later than the Option Expiration Date. The Participant's Service
shall be deemed to have terminated on account of death if the Participant dies
within one (1) month (or such longer period of time as determined by the
Committee, in its discretion) after the Participant's termination of Service.
(iii) TERMINATION AFTER CHANGE IN CONTROL. The
Committee may, in its discretion, provide in any Option Agreement that if the
Participant's Service with the Participating Company Group ceases as a result of
"Termination After Change in Control" (as defined in such Option Agreement),
then (1) the Option, to the extent unexercised and exercisable on the date on
which the Participant's Service terminated, may be exercised by the Participant
(or the Participant's guardian or legal representative) at any time prior to the
expiration of six (6) months (or such longer period of time as determined by the
Committee, in its discretion) after the date on which the Participant's Service
terminated, but in any event no later than the Option Expiration Date, and (2)
the exercisability and vesting of the Option and any shares acquired upon the
exercise thereof shall be accelerated effective as of the date on which the
Participant's Service terminated to such extent, if any, as shall have been
determined by the Committee, in its discretion, and set forth in the Option
Agreement. Notwithstanding the foregoing, if it is determined that the
provisions or operation of this Section 6.4(a)(iii) would
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preclude treatment of a Change in Control as a "pooling-of-interests" for
accounting purposes and provided further that in the absence of the preceding
sentence such Change in Control would be treated as a "pooling-of-interests" for
accounting purposes, then this Section 6.4(a)(iii) shall be void ab initio, and
the vesting and exercisability of the Option shall be determined under any other
applicable provision of the Plan or the Option Agreement evidencing such Option.
(iv) TERMINATION FOR CAUSE. Notwithstanding any
other provision of the Plan to the contrary, if the Participant's Service with
the Participating Company Group is terminated for Cause, as defined by the
Participant's Option Agreement or contract of employment or service (or, if not
defined in any of the foregoing, as defined below), the Option shall terminate
and cease to be exercisable immediately upon such termination of Service. Unless
otherwise defined by the Participant's Option Agreement or contract of
employment or service, for purposes of this Section 6.4(a)(iv) "CAUSE" shall
mean any of the following: (1) the Participant's theft, dishonesty, or
falsification of any Participating Company documents or records; (2) the
Participant's improper use or disclosure of a Participating Company's
confidential or proprietary information; (3) any action by the Participant which
has a detrimental effect on a Participating Company's reputation or business;
(4) the Participant's failure or inability to perform any reasonable assigned
duties after written notice from a Participating Company of, and a reasonable
opportunity to cure, such failure or inability; (5) any material breach by the
Participant of any employment or service agreement between the Participant and a
Participating Company, which breach is not cured pursuant to the terms of such
agreement; or (6) the Participant's conviction (including any plea of guilty or
nolo contendere) of any criminal act which impairs the Participant's ability to
perform his or her duties with a Participating Company.
(v) OTHER TERMINATION OF SERVICE. If the
Participant's Service with the Participating Company Group terminates for any
reason, except Disability, death, Termination After Change in Control or Cause,
the Option, to the extent unexercised and exercisable by the Participant on the
date on which the Participant's Service terminated, may be exercised by the
Participant at any time prior to the expiration of one (1) month (or such longer
period of time as determined by the Committee, in its discretion) after the date
on which the Participant's Service terminated, but in any event no later than
the Option Expiration Date.
(b) EXTENSION IF EXERCISE PREVENTED BY LAW.
Notwithstanding the foregoing other than termination of a Participant's Service
for Cause, if the exercise of an Option within the applicable time periods set
forth in Section 6.4(a) is prevented by the provisions of Section 11 below, the
Option shall remain exercisable until one (1) month (or such longer period of
time as determined by the Committee, in its discretion) after the date the
Participant is notified by the Company that the Option is exercisable, but in
any event no later than the Option Expiration Date.
(c) EXTENSION IF PARTICIPANT SUBJECT TO SECTION 16(b).
Notwithstanding the foregoing other than termination of a Participant's Service
for Cause, if a sale within the applicable time periods set forth in Section
6.4(a) of shares acquired upon the exercise of the Option would subject the
Participant to suit under Section 16(b) of the Exchange Act, the Option shall
remain exercisable until the earliest to occur of (i) the tenth (10th) day
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<PAGE> 17
following the date on which a sale of such shares by the Participant would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Participant's termination of Service, or (iii) the Option Expiration
Date.
6.5 TRANSFERABILITY OF OPTIONS. During the lifetime of the
Participant, an Option shall be exercisable only by the Participant or the
Participant's guardian or legal representative. No Option shall be assignable or
transferable by the Participant, except by will or by the laws of descent and
distribution. Notwithstanding the foregoing, to the extent permitted by the
Committee, in its discretion, and set forth in the Option Agreement evidencing
such Option, a Nonstatutory Stock Option shall be assignable or transferable
subject to the applicable limitations, if any, described in the General
Instructions to Form S-8 Registration Statement under the Securities Act.(4)
7. TERMS AND CONDITIONS OF RESTRICTED STOCK AWARDS.(5)
The Committee may from time to time grant Restricted Stock Awards
upon such conditions as the Committee shall determine, including, without
limitation, upon the attainment of one or more Performance Goals described in
Section 8.3. If either the grant of a Restricted Stock Award or the lapsing of
the Restriction Period is to be contingent upon the attainment of one or more
Performance Goals, the Committee shall follow procedures substantially
equivalent to those set forth in Sections 8.2 through 8.4. Restricted Stock
Awards may be in the form of either a Restricted Stock Bonus, which shall be
evidenced by Restricted Stock Bonus Agreement, or a Restricted Stock Purchase
Right, which shall be evidenced by Restricted Stock Purchase Agreement. Each
such Award Agreement shall specify the number of shares of Stock subject to and
the other terms, conditions and restrictions of the Award, and shall be in such
form as the Committee shall establish from time to time. No Restricted Stock
Award or purported Restricted Stock Award shall be a valid and binding
obligation of the Company unless evidenced by a fully executed Award Agreement.
Restricted Stock Award Agreements may incorporate all or any of the terms of the
Plan by reference and shall comply with and be subject to the following terms
and conditions:
7.1 PURCHASE PRICE. The purchase price under each Restricted
Stock Purchase Right shall be established by the Committee. No monetary payment
(other than applicable tax withholding) shall be required as a condition of
receiving a Restricted Stock Bonus, the consideration for which shall be
services actually rendered to a Participating Company or for its benefit.
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(4) Until immediately prior to the effective time of the Company's registration
of Stock under Section 12 of the Exchange Act, Section 6.5 shall also refer to
the limitations, if any, under Section 260.140.41 of Title 10 of the California
Code of Regulations and Rule 701 under the Securities Act.
(5) No Restricted Stock Award may be granted pursuant to this Section 7 until
immediately prior to the effective time of the Company's registration of Stock
under Section 12 of the Exchange Act.
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7.2 PURCHASE PERIOD. A Restricted Stock Purchase Right shall be
exercisable within a period established by the Committee, which shall in no
event exceed thirty (30) days from the effective date of the grant of the
Restricted Stock Purchase Right; provided, however, that no Restricted Stock
Purchase Right granted to a prospective Employee, prospective Director or
prospective Consultant may become exercisable prior to the date on which such
person commences Service.
7.3 PAYMENT OF PURCHASE PRICE. Except as otherwise provided
below, payment of the purchase price for the number of shares of Stock being
purchased pursuant to any Restricted Stock Purchase Right shall be made (i) in
cash, by check, or cash equivalent, (ii) provided that the Participant is an
Employee (unless otherwise not prohibited by law, including, without limitation,
any regulation promulgated by the Board of Governors of the Federal Reserve
System) and in the Company's sole discretion at the time the Restricted Stock
Purchase Right is exercised, by delivery of the Participant's promissory note in
a form approved by the Company for the aggregate purchase price, provided that,
if the Company is incorporated in the State of Delaware, the Participant shall
pay in cash that portion of the aggregate purchase price not less than the par
value of the shares being acquired, (iii) by such other consideration as may be
approved by the Committee from time to time to the extent permitted by
applicable law, or (iv) by any combination thereof. Payment by means of the
Participant's promissory note shall be subject to the conditions described in
Section 6.3(b)(iii). The Committee may at any time or from time to time grant
Restricted Stock Purchase Rights which do not permit all of the foregoing forms
of consideration to be used in payment of the purchase price or which otherwise
restrict one or more forms of consideration. Restricted Stock Bonuses shall be
issued in consideration for services actually rendered to a Participating
Company or for its benefit.
7.4 VESTING AND RESTRICTIONS ON TRANSFER. Shares issued pursuant
to any Restricted Stock Award may be made subject to vesting conditioned upon
the satisfaction of such Service requirements, conditions, restrictions or
performance criteria, including, without limitation, Performance Goals as
described in Section 8.3 (the "VESTING Conditions"), as shall be established by
the Committee and set forth in the Award Agreement evidencing such Award. During
any period (the "RESTRICTION PERIOD") in which shares acquired pursuant to a
Restricted Stock Award remain subject to Vesting Conditions, such shares may not
be sold, exchanged, transferred, pledged, assigned or otherwise disposed of
other than pursuant to an Ownership Change Event, as defined in Section 10.1, or
as provided in Section 7.7. Upon request by the Company, each Participant shall
execute any agreement evidencing such transfer restrictions prior to the receipt
of shares of Stock hereunder and shall promptly present to the Company any and
all certificates representing shares of Stock acquired hereunder for the
placement on such certificates of appropriate legends evidencing any such
transfer restrictions.
7.5 VOTING RIGHTS; DIVIDENDS. Except as provided in this Section
and Section 7.4, during the Restriction Period applicable to shares subject to a
Restricted Stock Award held by a Participant, the Participant shall have all of
the rights of a stockholder of the Company holding shares of Stock, including
the right to vote such shares and to receive all dividends and other
distributions paid with respect to such shares; provided, however, that if any
such dividends or distributions are paid in shares of Stock, such shares shall
be subject to the
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same Vesting Conditions as the shares subject to the Restricted Stock Award with
respect to which the dividends or distributions were paid.
7.6 EFFECT OF TERMINATION OF SERVICE. Unless otherwise provided
in the grant of a Restricted Stock Award and set forth in the Award Agreement,
the effect of the Participant's termination of Service shall be as follows:
(a) TERMINATION AFTER CHANGE IN CONTROL. The Committee
may, in its discretion, provide in any Restricted Stock Award Agreement that if
the Participant's Service with the Participating Company Group ceases as a
result of "Termination After Change in Control" (as defined in such Award
Agreement), then the Vesting Conditions applicable to the shares subject to the
Restricted Stock Award shall terminate effective as of the date on which the
Participant's Service terminated to the extent specified in such Award
Agreement. Notwithstanding the foregoing, if it is determined that the
provisions or operation of this Section 7.6(a) would preclude treatment of a
Change in Control as a "pooling-of-interests" for accounting purposes and
provided further that in the absence of the preceding sentence such Change in
Control would be treated as a "pooling-of-interests" for accounting purposes,
then this Section 7.6(a) shall be void ab initio, and the effect of the
Participant's termination of Service shall be determined under any other
applicable provision of the Plan or the Award Agreement evidencing such
Restricted Stock Award.
(b) OTHER TERMINATION OF SERVICE. If a Participant's
Service with the Participating Company Group terminates for any reason, except
Termination After Change in Control, whether voluntary or involuntary (including
the Participant's death or disability), then (i) the Company shall have the
option to repurchase for the purchase price paid by the Participant any shares
acquired by the Participant pursuant to a Restricted Stock Purchase Right which
remain subject to Vesting Conditions as of the date of the Participant's
termination of Service and (ii) the Participant shall forfeit to the Company any
shares acquired by the Participant pursuant to a Restricted Stock Bonus which
remain subject to Vesting Conditions as of the date of the Participant's
termination of Service. The Company shall have the right to assign at any time
any repurchase right it may have, whether or not such right is then exercisable,
to one or more persons as may be selected by the Company.
7.7 NONTRANSFERABILITY OF RESTRICTED STOCK AWARD RIGHTS. Rights
to acquire shares of Stock pursuant to a Restricted Stock Award may not be
assigned or transferred in any manner except by will or the laws of descent and
distribution, and, during the lifetime of the Participant, shall be exercisable
only by the Participant.
8. TERMS AND CONDITIONS OF PERFORMANCE AWARDS.(6)
The Committee may from time to time grant Performance Awards upon
such conditions as the Committee shall determine. Performance Awards may be in
the form of either Performance Shares, which shall be evidenced by a Performance
Share Agreement, or
- ----------
(6) No Performance Award may be granted pursuant to this Section 8 until
immediately prior to the effective time of the Company's registration of Stock
under Section 12 of the Exchange Act.
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Performance Units, which shall be evidenced by a Performance Unit Agreement.
Each such Award Agreement shall specify the number of Performance Shares or
Performance Units subject thereto, the method of computing the value of each
Performance Share or Performance Unit, the Performance Goals and Performance
Period applicable to the Award, and the other terms, conditions and restrictions
of the Award, and shall be in such form as the Committee shall establish from
time to time. No Performance Award or purported Performance Award shall be a
valid and binding obligation of the Company unless evidenced by a fully executed
Award Agreement. Performance Share and Performance Unit Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:
8.1 INITIAL VALUE OF PERFORMANCE SHARES AND PERFORMANCE UNITS.
Unless otherwise provided by the Committee in granting a Performance Award, each
Performance Share shall have an initial value equal to the Fair Market Value of
a share of Stock on the effective date of grant of the Performance Share, and
each Performance Unit shall have an initial value of one hundred dollars ($100).
The final value payable to the Participant in settlement of a Performance Award
will depend on the extent to which Performance Goals established by the
Committee are attained within the applicable Performance Period established by
the Committee.
8.2 ESTABLISHMENT OF PERFORMANCE GOALS AND PERFORMANCE PERIOD.
The Committee shall establish in writing the Performance Period applicable to
each Performance Award and one or more Performance Goals which, when measured at
the end of the Performance Period, shall determine the final value of the
Performance Award to be paid to the Participant. Unless otherwise permitted in
compliance with the requirements under Section 162(m) with respect to
"performance-based compensation," the Committee shall establish the Performance
Goals applicable to each Performance Award no later than the earlier of (a) the
date ninety (90) days after the commencement of the applicable Performance
Period or (b) the date on which 25% of the Performance Period has elapsed, and,
in any event, at a time when the outcome of the Performance Goals remains
substantially uncertain. Once established, the Performance Goals shall not be
changed during the Performance Period.
8.3 MEASUREMENT OF PERFORMANCE GOALS. Performance Goals shall be
established by the Committee on the basis of targets to be attained
("PERFORMANCE TARGETS") with respect one or more measures of business or
financial performance (each, a "PERFORMANCE MEASURE"). Performance Measures
shall have the same meanings as used in the Company's financial statements, or
if such terms are not used in the Company's financial statements, they shall
have the meaning applied pursuant to generally accepted accounting principles,
or as used generally in the Company's industry. Performance Targets may include
a minimum, maximum, target level and intermediate levels of performance, with
the final value of a Performance Award determined by the level attained during
the applicable Performance Period. A Performance Target may be stated as an
absolute value or as a value determined relative to a standard selected by the
Committee. Performance Measures shall be calculated with respect to the Company
and each Subsidiary Corporation consolidated therewith for financial reporting
purposes or such division or other business unit as may be selected by the
Committee. For purposes of the Plan, the Performance Measures applicable to a
Performance Award shall be calculated before the effect of changes in accounting
standards, restructuring charges and similar extraordinary items,
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determined according to criteria established by the Committee, occurring after
the establishment of the Performance Goals applicable to a Performance Award.
Performance Measures may be one or more of the following, as determined by the
Committee:
(a) revenue
(b) gross margin
(c) operating margin
(d) operating income
(e) pre-tax profit
(f) earnings before interest, taxes and depreciation
(g) net income
(h) cash flow
(i) expenses
(j) stock price
(k) earnings per share
(l) return on stockholder equity
(m) return on capital
(n) return on net assets
(o) economic value added
(p) number of customers
(q) market share
8.4 DETERMINATION OF FINAL VALUE OF PERFORMANCE AWARDS. As soon
as practicable following the completion of the Performance Period applicable to
a Performance Award, the Committee shall certify in writing the extent to which
the applicable Performance Goals have been attained and the resulting final
value of the Award earned by the Participant and to be paid upon its settlement
in accordance with the terms of the Award Agreement. The Committee shall have no
discretion to increase the value of an Award payable upon its settlement in
excess of the amount called for by the terms of the Award Agreement on the basis
of the degree of attainment of the Performance Goals as certified by the
Committee. However, notwithstanding the attainment of any Performance Goal, if
permitted under a Participant's Award Agreement, the Committee shall have the
discretion, on the basis of such criteria as may be established by the
Committee, to reduce some or all of the value of a Performance Award that would
otherwise be paid upon its settlement. No such reduction may result in an
increase in the amount payable upon settlement of another Participant's
Performance Award. As soon as practicable following the Committee's
certification, the Company shall notify the Participant of the determination of
the Committee.
8.5 DIVIDEND EQUIVALENTS. In its discretion, the Committee may
provide in the Award Agreement evidencing any Performance Share Award that the
Participant shall be entitled to receive Dividend Equivalents with respect to
the payment of cash dividends on Stock having a record date prior to the date on
which the Performance Shares are settled or forfeited. Dividend Equivalents may
be paid currently or may be accumulated and paid to the extent that Performance
Shares become nonforfeitable, as determined by the Committee. Settlement of
Dividend Equivalents may be made in cash, shares of Stock, or a combination
thereof as determined by the Committee, and may be paid on the same basis as
settlement of the related
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Performance Share as provided in Section 8.6. Dividend Equivalents shall not be
paid with respect to Performance Units.
8.6 PAYMENT IN SETTLEMENT OF PERFORMANCE AWARDS. Payment of the
final value of a Performance Award earned by a Participant as determined
following the completion of the applicable Performance Period pursuant to
Sections 8.4 and 8.5 may be made in cash, shares of Stock, or a combination
thereof as determined by the Committee. If payment is made in shares of Stock,
the number of such shares shall be determined by dividing the final value of the
Performance Award by the Fair Market Value of a share of Stock on the settlement
date. Payment may be made in a lump sum or installments as prescribed by the
Committee. If any payment is to be made on a deferred basis, the Committee may,
but shall not be obligated to, provide for the payment during the deferral
period of Dividend Equivalents or a reasonable rate of interest within the
meaning of Section 162(m).
8.7 RESTRICTIONS APPLICABLE TO PAYMENT IN SHARES. Shares of Stock
issued in payment of any Performance Award may be fully vested and freely
transferable shares or may be shares of Stock subject to Vesting Conditions as
provided in Section 7.4. Any shares subject to Vesting Conditions shall be
evidenced by an appropriate Restricted Stock Bonus Agreement and shall be
subject to the provisions of Sections 7.4 through 7.7 above.
8.8 EFFECT OF TERMINATION OF SERVICE. Unless otherwise provided
by the Committee in the grant of a Performance Award and set forth in the Award
Agreement, the effect of the Participant's termination of Service shall be as
follows:
(a) DEATH OR DISABILITY. If the Participant's Service with
the Participating Company Group terminates because of the death or Disability of
the Participant prior to the completion of the Performance Period applicable to
a Performance Award held by the Participant, the final value of the Performance
Award shall be determined by the extent to which the applicable Performance
Goals are attained with respect to the entire Performance Period but shall be
prorated on the basis of the number of days of the Participant's Service during
the Performance Period. Payment shall be made following the end of the
Performance Period in any manner permitted by Section 8.6.
(b) TERMINATION AFTER CHANGE IN CONTROL. The Committee
may, in its discretion, provide in any Performance Award Agreement that if the
Participant's Service with the Participating Company Group ceases as a result of
"Termination After Change in Control" (as defined in such Award Agreement), then
the Performance Award shall become payable, effective as of the date on which
the Participant's Service terminated, in the amount of a final value determined
in accordance with the method specified by the Committee, in its discretion, and
set forth in the Award Agreement. Notwithstanding the foregoing, if it is
determined that the provisions or operation of this Section 8.8(b) would
preclude treatment of a Change in Control as a "pooling-of-interests" for
accounting purposes and provided further that in the absence of the preceding
sentence such Change in Control would be treated as a "pooling-of-interests" for
accounting purposes, then this Section 8.8(b) shall be void ab initio, and the
effect of the Participant's termination of Service shall be determined under any
other applicable provision of the Plan or the Award Agreement evidencing such
Performance Award.
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(c) OTHER TERMINATION OF SERVICE. If the Participant's
Service with the Participating Company Group terminates for any reason, except
death, Disability or Termination After Change in Control, prior to the
completion of the Performance Period applicable to a Performance Award held by
the Participant, the Performance Award shall be forfeited in its entirety.
8.9 NONTRANSFERABILITY OF PERFORMANCE AWARDS. Performance Shares
and Performance Units may not be sold, exchanged, transferred, pledged,
assigned, or otherwise disposed of other than by will or by the laws of descent
and distribution until the completion of the applicable Performance Period. All
rights with respect to Performance Shares and Performance Units granted to a
Participant hereunder shall be exercisable during his or her lifetime only by
such Participant.
9. STANDARD FORMS OF AWARD AGREEMENT.
9.1 AWARD AGREEMENTS. Each Award shall comply with and be subject
to the terms and conditions set forth in the appropriate form of Award Agreement
approved by the Committee concurrently with its adoption of the Plan and as
amended from time to time. Any Award Agreement may consist of an appropriate
form of Notice of Grant and a form of Agreement incorporated therein by
reference, or such other form or forms as the Committee may approve from time to
time.
9.2 AUTHORITY TO VARY TERMS. The Committee shall have the
authority from time to time to vary the terms of any standard form of Award
Agreement either in connection with the grant or amendment of an individual
Award or in connection with the authorization of a new standard form or forms;
provided, however, that the terms and conditions of any such new, revised or
amended standard form or forms of Award Agreement are not inconsistent with the
terms of the Plan.
10. CHANGE IN CONTROL.
10.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company: (i) the
direct or indirect sale or exchange in a single or series of related
transactions by the stockholders of the Company of more than fifty percent (50%)
of the voting stock of the Company; (ii) a merger or consolidation in which the
Company is a party; (iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or (iv) a liquidation or
dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, a
"TRANSACTION") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial
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ownership of more than fifty percent (50%) of the total combined voting power of
the outstanding voting stock of the Company or the corporation or corporations
to which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(s)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Committee shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
10.2 EFFECT OF CHANGE IN CONTROL ON OPTIONS. In the event of a
Change in Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under
outstanding Options or substitute for outstanding Options substantially
equivalent options for the Acquiring Corporation's stock. In the event that the
Acquiring Corporation elects not to assume or substitute for outstanding Options
in connection with a Change in Control, the exercisability and vesting of each
such outstanding Option and any shares acquired upon the exercise thereof held
by a Participant whose Service has not terminated prior to such date shall be
accelerated, effective as of the date ten (10) days prior to the date of the
Change in Control, to such extent, if any, as shall have been determined by the
Committee, in its discretion, and set forth in the Option Agreement evidencing
such Option. The exercise or vesting of any Option and any shares acquired upon
the exercise thereof that was permissible solely by reason of this Section 10.2
and the provisions of such Option Agreement shall be conditioned upon the
consummation of the Change in Control. Any Options which are neither assumed or
substituted for by the Acquiring Corporation in connection with the Change in
Control nor exercised as of the date of the Change in Control shall terminate
and cease to be outstanding effective as of the date of the Change in Control.
Notwithstanding the foregoing, shares acquired upon exercise of an Option prior
to the Change in Control and any consideration received pursuant to the Change
in Control with respect to such shares shall continue to be subject to all
applicable provisions of the Option Agreement evidencing such Option except as
otherwise provided in such Option Agreement. Furthermore, notwithstanding the
foregoing, if the corporation the stock of which is subject to the outstanding
Options immediately prior to an Ownership Change Event described in Section
8.1(a)(i) constituting a Change in Control is the surviving or continuing
corporation and immediately after such Ownership Change Event less than fifty
percent (50%) of the total combined voting power of its voting stock is held by
another corporation or by other corporations that are members of an affiliated
group within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the outstanding Options shall not
terminate unless the Committee otherwise provides in its discretion.
10.3 EFFECT OF CHANGE IN CONTROL ON RESTRICTED STOCK AWARDS. The
Committee may, in its discretion, provide in any Restricted Stock Award
Agreement that, in the event of a Change in Control, the lapsing of the Vesting
Conditions applicable to the shares subject to the Restricted Stock Award held
by a Participant whose Service has not terminated prior to such date shall be
accelerated effective as of the date of the Change in Control to such
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extent as specified in such Award Agreement. Any acceleration of the lapsing of
Vesting Conditions that was permissible solely by reason of this Section 10.3
and the provisions of such Award Agreement shall be conditioned upon the
consummation of the Change in Control. Notwithstanding the foregoing, if it is
determined that the provisions or operation of this Section 10.3 would preclude
treatment of a Change in Control as a "pooling-of-interests" for accounting
purposes and provided further that in the absence of the preceding sentences
such Change in Control would be treated as a "pooling-of-interests" for
accounting purposes, then this Section 10.3 shall be void ab initio.
10.4 EFFECT OF CHANGE IN CONTROL ON PERFORMANCE AWARDS. The
Committee may, in its discretion, provide in any Performance Award Agreement
that, in the event of a Change in Control, the Performance Award held by a
Participant whose Service has not terminated prior to such date (unless the
Participant's Service terminated by reason of the Participant's death or
Disability) shall become payable effective as of the date of the Change in
Control. For this purpose, the final value of the Performance Award shall be
determined by the greater of (a) the extent to which the applicable Performance
Goals have been attained during the Performance Period prior to the date of the
Change in Control or (b) the pre-established 100% level with respect to each
Performance Target comprising the applicable Performance Goals. Notwithstanding
the foregoing, if it is determined that the provisions or operation of this
Section 10.4 would preclude treatment of a Change in Control as a
"pooling-of-interests" for accounting purposes and provided further that in the
absence of the preceding sentences such Change in Control would be treated as a
"pooling-of-interests" for accounting purposes, then this Section 10.4 shall be
void ab initio.
11. COMPLIANCE WITH SECURITIES LAW.
The grant of Awards and the issuance of shares of Stock pursuant
to any Award shall be subject to compliance with all applicable requirements of
federal, state and foreign law with respect to such securities and the
requirements of any stock exchange or market system upon which the Stock may
then be listed. In addition, no Award may be exercised or shares issued pursuant
to an Award unless (a) a registration statement under the Securities Act shall
at the time of such exercise or issuance be in effect with respect to the shares
issuable pursuant to the Award or (b) in the opinion of legal counsel to the
Company, the shares issuable pursuant to the Award may be issued in accordance
with the terms of an applicable exemption from the registration requirements of
the Securities Act. The inability of the Company to obtain from any regulatory
body having jurisdiction the authority, if any, deemed by the Company's legal
counsel to be necessary to the lawful issuance and sale of any shares hereunder
shall relieve the Company of any liability in respect of the failure to issue or
sell such shares as to which such requisite authority shall not have been
obtained. As a condition to issuance of any Stock, the Company may require the
Participant to satisfy any qualifications that may be necessary or appropriate,
to evidence compliance with any applicable law or regulation and to make any
representation or warranty with respect thereto as may be requested by the
Company.
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12. TAX WITHHOLDING.
12.1 TAX WITHHOLDING IN GENERAL. The Company shall have the right
to require the Participant, through payroll withholding, cash payment or
otherwise, including by means of a Cashless Exercise of an Option, to make
adequate provision for the federal, state, local and foreign taxes, if any,
required by law to be withheld by the Participating Company Group with respect
to an Award or the shares acquired pursuant thereto. The Company shall have no
obligation to deliver shares of Stock, to release shares of Stock from an escrow
established pursuant to an Award Agreement, or to make any payment in cash under
the Plan until the Participating Company Group's tax withholding obligations
have been satisfied by the Participant.
12.2 WITHHOLDING IN SHARES. The Company shall have the right, but
not the obligation, to deduct from the shares of Stock issuable to a Participant
upon the exercise or settlement of an Award, or to accept from the Participant
the tender of, a number of whole shares of Stock having a Fair Market Value, as
determined by the Company, equal to all or any part of the tax withholding
obligations of the Participating Company Group. The Fair Market Value of any
shares of Stock withheld or tendered to satisfy any such tax withholding
obligations shall not exceed the amount determined by the applicable minimum
statutory withholding rates.
13. TERMINATION OR AMENDMENT OF PLAN.
The Committee may terminate or amend the Plan at any time.
However, subject to changes in applicable law, regulations or rules that would
permit otherwise, without the approval of the Company's stockholders, there
shall be (a) no increase in the maximum aggregate number of shares of Stock that
may be issued under the Plan (except by operation of the provisions of Section
4.2), (b) no change in the class of persons eligible to receive Incentive Stock
Options, and (c) no other amendment of the Plan that would require approval of
the Company's stockholders under any applicable law, regulation or rule. No
termination or amendment of the Plan shall affect any then outstanding Award
unless expressly provided by the Committee. In any event, no termination or
amendment of the Plan may adversely affect any then outstanding Award without
the consent of the Participant, unless such termination or amendment is required
to enable an Option designated as an Incentive Stock Option to qualify as an
Incentive Stock Option or is necessary to comply with any applicable law,
regulation or rule.
14. MISCELLANEOUS PROVISIONS.
14.1 PROVISION OF INFORMATION. Each Participant shall be given
access to information concerning the Company equivalent to that information
generally made available to the Company's common stockholders.(7)
- ----------
(7) Until immediately prior to the effective time of the Company's registration
of Stock under Section 12 of the Exchange Act, Section 14.1 will read as
follows:
At least annually, copies of the Company's balance sheet and income
statement for the just completed fiscal year shall be made available to
each Participant and purchaser of
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14.2 RIGHTS AS EMPLOYEE, CONSULTANT OR DIRECTOR. No person, even
though eligible pursuant to Section 5, shall have a right to be selected as a
Participant, or, having been so selected, to be selected again as a Participant.
Nothing in the Plan or any Award granted under the Plan shall confer on any
Participant a right to remain an Employee, Consultant or Director, or interfere
with or limit in any way the right of a Participating Company to terminate the
Participant's Service at any time.
14.3 RIGHTS AS A STOCKHOLDER. A Participant shall have no rights
as a stockholder with respect to any shares covered by an Award until the date
of the issuance of a certificate for such shares (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company). No adjustment shall be made for dividends, distributions
or other rights for which the record date is prior to the date such certificate
is issued, except as provided in Section 4.2 or another provision of the Plan.
14.4 BENEFICIARY DESIGNATION. Each Participant may file with the
Company a written designation of a beneficiary who is to receive any benefit
under the Plan to which the Participant is entitled in the event of such
Participant's death before he or she receives any or all of such benefit. Each
designation will revoke all prior designations by the same Participant, shall be
in a form prescribed by the Company, and will be effective only when filed by
the Participant in writing with the Company during the Participant's lifetime.
If a married Participant designates a beneficiary other than the Participant's
spouse, the effectiveness of such designation shall be subject to the consent of
the Participant's spouse. If a Participant dies without an effective designation
of a beneficiary who is living at the time of the Participant's death, the
Company will pay any remaining unpaid benefits to the Participant's legal
representative.
14.5 UNFUNDED OBLIGATION. Any amounts payable to Participants
pursuant to the Plan shall be unfunded obligations for all purposes, including,
without limitation, Title I of the Employee Retirement Income Security Act of
1974. No Participating Company shall be required to segregate any monies from
its general funds, or to create any trusts, or establish any special accounts
with respect to such obligations. The Company shall retain at all times
beneficial ownership of any investments, including trust investments, which the
Company may make to fulfill its payment obligations hereunder. Any investments
or the creation or maintenance of any trust or any Participant account shall not
create or constitute a trust or fiduciary relationship between the Committee or
any Participating Company and a Participant, or otherwise create any vested or
beneficial interest in any Participant or the Participant's creditors in any
assets of any Participating Company. The Participants shall have no claim
against any Participating Company for any changes in the value of any assets
which may be invested or reinvested by the Company with respect to the Plan.
- ----------
shares of Stock upon the exercise of an Option. The Company shall not be
required to provide such information to key employees whose duties in
connection with the Company assure them access to equivalent
information.
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15. CONTINUATION OF INITIAL PLAN AS TO OUTSTANDING OPTIONS.(8)
Any other provision of the Plan to the contrary notwithstanding,
the terms of the Initial Plan (other than the maximum aggregate number of shares
of Stock issuable thereunder) shall remain in effect and apply to all Options
granted pursuant to the Initial Plan.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that the foregoing sets forth the Telocity, Inc. 2000 Equity Incentive Plan as
duly adopted by the Board on January 4, 2000.
/s/ SCOTT MARTIN
-----------------------------------
Secretary
- ----------
(8) Until immediately prior to the effective time of the Company's registration
of Stock under Section 12 of the Exchange Act, the Plan shall include a Section
16 reading as follows:
The Plan or any increase in the maximum aggregate number of shares of
Stock issuable thereunder as provided in Section 4.1 (the "AUTHORIZED
SHARES") shall be approved by the stockholders of the Company within
twelve (12) months of the date of adoption thereof by the Board. Options
granted prior to stockholder approval of the Plan or in excess of the
Authorized Shares previously approved by the stockholders shall become
exercisable no earlier than the date of stockholder approval of the Plan
or such increase in the Authorized Shares, as the case may be.
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<PAGE> 1
EXHIBIT 10.3
TELOCITY, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. The Telocity, Inc. 2000 Employee Stock Purchase
Plan (the "PLAN") is hereby established effective as of the effective date of
the initial registration by the Company of its Stock under Section 12 of the
Securities Exchange Act of 1934, as amended (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests of
Company and its stockholders by providing an incentive to attract, retain and
reward Eligible Employees of the Participating Company Group and by motivating
such persons to contribute to the growth and profitability of the Participating
Company Group. The Plan provides such Eligible Employees with an opportunity to
acquire a proprietary interest in the Company through the purchase of Stock. The
Company intends that the Plan qualify as an "employee stock purchase plan" under
Section 423 of the Code (including any amendments or replacements of such
section), and the Plan shall be so construed.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Any term not expressly defined in the Plan but
defined for purposes of Section 423 of the Code shall have the same definition
herein. Whenever used herein, the following terms shall have their respective
meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If
one or more Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means a committee of the Board duly appointed
to administer the Plan and having such powers as specified by the Board. Unless
the powers of the Committee have been specifically limited, the Committee shall
have all of the powers of the Board granted herein, including, without
limitation, the power to amend or terminate the Plan at any time, subject to the
terms of the Plan and any applicable limitations imposed by law.
(d) "COMPANY" means Telocity, Inc., a Delaware corporation, or
any successor corporation thereto.
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(e) "COMPENSATION" means, with respect to any Offering Period,
base salary and commissions, including any base salary or commissions deferred
under any program or plan established by a Participating Company, including,
without limitation, any plan described in Section 401(k) or Section 125 of the
Code. Compensation shall be limited to amounts actually payable in cash directly
to the Participant or deferred by the Participant during the Offering Period.
Compensation shall not include overtime, bonuses, annual awards, profit sharing,
other incentive payments, shift premiums, long-term disability, workers'
compensation, moving allowances, payments pursuant to a severance agreement,
termination pay, relocation payments, sign-on bonuses, expense reimbursements,
the cost of employee benefits paid by a Participating Company, tuition
reimbursements, imputed income arising under any benefit program, contributions
made by a Participating Company under any employee benefit plan, income directly
or indirectly received pursuant to the Plan or any other stock purchase or stock
option plan, or any other compensation not included in base salary and
commissions.
(f) "ELIGIBLE EMPLOYEE" means an Employee who meets the
requirements set forth in Section 5 for eligibility to participate in the Plan.
(g) "EMPLOYEE" means a person treated as an employee of a
Participating Company for purposes of Section 423 of the Code. A Participant
shall be deemed to have ceased to be an Employee either upon an actual
termination of employment or upon the corporation employing the Participant
ceasing to be a Participating Company. For purposes of the Plan, an individual
shall not be deemed to have ceased to be an Employee while on any military
leave, sick leave, or other bona fide leave of absence approved by the Company
of ninety (90) days or less. If an individual's leave of absence exceeds ninety
(90) days, the individual shall be deemed to have ceased to be an Employee on
the ninety-first (91st) day of such leave unless the individual's right to
reemployment with the Participating Company Group is guaranteed either by
statute or by contract.
(h) "FAIR MARKET VALUE" means, as of any date:
(i) If the Stock is then listed on a national or
regional securities exchange or market system or is regularly quoted by a
recognized securities dealer, the closing sale price of a share of Stock (or the
mean of the closing bid and asked prices if the Stock is so quoted instead) as
quoted on the Nasdaq National Market, the Nasdaq SmallCap Market or such other
national or regional securities exchange or market system constituting the
primary market for the Stock, or by such recognized securities dealer, as
reported in The Wall Street Journal or such other source as the Company deems
reliable. If the relevant date does not fall on a day on which the Stock has
traded on such securities exchange or market system or has been quoted by such
securities dealer, the date on which the Fair Market Value is established shall
be the last day on which the Stock was so traded or quoted prior to the relevant
date, or such other appropriate day as determined by the Board, in its
discretion.
(ii) If, on the relevant date, the Stock is not then
listed on a national or regional securities exchange or market system or
regularly quoted by a recognized securities dealer, the Fair Market Value of a
share of Stock shall be as determined in good faith by the Board.
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<PAGE> 3
(iii) Notwithstanding the foregoing, the Fair Market
Value of a share of Stock on the Effective Date shall be deemed to be the public
offering price set forth in the final prospectus filed with the Securities and
Exchange Commission in connection with the Company's initial public offering of
the Stock.
(i) "OFFERING" means an offering of Stock as provided in
Section 6.
(j) "OFFERING DATE" means, for any Offering, the first day of
the Offering Period.
(k) "OFFERING PERIOD" means a period established in accordance
with Section 6.
(l) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(m) "PARTICIPANT" means an Eligible Employee who has become a
participant in an Offering Period in accordance with Section 7 and remains a
participant in accordance with the Plan.
(n) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation designated by the Board as a corporation
the Employees of which may, if Eligible Employees, participate in the Plan. The
Board shall have the sole and absolute discretion to determine from time to time
which Parent Corporations or Subsidiary Corporations shall be Participating
Companies.
(o) "PARTICIPATING COMPANY GROUP" means, at any point in time,
the Company and all other corporations collectively which are then Participating
Companies.
(p) "PURCHASE DATE" means, for any Offering, the last day of
the Offering Period; provided, however, that the Board in its discretion may
establish one or more additional Purchase Dates during any Offering Period.
(q) "PURCHASE PRICE" means the price at which a share of Stock
may be purchased under the Plan, as determined in accordance with Section 9.
(r) "PURCHASE RIGHT" means an option granted to a Participant
pursuant to the Plan to purchase such shares of Stock as provided in Section 8,
which the Participant may or may not exercise during the Offering Period in
which such option is outstanding. Such option arises from the right of a
Participant to withdraw any accumulated payroll deductions of the Participant
not previously applied to the purchase of Stock under the Plan and to terminate
participation in the Plan at any time during an Offering Period.
(s) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 4.2.
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(t) "SUBSCRIPTION AGREEMENT" means a written agreement in such
form as specified by the Company, stating an Employee's election to participate
in the Plan and authorizing payroll deductions under the Plan from the
Employee's Compensation.
(u) "SUBSCRIPTION DATE" means the last business day prior to
the Offering Date of an Offering Period or such earlier date as the Company
shall establish.
(v) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by
the Board. All questions of interpretation of the Plan, of any form of agreement
or other document employed by the Company in the administration of the Plan, or
of any Purchase Right shall be determined by the Board and shall be final and
binding upon all persons having an interest in the Plan or the Purchase Right.
Subject to the provisions of the Plan, the Board shall determine all of the
relevant terms and conditions of Purchase Rights; provided, however, that all
Participants granted Purchase Rights pursuant to an Offering shall have the same
rights and privileges within the meaning of Section 423(b)(5) of the Code in
such Offering. All expenses incurred in connection with the administration of
the Plan shall be paid by the Company.
3.2 AUTHORITY OF OFFICERS. Any officer of the Company shall have the
authority to act on behalf of the Company with respect to any matter, right,
obligation, determination or election that is the responsibility of or that is
allocated to the Company herein, provided that the officer has apparent
authority with respect to such matter, right, obligation, determination or
election.
3.3 POLICIES AND PROCEDURES ESTABLISHED BY THE COMPANY. The Company
may, from time to time, consistent with the Plan and the requirements of Section
423 of the Code, establish, change or terminate such rules, guidelines,
policies, procedures, limitations, or adjustments as deemed advisable by the
Company, in its discretion, for the proper administration of the Plan,
including, without limitation, (a) a minimum payroll deduction amount required
for participation in an Offering, (b) a limitation on the frequency or number of
changes permitted in the rate of payroll deduction during an Offering, (c) an
exchange ratio applicable to amounts withheld in a currency other than United
States dollars, (d) a payroll deduction greater than or less than the amount
designated by a Participant in order to adjust for the Company's delay or
mistake in processing a Subscription Agreement or in otherwise effecting a
Participant's election under the Plan or as advisable to comply with the
requirements of Section 423 of the Code, and
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(e) determination of the date and manner by which the Fair Market Value of a
share of Stock is determined for purposes of administration of the Plan.
3.4 INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as members of the Board or officers or
employees of the Participating Company Group, members of the Board and any
officers or employees of the Participating Company Group to whom authority to
act for the Board or the Company is delegated shall be indemnified by the
Company against all reasonable expenses, including attorneys' fees, actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan, or any right granted hereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such person is liable for gross negligence, bad faith or
intentional misconduct in duties; provided, however, that within sixty (60) days
after the institution of such action, suit or proceeding, such person shall
offer to the Company, in writing, the opportunity at its own expense to handle
and defend the same.
4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be two million five hundred thousand
(2,500,000), cumulatively increased on January 1, 2001 and each January 1
thereafter until and including January 1, 2010 by a number of shares of Stock
(the "ANNUAL INCREASE") equal to the lesser of (a) one percent (1%) of the
number of shares of Stock issued and outstanding on the immediately preceding
December 31, (b) one million (1,000,000) shares or (c) an amount determined by
the Board, and shall consist of authorized but unissued or reacquired shares of
Stock, or any combination thereof. If an outstanding Purchase Right for any
reason expires or is terminated or canceled, the shares of Stock allocable to
the unexercised portion of that Purchase Right shall again be available for
issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, or in the event of any merger (including a merger effected for the
purpose of changing the Company's domicile), sale of assets or other
reorganization in which the Company is a party, appropriate adjustments shall be
made in the number and class of shares subject to the Plan, the Annual Increase
and each Purchase Right, and in the Purchase Price. If a majority of the shares
of the same class as the shares subject to outstanding Purchase Rights are
exchanged for, converted into, or otherwise become (whether or not pursuant to
an Ownership Change Event) shares of another corporation (the "NEW SHARES"), the
Board may unilaterally amend the outstanding Purchase Rights to provide that
such Purchase Rights are exercisable for New Shares. In the event of any such
amendment, the number of shares subject to, and the Purchase Price of, the
outstanding Purchase Rights shall be adjusted in a fair and equitable manner, as
determined by the Board, in its discretion. Notwithstanding the
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foregoing, any fractional share resulting from an adjustment pursuant to this
Section 4.2 shall be rounded down to the nearest whole number, and in no event
may the Purchase Price be decreased to an amount less than the par value, if
any, of the stock subject to the Purchase Right. The adjustments determined by
the Board pursuant to this Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY.
5.1 EMPLOYEES ELIGIBLE TO PARTICIPATE. Each Employee of a
Participating Company is eligible to participate in the Plan and shall be deemed
an Eligible Employee, except any Employee who is either: (a) customarily
employed by the Participating Company Group for twenty (20) hours or less per
week or (b) customarily employed by the Participating Company Group for not more
than five (5) months in any calendar year.
5.2 EXCLUSION OF CERTAIN STOCKHOLDERS. Notwithstanding any provision
of the Plan to the contrary, no Employee shall be treated as an Eligible
Employee and granted a Purchase Right under the Plan if, immediately after such
grant, the Employee would own or hold options to purchase stock of the Company
or of any Parent Corporation or Subsidiary Corporation possessing five percent
(5%) or more of the total combined voting power or value of all classes of stock
of such corporation, as determined in accordance with Section 423(b)(3) of the
Code. For purposes of this Section 5.2, the attribution rules of Section 424(d)
of the Code shall apply in determining the stock ownership of such Employee.
5.3 DETERMINATION BY COMPANY. The Company shall determine in good
faith and in the exercise of its discretion whether an individual has become or
has ceased to be an Employee or an Eligible Employee and the effective date of
such individual's attainment or termination of such status, as the case may be.
For purposes of an individual's participation in or other rights, if any, under
the Plan as of the time of the Company's determination, all such determinations
by the Company shall be final, binding and conclusive, notwithstanding that the
Company or any governmental agency subsequently makes a contrary determination.
6. OFFERINGS.
The Plan shall be implemented on and after the Effective Date by
sequential Offerings of approximately six (6) months duration or such other
duration as the Board shall determine (an "OFFERING PERIOD"); provided, however,
that the first Offering Period (the "INITIAL OFFERING PERIOD") shall commence on
the Effective Date and end on or about November 30, 2000. Subsequent Offering
Periods shall commence on or about May 1 (excluding May 1, 2000) and December 1
of each year and end on or about the last days of the next November and April,
respectively, occurring thereafter. Notwithstanding the foregoing, the Board may
establish a different duration for one or more Offering Periods or different
commencing or ending dates for such Offering Periods; provided, however, that no
Offering Period may have a duration exceeding twenty-seven (27) months. If the
first or last day of an Offering Period is not a day on which the national
securities exchanges or Nasdaq Stock Market are open for trading, the Company
shall specify the trading day that will be deemed the first or last day, as the
case may be, of the Offering Period.
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7. PARTICIPATION IN THE PLAN.
7.1 INITIAL PARTICIPATION. An Eligible Employee may become a
Participant in an Offering Period by delivering a properly completed
Subscription Agreement to the office designated by the Company not later than
the close of business for such office on the Subscription Date established by
the Company for that Offering Period. An Eligible Employee who does not deliver
a properly completed Subscription Agreement to the Company's designated office
on or before the Subscription Date for an Offering Period shall not participate
in the Plan for that Offering Period or for any subsequent Offering Period
unless the Eligible Employee subsequently delivers a properly completed
Subscription Agreement to the appropriate office of the Company on or before the
Subscription Date for such subsequent Offering Period. An Employee who becomes
an Eligible Employee after the Offering Date of an Offering Period shall not be
eligible to participate in that Offering Period but may participate in any
subsequent Offering Period provided the Employee is still an Eligible Employee
as of the Offering Date of such subsequent Offering Period.
7.2 CONTINUED PARTICIPATION. A Participant shall automatically
participate in the next Offering Period commencing immediately after the
Purchase Date of each Offering Period in which the Participant participates
provided that the Participant remains an Eligible Employee on the Offering Date
of the new Offering Period and has not either (a) withdrawn from the Plan
pursuant to Section 12.1 or (b) terminated employment as provided in Section 13.
A Participant who may automatically participate in a subsequent Offering Period,
as provided in this Section, is not required to deliver any additional
Subscription Agreement for the subsequent Offering Period in order to continue
participation in the Plan. However, a Participant may deliver a new Subscription
Agreement for a subsequent Offering Period in accordance with the procedures set
forth in Section 7.1 if the Participant desires to change any of the elections
contained in the Participant's then effective Subscription Agreement.
8. RIGHT TO PURCHASE SHARES.
8.1 GRANT OF PURCHASE RIGHT. Except as set forth below, on the
Offering Date of each Offering Period, each Participant in that Offering Period
shall be granted automatically a Purchase Right consisting of an option to
purchase the lesser of (a) that number of whole shares of Stock determined by
dividing Twelve Thousand Five Hundred Dollars ($12,500) by the Fair Market Value
of a share of Stock on such Offering Date or (b) one thousand (1,000) shares of
Stock. No Purchase Right shall be granted on an Offering Date to any person who
is not, on such Offering Date, an Eligible Employee.
8.2 PRO RATA ADJUSTMENT OF PURCHASE RIGHT. Notwithstanding the
provisions of Section 8.1, if the Board establishes an Offering Period of any
duration other than six months, then (a) the dollar amount in Section 8.1 shall
be determined by multiplying $2,083.33 by the number of months (rounded to the
nearest whole month) in the Offering Period and rounding to the nearest whole
dollar, and (b) the share amount in Section 8.1 shall be determined by
multiplying 166.67 shares by the number of months (rounded to the nearest whole
month) in the Offering Period and rounding to the nearest whole share.
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8.3 CALENDAR YEAR PURCHASE LIMITATION. Notwithstanding any provision
of the Plan to the contrary, no Participant shall be granted a Purchase Right
which permits his or her right to purchase shares of Stock under the Plan to
accrue at a rate which, when aggregated with such Participant's rights to
purchase shares under all other employee stock purchase plans of a Participating
Company intended to meet the requirements of Section 423 of the Code, exceeds
Twenty-Five Thousand Dollars ($25,000) in Fair Market Value (or such other
limit, if any, as may be imposed by the Code) for each calendar year in which
such Purchase Right is outstanding at any time. For purposes of the preceding
sentence, the Fair Market Value of shares purchased during a given Offering
Period shall be determined as of the Offering Date for such Offering Period. The
limitation described in this Section shall be applied in conformance with
applicable regulations under Section 423(b)(8) of the Code.
9. PURCHASE PRICE.
The Purchase Price at which each share of Stock may be acquired in
an Offering Period upon the exercise of all or any portion of a Purchase Right
shall be established by the Board; provided, however, that the Purchase Price
shall not be less than eighty-five percent (85%) of the lesser of (a) the Fair
Market Value of a share of Stock on the Offering Date of the Offering Period or
(b) the Fair Market Value of a share of Stock on the Purchase Date. Unless
otherwise provided by the Board prior to the commencement of an Offering Period,
the Purchase Price for that Offering Period shall be eighty-five percent (85%)
of the lesser of (a) the Fair Market Value of a share of Stock on the Offering
Date of the Offering Period, or (b) the Fair Market Value of a share of Stock on
the Purchase Date.
10. ACCUMULATION OF PURCHASE PRICE THROUGH PAYROLL DEDUCTION.
Shares of Stock acquired pursuant to the exercise of all or any
portion of a Purchase Right may be paid for only by means of payroll deductions
from the Participant's Compensation accumulated during the Offering Period for
which such Purchase Right was granted, subject to the following:
10.1 AMOUNT OF PAYROLL DEDUCTIONS. Except as otherwise provided
herein, the amount to be deducted under the Plan from a Participant's
Compensation on each payday during an Offering Period shall be determined by the
Participant's Subscription Agreement. The Subscription Agreement shall set forth
the percentage of the Participant's Compensation to be deducted on each payday
during an Offering Period in whole percentages of not less than one percent (1%)
(except as a result of an election pursuant to Section 10.3 to stop payroll
deductions effective following the first payday during an Offering) or more than
twenty percent (20%). The Board may change the foregoing limits on payroll
deductions effective as of any Offering Date.
10.2 COMMENCEMENT OF PAYROLL DEDUCTIONS. Payroll deductions shall
commence on the first payday following the Offering Date and shall continue to
the end of the Offering Period unless sooner altered or terminated as provided
herein.
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10.3 ELECTION TO CHANGE OR STOP PAYROLL DEDUCTIONS. During an
Offering Period, a Participant may elect to increase or decrease the rate of or
to stop deductions from his or her Compensation by delivering to the Company's
designated office an amended Subscription Agreement authorizing such change on
or before the Change Notice Date, as defined below. A Participant who elects,
effective following the first payday of an Offering Period, to decrease the rate
of his or her payroll deductions to zero percent (0%) shall nevertheless remain
a Participant in the current Offering Period unless such Participant withdraws
from the Plan as provided in Section 12.1. The "CHANGE NOTICE DATE" shall be the
day immediately prior to the beginning of the first pay period for which such
election is to be effective, unless a different date is established by the
Company and announced to the Participants.
10.4 ADMINISTRATIVE SUSPENSION OF PAYROLL DEDUCTIONS. The Company
may, in its sole discretion, suspend a Participant's payroll deductions under
the Plan as the Company deems advisable to avoid accumulating payroll deductions
in excess of the amount that could reasonably be anticipated to purchase the
maximum number of shares of Stock permitted (a) under the Participant's Purchase
Right or (b) during a calendar year under the limit set forth in Section 8.3.
Payroll deductions shall be resumed at the rate specified in the Participant's
then effective Subscription Agreement at the beginning, respectively, of (a) the
next Offering Period, provided that the individual is a Participant in such
Offering Period or (b) the next Offering Period the Purchase Date of which falls
in the following calendar year, unless the Participant has either withdrawn from
the Plan as provided in Section 12.1 or has ceased to be an Eligible Employee.
10.5 PARTICIPANT ACCOUNTS. Individual bookkeeping accounts shall be
maintained for each Participant. All payroll deductions from a Participant's
Compensation shall be credited to such Participant's Plan account and shall be
deposited with the general funds of the Company. All payroll deductions received
or held by the Company may be used by the Company for any corporate purpose.
10.6 NO INTEREST PAID. Interest shall not be paid on sums deducted
from a Participant's Compensation pursuant to the Plan.
10.7 VOLUNTARY WITHDRAWAL FROM PLAN ACCOUNT. A Participant may
withdraw all or any portion of the payroll deductions credited to his or her
Plan account and not previously applied toward the purchase of Stock by
delivering to the Company's designated office a written notice on a form
provided by the Company for such purpose. A Participant who withdraws the entire
remaining balance credited to his or her Plan account shall be deemed to have
withdrawn from the Plan in accordance with Section 12.1. Amounts withdrawn shall
be returned to the Participant as soon as practicable after the Company's
receipt of the notice of withdrawal and may not be applied to the purchase of
shares in any Offering under the Plan. The Company may from time to time
establish or change limitations on the frequency of withdrawals permitted under
this Section, establish a minimum dollar amount that must be retained in the
Participant's Plan account, or terminate the withdrawal right provided by this
Section.
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11. PURCHASE OF SHARES.
11.1 EXERCISE OF PURCHASE RIGHT. On the Purchase Date of an Offering
Period, each Participant who has not withdrawn from the Plan and whose
participation in the Offering has not otherwise terminated before such Purchase
Date shall automatically acquire pursuant to the exercise of the Participant's
Purchase Right the number of whole shares of Stock determined by dividing (a)
the total amount of the Participant's payroll deductions accumulated in the
Participant's Plan account during the Offering Period and not previously applied
toward the purchase of Stock by (b) the Purchase Price. However, in no event
shall the number of shares purchased by the Participant during an Offering
Period exceed the number of shares subject to the Participant's Purchase Right.
No shares of Stock shall be purchased on a Purchase Date on behalf of a
Participant whose participation in the Offering or the Plan has terminated
before such Purchase Date.
11.2 PRO RATA ALLOCATION OF SHARES. If the number of shares of Stock
which might be purchased by all Participants in the Plan on a Purchase Date
exceeds the number of shares of Stock available in the Plan as provided in
Section 4.1, the Company shall make a pro rata allocation of the remaining
shares in as uniform a manner as practicable and as the Company determines to be
equitable. Any fractional share resulting from such pro rata allocation to any
Participant shall be disregarded.
11.3 DELIVERY OF CERTIFICATES. As soon as practicable after each
Purchase Date, the Company shall arrange the delivery to each Participant of a
certificate representing the shares acquired by the Participant on such Purchase
Date; provided that the Company may deliver such shares to a broker designated
by the Company that will hold such shares for the benefit of the Participant.
Shares to be delivered to a Participant under the Plan shall be registered in
the name of the Participant, or, if requested by the Participant, in the name of
the Participant and his or her spouse, or, if applicable, in the names of the
heirs of the Participant.
11.4 RETURN OF CASH BALANCE. Any cash balance remaining in a
Participant's Plan account following any Purchase Date shall be refunded to the
Participant as soon as practicable after such Purchase Date. However, if the
cash balance to be returned to a Participant pursuant to the preceding sentence
is less than the amount that would have been necessary to purchase an additional
whole share of Stock on such Purchase Date, the Company may retain the cash
balance in the Participant's Plan account to be applied toward the purchase of
shares of Stock in the subsequent Offering Period.
11.5 TAX WITHHOLDING. At the time a Participant's Purchase Right is
exercised, in whole or in part, or at the time a Participant disposes of some or
all of the shares of Stock he or she acquires under the Plan, the Participant
shall make adequate provision for the federal, state, local and foreign tax
withholding obligations, if any, of the Participating Company Group which arise
upon exercise of the Purchase Right or upon such disposition of shares,
respectively. The Participating Company Group may, but shall not be obligated
to, withhold from the Participant's compensation the amount necessary to meet
such withholding obligations.
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11.6 EXPIRATION OF PURCHASE RIGHT. Any portion of a Participant's
Purchase Right remaining unexercised after the end of the Offering Period to
which the Purchase Right relates shall expire immediately upon the end of the
Offering Period.
11.7 PROVISION OF REPORTS AND STOCKHOLDER INFORMATION TO
PARTICIPANTS. Each Participant who has exercised all or part of his or her
Purchase Right shall receive, as soon as practicable after the Purchase Date, a
report of such Participant's Plan account setting forth the total payroll
deductions accumulated prior to such exercise, the number of shares of Stock
purchased, the Purchase Price for such shares, the date of purchase and the cash
balance, if any, remaining immediately after such purchase that is to be
refunded or retained in the Participant's Plan account pursuant to Section 11.4.
The report required by this Section may be delivered in such form and by such
means, including by electronic transmission, as the Company may determine. In
addition, each Participant shall be provided information concerning the Company
equivalent to that information provided generally to the Company's common
stockholders.
12. WITHDRAWAL FROM PLAN.
12.1 VOLUNTARY WITHDRAWAL FROM THE PLAN. A Participant may withdraw
from the Plan by signing and delivering to the Company's designated office a
written notice of withdrawal on a form provided by the Company for this purpose.
Such withdrawal may be elected at any time prior to the end of an Offering
Period; provided, however, that if a Participant withdraws from the Plan after a
Purchase Date, the withdrawal shall not affect shares of Stock acquired by the
Participant on such Purchase Date. A Participant who voluntarily withdraws from
the Plan is prohibited from resuming participation in the Plan in the same
Offering from which he or she withdrew, but may participate in any subsequent
Offering by again satisfying the requirements of Sections 5 and 7.1. The Company
may impose, from time to time, a requirement that the notice of withdrawal from
the Plan be on file with the Company's designated office for a reasonable period
prior to the effectiveness of the Participant's withdrawal.
12.2 RETURN OF PAYROLL DEDUCTIONS. Upon a Participant's voluntary
withdrawal from the Plan pursuant to Section 12.1, the Participant's accumulated
payroll deductions which have not been applied toward the purchase of shares
shall be refunded to the Participant as soon as practicable after the
withdrawal, without the payment of any interest, and the Participant's interest
in the Plan shall terminate. Such accumulated payroll deductions to be refunded
in accordance with this Section may not be applied to any other Offering under
the Plan.
13. TERMINATION OF EMPLOYMENT OR ELIGIBILITY.
Upon a Participant's ceasing, prior to a Purchase Date, to be an
Employee of the Participating Company Group for any reason, including
retirement, disability or death, or upon the failure of a Participant to remain
an Eligible Employee, the Participant's participation in the Plan shall
terminate immediately. In such event, the Participant's accumulated payroll
deductions which have not been applied toward the purchase of shares shall, as
soon as practicable, be returned to the Participant or, in the case of the
Participant's death, to the Participant's legal representative, and all of the
Participant's rights under the Plan shall
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terminate. Interest shall not be paid on sums returned pursuant to this Section
13. A Participant whose participation has been so terminated may again become
eligible to participate in the Plan by satisfying the requirements of Sections 5
and 7.1.
14. CHANGE IN CONTROL.
14.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company: (i) the
direct or indirect sale or exchange in a single or series of related
transactions by the stockholders of the Company of more than fifty percent (50%)
of the voting stock of the Company; (ii) a merger or consolidation in which the
Company is a party; (iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or (iv) a liquidation or
dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the stockholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(s)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
14.2 EFFECT OF CHANGE IN CONTROL ON PURCHASE RIGHTS. In the event of
a Change in Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may assume the Company's rights and obligations under the Plan.
If the Acquiring Corporation elects not to assume the Company's rights and
obligations under outstanding Purchase Rights, the Purchase Date of the then
current Offering Period shall be accelerated to a date before the date of the
Change in Control specified by the Board, but the number of shares of Stock
subject to outstanding Purchase Rights shall not be adjusted. All Purchase
Rights which are neither assumed by the Acquiring Corporation in connection with
the Change in Control nor exercised as of the date of the Change in Control
shall terminate and cease to be outstanding effective as of the date of the
Change in Control.
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15. NONTRANSFERABILITY OF PURCHASE RIGHTS.
Neither payroll deductions credited to a Participant's Plan account
nor a Participant's Purchase Right may be assigned, transferred, pledged or
otherwise disposed of in any manner other than as provided by the Plan or by
will or the laws of descent and distribution. (A beneficiary designation
pursuant to Section 20 shall not be treated as a disposition for this purpose.)
Any such attempted assignment, transfer, pledge or other disposition shall be
without effect, except that the Company may treat such act as an election to
withdraw from the Plan as provided in Section 12.1. A Purchase Right shall be
exercisable during the lifetime of the Participant only by the Participant.
16. COMPLIANCE WITH SECURITIES LAW.
The issuance of shares under the Plan shall be subject to compliance
with all applicable requirements of federal, state and foreign law with respect
to such securities. A Purchase Right may not be exercised if the issuance of
shares upon such exercise would constitute a violation of any applicable
federal, state or foreign securities laws or other law or regulations or the
requirements of any securities exchange or market system upon which the Stock
may then be listed. In addition, no Purchase Right may be exercised unless (a) a
registration statement under the Securities Act of 1933, as amended, shall at
the time of exercise of the Purchase Right be in effect with respect to the
shares issuable upon exercise of the Purchase Right, or (b) in the opinion of
legal counsel to the Company, the shares issuable upon exercise of the Purchase
Right may be issued in accordance with the terms of an applicable exemption from
the registration requirements of said Act. The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company's legal counsel to be necessary to the lawful issuance and
sale of any shares under the Plan shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of a
Purchase Right, the Company may require the Participant to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation, and to make any representation or warranty
with respect thereto as may be requested by the Company.
17. RIGHTS AS A STOCKHOLDER AND EMPLOYEE.
A Participant shall have no rights as a stockholder by virtue of the
Participant's participation in the Plan until the date of the issuance of a
certificate for the shares purchased pursuant to the exercise of the
Participant's Purchase Right (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends, distributions or other rights for which
the record date is prior to the date such certificate is issued, except as
provided in Section 4.2. Nothing herein shall confer upon a Participant any
right to continue in the employ of the Participating Company Group or interfere
in any way with any right of the Participating Company Group to terminate the
Participant's employment at any time.
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18. LEGENDS.
The Company may at any time place legends or other identifying
symbols referencing any applicable federal, state or foreign securities law
restrictions or any provision convenient in the administration of the Plan on
some or all of the certificates representing shares of Stock issued under the
Plan. The Participant shall, at the request of the Company, promptly present to
the Company any and all certificates representing shares acquired pursuant to a
Purchase Right in the possession of the Participant in order to carry out the
provisions of this Section. Unless otherwise specified by the Company, legends
placed on such certificates may include but shall not be limited to the
following:
"THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE
CORPORATION TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER AN
EMPLOYEE STOCK PURCHASE PLAN AS DEFINED IN SECTION 423 OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED. THE TRANSFER AGENT FOR THE SHARES EVIDENCED HEREBY
SHALL NOTIFY THE CORPORATION IMMEDIATELY OF ANY TRANSFER OF THE SHARES BY THE
REGISTERED HOLDER HEREOF. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED
UNDER THE PLAN IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME OF ANY
NOMINEE)."
19. NOTIFICATION OF DISPOSITION OF SHARES.
The Company may require the Participant to give the Company prompt
notice of any disposition of shares acquired by exercise of a Purchase Right.
The Company may require that until such time as a Participant disposes of shares
acquired upon exercise of a Purchase Right, the Participant shall hold all such
shares in the Participant's name (or, if elected by the Participant, in the name
of the Participant and his or her spouse but not in the name of any nominee)
until the later of two years after the date of grant of such Purchase Right or
one year after the date of exercise of such Purchase Right.. The Company may
direct that the certificates evidencing shares acquired by exercise of a
Purchase Right refer to such requirement to give prompt notice of disposition.
20. DESIGNATION OF BENEFICIARY.
20.1 DESIGNATION PROCEDURE. A Participant may file a written
designation of a beneficiary who is to receive (a) shares and cash, if any, from
the Participant's Plan account if the Participant dies subsequent to a Purchase
Date but prior to delivery to the Participant of such shares and cash or (b)
cash, if any, from the Participant's Plan account if the Participant dies prior
to the exercise of the Participant's Purchase Right. If a married Participant
designates a beneficiary other than the Participant's spouse, the effectiveness
of such designation shall be subject to the consent of the Participant's spouse.
A Participant may change his or her beneficiary designation at any time by
written notice to the Company.
20.2 ABSENCE OF BENEFICIARY DESIGNATION. If a Participant dies
without an effective designation pursuant to Section 20.1 of a beneficiary who
is living at the time of the
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Participant's death, the Company shall deliver any shares or cash credited to
the Participant's Plan account to the Participant's legal representative.
21. NOTICES.
All notices or other communications by a Participant to the Company
under or in connection with the 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.
22. AMENDMENT OR TERMINATION OF THE PLAN.
The Board may at any time amend or terminate the Plan, except that
(a) such termination shall not affect Purchase Rights previously granted under
the Plan, except as permitted under the Plan, and (b) no amendment may adversely
affect a Purchase Right previously granted under the Plan (except to the extent
permitted by the Plan or as may be necessary to qualify the Plan as an employee
stock purchase plan pursuant to Section 423 of the Code or to obtain
qualification or registration of the shares of Stock under applicable federal,
state or foreign securities laws). In addition, an amendment to the Plan must be
approved by the stockholders of the Company within twelve (12) months of the
adoption of such amendment if such amendment would increase the maximum
aggregate number of shares of Stock that may be issued under the Plan (except by
operation of the provisions of Section 4.1 or Section 4.2) or would change the
definition of the corporations that may be designated by the Board as
Participating Companies.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that the foregoing Telocity, Inc. 2000 Employee Stock Purchase Plan was duly
adopted by the Board of Directors of the Company on January 4, 2000.
/s/ SCOTT MARTIN
------------------------------------
Secretary
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EXHIBIT 10.4
TELOCITY, INC.
2000 OUTSIDE DIRECTORS STOCK PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENt. The Telocity, Inc 2000 Outside Directors Stock
Plan (the "PLAN") is hereby established effective as of the effective date of
the initial registration by the Company of its Stock under Section 12 of the
Securities Exchange Act of 1934, as amended (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests
of the Participating Company Group and its stockholders by providing an
incentive to attract, retain and reward persons performing services as Outside
Directors of the Company and by creating an additional incentive for such
persons to promote the growth and profitability of the Participating Company
Group.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued and all
restrictions on such shares under the terms of the Plan have lapsed.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:
(a) "AWARD" means any Option or Director Fee Award granted
under the Plan.
(b) "AWARD AGREEMENT" means a written agreement between
the Company and a Participant setting forth the terms, conditions and
restrictions of an Award granted to the Participant. An Award Agreement may be
an "Outside Director Stock Option Agreement," an "Outside Director Fee Option
Agreement" or an "Outside Director Stock Units Agreement."
(c) "BOARD" means the Board of Directors of the Company.
If one or more Committees have been appointed by the Board to administer the
Plan, "Board" also means such Committee(s).
(d) "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
(e) "COMMITTEE" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the
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Committee shall have all of the powers of the Board granted herein, including,
without limitation, the power to amend or terminate the Plan at any time,
subject to the terms of the Plan and any applicable limitations imposed by law.
(f) "COMPANY" means Telocity, Inc., a Delaware
corporation, or any successor corporation thereto.
(g) "CONSULTANT" means a person engaged to provide
consulting or advisory services (other than as an Employee or a Director) to a
Participating Company.
(h) "DIRECTOR" means a member of the Board or of the board
of directors of any other Participating Company.
(i) "DIRECTOR FEE AWARD" means any Director Fee Option or
Stock Units Award.
(j) "DIRECTOR FEE OPTION" means an Option granted pursuant
to Section 7.
(k) "DIRECTOR FEES" mean an Outside Director's annual
retainer fee, meeting fees and any other compensation payable with respect to
such individual's Service as a Director.
(l) "DISABILITY" means the inability of the Participant,
in the opinion of a qualified physician acceptable to the Company, to perform
the major duties of the Participant's position with the Participating Company
Group because of the sickness or injury of the Participant.
(m) "DIVIDEND EQUIVALENT" means a credit to the account of
a Participant in an amount equal to the cash dividends paid on one share of
Stock for each share of Stock represented by a Stock Units Award held by such
Participant.
(n) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.
(o) "EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended.
(p) "FAIR MARKET VALUE" means, as of any date, the value
of a share of Stock determined as follows:
(i) If, on such date, the Stock is listed on a
national or regional securities exchange or market system, the Fair Market Value
of a share of Stock shall be the closing price of a share of Stock (or the mean
of the closing bid and asked prices of a share of
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Stock if the Stock is so quoted instead) as quoted on the Nasdaq National
Market, The Nasdaq SmallCap Market or such other national or regional securities
exchange or market system constituting the primary market for the Stock, as
reported in The Wall Street Journal or such other source as the Company deems
reliable. If the relevant date does not fall on a day on which the Stock has
traded on such securities exchange or market system, the date on which the Fair
Market Value shall be established shall be the last day on which the Stock was
so traded prior to the relevant date.
(ii) If, on such date, the Stock is not listed on a
national or regional securities exchange or market system, the Fair Market Value
of a share of Stock shall be as determined by the Board in good faith without
regard to any restriction other than a restriction which, by its terms, will
never lapse.
(q) "OPTION" means a right to purchase Stock (subject to
adjustment as provided in Section 4.2) pursuant to the terms and conditions of
the Plan. Unless the context clearly requires otherwise, the term "Option"
includes both an Option granted pursuant to Section 6 and a Director Fee Option
granted pursuant to Section 7. Each Option shall be a nonstatutory stock option;
that is, an option not intended to qualify as an incentive stock option within
the meaning of Section 422(b) of the Code.
(r) "OUTSIDE DIRECTOR" means a Director of the Company who
is not an Employee or a Consultant.
(s) "PARENT CORPORATION" means any present or future
"parent corporation" of the Company, as defined in Section 424(e) of the Code.
(t) "PARTICIPANT" means a person who has been granted one
or more Awards.
(u) "PARTICIPATING COMPANY" means the Company or any
Parent Corporation or Subsidiary Corporation.
(v) "PARTICIPATING COMPANY GROUP" means, at any point in
time, all corporations collectively which are then Participating Companies.
(w) "RULE 16b-3" means Rule 16b-3 under the Exchange Act,
as amended from time to time, or any successor rule or regulation.
(x) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(y) "SERVICE" means a Participant's employment or service
with the Participating Company Group, whether in the capacity of an Employee, a
Director or a Consultant. A Participant's Service shall not be deemed to have
terminated merely because of a change in the capacity in which the Participant
renders Service to the Participating Company Group or a change in the
Participating Company for which the Participant renders such Service, provided
that there is no interruption or termination of the Participant's Service.
Furthermore, a
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Participant's Service with the Participating Company Group shall not be deemed
to have terminated if the Participant takes any military leave, sick leave, or
other bona fide leave of absence approved by the Company; provided, however,
that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day
of such leave the Participant's Service shall be deemed to have terminated
unless the Participant's right to return to Service with the Participating
Company Group is guaranteed by statute or contract. Notwithstanding the
foregoing, unless otherwise designated by the Company or required by law, a
leave of absence shall not be treated as Service for purposes of determining
vesting under the Participant's Award Agreement. The Participant's Service shall
be deemed to have terminated either upon an actual termination of Service or
upon the corporation for which the Participant performs Service ceasing to be a
Participating Company. Subject to the foregoing, the Company, in its discretion,
shall determine whether the Participant's Service has terminated and the
effective date of such termination.
(z) "STOCK" means the common stock of the Company, as
adjusted from time to time in accordance with Section 4.2.
(aa) "STOCK UNIT" means a bookkeeping entry representing a
right granted to a Participant pursuant to the terms and conditions of Section 7
to receive payment of one (1) share of Stock.
(bb) "STOCK UNITS AWARD" means an Award of Stock Units
granted pursuant to Section 7.
(cc) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered
by the Board. All questions of interpretation of the Plan or of any Award shall
be determined by the Board, and such determinations shall be final and binding
upon all persons having an interest in the Plan or such Award. At any time that
any class of equity security of the Company is registered pursuant to Section 12
of the Exchange Act, the Plan shall be administered in compliance with the
requirements, if any, of Rule 16b-3.
3.2 AUTHORITY OF OFFICERS. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, determination or election which is the responsibility
of or which is allocated to the Company herein, provided the officer has
apparent authority with respect to such matter, right, obligation, determination
or election.
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3.3 INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as members of the Board or officers or
employees of the Participating Company Group, members of the Board and any
officers or employees of the Participating Company Group to whom authority to
act for the Board or the Company is delegated shall be indemnified by the
Company against all reasonable expenses, including attorneys' fees, actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan, or any right granted hereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such person is liable for gross negligence, bad faith or
intentional misconduct in duties; provided, however, that within sixty (60) days
after the institution of such action, suit or proceeding, such person shall
offer to the Company, in writing, the opportunity at its own expense to handle
and defend the same.
4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be four hundred thousand (400,000),
cumulatively increased on January 1, 2001 and each January 1 thereafter by a
number of shares of Stock (the "ANNUAL INCREASE") equal to the lesser of (a) two
tenths of one percent (0.20%) of the number of shares of Stock issued and
outstanding on the immediately preceding December 31, (b) one hundred fifty
thousand (150,000) shares or (c) an amount determined by the Board, and shall
consist of authorized but unissued or reacquired shares of Stock, or any
combination thereof. If an outstanding Award for any reason expires or is
terminated or canceled or if shares of Stock issued pursuant to an Award are
repurchased by the Company, the shares of Stock allocable to the terminated
portion of such Award or such repurchased shares of Stock shall again be
available for issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, appropriate adjustments shall be made in the number and class of shares
subject to the Plan, to the Annual Increase, to the Options to be granted
automatically pursuant to Section 6.1 and to any outstanding Awards, and in the
exercise price per share of any outstanding Options. If a majority of the shares
which are of the same class as the shares that are subject to outstanding Awards
are exchanged for, converted into, or otherwise become (whether or not pursuant
to an Ownership Change Event, as defined in Section 8.1) shares of another
corporation (the "NEW SHARES"), the Board may unilaterally amend the outstanding
Awards to provide that such Awards shall relate to New Shares. In the event of
any such amendment, the number of shares subject to outstanding Awards and the
exercise price per share under outstanding Options shall be adjusted in a fair
and equitable manner as determined by the Board, in its discretion.
Notwithstanding the foregoing, any fractional share resulting from an adjustment
pursuant to this Section 4.2 shall be rounded down
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to the nearest whole number, and in no event may the exercise price of any
Option be decreased to an amount less than the par value, if any, of the stock
subject to the Option. The adjustments determined by the Board pursuant to this
Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY FOR PARTICIPATION.
Only those persons who, at the time of grant, are serving as
Outside Directors shall be eligible to become Participants and to be granted an
Award.
6. TERMS AND CONDITIONS OF OPTIONS.
Options shall be evidenced by Award Agreements specifying the
number of shares of Stock covered thereby, in such form as the Board shall from
time to time establish. Award Agreements may incorporate all or any of the terms
of the Plan by reference and shall comply with and be subject to the following
terms and conditions:
6.1 AUTOMATIC GRANT. Subject to the execution by an Outside
Director of an appropriate Award Agreement, Options shall be granted
automatically and without further action of the Board, as follows:
(a) INITIAL OPTION. Each person who first becomes an
Outside Director on or after the Effective Date shall be granted on the date
such person first becomes an Outside Director an Option to purchase forty
thousand (40,000) shares of Stock (an "INITIAL OPTION"); provided, however, that
an Initial Option shall not be granted to a Director who previously did not
qualify as an Outside Director but who subsequently becomes an Outside Director
as a result of the termination of his or her status as an Employee or
Consultant.
(b) ANNUAL OPTION. Each Outside Director (including any
Director who previously did not qualify as an Outside Director but who
subsequently becomes an Outside Director) shall be granted on the date of each
annual meeting of the stockholders of the Company which occurs on or after the
Effective Date (an "ANNUAL MEETING") immediately following which such person
remains an Outside Director an Option to purchase ten thousand (10,000) shares
of Stock (an "ANNUAL OPTION"); provided, however, that an Outside Director
granted an Initial Option on, or within a period of six (6) months prior to, the
date of an Annual Meeting shall not be granted an Annual Option pursuant to this
Section with respect to the same Annual Meeting.
(c) RIGHT TO DECLINE OPTION. Notwithstanding the
foregoing, any person may elect not to receive an Option pursuant to this
Section 6.1 by delivering written notice of such election to the Board no later
than the day prior to the date such Option would otherwise be granted. A person
so declining an Option shall receive no payment or other consideration in lieu
of such declined Option. A person who has declined an Option may revoke such
election by delivering written notice of such revocation to the Board no later
than the day prior to the date such Option would be granted pursuant to Section
6.1(a) or (b), as the case may be. This Section 6.1(c) shall not apply to the
receipt of any Director Fee Option.
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6.2 EXERCISE PRICE. The exercise price per share of Stock subject
to an Option shall be the Fair Market Value of a share of Stock on the date of
grant of the Option.
6.3 EXERCISABILITY AND TERM OF OPTIONS. Each Option shall vest
and become exercisable as set forth below and shall terminate and cease to be
exercisable on the tenth (10th) anniversary of the date of grant of the Option,
unless earlier terminated in accordance with the terms of the Plan or the Award
Agreement evidencing such Option.
(a) INITIAL OPTIONS. Except as otherwise provided in the
Plan or in the Award Agreement evidencing such Option, each Initial Option shall
vest and become exercisable in four (4) substantially equal installments on each
of the first four (4) anniversaries of the date of grant of the Option, provided
that the Participant's Service has not terminated prior to the relevant date.
(b) ANNUAL OPTIONS. Except as otherwise provided in the
Plan or in the Award Agreement evidencing such Option, each Annual Option shall
become fully vested and exercisable on the day immediately preceding the date of
the Annual Meeting next following the date of grant of the Option, provided the
Participant's Service has not terminated prior to such date.
6.4 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the exercise price for the number of shares of Stock
being purchased pursuant to any Option shall be made (i) in cash, by check or
cash equivalent, (ii) by tender to the Company, or attestation to the ownership,
of shares of Stock owned by the Participant having a Fair Market Value not less
than the exercise price, (iii) by delivery of a properly executed notice
together with irrevocable instructions to a broker providing for the assignment
to the Company of the proceeds of a sale or loan with respect to some or all of
the shares being acquired upon the exercise of the Option (including, without
limitation, through an exercise complying with the provisions of Regulation T as
promulgated from time to time by the Board of Governors of the Federal Reserve
System) (a "CASHLESS EXERCISE"), or (iv) by any combination thereof.
(b) LIMITATIONS ON FORMS OF CONSIDERATION.
(i) TENDER OF STOCK. Notwithstanding the foregoing,
an Option may not be exercised by tender to the Company, or attestation to the
ownership, of shares of Stock to the extent such tender or attestation would
constitute a violation of the provisions of any law, regulation or agreement
restricting the redemption of the Company's stock. Unless otherwise provided by
the Board, an Option may not be exercised by tender to the Company, or
attestation to the ownership, of shares of Stock unless such shares either have
been owned by the Participant for more than six (6) months or were not acquired,
directly or indirectly, from the Company.
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(ii) CASHLESS EXERCISE. The Company reserves, at
any and all times, the right, in the Company's sole and absolute discretion, to
establish, decline to approve or terminate any program or procedures for the
exercise of Options by means of a Cashless Exercise.
6.5 EFFECT OF TERMINATION OF SERVICE.
(a) OPTION EXERCISABILITY. Subject to earlier termination
of the Option as otherwise provided herein, an Option shall be exercisable after
a Participant's termination of Service only during the applicable time period
determined in accordance with this Section 6.5 and thereafter shall terminate:
(i) DISABILITY. If the Participant's Service with
the Participating Company Group terminates because of the Disability of the
Participant, the Option, to the extent unexercised and exercisable on the date
on which the Participant's Service terminated, may be exercised by the
Participant (or the Participant's guardian or legal representative) at any time
prior to the expiration of twelve (12) months after the date on which the
Participant's Service terminated, but in any event no later than the date of
expiration of the Option's term as set forth in the Award Agreement evidencing
such Option (the "OPTION EXPIRATION DATE").
(ii) DEATH. If the Participant's Service with the
Participating Company Group terminates because of the death of the Participant,
the Option, to the extent unexercised and exercisable on the date on which the
Participant's Service terminated, may be exercised by the Participant's legal
representative or other person who acquired the right to exercise the Option by
reason of the Participant's death at any time prior to the expiration of twelve
(12) months after the date on which the Participant's Service terminated, but in
any event no later than the Option Expiration Date. The Participant's Service
shall be deemed to have terminated on account of death if the Participant dies
within three (3) months after the Participant's termination of Service.
(iii) OTHER TERMINATION OF SERVICE. If the
Participant's Service with the Participating Company Group terminates for any
reason, except Disability or death, the Option, to the extent unexercised and
exercisable by the Participant on the date on which the Participant's Service
terminated, may be exercised by the Participant at any time prior to the
expiration of six (6) months after the date on which the Participant's Service
terminated, but in any event no later than the Option Expiration Date.
(b) EXTENSION IF EXERCISE PREVENTED BY LAW.
Notwithstanding the foregoing, if the exercise of an Option within the
applicable time periods set forth in Section 6.5(a) is prevented by the
provisions of Section 10 below, the Option shall remain exercisable until the
date three (3) months after the date the Participant is notified by the Company
that the Option is exercisable, but in any event no later than the Option
Expiration Date.
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(c) EXTENSION IF PARTICIPANT SUBJECT TO SECTION 16(b).
Notwithstanding the foregoing, if a sale within the applicable time periods set
forth in Section 6.5(a) of shares acquired upon the exercise of the Option would
subject the Participant to suit under Section 16(b) of the Exchange Act, the
Option shall remain exercisable until the earliest to occur of (i) the tenth
(10th) day following the date on which a sale of such shares by the Participant
would no longer be subject to such suit, (ii) the one hundred and ninetieth
(190th) day after the Participant's termination of Service, or (iii) the Option
Expiration Date.
6.6 TRANSFERABILITY OF OPTIONS. During the lifetime of the
Participant, an Option shall be exercisable only by the Participant or the
Participant's guardian or legal representative. No Option shall be assignable or
transferable by the Participant, except by will or by the laws of descent and
distribution. Notwithstanding the foregoing, to the extent permitted by the
Board, in its discretion, and set forth in the Award Agreement evidencing such
Option, an Option shall be assignable or transferable subject to the applicable
limitations, if any, described in the General Instructions to Form S-8
Registration Statement under the Securities Act.
7. DIRECTOR FEE AWARDS.
7.1 EFFECTIVE DATE AND DURATION OF THIS SECTION. This Section 7
shall become effective commencing with the first calendar quarter beginning
after the Effective Date and shall continue in effect for the remainder of the
calendar year of the Effective Date (the "INITIAL PLAN YEAR") and each
subsequent calendar year commencing during the term (as provided in Section 1.3)
of the Plan (a "PLAN YEAR"). Notwithstanding any Participant's prior election
pursuant to Section 7.2, no Director Fee Award shall be granted to such
Participant after termination of the Plan, and all Director Fees with respect to
which Director Fee Awards have not been granted prior to termination of the Plan
shall thereafter be paid in cash in accordance with the Company's normal
Director Fee payment procedures. However, subject to compliance with applicable
law as provided in Section 10, all Director Fee Awards granted prior to
termination of the Plan shall continue to be governed by and may be exercised or
settled in accordance with the terms of the Plan and the Award Agreement
evidencing such Director Fee Award.
7.2 DIRECTOR FEE AWARD ELECTIONS. Each Outside Director may elect
to receive Director Fee Awards in lieu of payment in cash of all or any portion
not less than twenty-five percent (25%) of such Outside Director's Director Fees
during the Initial Plan Year and each subsequent Plan Year (or the portion of
such Plan Year following an individual's initial appointment or election as an
Outside Director). For the Initial Plan Year and each subsequent Plan Year or
applicable portion thereof, a Participant shall be entitled to elect one of the
following alternative forms of payment of the value of the Participant's
Director Fees:
(a) PAYMENT IN THE FORM OF A DIRECTOR FEE OPTION. If
elected, that portion of the Participant's Director Fees elected by the
Participant will be paid in the form of a Director Fee Option in accordance with
Section 7.5, and the balance will be paid in cash in accordance with the
Company's normal Director Fee payment procedures.
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(b) PAYMENT IN THE FORM OF A STOCK UNITS AWARD. If
elected, that portion of the Participant's Director Fees elected by the
Participant will be paid in the form of a Stock Units Award in accordance with
Section 7.6, and the balance will be paid in cash in accordance with the
Company's normal Director Fee payment procedures. In connection with an election
to receive a Stock Units Award, the Participant may elect an "Early Settlement
Date" (as defined below) upon which the Stock Units Award will be settled in
accordance with Section 7.6(c); provided, however, that upon termination of the
Participant's Service prior to the Early Settlement Date, settlement shall be
made as provided in Section 7.6(c). An "EARLY SETTLEMENT DATE" is a date, if
any, elected by the Participant which shall be a date no sooner than January 1
of the third Plan Year following the Plan Year of the Stock Units Award. A
Participant's election of an Early Settlement Date shall become irrevocable as
provided in Section 7.3(b).
7.3 TIME AND MANNER OF ELECTION.
(a) TIME OF ELECTION. Each Outside Director making an
election pursuant to Section 7.2 shall make such election:
(i) for the Initial Plan Year, prior to the earlier
of (1) the date thirty (30) days following in the Effective Date or (2) the
commencement of the first calendar quarter beginning after the Effective Date;
(ii) for each subsequent Plan Year, prior to the
first day of such Plan Year; and
(iii) in the case of a newly appointed or elected
Outside Director, on the date of such appointment or election for the remainder
of the Initial Plan Year or subsequent Plan Year of appointment or election, as
the case may be.
(b) ELECTION IRREVOCABLE. A Participant's elections
pursuant to Section 7.2 shall become irrevocable as of the commencement of the
Plan Year or portion thereof to which it applies.
(c) FAILURE TO TIMELY ELECT. Any Outside Director who
fails to make an election in accordance with this Section for any Plan Year (or
the Initial Plan Year, as the case may be) shall be deemed to have elected to
receive all of such individual's Director Fees in cash in accordance with the
Company's normal Director Fee payment procedures.
(d) MANNER OF ELECTION. Each election in accordance with
this Section shall be made on a form prescribed by the Company for this purpose
and shall be delivered to the Chief Financial Officer of the Company.
7.4 AUTOMATIC GRANT OF DIRECTOR FEE AWARDS. Subject to the
provisions of Section 4.1 and this Section 7, effective as of the last day of
each quarter during any Plan Year (or the Initial Plan Year, as the case may
be), each Participant shall be granted automatically and without further action
of the Board a Director Fee Award in lieu of that portion, if any (the "ELECTED
QUARTERLY FEES"), of the Director Fees earned by the Participant during such
quarter
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and specified by the Participant's election under Section 7.2 for such Plan Year
(or Initial Plan Year). In accordance with the Participant's election under
Section 7.2 for the Plan Year (or Initial Plan Year), the Director Fee Award
shall be either in the form of a Director Fee Option pursuant to Section 7.5 or
a Stock Units Award pursuant to Section 7.6.
7.5 DIRECTOR FEE OPTION. Each Director Fee Option shall be
evidenced by a Director Fee Option Agreement specifying the number of shares of
Stock covered thereby, in such form as the Board shall from time to time
establish. Director Fee Option Agreements may incorporate all or any of the
terms of the Plan by reference and shall comply with and be subject to the terms
and conditions of Section 6 to the extent not inconsistent with this Section 7
and to the terms and conditions set forth in Sections 7.5(a) through 7.5(c)
below:
(a) EXERCISE PRICE OF DIRECTOR FEE OPTION. The exercise
price per share for each Director Fee Option shall be fifty percent (50%) of the
Fair Market Value of a share of Stock on the date of grant of the Director Fee
Option.
(b) NUMBER OF SHARES SUBJECT TO DIRECTOR FEE OPTION. The
number of shares of Stock subject to a Director Fee Option shall be determined
by the following formula (with any resulting fractional share being
disregarded):
X = A / (B x 50%)
where,
"X" is the number of shares subject to the Director
Fee Option;
"A" is the amount of Elected Quarterly Fees in lieu
of which the Director Fee Option is granted; and
"B" is the Fair Market Value of a share of Stock on
the date of grant of the Director Fee Option.
(c) EXERCISABILITY AND TERM OF DIRECTOR FEE OPTION. Each
Director Fee Option shall be immediately exercisable and vested in full on and
after the date of grant and shall terminate and cease to be exercisable on the
tenth (10th) anniversary of the date of grant of the Director Fee Option, unless
earlier terminated pursuant to the terms of the Plan or the Director Fee Option
Agreement.
7.6 STOCK UNITS AWARD. Each Stock Units Award shall be evidenced
by a Stock Units Agreement that shall specify the number of Stock Units to which
such agreement pertains, the form and time of settlement of such Stock Units and
such other provisions as the Board shall determine. Stock Units Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the terms and conditions set forth in Sections 7.6(a)
through 7.6(d) below:
(a) NUMBER OF STOCK UNITS AWARDED. The number of Stock
Units subject to a Stock Units Award shall be determined by the following
formula (with any resulting fractional Stock Unit being disregarded):
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X = A / B
where,
"X" is the number of Stock Units subject to the
Stock Units Award;
"A" is the amount of Elected Quarterly Fees in lieu
of which the Stock Units Award is granted; and
"B" is the Fair Market Values of a share of Stock
on the date of grant of the Stock Units Award.
(b) VOTING AND DIVIDEND EQUIVALENT RIGHTS. Participants
shall have no voting rights with respect to shares of Stock represented by Stock
Units until the date of the issuance of a certificate for such shares (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company). Prior to settlement of a Stock Units
Award, such Award shall include the right to Dividend Equivalents, pursuant to
which the Participant shall be credited with additional whole and/or fractional
Stock Units as of the date of any payment of cash dividends with respect to the
Stock occurring prior to such settlement date. Such additional Stock Units shall
be subject to the same terms and conditions and shall be settled in the same
manner and at the same time as the Stock Units originally subject to the Stock
Units Award. The number of such whole and/or fractional Stock Units to be
credited with respect to any Stock Units Award on the date of payment of any
cash dividend shall be determined by the following formula:
X = (A x B) / C
where,
"X" is the number of whole and/or fractional Stock
Units to be credited with respect to the Stock
Units Award;
"A" is the amount of cash dividends paid on one
share of Stock;
"B" is the number of whole and fractional Stock
Units subject to the Stock Units Award as of the
cash dividend payment date and immediately prior to
the crediting of Dividend Equivalents; and
"C" is the Fair Market Value of a share of Stock on
the cash dividend payment date.
(c) SETTLEMENT OF STOCK UNITS AWARD. Subject to the
provisions of Section 10 below, the Company shall issue to the Participant,
within thirty (30) days following the earlier of (i) the Early Settlement Date
elected by the Participant with respect to the Stock Units Award or (ii) the
date of termination of the Participant's Service, a number of whole shares of
Stock equal to the number of whole Stock Units subject to the Stock Units Award.
Such shares of Stock shall be fully vested and shall not be subject to any
restriction on transfer other than any such restriction as may be required
pursuant to Section 10 or any applicable law, rule or regulation. The
Participant shall not be required to pay any additional consideration to acquire
shares of Stock upon settlement of a Stock Units Award. Any fractional Stock
Unit subject to the Stock Units Award shall be settled in accordance with
Section 7.8.
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(d) NONTRANSFERABILITY OF STOCK UNITS. Prior to their
settlement pursuant to Section 7.6(c), no Stock Units granted to a Participant
shall be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, or garnishment by creditors of the Participant
or the Participant's beneficiary, except by will or by the laws of descent and
distribution.
7.7 EFFECT OF TERMINATION OF SERVICE. Notwithstanding any
Participant's prior election pursuant to Section 7.2, no Director Fee Award
shall be granted to such Participant after termination of such Participant's
Service as an Outside Director, and all Director Fees with respect to which
Director Fee Awards have not been granted prior to termination of such
Participant's Service as an Outside Director shall thereafter be paid in cash in
accordance with the Company's normal Director Fee payment procedures. However,
subject to compliance with applicable law as provided in Section 10, all
Director Fee Awards granted prior to termination of a Participant's Service
shall continue to be governed by and may be exercised or settled in accordance
with the terms of the Plan and the Award Agreement evidencing such Director Fee
Award.
7.8 FRACTIONAL SHARES. No fractional shares of Stock shall be
issued upon the exercise of any Director Fee Option or settlement of any Stock
Units Award. Upon the settlement of any Stock Units Award, the Company shall pay
to the Participant cash in lieu of any fractional Stock Unit subject to the
Stock Units Award in an amount equal to the Fair Market Value on the settlement
date of such fractional share of Stock. Furthermore, any portion of a
Participant's Elected Quarterly Fees representing a fractional share amount that
would otherwise be paid in the form of a Director Fee Option or a Stock Units
Award shall instead be paid in cash in accordance with the Company's normal
Director Fee payment procedures.
8. STANDARD FORMS OF AWARD AGREEMENT.
8.1 AWARD AGREEMENT. Each Award shall comply with and be subject
to the terms and conditions set forth in the appropriate form of Award Agreement
approved by the Board concurrently with its adoption of the Plan and as amended
from time to time. Any Award Agreement may consist of an appropriate form of
Notice of Grant and a form of Agreement incorporated therein by reference, or
such other form or forms as the Board may approve from time to time.
8.2 AUTHORITY TO VARY TERMS. The Board shall have the authority
from time to time to vary the terms of any standard form of Award Agreement
either in connection with the grant or amendment of an individual Award or in
connection with the authorization of a new standard form or forms; provided,
however, that the terms and conditions of any such new, revised or amended
standard form or forms of Award Agreement are not inconsistent with the terms of
the Plan.
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9. CHANGE IN CONTROL.
9.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company: (i) the
direct or indirect sale or exchange in a single or series of related
transactions by the stockholders of the Company of more than fifty percent (50%)
of the voting stock of the Company; (ii) a merger or consolidation in which the
Company is a party; (iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or (iv) a liquidation or
dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, a
"TRANSACTION") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(s)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
9.2 EFFECT OF CHANGE IN CONTROL ON OPTIONS. In the event of a
Change in Control, any unexercisable or unvested portions of outstanding Options
and any shares acquired upon the exercise thereof held by Participants whose
Service has not terminated prior to such date shall be immediately exercisable
and vested in full as of the date ten (10) days prior to the date of the Change
in Control. However, if it is determined that the provisions or operation of the
preceding sentence would preclude treatment of a Change in Control as a
"pooling-of-interests" for accounting purposes and provided further that in the
absence of the preceding sentence such Change in Control would be treated as a
"pooling-of-interests" for accounting purposes, then the preceding sentence
shall be void ab initio, and the vesting and exercisability of each outstanding
Option and any shares acquired upon the exercise thereof shall be determined
under any other applicable provision of the Plan or the Award Agreement
evidencing such Option. The exercise or vesting of any Option and any shares
acquired upon the exercise thereof that was permissible solely by reason of this
Section 9.2 shall be conditioned upon the consummation of the Change in Control.
In addition, the surviving, continuing, successor, or purchasing corporation or
parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"),
may either assume the Company's rights and obligations under outstanding Options
or substitute for outstanding Options substantially equivalent options for the
Acquiring Corporation's stock. Any Options which are neither assumed or
substituted for by the Acquiring Corporation in connection with the Change in
Control nor exercised as of the date of the Change
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in Control shall terminate and cease to be outstanding effective as of the date
of the Change in Control. Notwithstanding the foregoing, if the corporation the
stock of which is subject to the outstanding Options immediately prior to an
Ownership Change Event described in Section 9.1(a)(i) constituting a Change in
Control is the surviving or continuing corporation and immediately after such
Ownership Change Event less than fifty percent (50%) of the total combined
voting power of its voting stock is held by another corporation or by other
corporations that are members of an affiliated group within the meaning of
Section 1504(a) of the Code without regard to the provisions of Section 1504(b)
of the Code, the outstanding Options shall not terminate.
9.3 EFFECT OF CHANGE IN CONTROL ON STOCK UNITS. In the event of a
Change in Control, the Acquiring Corporation may either assume the Company's
rights and obligations under outstanding Stock Units Awards or substitute for
outstanding Stock Units Awards substantially equivalent awards with respect to
the Acquiring Corporation's stock. Any outstanding Stock Units Awards not
assumed or substituted for by the Acquiring Corporation shall be settled in
accordance with Section 7.6(c) immediately prior to the effective date of the
Change in Control.
9.4 EFFECT OF CHANGE IN CONTROL ON UNPAID DIRECTOR FEES. In the
event of a Change in Control, any Director Fees with respect to which the
Company has not granted either a Director Fee Option or a Stock Units Award
pursuant to Section 7 prior to the effective date of the Change in Control shall
be paid in cash immediately prior to such effective date.
10. COMPLIANCE WITH SECURITIES LAW.
The grant of Awards and the issuance of shares of Stock pursuant
to any Award shall be subject to compliance with all applicable requirements of
federal, state and foreign law with respect to such securities and the
requirements of any stock exchange or market system upon which the Stock may
then be listed. In addition, no Option may be exercised unless (a) a
registration statement under the Securities Act shall at the time of exercise of
the Option be in effect with respect to the shares issuable upon exercise of the
Option or (b) in the opinion of legal counsel to the Company, the shares
issuable upon exercise of the Option may be issued in accordance with the terms
of an applicable exemption from the registration requirements of the Securities
Act. The inability of the Company to obtain from any regulatory body having
jurisdiction the authority, if any, deemed by the Company's legal counsel to be
necessary to the lawful issuance and sale of any shares hereunder shall relieve
the Company of any liability in respect of the failure to issue or sell such
shares as to which such requisite authority shall not have been obtained. As a
condition to the issuance of any Stock, the Company may require the Participant
to satisfy any qualifications that may be necessary or appropriate, to evidence
compliance with any applicable law or regulation and to make any representation
or warranty with respect thereto as may be requested by the Company.
11. TERMINATION OR AMENDMENT OF PLAN.
The Board may terminate or amend the Plan at any time. However,
subject to changes in applicable law, regulations or rules that would permit
otherwise, without the approval
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of the Company's stockholders, there shall be (a) no increase in the maximum
aggregate number of shares of Stock that may be issued under the Plan (except by
operation of the provisions of Section 4.1 or Section 4.2) and (b) no other
amendment of the Plan that would require approval of the Company's stockholders
under any applicable law, regulation or rule. No termination or amendment of the
Plan shall affect any then outstanding Award unless expressly provided by the
Board. In any event, no termination or amendment of the Plan may adversely
affect any then outstanding Award without the consent of the Participant, unless
such termination or amendment is necessary to comply with any applicable law,
regulation or rule.
12. MISCELLANEOUS PROVISIONS.
12.1 TAX WITHHOLDING. The Company shall have the right, but not
the obligation, to deduct from the shares of Stock issuable pursuant to an
Award, or to accept from the Participant the tender of, a number of whole shares
of Stock having a Fair Market Value, as determined by the Company, equal to all
or any part of the federal, state, local and foreign taxes, if any, required by
law to be withheld by the Participating Company Group with respect to such
Award. Alternatively or in addition, in its discretion, the Company shall have
the right to require the Participant, through payroll withholding, cash payment
or otherwise, including by means of a Cashless Exercise, to make adequate
provision for any such tax withholding obligations of the Participating Company
Group arising in connection with the Award. The Fair Market Value of any shares
of Stock withheld or tendered to satisfy any such tax withholding obligations
shall not exceed the amount determined by the applicable minimum statutory
withholding rates. The Company shall have no obligation to deliver shares of
Stock until the Participating Company Group's tax withholding obligations have
been satisfied by the Participant.
12.2 PROVISION OF INFORMATION. Each Participant shall be given
access to information concerning the Company equivalent to that information
generally made available to the Company's common stockholders.
12.3 BENEFICIARY DESIGNATION. Each Participant may name, from
time to time, any beneficiary or beneficiaries (who may be named contingently or
successively) to whom any benefit under the Plan is to be paid in case of such
Participant's death before he or she receives any or all of such benefit. Each
designation will revoke all prior designations by the same Participant, shall be
in a form prescribed by the Company, and will be effective only when filed by
the Participant in writing with the Company during the Participant's lifetime.
In the absence of any such designation, benefits remaining unpaid at the
Participant's death shall be paid to his or her estate.
12.4 UNFUNDED OBLIGATION. Any benefits payable to Participants
pursuant to the Plan shall be unfunded obligations for all purposes, including,
without limitation, Title I of the Employee Retirement Income Security Act of
1974. No Participating Company shall be required to segregate any monies from
its general funds, or to create any trusts, or establish any special accounts
with respect to such obligations. The Company shall retain at all times
beneficial ownership of any investments, including trust investments, which the
Company may make to fulfill its payment obligations hereunder. Any investments
or the creation or maintenance of any trust or any Participant account shall not
create or constitute a trust or
16
<PAGE> 17
fiduciary relationship between the Committee or any Participating Company and a
Participant, or otherwise create any vested or beneficial interest in any
Participant or the Participant's creditors in any assets of any Participating
Company. The Participants shall have no claim against any Participating Company
for any changes in the value of any assets which may be invested or reinvested
by the Company with respect to the Plan. To the extent that any person acquires
a right to receive any payment from a Participating Company under the Plan, such
right shall be no greater than the right of an unsecured general creditor of
such Participating Company.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that the foregoing sets forth the Telocity, Inc. Outside Directors Stock Plan as
duly adopted by the Board on January 4, 2000.
/s/ SCOTT MARTIN
-----------------------------------
Secretary
17
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated January 28, 2000 relating to the consolidated financial
statements of Telocity, Inc., which appear in such Registration Statement. We
also consent to the reference to us under the headings "Experts" and "Selected
Financial Data" in such Registration Statement.
San Jose, California
February 16, 2000
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 66,978
<SECURITIES> 0
<RECEIVABLES> 13
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 74,004
<PP&E> 24,816
<DEPRECIATION> 2,544
<TOTAL-ASSETS> 140,071
<CURRENT-LIABILITIES> 20,275
<BONDS> 11,991
156,020
0
<COMMON> 17
<OTHER-SE> (48,299)
<TOTAL-LIABILITY-AND-EQUITY> 140,071
<SALES> 0
<TOTAL-REVENUES> 187
<CGS> 0
<TOTAL-COSTS> 2,080
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,448
<INCOME-PRETAX> (43,419)
<INCOME-TAX> 0
<INCOME-CONTINUING> (43,419)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (60,169)
<EPS-BASIC> (7.32)
<EPS-DILUTED> (7.32)
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