<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 27, 2000
REGISTRATION NO. 333-94271
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TELOCITY DELAWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 7370 77-0467929
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</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.............................. $151,800,000 $40,076
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</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 MARCH 27, 2000
PROSPECTUS
11,000,000 SHARES
[TELOCITY LOGO]
COMMON STOCK
----------------------
This is Telocity Delaware, Inc.'s initial public offering. Telocity is
selling all of the shares.
We expect the public offering price to be between $10.00 and $12.00 per
share. After pricing of the offering, we expect that the shares will trade 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 1,650,000 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 WIT SOUNDVIEW
----------------------
The date of this prospectus is , 2000.
<PAGE> 3
Page 1
[Telocity logo]
OUR BUSINESS
We intend to be a leading provider of residential high-speed Internet services
and content 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-connected," 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
We currently offer personalized web pages. Along with our partners, we are
developing and will offer streaming audio and video, online gaming and
interactive shopping.
[Telocity logo]
[NBCi logo]
[NBC logo]
[Snap logo]
[Xoom logo]
COMMUNICATIONS
We currently offer Internet access, e-mail and remote access. We are developing
and will offer virtual private networks, enhanced voice messaging services and
chat facilities.
[Telocity logo]
UTILITY
We are developing and will offer data security systems, home networking, home
monitoring, home automation and backup services.
[Telocity logo]
[GE logo]
<PAGE> 4
PAGES 2 & 3
BROADBAND TO AND THROUGHOUT THE HOME
[Image of house]
[Image of Web page]
THE TELOCITY/NBCi PORTAL
The Telocity/NBCi portal is the first Web page a customer views when accessing
our services. From this page a customer can access the Internet as well as
services and content offered by us and NBCi, including financial information,
news and weather.
BROADBAND TO AND THROUGHOUT THE HOME
Telocity's current broadband services provide customers benefits such as always
connected, high-speed Internet access and personalized Web pages. Our future
services which we are currently developing will provide customers with addition
benefits such as data security systems, backup services, virtual private network
capabilities, home networking and home monitoring and automation, as well as
other services and content offered in partnership with NBCi such as streaming
audio and video, online gaming and interactive shopping.
RESIDENTIAL GATEWAY
[Images of Telocity gateway from two different angles - front and back]
[Identification of different ports on back of Telocity modem: Phone; USB
Host/USB Slave; Power; 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 can be added to conform to an individual user's
preferences without requiring new equipment or an on-site visit by a technician.
MANAGED NETWORK
[Artist rendering of map of United Sates with picture of phone operator
superimposed]
We manage a nationwide network designed to be responsive and reliable. Our
managed network includes communications lines and facilities, which we lease
through network agreements, as well as our network operations center and
operational support system, which we own and operate. Through out network
operations center and operational support system, we are able to monitor our
services throughout the network to ensure a high 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.................................. 21
Use of Proceeds............................................. 21
Dividend Policy............................................. 21
Capitalization.............................................. 22
Dilution.................................................... 23
Selected Consolidated Financial Information................. 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 25
Business.................................................... 33
Management.................................................. 55
Related Party Transactions.................................. 70
Principal Stockholders...................................... 78
Description of Capital Stock................................ 82
Shares Eligible for Future Sale............................. 86
Underwriting................................................ 88
Legal Matters............................................... 91
Experts..................................................... 91
Additional Information...................................... 91
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 other 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
those statements before making an investment decision.
OUR COMPANY
We develop, market and deliver to the residential market interactive
online services and content designed for use over high-speed, or broadband,
connections. These broadband connections allow our customers to enjoy services
and content that they could not access with traditional slower speed Internet
connections. Through a recent set of agreements, NBC Internet, Inc., or NBCi,
currently provides all of the content offered on our jointly developed website
the Telocity/NBCi portal, which is the first Web page a customer views when
accessing our services. Additionally, under these agreements we and NBCi have
each agreed to develop new services and content to be offered and sold over this
website and to share the revenue associated with those sales. We also intend to
develop or acquire additional content if it is not available through NBCi.
Although we currently deliver our services to customers using digital subscriber
line, or DSL, technology, in the future we intend to utilize the technology we
have developed to deliver these services and content over a variety of broadband
technologies from a managed nationwide network to and throughout the home. Our
goal is to become a leading provider of broadband access services, content and
home networking services to the residential market.
We currently generate revenue by selling monthly subscriptions for our
basic service package that may include activation and other one-time fees, and
to date we have not received revenue from any of the content provided through
our website. Revenues from these services for the year ended December 31, 1999
were $187,000. For a single monthly fee, a customer receives our current basic
service package, which consists of always connected Internet access, e-mail
accounts, storage space and hosting for Web pages and 60 minutes of remote
access to the Internet each month when the customer is away from home. As our
business develops and we begin to offer additional services for incremental
recurring fees, we expect to become less dependent on revenues from our basic
service package, and we expect our operating margins to increase as we believe
these additional services and content can be added at a lower cost than our
current basic services. During 2000, we will begin offering the following
additional services and content:
- Electronic commerce, entertainment and media content-based services we
are currently developing in collaboration with NBCi;
- Communication services we are currently developing such as virtual
private networks that will enable customers to telecommute to their
workplace securely from home, enhanced voice messaging services that
will allow our customers to access services over the phone, as well as
chat facilities that will allow our customers to interact with each
other; and
- Utility services we are currently developing 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 a service deployment system, our platform, which
delivers broadband online services directly to our customers' homes. Our
platform consists of a managed network, our residential gateway, user interface
software, customer care and support services and automated billing and
provisioning systems. Our managed network includes communications lines and
facilities, which we lease through network agreements, as well as our network
operations center and operational support system, which we own and operate.
Through our network operations center and operational support system, we are
able to monitor our services throughout the network to ensure a high level of
performance. We designed our platform so that we can offer a growing number 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.
From a customer's perspective, the first component of our service
deployment platform is our proprietary residential gateway. The gateway is a
unique hardware device that combines a digital subscriber line modem, home
1
<PAGE> 7
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 and telephone jacks, which allows them to
connect directly to our network and the Internet. 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. For a further description of speeds of
various forms of broadband access please see page 48.
We have designed our service deployment platform to be flexible and
expandable. Although we currently deliver our services to our customers using
DSL technology, we have the capability to configure our gateway easily to
support all major broadband local access technologies such as cable, fiber,
wireless and satellite, by replacing a limited number of components in our
gateway, including the current DSL modem, with components that support these
technologies. In the future, we will choose the most reliable, flexible and
cost-effective broadband access technology available in each local market in
which we offer services.
In July 1999, we began offering services commercially in Chicago. As of
February 29, 2000, we were also offering services in more than 50 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 over 6,500 customers of which over 3,100 are receiving our
services and over 3,400 prequalified customers have placed orders for our
services. Based on our limited historical experience we estimate that
approximately 90% of those placing orders will actually be converted into
customers receiving our services depending on the local access provider on which
we rely. By the end of 2000, we expect that we will offer services in
approximately 150 of the nation's 349 metropolitan statistical areas which we
estimate will allow us to make our services available to at least 20% of all
U.S. households. Our maximum potential market is limited by the number of homes
that are DSL-capable, meaning homes that are within approximately 2 1/2 and 3
miles from a local telephone office that has equipment necessary to support DSL
service and have voice grade copper telephone lines that are in good condition.
We believe that currently 1.4% of all U.S. households receive DSL service and
30% of all U.S. households are DSL-capable, with the percent of DSL-capable
households growing to 50% in 2001 and 75% in 2002.
In December 1999, we entered into several agreements with NBC, NBCi and
NBCi's 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. We and NBCi
have formed a joint task force to implement the specific future service and
content offerings contemplated by those agreements. As these new services and
content are added, our customers will be able to access them through the
Telocity/NBCi portal. Under these agreements we have each agreed to share a
portion of the revenues generated from services, advertising and electronic
commerce activities offered through the Telocity/NBCi portal, including the
services we currently offer. In connection with these agreements NBCi and its
affiliates, GE Capital and NBC purchased 13,072,518 shares of our stock, which
including the outstanding warrants to purchase up to an additional 2,089,313
shares of our stock held by this stockholder group would total approximately
17.7% of the stock outstanding after this offering, representing the largest
stockholder group outside of the management team assuming the exercise of all of
those warrants. In addition, NBCi has the right to elect a director to our Board
of Directors, which it has already done, and NBC will have the right to elect a
director upon the closing of this offering. For a further discussion of these
agreements with NBC, NBCi, XOOM.com and Snap.com please refer to "Related Party
Transactions -- Agreements with NBCi and Affiliates."
In February 2000, we entered into a two year master broadband services
agreement with GE and its affiliates. Under the services agreement, we will
provide our residential services to GE and its affiliates' telecommuters and
other employees at discounted rates, as well as non-employee users introduced to
us by GE. In addition, under this agreement GE will help market and promote our
services. We will work with GE to achieve milestones of 8,000 active customers
after the first year of the agreement and 20,000 at the end of the second year.
We have issued GE warrants for the contingent purchase of up to 200,000 shares
of our common stock at an exercise price of $12.00 per share based upon
achievement of these customer-based milestones during the term of the agreement.
For a further description of our relationship with GE, please refer to "Related
Party Transactions -- Master Broadband Services Agreement with GE."
2
<PAGE> 8
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.
RISK FACTORS
We face many risks and uncertainties. For example, we have a limited
operating history and as of January 31, 2000, we had an accumulated deficit of
approximately $77.5 million. In addition, we operate in a highly competitive
market and we expect to record substantial losses for the foreseeable future.
For a further discussion of these and other factors you should carefully
consider before deciding to invest in shares of our common stock please refer to
"Risk Factors."
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 in our proprietary technology in
order to become a 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, www.telocity.net and
http://telocity.snap.com. Information contained in our Web sites does not
constitute a part of this prospectus.
3
<PAGE> 9
THE OFFERING
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Common stock offered by Telocity:............ 11,000,000 shares
Shares outstanding after the offering........ 83,800,129 shares
Use of proceeds.............................. Based on an estimated offering price of
$11.00, we estimate that our net proceeds
from this offering without exercise of the
over-allotment options will be approximately
$111.2 million. We intend to use these
proceeds for general corporate purposes,
including:
- funding working capital needs,
- expanding our network, operations, and
sales and marketing efforts,
- repaying current and future commitments
under financial leases, and
- repaying outstanding notes.
Proposed Nasdaq National Market symbol....... TLCT
</TABLE>
The number of shares that will be outstanding after the offering is based
on 72,800,129 shares outstanding as of February 29, 2000 and excludes:
- 1,017,652 shares of common stock issuable upon exercise of options
outstanding at February 29, 2000 under our 2000 Stock Plan, with a
weighted average exercise price of $5.08 per share;
- 10,546,670 shares of common stock reserved for issuance under our 2000
Stock Plan as of February 29, 2000;
- 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
- 4,586,941 shares of common stock issuable through the exercise of common
stock warrants and convertible preferred stock warrants outstanding on
February 29, 2000 at a weighted average exercise price of $3.17 per
share.
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 1,650,000 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 February 29,
2000. Unless specifically stated, the information in this prospectus:
- reflects 22,136,250 shares of common stock outstanding on February 29,
2000 and the automatic conversion of all outstanding shares of our
Series A, B and C convertible redeemable preferred stock as of February
29, 2000 into 50,663,879 shares of common stock upon the closing of this
offering; and
- does not include any rights to purchase stock issued by us or
repurchases of stock executed by us after February 29, 2000.
All references to "we," "us," "our" or "Telocity" in this prospectus mean
Telocity Delaware, Inc.
4
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
AUGUST 18, 1997 YEAR ENDED YEAR ENDED
(DATE OF INCORPORATION) TO DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1997 1998 1999
-------------------------- ------------ ------------
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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
PRO FORMA AS ADJUSTED
ACTUAL (UNAUDITED) (UNAUDITED)
-------- ----------- -----------
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BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 66,978 $ 66,978 $178,208
Working capital......................................... 53,729 53,729 164,959
Total assets............................................ 140,071 140,071 251,301
Long-term obligations, less current portion............. 12,058 12,058 12,058
Mandatorily redeemable convertible preferred stock...... 156,020 -- --
Total stockholders' equity (deficit).................... (48,282) 107,738 218,968
</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 11,000,000
shares of common stock offered hereby at an assumed public offering price of
$11.00 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 256 employees at February 29, 2000. Of our entire current executive
management team of eleven, only four members were with us at December 31, 1998.
WE HAVE INCURRED NET LOSSES SINCE OUR INCEPTION AND EXPECT FUTURE LOSSES FOR THE
FORESEEABLE FUTURE. 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, AND WE MAY NOT BE ABLE TO RAISE SUFFICIENT CAPITAL TO FINANCE OUR
BUSINESS IN THE FUTURE.
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 and they may impair our ability to raise capital. 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
exactly 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 January 31, 2000, we had an accumulated deficit of approximately
$77.5 million.
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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
existing customers, it did result in lost revenue for that 30 day period.
Although this delay did not materially harm our business, future delays may be
more severe and adversely affect our financial performance.
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 PERFORM OUR OBLIGATIONS
UNDER OUR AGREEMENTS WITH NBCI AND ITS AFFILIATES.
Our business, especially the development of our content offerings, is
substantially dependent upon our ability to perform our obligations under our
agreements with NBCi and its affiliates, which provide for the joint development
and design of services and content branded by both companies, such as
entertainment, electronic commerce, gaming, search applications and other
features designed for broadband users. Customers currently can use our existing
gateway to access this content. 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, or if
Ms. Hart leaves Telocity by December 2002.
- 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 series of agreements with NBCi, please
refer to "Business -- Strategic Relationship with NBCi and Affiliates" and
"Related Transactions -- Agreements with NBCi and Affiliates."
If our agreements 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 ADDITIONAL SERVICES TO OUR
CUSTOMERS, OUR OPERATING MARGINS MAY SUFFER.
We have based our business model upon our customers purchasing not only
our basic services package but also our additional services. We currently expect
these additional services, including online gaming, virtual private networks,
and various utility services, will be available to our customers during 2000.
While future content both we and NBCi are currently developing will not require
any upgrade, some of these new services will require software upgrades or the
addition of new technology to our network while others will require the
utilization of our next-generation residential gateway, which we expect to
release during 2000. These additional services will allow us to generate greater
financial margins from each customer. If our customers only pay for our basic
service package or choose not to upgrade to our next-generation gateway to
receive additional services, our operating margins 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-front 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 the development and production of 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
greater operating losses over a longer period of time than currently estimated
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 continued deployment of our services and content,
the marketing of our services and the development of new services, our brand and
our strategy. Our future growth and ability to sustain this growth depend 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,
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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.
WE MAY EXPERIENCE DIFFICULTIES IN THE INTRODUCTION OF OUR NEXT-GENERATION
GATEWAY AND IN OUR DEVELOPMENT OF NEW OR ENHANCED TECHNOLOGIES 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 expenses to increase and our
revenues to decline. In addition, because technical innovations and enhancements
are inherently complex and require long development cycles, 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.
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.
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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. This rollout calls for us to expand our services across the
United States, beginning with major markets, and provide services in our
targeted markets. In order to accomplish this nationwide rollout, we must expand
our network into geographic areas throughout the country, beginning with major
markets, 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's coverage across the country, 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 50 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.
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By the end of 2000, we expect that we will offer services in approximately 150
of the nation's 349 metropolitan statistical areas which we estimate will allow
us to make our services available to at least 20% of all U.S. households. Our
maximum potential market is limited by the number of homes that are DSL-capable,
meaning homes that are within approximately 2 1/2 and 3 miles from a local
telephone office that has equipment necessary to support DSL service and have
voice grade copper telephone lines that are in good condition. We believe that
currently 1.4% of all U.S. households receive DSL service and 30% of all U.S.
households are DSL-capable, with the percent of DSL-capable households growing
to 50% in 2001 and 75% in 2002. 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;
- the inside wiring of our customers' homes; and
- the limitations of our customers' computers.
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
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competition. For a further discussion of the competition we face, please refer
to "Business -- Competition."
OUR FAILURE TO 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,
customer requirements and industry standards may have changed, which would
adversely affect our ability to sell our services and cause our results of
operations and financial condition to suffer.
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 three 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 gateways 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 gateways 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
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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 gateways
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. DSL operates over local telephone lines, which are under the control
of traditional telephone companies and new competitive carriers and requires a
special connection from our network to the telephone lines. We rely on them to
provide us with these DSL connections, and if we were unable to use these
connections, we would not be able 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 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.
WE WILL COMPETE WITH OUR DSL ACCESS PROVIDERS IN PROVIDING BROADBAND INTERNET
ACCESS, WHICH MAY CAUSE DELAYS OR INCREASE EXPENSES.
Because in some instances our DSL access providers will also provide
broadband Internet access and other services, we will compete with them.
Although our DSL access providers 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 DSL access
providers 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 DISTANCE
SENSITIVITY OF DSL TECHNOLOGY, THE PHYSICAL LIMITATIONS OF OUR CUSTOMERS'
TELEPHONE LINES, OR BECAUSE THE TELEPHONE LINES WE RELY UPON MAY BE UNAVAILABLE
OR IN POOR CONDITION.
Because DSL technology is distance sensitive and operates over local
telephone lines, we will not be able to provide services to customers whose
homes are outside a maximum distance.
Our ability to provide services to potential customers using DSL
connections through the telephone network over which DSL must operate depends on
the length of our customers' local telephone lines. It also depends on the
quality, physical condition, availability and maintenance of those telephone
lines, all of which are within the control of traditional telephone companies.
DSL technology is distance sensitive and, in many cases, the homes of our
potential 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. Our existing customers are all within this
maximum distance, as we cannot provide our services to customers beyond this
maximum distance. Currently, 70% of U.S. homes are not DSL-capable, meaning they
are more than approximately 2 1/2 to 3 miles from a local telephone office that
has equipment necessary to support DSL service or do not have voice-grade copper
telephone lines that are in good condition. Many traditional telephone companies
are rapidly deploying additional equipment in central offices and we work with
our DSL access providers to identify new locations in which we would like to
offer our services. Nevertheless, our DSL access providers 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.
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If we receive inaccurate information regarding the distances of customers
from the central telephone office, we will incur additional expenses that will
harm our operating results.
Although we work with our DSL access providers 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. In the past, our
historical experiences of finding inaccurate information have caused us to incur
expenses such as costs associated with sending a technician to enable a
potential customer's telephone line that cannot be DSL enabled. Although to date
these expenses have not materially harmed our operating results, if we cannot
reduce the number of these false positive customer identifications as we expand
our operations on a larger scale, we will continue to incur significant expenses
that will harm our operating results.
If the telephone lines of our customers are in poor condition, we may not
be able to provide our services to those customers.
The current condition of local telephone lines may be inadequate to permit
us to provide our services to all of our customers utilizing current DSL
technologies. Because the copper telephone lines are owned by other companies
and because the number of copper lines is so large and often inside a potential
customer's house, the condition of the lines can only be determined on a
case-by-case basis. 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.
Our ability to provide DSL-based services to customers whose homes are
connected to telephone networks that do not use copper lines will be limited
because DSL-based services are not be available to those customers.
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 will 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
DSL-based services to those homes and would harm our business.
ALWAYS CONNECTED INTERNET SERVICES, SUCH AS OURS, MAY BE SUBJECT TO ADDITIONAL
SECURITY RISKS WHICH COULD CAUSE US TO LOSE EXISTING CUSTOMERS, DETER POTENTIAL
CUSTOMERS AND HARM OUR REPUTATION.
Since our services allow customers to be connected to the Internet at all
times, unauthorized users may have a greater ability to access information
stored in our customers' computer systems. Always connected Internet services
may give unauthorized users, or hackers, more and longer opportunities to break
into a customer's computer or access, misappropriate, destroy or otherwise alter
data through the Internet. We are currently developing data security systems
that protect a customer's computer from unauthorized access through the
Internet, but we cannot ensure that the security risks will be eliminated.
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.
Although we have not experienced any system failures or breaches of
network security that materially affected us, if we experience one or more of
the problems described below in the future, our financial performance and
results of operations could be materially affected at that time.
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 cable cuts and
similar events. The occurrence of a natural disaster or other unanticipated
problem at our network operations center, our operational support system, our
managed network of leased communication
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lines or any 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 new 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.
We may be prevented from or delayed in providing asymmetric digital
subscriber line, or ADSL, access to our customers if the FCC does not grant our
application for a waiver from compliance with the requirements for connecting
ADSL equipment to the public telephone network.
We currently provide ADSL access to some of our customers. On February 28,
2000, the FCC set forth guidelines streamlining the process for obtaining
waivers from compliance with the requirements for connecting ADSL equipment to
the public telephone network. We have submitted our application for a
15
<PAGE> 21
waiver and expect to receive this waiver in the near future because we believe
we have met the requirements for receiving the waiver. However, we cannot assure
you that we will obtain this waiver. If we do not obtain this waiver, the FCC
may enjoin us from providing ADSL service. If this occurs, we would be prevented
from or delayed in providing ADSL access to our customers.
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.
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 may 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.
16
<PAGE> 22
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 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 ANY ELEMENT OF OUR SERVICE DEPLOYMENT 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.
17
<PAGE> 23
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 manufacturer 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.
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 60,747,952 shares of common stock, which in the
aggregate will represent approximately 72.2% 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.
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<PAGE> 24
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; 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 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, based on an assumed offering
price of $11.00 per share, if you purchase common stock in the offering, you
will incur immediate dilution of approximately $8.33 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.
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<PAGE> 25
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. Under such lock-up agreements, the
holders of over 95% of our outstanding shares of common stock agreed not to sell
or otherwise dispose of any of their shares until 180 days after the date of
this offering. 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."
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.
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<PAGE> 26
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 11,000,000
shares in this offering of approximately $111.2 million (approximately $128.1
million if the underwriters' over-allotment option is exercised in full), at an
assumed initial public offering price of $11.00 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:
- $83.8 million for working capital and general corporate purposes,
including expanding our sales and marketing efforts and expanding our
network;
- $22.0 million for the payment of current and future commitments under
finance leases; and
- $5.4 million for the repayment of notes outstanding at February 29,
2000.
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.
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.
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<PAGE> 27
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
11,000,000 shares of common stock at an assumed initial offering price
of $11.00 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
PRO FORMA AS ADJUSTED
ACTUAL (UNAUDITED) (UNAUDITED)
-------- ----------- -----------
(IN THOUSANDS
EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Long-term obligations, net of current portion............... $ 12,058 $ 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); 81,946,149 issued and
outstanding (pro forma as adjusted).................... 17 68 79
Additional paid-in capital.................................. 39,478 195,447 306,666
Receivable from stockholders................................ (5,457) (5,457) (5,457)
Unearned stock-based compensation........................... (13,883) (13,883) (13,883)
Accumulated deficit......................................... (68,437) (68,437) (68,437)
-------- -------- --------
Total stockholders' equity (deficit)................... (48,282) 107,738 218,968
-------- -------- --------
Total capitalization................................... $119,796 $119,796 $231,026
======== ======== ========
</TABLE>
The data in the table above excludes:
- 1,873,442 shares of common stock issuable upon exercise of options
outstanding at December 31, 1999, with a weighted average exercise price
of $2.26 per share;
- 1,494,860 shares of common stock reserved for issuance under our 1998
Stock Plan as of December 31, 1999;
- 2,900,000 additional 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 price of $2.76 per share.
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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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 11,000,000 shares of
common stock in this offering at an assumed public offering price of $11.00 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 $218.6 million or approximately $2.67 per share. This
represents an immediate increase in net tangible book value of $1.16 per share
to existing stockholders and an immediate dilution in net tangible book value of
$8.33 per share to new investors, or approximately 76% of the initial public
offering price of $11.00 per share. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share at December
31, 1999............................................... $1.51
Increase per share attributable to this offering.......... $1.16
-----
Pro forma as adjusted net tangible book value per share
after this offering....................................... $ 2.67
------
Dilution per share to new investors......................... $ 8.33
======
</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 $11.00 per share, before deducting the estimated underwriting discounts
and commissions and estimated offering expenses) (in thousands, except share and
per share data):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................ 70,946,149 87% $148,575 55% $ 2.09
New investors................................ 11,000,000 13% 121,000 45% 11.00
---------- ----- -------- -----
Total................................... 81,946,149 100% $269,575 100%
========== ===== ======== =====
</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> 29
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>
FOR THE
PERIOD FROM
AUGUST 18, 1997 YEAR ENDED
(INCORPORATION) 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 7,683
Research and development................................ 327 4,744 16,723
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) (37,002)
Capital expenditures(2)..................................... 303 2,830 22,196
</TABLE>
<TABLE>
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.
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.
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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
We develop, market and deliver to the residential market interactive
online services and content designed for use over high-speed, or broadband,
connections. These broadband connections allow our customers to enjoy services
and content that they could not access with traditional slower speed Internet
connections. Through a recent set of agreements, NBC Internet, Inc., or NBCi,
currently provides all of the content offered on our jointly developed website,
the Telocity/NBCi portal, which is the first Web page a customer views when
accessing our services. Additionally, under these agreements we and NBCi have
each agreed to develop new services and content to be offered and sold over this
website and to share the revenue associated with those sales. We also intend to
develop or acquire additional content if it is not available through NBCi from
other third parties. Although we currently deliver our services to customers
using digital subscriber line, or DSL, technology, in the future we intend to
utilize the technology we have developed to deliver these services and content
over a variety of broadband technologies from a managed nationwide network to
and throughout the home. Our goal is to become a leading provider of broadband
access services, content and home networking services to the residential market.
In July 1999, we began offering services commercially in Chicago. As of
February 29, 2000, we were also offering services in more than 50 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 over 6,500 customers of which over 3,100 are receiving our
services and over 3,400 prequalified customers have placed orders for our
services. Based on our limited historical experience we estimate that
approximately 90% of those placing orders will actually be converted into
customers receiving our services depending on the local access provider on which
we rely. By the end of 2000, we expect that we will offer services in
approximately 150 of the nation's 349 metropolitan statistical areas which we
estimate will allow us to make our services available to at least 20% of all
U.S. households. Our maximum potential market is limited by the number of homes
that are DSL-capable, meaning homes that are within approximately 2 1/2 and 3
miles from a local telephone office that has equipment necessary to support DSL
service and have voice grade copper telephone lines that are in good condition.
We believe that currently 1.4% of all U.S. households receive DSL service and
30% of all U.S. households are DSL-capable, with the percent of DSL-capable
households growing to 50% in 2001 and 75% in 2002.
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;
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<PAGE> 31
- 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.
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 substantially all of our revenues
from our basic service package, which we offer directly to our customers. Our
current basic service package consists of always connected Internet access,
e-mail accounts, storage space and hosting for Web pages and 60 minutes of
remote access to the Internet each month when the customer is away from home. We
bill our customers a monthly rate for these services. 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.
To date we have not received any revenue from the content provided through our
website, nor do we expect to receive any substantial revenue from this content
in the near future. In the future we expect to bill our customers for monthly
recurring charges based on the services and content selected by the customer.
As our business develops and we begin to offer additional services and
content for incremental recurring fees, we expect to become less dependent on
revenues from our basic service package. By providing additional services and
content, we expect to enhance our overall operating margins as we believe these
additional services and content can be added at a lower cost than our current
basic services. We also believe that these additional services and content 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 our basic services package for
$49.95 per month with no additional per-minute usage charges and 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. Following the commercial release of
our jointly developed Web portal, which we currently expect to be in June 2000,
we will also earn revenue from an advertising and revenue sharing agreement with
NBCi. 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.
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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;
- reduce the costs associated with the production of our gateway;
- 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 traditional telephone
companies and new competitive carriers 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
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<PAGE> 33
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 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.
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 and we believe that
these costs will exceed revenue for the next twelve months.
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 a $9.3 million
increase in advertising and promotion costs related to the launch of our service
deployment platform in July 1999 and a $2.7 million increase in employee costs.
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 an
incremental charge of $3.1 million for the addition of personnel performing
general corporate and customer service and a $2.5 million increase in rent and
associated overhead expense. 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 $16.7
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 an incremental charge of $10.1 million for the hiring of additional
engineers and consultants involved in increased research and development
activities associated with the development of our service development 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.
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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 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 due to an increase in market research, personnel and associated
overhead costs of $82,000, $66,000 and $99,000, respectively.
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 due in large part to an increase in employees,
facilities, legal and consultant expenses of $501,000, $312,000, $397,000 and
$148,000, respectively.
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 an incremental charge of $3.3 million for the hiring of additional engineers
and consultants involved in research and development activities associated with
the development of our broadband platform and associated services.
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 due in large
part to an additional $2.5 million of network, software and equipment
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 $11.9 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
of our tangible assets, bear interest at a weighed average rate of 11.1% 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
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<PAGE> 35
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.
All of the outstanding 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, and we expect to record substantial
losses for the foreseeable future. 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 expand our network in
order to provide services to the markets we have identified for our national
expansion. For a further discussion of our network deployment, please refer to
"Business -- Nationwide Network Rollout" below. There can be no assurance that
additional capital will be available on terms acceptable to us, or at all. While
we would 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.
RECENT ACCOUNTING PRONOUNCEMENTS
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,
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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. We believe
that the impact of SAB 101 will not have a material effect on our financial
position or results of operations.
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 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.
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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;
- 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
We develop, market and deliver to the residential market interactive
online services and content designed for use over high-speed, or broadband,
connections. These broadband connections allow our customers to enjoy services
and content that they could not access with traditional slower speed Internet
connections. Through a recent set of agreements, NBC Internet, Inc., or NBCi,
currently provides all of the content offered on our jointly developed website
the Telocity/NBCi portal, which is the first Web page a customer views when
accessing our services. Additionally, under these agreements we and NBCi have
each agreed to develop new services and content to be offered and sold over this
website and to share the revenue associated with those sales. We also intend to
develop or acquire additional content if it is not available through NBCi.
Although we currently deliver our services to customers using digital subscriber
line, or DSL, technology, in the future we intend to utilize the technology we
have developed to deliver these services and content over a variety of broadband
technologies from a managed nationwide network to and throughout the home. Our
goal is to become a leading provider of broadband access services, content and
home networking services to the residential market.
We currently generate revenue by selling monthly subscriptions for our
basic service package that may include activation and other one-time fees, and
to date we have not received revenue from any of the content provided through
our website. Revenues from these services for the year ended December 31, 1999
were $187,000. For a single monthly fee, a customer receives our current basic
service package, which consists of always connected Internet access, e-mail
accounts, storage space and hosting for Web pages and 60 minutes of remote
access to the Internet each month when the customer is away from home. As our
business develops and we begin to offer additional services for incremental
recurring fees, we expect to become less dependent on revenues from our basic
service package, and we expect our operating margins to increase as we believe
these additional services and content can be added at a lower cost than our
current basic services. During 2000, we will begin offering the following
additional services and content:
- Electronic commerce, entertainment and media content-based services we
are currently developing in collaboration with NBCi;
- Communication services we are currently developing such as virtual
private networks that will enable customers to telecommute to their
workplace securely from home, enhanced voice messaging services that
will allow our customers to access services over the phone, as well as
chat facilities that will allow our customers to interact with each
other; and
- Utility services we are currently developing 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 a service deployment system, our platform, which
delivers broadband online services directly to our customers' homes. Our
platform consists of a managed network, our residential gateway, user interface
software, customer care and support services and automated billing and
provisioning systems. Our managed network includes communications lines and
facilities, which we lease through network agreements, as well as our network
operations center and operational support system, which we own and operate.
Through our network operations center and operational support system, we are
able to monitor our services throughout the network to ensure a high level of
performance. We designed our platform so that we can offer a growing number 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.
From a customer's perspective, the first component of our service
deployment 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
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personal computers and telephone jacks, which allows them to connect directly to
our network and the Internet. 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. For a further description of speeds of various forms of
broadband access please see page .
We have designed our service deployment platform to be flexible and
expandable. Although we currently deliver our services to our customers using
DSL technology, we have the capability to configure our gateway easily to
support all major broadband local access technologies such as cable, fiber,
wireless and satellite, by replacing a limited number of components in our
gateway, including the current DSL modem, with components that support these
technologies. In the future, we will choose the most reliable, flexible and
cost-effective broadband access technology available in each local market in
which we offer services.
In July 1999, we began offering services commercially in Chicago. As of
February 29, 2000, we were also offering services in more than 50 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 over 6,500 customers of which over 3,100 are receiving our
services and over 3,400 prequalified customers have placed orders for our
services. Based on our limited historical experience we estimate that
approximately 90% of those placing orders will actually be converted into
customers receiving our services depending on the local access provider on which
we rely. By the end of 2000, we expect that we will offer services in
approximately 150 of the nation's 349 metropolitan statistical areas which we
estimate will allow us to make our services available to at least 20% of all
U.S. households. Our maximum potential market is limited by the number of homes
that are DSL-capable, meaning homes that are within approximately 2 1/2 and 3
miles from a local telephone office that has equipment necessary to support DSL
service and have voice grade copper telephone lines that are in good condition.
We believe that currently 1.4% of all U.S. households receive DSL service and
30% of all U.S. households are DSL-capable, with the percent of DSL-capable
households growing to 50% in 2001 and 75% in 2002.
In December 1999, we entered into several agreements with NBC, NBCi and
NBCi's 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. We and NBCi
have formed a joint task force to implement the specific future service and
content offerings contemplated by those agreements. As these new services and
content are added, our customers will be able to access them through the
Telocity/NBCi portal. Under these agreements we have each agreed to share a
portion of the revenues generated from services, advertising and electronic
commerce activities offered through the Telocity/NBCi portal, including the
services we currently offer. In connection with these agreements NBCi and its
affiliates, GE Capital and NBC purchased 13,072,518 shares of our stock, which
including the outstanding warrants to purchase up to an additional 2,089,313
shares of our stock held by this stockholder group would total approximately
17.7% of the stock outstanding after this offering, representing the largest
stockholder group outside of the management team assuming the exercise of all of
those warrants. In addition, NBCi has the right to elect a director to our Board
of Directors, which it has already done, and NBC will have the right to elect a
director upon the closing of this offering. For a further discussion of these
agreements with NBC, NBCi, XOOM.com and Snap.com please refer to "Related Party
Transactions -- Agreements with NBCi and Affiliates."
In February 2000, we entered into a two year master broadband services
agreement with GE and its affiliates. Under the services agreement, we will
provide our residential services to GE and its affiliates' telecommuters and
other employees at discounted rates, as well as non-employee users introduced to
us by GE. In addition, under this agreement GE will help market and promote our
services. We will work with GE to achieve milestones of 8,000 active customers
after the first year of the agreement and 20,000 at the end of the second year.
We have issued GE warrants for the contingent purchase of up to 200,000 shares
of our common stock at an exercise price of $12.00 per share based upon
achievement of these customer-
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based milestones during the term of the agreement. For a further description of
our relationship with GE, please refer to "Related Party Transactions -- Master
Broadband Services Agreement with GE."
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.
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.
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, we believe that 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
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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, we believe that 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 throughout the
nation by a variety of access providers. 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 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 "-- 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 basic service package addresses many of the
residential market's unmet data communication needs. In addition, in the future
through the introduction of additional services and content currently being
developed on our own and in collaboration with NBCi to be offered over our
service deployment platform, we believe we will offer our customers an appealing
combination of media, entertainment and electronic commerce services,
communication services and utility services.
Broadband Enabled Services and Content
We have designed our service deployment platform to provide our customers
with a growing number of broadband services and content that they could not
access with traditional slower speed Internet connections. Our current service
offering includes our basic services package consisting of high-speed always
connected Internet access, e-mail, personalized Web pages and remote Internet
access. As part of
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our future offerings, we intend to develop additional services both on our own
and in collaboration with NBCi in the following areas: media, entertainment and
electronic commerce, communications and utility. Specifically, in 2000 we intend
to develop independently and offer virtual private networks, enhanced voice
messaging services, home networking, home monitoring and automation, data
security and chat facilities. In addition, in 2000 we also intend to develop in
collaboration with NBCi and offer to our customers advanced streaming audio and
video content offerings. All of these services will only be available to our
customers through our gateway and many will only be available through our
next-generation 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.
Simple Plug-and-Play Deployment
We developed our service deployment 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 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
Our gateway currently supports three DSL technologies: asymmetric digital
subscriber line, or ADSL, symmetric digital subscriber line, or SDSL and G.Lite.
However, we have designed our service deployment platform to be easily
configurable to support the delivery of services and content over a variety of
high-speed local access technologies such as wireless, fixed wireless, cable
modem, fiber and satellite by replacing a limited number of components in our
gateway, including the current DSL modem, with components that support these
technologies. In the future, we intend to choose the most reliable, flexible and
cost-effective broadband access technology available in each local market in
which we offer services.
Scalable Nationwide Network with Enhanced Content Delivery
We have deployed, and will continue to expand, a managed nationwide
Internet protocol-based network. Our managed network includes communications
lines and facilities, which we lease through network agreements, as well as our
network operations center and operational support system, which we own and
operate. 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 to ensure a high level of support. We intend
to implement a differentiated-services protocol throughout this network 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 reduce redundant data traffic on the
network and speed data delivery to our customers, by duplicating and storing
frequently accessed content locally at network hubs via satellite
communications. This system distributes content rapidly and cost-effectively
throughout our nationwide network.
Service Flexibility and Ease-of-Use
We designed our service deployment platform to be adaptable and responsive
to the needs of our customers. For example, the deployment, configuration and
management of each customer feature and
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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 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 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 service
deployment platform is designed to be easily configurable to support any
currently available broadband access technology. We designed our proprietary
gateway device to be self-installable, interoperable with multiple technologies
and easily upgradable. In addition, because our customers can easily install our
residential gateway and because our service deployment 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 and
content such as online gaming, streaming audio and video, interactive shopping,
chat facilities, virtual private networks and enhanced voice messaging services,
all of which are currently scheduled for release during 2000. In addition, we
intend to extend our services and content to devices throughout the home. For
example, we designed the 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 Relationships
We intend to utilize our relationship with NBCi, as well as other
potential strategic relationships, to accelerate the development and enhance the
breadth and availability of our content offerings and to promote marketing and
branding of our services. Our agreements with NBCi provide for, among other
things: access to NBCi's multimedia broadband content, development of new online
services and applications, joint development of a Web portal branded by both
companies, which we have already developed, promotion of brand awareness and
revenue sharing. In addition, to the extent that we do not obtain services and
content through our collaboration with NBCi, we expect to enter into agreements
with other providers 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
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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.
STRATEGIC RELATIONSHIP WITH NBCI AND AFFILIATES
In December 1999, we entered into several agreements with NBC, NBCi and
their affiliates, XOOM.com and Snap.com. These agreements provide for, among
other things:
- access to multimedia content;
- development of new online services and content;
- joint development of a Web portal branded by both companies;
- promotion of brand awareness; and
- revenue sharing.
Our operating agreement with NBCi provides for the joint development of
services branded by both companies, 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 using content provided by NBCi, we
will be able to provide a dynamic multimedia experience to our customers that
they can only access over a broadband connection. 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 Web
portal branded by both companies from which our customers can access the
Internet, as well as services and content offered by us and NBCi. 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.
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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 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 official commercial
release of the jointly developed Web portal which we currently expect will take
place in June 2000, 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 our
jointly developed web site. NBCi will receive 10% of the net 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 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 -- Agreements with NBCi and Affiliates."
SERVICES
Our service deployment platform is capable of delivering a comprehensive
suite of broadband services, including high-speed Internet connections and
additional related 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
our basic service package 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. As our
business develops and we begin to offer additional services for incremental
recurring fees, we expect to become less dependent on revenues from our basic
service package and we expect our operating margins to increase as we believe
these additional services and content can be added at a lower cost than our
current basic services.
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 our basic service package, which consists of:
- 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.
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- 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. While future content both we and NBC are
currently developing will not require any upgrade, we are currently developing
the following additional services which will require customers to upgrade the
gateway software or to upgrade to our next-generation gateway:
- 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 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.
- Enhanced Voice Messaging Services. Through our network, our customers
will be able to receive our services through their phones or through the
gateway over Internet protocol functionalities.
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This feature will include access to services such as e-mail or home
automation controls. Likewise, the gateway can automatically report
problems to our customer care and support system.
THE TELOCITY/NBCI PORTAL
Through our agreements with NBCi, we provide dynamic multimedia broadband
content for our customers. Customers are able to access this content through the
Website we have developed with NBCi, the Telocity/NBCi portal. The Telocity/NBCi
portal, located at http://telocity.snap.com, is the first Web page a customer
will view when accessing our services. From this page, a customer can access the
Internet as well as some of the services provided by us and NBCi. The Web portal
currently offers media, entertainment and electronic commerce services provided
exclusively by NBCi such as interactive shopping, a limited selection of
streaming audio and video, financial information, sports, news and weather.
Through the Telocity/NBCi portal our customers will be able to access the full
suite of NBCi's entertainment offerings.
In connection with these agreements, we and NBCi have joint task force to
plan future content offerings. We have devoted personnel and resources to the
design and implementation of the portal. NBCi has also devoted personnel and
resources to the design and implementation of the portal, in addition to
providing all the content currently found on the portal. The joint task force is
creating a service and content development plan and is concurrently studying how
to provide the additional planned services and content.
OUR BROADBAND SERVICE DEPLOYMENT PLATFORM
We designed our broadband service deployment platform to provide reliable,
high-performance Internet access and to alleviate Internet bottlenecks through
an easily deployed scalable architecture with end-to-end network management
capabilities. Through our platform we will continue to offer a growing number of
services and content offering that we can remotely configure to each customer's
needs. Our broadband service deployment 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;
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- 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 2000. In addition to supporting our basic service package, our
next-generation gateway will incorporate several new hardware components that
will enable us to support additional value-added services. For example, we are
adding technology to our next-generation gateway 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
Our managed network includes communications lines and facilities, which we
lease through network agreements, as well as our network operations center and
operational support system, which we own and operate. 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 which we lease through network
agreements. 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 leased 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. Between metropolitan hubs, our
customer traffic travels on a leased high capacity fiber network which is
interconnected to the Internet and to other network providers at Internet
exchange points via private and public peering arrangements. Network peering is
the process of connecting to other networks at the closest point, thereby
ensuring the least number of connection points in the delivery of data.
Our managed 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
leased optical carrier 3 network. This secure high capacity fiber 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.
We sometimes use satellite content feeds to supply data to our caching
servers because transmission of data by satellite is often more cost effective
and efficient than transmission of data over our leased land-
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based network. We lease satellite dishes located on the roofs of buildings that
are connected to our leased land-based network, from which we receive content
from a satellite owned by Cidera, Inc., a satellite caching company. Cidera
transmits web-based content that our customers frequently access to this
satellite throughout the day. Once transmitted to the satellite, this content is
periodically retransmitted to our satellite dishes to help prevent data traffic
congestion on our leased land-based network.
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 managed
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 managed 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. As a result, we have agreed to jointly develop with NBCi a consistent
user experience across all of our combined services. We have already begun to
implement our joint user interface in the Telocity/NBCi portal. In the future
along with NBCi we intend to expand this interface capability to our other
services and 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.
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.
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Our Automated Billing and Provisioning Systems
We have built our service deployment 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 a 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. We
are undertaking channel programs through which other companies market and sell
our services. We expect to enter into agreements with channel partners to
establish affinity marketing programs, through which companies market and sell
our services through their own sales or distribution channels to their own
existing or prospective customers with special promotional or bundled offers. In
addition, we expect to enter into agreements with other channel partners to
establish employee and telecommuter programs, through which companies may
provide our services to their workers who have a business need for high-speed
Internet access at home. For example, in February 2000 we signed our first
agreement with a channel partner, GE. For a further description of our
relationship with GE please refer to "Related Party Transactions -- Master
Broadband Services Agreement with GE."
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 contract manufacturer of our
gateway, but we are in negotiations so that we can increase the number of
manufacturers in the near term.
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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.
Although many companies offer broadband access and content, we believe
that we are currently the only company that combines all of the following
features into a unified service offering tailored for the residential market:
- we manage data traffic over the network, lease and utilize
telecommunications lines and facilities and operate our own network
operations center;
- we have designed and supply our own proprietary gateway device, which we
have customized to provide our current services and which will enable us
to provide our future services;
- we provide content and services to our subscribers, many of which we
have customized for high-speed Internet access; and
- our service delivery system, or platform, allows us to provision
customers quickly and cost-effectively, as does our simple plug-and-play
residential gateway device.
The unique combination of all of these features provides us with
flexibility and scalability. The most significant feature unique to our service
offering is our plug-and-play residential gateway device. Our proprietary
gateway combines a DSL modem, a home networking router, multiple connection
ports and network monitoring software. Because our gateway simplifies
installation, customer support and service upgrades, we can deploy our services
to customers nationwide more rapidly at a lower cost than competitors who do not
have a similar device. For a more complete discussion of our gateway, please
refer
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to "-- Our Broadband Service Deployment Platform -- Our Residential Gateway."
And, unlike some of our competitors, we are not dependent upon a single local
access technology to deliver our services, but have designed our platform to be
configurable to support technologies other than DSL.
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 acquiring another Internet services provider, Mindspring, Concentric Network,
which is being acquired by Nextlink, 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.
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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 new 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 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.
- New 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.
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Consumer Electronics and Appliance Manufacturers
Our service deployment 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.
COMPARISON OF DIAL-UP AND BROADBAND TECHNOLOGIES
For our local access connections, the speed and effectiveness of the DSL
connection we utilize varies based on a number of factors. In the future, we
intend to examine utilizing a variety of high-speed local access technologies as
they gain popularity. The chart below together with the footnotes compares the
performance and range for traditional dial-up service with those of broadband
technologies.
<TABLE>
<CAPTION>
DIAL-UP ADSL SDSL IDSL CABLE
-------------- ------------------ ------------------ ----------- ----------------
<S> <C> <C> <C> <C> <C>
Speed to End Users..... 28 - 56Kbps 144Kbps - 8Mbps(2) 128Kbps - 2Mbps(3) 144Kbps(4) 4Mbps - 10Mbps
Speed from End Users... 14 - 33Kbps 64Kbps - 1Mbps 64Kbps - 1.5Mbps 144Kbps 1Mbps - 4Mbps(5)
Distance Limitations... None(1) 17,500 Feet 29,000 Feet 30,000 Feet None
<CAPTION>
SATELLITE
--------------------
<S> <C>
Speed to End Users..... 384Kbps - 400Kbps(6)
Speed from End Users... 14Kbps - 33Kbps(7)
Distance Limitations... None
</TABLE>
- ---------------
Key: Kbps = kilobits per second
Mbps = megagbits per second (1000 Kbps = 1 Mbps)
(1) Speed is limited by line condition.
(2) The following table sets forth estimated distance limitations and speeds for
ADSL:
<TABLE>
<CAPTION>
NUMBER SPEED TO SPEED FROM
OF FEET END USER END USER
------- -------- ----------
<S> <C> <C>
15,000 384 Kbps 384 Kbps
14,000 512 Kbps 512 Kbps
12,000 768 Kbps 768 Kbps
12,000 1 Mbps 1 Mbps
10,700 3 Mbps 1 Mbps
9,000 5 Mbps 1 Mbps
7,800 7.1 Mbps 1 Mbps
</TABLE>
These numbers vary by the telecommunications service provider of the ADSL
connection. ADSL speed is also affected by the distance of the end user
from the local telephone office and the condition of the copper telephone
line that connects the end user to the local telephone office.
(3) The following table sets forth estimated distance limitations and speeds for
SDSL:
<TABLE>
<CAPTION>
NUMBER SPEED TO SPEED FROM
OF FEET END USER END USER
------- -------- ----------
<S> <C> <C>
18,000 256 Kbps 256 Kbps
8,000 1.5 Mbps 1.5 Mbps
</TABLE>
These numbers vary by the telecommunications service provider of the SDSL
connection. SDSL technology allows end users to achieve up to 1.5 Mbps
speeds both to and from the end user. Depending on the quality of the
copper telephone line, 1.5 Mbps can typically be achieved if the end user
is within 8,000 feet, or approximately 1.5 miles, from the local telephone
office.
(4) The following table sets forth the estimated distance limitation and speed
for IDSL:
<TABLE>
<CAPTION>
NUMBER SPEED TO SPEED FROM
OF FEET END USER END USER
------- -------- ----------
<S> <C> <C>
Unlimited 144 Kbps 144 Kbps
</TABLE>
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These numbers vary by the telecommunications service provider of the IDSL
connection. IDSL technology may reach all end users within a telephone
office serving area irrespective of the end user's distance from the
telephone office. IDSL service operates at up to 144 Kbps in each direction
and can use existing integrated services digital network equipment at the
end user site. IDSL may be offered to end users that have lines that do not
consist of continuous copper, such as digital line carrier equipped lines
that are partially copper and partially fiber. Speeds are 128 Kbps under
certain circumstances.
(5) Bandwidth is generally shared between individuals in a particular
neighborhood so that service may be degraded if a number of users attempt to
utilize the service over shared bandwidth at the same time. The connection
from the end user may be analog for some cable system providers limiting
speed from the end user to 33Kbps.
(6) Requires a line of sight view to receive the satellite signal.
(7) Speeds from the end user are limited by a analog connection to 33Kbps.
NATIONWIDE NETWORK ROLLOUT
By the end of 2000, we expect that we will offer services in approximately
150 of the nation's 349 metropolitan statistical areas. We have identified
markets in which to offer our services based upon a number of criteria,
including the following:
- The total number of potential customers and the anticipated consumer
response in a market to our service offering;
- the technical compatibility of our equipment with the equipment of
traditional telephone companies and competitive telephone companies in a
market;
- our ability to negotiate agreements with and receive cooperation from
traditional telephone companies and competitive telephone companies in
specific regions of the nation as well as within a single market for
network connections and other infrastructure needs;
- the number of households of potential customers that are DSL-capable in
a market;
- the existence of competitors as well as the services and prices offered
by those competitors in a market; and
- our anticipated return on investment from expanding our network to a
market.
Once we have determined that we would like to begin offering our services
in a market, we put in place the components of our managed network necessary to
deliver our services. In particular, we lease additional communication lines to
ensure that we have sufficient capacity on our managed network and an adequate
number of dedicated circuits to meet the projected demand for our services in a
market. We also lease communications facilities, and, as necessary, facilities
space for new metropolitan hubs, which are data distribution centers in
metropolitan areas. Once we have configured and tested our network and
equipment, we are ready to begin provisioning services to new customers in the
market. For a further description of our managed network, please refer to
"-- Our Broadband Service Department Platform -- Our Managed Network" above.
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.
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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 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.
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 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. In 2000, we expect to add
collocation space through both Level 3 and MCI WorldCom.
In October 1999, we entered into a three year agreement with Telecordia
Technologies, Inc. for the testing and qualification of local telephone lines.
We terminated this agreement in March 2000. Telecordia has disputed this
termination. We are currently negotiating a new agreement with Telecordia for
these services.
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
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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.
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,
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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 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.
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<PAGE> 59
EMPLOYEES
As of February 29, 2000 we had 256 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.
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.
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
From time to time, we may be involved in litigation that arises in the
normal course of our business operations. As of the date of this prospectus, we
are not a party to any litigation that we believe could adversely affect our
business relationships and our financial results.
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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 March 7, 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
Scott Martin.............................. 43 Executive Vice President, Chief
Administrative Officer and Corporate
Secretary
Jim Morrissey............................. 50 Executive Vice President and Chief
Marketing Officer
Kevin Grundy.............................. 42 Senior Vice President, Engineering
Thomas Obenhuber.......................... 44 Senior Vice President, Corporate
Development
James Rohrer.............................. 58 Senior Vice President, Customer Service
Matthew Stepovich......................... 36 Senior Vice President, Legal and
Regulatory Affairs
Regina Wiedemann.......................... 38 Senior Vice President, Business
Development
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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<PAGE> 61
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.
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.
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, Corporate Development since February 2000. From August 1997 to
February 2000, Mr. Obenhuber served as Senior Vice President, Business and
Product Planning. 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.
James Rohrer has served as our Senior Vice President, Customer Service
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.
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.
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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<PAGE> 62
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.
Messrs. Cowan, Rappaport, Solomon and Strahan are independent directors
and Mr. Sanctis serves as the director designated by NBCi.
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<PAGE> 63
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-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, Sanctis 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.
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<PAGE> 64
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)
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, Corporate 1998 90,000 2,129 54,858 --
Development 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.
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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
10,202,902 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 and were exercised on that date.
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 ten years based on an assumed initial public offering price
of $11.00 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.
<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 31.6% $0.350 4/30/09 $56,678,655 $90,920,159
Jim Morrissey............... 800,000 7.8 0.750 9/10/09 13,734,269 22,224,932
Peter Olson................. 7,714 -- 0.575 6/25/09 133,783 215,654
Thomas Obenhuber............ 5,142 -- 0.575 6/25/09 89,177 143,751
</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. The value
realized upon exercise of the options is based on an assumed initial public
offering price of $11.00, less the exercise price. As of December 31, 1999,
these officers had exercised all of their options.
<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 $34,359,818 -- -- -- --
Jim Morrissey........... 800,000 8,200,000 -- -- -- --
Peter Olson............. 7,714 80,418 -- -- -- --
Thomas Obenhuber........ 5,142 53,605 -- -- -- --
</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,
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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, 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
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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 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 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
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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 which began in 2000 in
order to reward our employees for their contributions. We will distribute
bonuses quarterly, in January, April, July and 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
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Equity Incentive Plan in March 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:
- 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.
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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 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 March 2000.
A total of 2,500,000 shares of our common stock
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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 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 November 1 of each year, except that the first offering
period will commence on the effective date of this offering and end on or about
October 31, 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.
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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 March 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
- 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.
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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.
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
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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.
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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<PAGE> 75
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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<PAGE> 76
(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.
AGREEMENTS WITH NBCI AND AFFILIATES
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
services branded by both companies, 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 official commercial release of the jointly developed Web portal,
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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<PAGE> 77
The operating agreement also provides that between December 1999 and
December 2002 NBCi will provide us with $5 million of online advertising of our
services at a 15% discount from NBCi's applicable rates. 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 a 15% discount from NBC's applicable 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 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.
MASTER BROADBAND SERVICES AGREEMENT WITH GE
In February 2000, we entered into a two year master broadband services
agreement with GE and its affiliates. Under the services agreement, we will
provide our services to GE and its affiliates' telecommuters, other employees
and affinity users.
- Telecommuter Program. GE and its affiliates will make available our
services to some of their employees who telecommute or otherwise need
high-speed Internet access at home for a business purpose. Through this
program, we will offer our current services and a few advanced services,
including virtual private network, data security and backup services to
telecommuters. GE and its affiliates will be financially responsible to
us for the fees and other costs generated by these telecommuting users,
which we will provide at a 16% discount from our current price for our
basic services. GE and its affiliates will pay to us a fee if a
telecommuter terminates service with us before the completion of a
24-month term. GE and its affiliates will determine which employees are
eligible for the telecommuter program.
- Employee Program. Employees of GE and its affiliates who are not
eligible for the telecommuter program may nonetheless order, at their
own expense, our regular services available to consumers at a 16%
discount from our current price for our basic services.
- Affinity Program. GE and its affiliates may sell our services to
non-employee users through special marketing and promotional offers. The
current marketing and promotional offer under the agreement provides for
a waiver of installation charges and the first month of basic services
free
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<PAGE> 78
for customers who agree to a one year term; customers who sign up for
two years also receive the thirteenth month of basic services free. The
fees we will charge affinity users will be the same as for our regular
consumers. We will track affinity users through special affinity codes
unique to GE and its affiliates. GE and its affiliates will have no
liability, financial or otherwise, to us for affinity users. Employees
whose job status changes may convert to the affinity program.
GE will cooperate with us in providing some marketing and promotional
efforts, including an initial press release announcing the agreement. GE will
serve as a reference account for us and will respond to calls from potential
business customers, investors and analysts. We may name GE as a customer in our
marketing and promotional materials, subject to GE's approval. GE will also
provide us with information so that we can contact GE's affiliates directly to
market and promote our services. Furthermore, provided that we comply with our
obligations under the services agreement, GE will prominently post details of
Telocity's services on its corporate intranet for its employees and will work
with us to facilitate links to each other's Websites.
In connection with the services agreement, we also issued to GE four
warrants to purchase an aggregate of 200,000 shares of our common stock, which
may only be exercised upon GE's meeting pre-determined subscriber milestones.
The four warrants are for the purchase of up to 40,000, 40,000, 60,000 and
60,000 shares. Telecommuters, other employees and affinity users from GE and all
its affiliates under the services agreement will count toward these overall
active subscriber milestones.
<TABLE>
<CAPTION>
TARGET FOR ACHIEVING MILESTONE
--------------------------------------------
6 MONTHS 12 MONTHS 18 MONTHS 24 MONTHS
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cumulative Subscribers................................ 4,000 8,000 14,000 20,000
Cumulative Shares..................................... 40,000 80,000 140,000 200,000
</TABLE>
GE must exercise a warrant within 12 months of meeting the milestone for
that warrant. All warrants whose milestones have not yet been achieved will
expire upon the termination of the services agreement. Although we and GE will
work together to meet subscriber milestones by the 6, 12, 18, and 24 month
targets, GE has a total of 30 months in which to meet the active subscriber
milestones, so that all warrants will expire no later than 42 months. GE has
registration rights for shares exercised limited only to inclusion in any
registration statements we otherwise would file with the SEC.
Under the services agreement, a GE affiliate, meaning any company at least
20% owned by GE, may accept and be bound by the terms of the agreement so long
as GE consents. If GE does not consent to the participation of an affiliate, we
may sign a separate agreement with that company. The services agreement does not
supersede or alter any pre-existing relationship we have with any GE affiliate,
including NBC and NBCi. As part of the services agreement, we also agreed to
participate in quality improvement programs that GE has developed for itself and
its affiliates.
Under the services agreement, we will work with GE and its affiliates to
develop timelines and procedures for deploying our services to telecommuters,
including placing our equipment at GE and its affiliates' network facilities so
that we can connect telecommuters to GE and its affiliates' networks through our
virtual private network service. We will also provide technical support to GE's
help desk to resolve problems experienced by telecommuters. In addition, the
services agreement outlines a procedure for the creation of jointly developed
intellectual property during the term of the agreement.
At the end of two years, the services agreement will automatically renew
for successive one year periods unless a party provides the other notice that it
wishes to terminate. Either party may terminate the services agreement for
uncured material breach or the insolvency of the other party. In addition, GE
may terminate the services agreement if we fail to develop adequate procedures
to ensure quality service, if we terminate services to a large number of GE
telecommuters or if our service offering fails to remain competitive with other
service offerings that are in all material respects similar to ours.
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<PAGE> 79
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.
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
Thomas Obenhuber....... February 14, 2000 1,350,000 6.20 150,000 February 14, 2005
Kevin Grundy........... February 23, 2000 1,350,000 6.20 150,000 February 23, 2005
</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
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<PAGE> 80
$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.
STOCK OPTION GRANTS TO DIRECTORS AND OFFICERS
During 1999 and 2000, 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
Kevin Grundy.............................. January 26, 2000 150,000 9.000
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
January 26, 2000 150,000 9.000
Regina Wiedemann.......................... September 28, 1999 240,000 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
February 29, 2000 50,000 12.000
</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 for Messrs. Olson and Solomon and 1/8 of each of the founder's
shares vested immediately for Messrs. Stepovich and Obenhuber; the remaining
shares for each vest subsequently at a rate of 1/42 per month of the remaining
total so long as the founder is continuously employed by us or, in the case of
Mr. Solomon, so long as he continues to act as an advisor to 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.
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<PAGE> 81
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 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.
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<PAGE> 82
BRIDGE LOANS
On November 15, 1999, in advance of the closing 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> 83
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of February 29, 2000 and as adjusted
to reflect the sale of common stock offered hereby by the following:
- each stockholder known by us to own beneficially more than 5% of our
common stock;
- 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) 72,800,129 shares outstanding as of February 29,
2000 and (b) 83,800,129 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 February
29, 2000 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 SHARES SUBJECT
BENEFICIALLY -------------------- TO RIGHT OF
OWNED PRIOR PRIOR TO AFTER REPURCHASE AS
NAME OR GROUP OF BENEFICIAL OWNERS TO OFFERING OFFERING OFFERING OF 2/29/00
- ---------------------------------- ------------ -------- -------- --------------
<S> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
David Cowan(1)................................. 9,050,088 12.4% 10.8%
Bessemer Ventures Partners
535 Middlefield Road, Suite 245
Menlo Park, California 94025
Patti Hart..................................... 3,599,037 4.9 4.3 2,688,565
Peter Olson.................................... 2,426,648 3.3 2.9 440,392
Andrew Rappaport(2)............................ 15,026,102 20.6 17.9
August Capital
2480 Sand Hill Road, Suite 101
Menlo Park, California 94025
Edmond Sanctis(3).............................. 6,382,632 8.8 7.5
NBC Internet, Inc.
225 Bush Street
San Francisco, California 94104
Michael Solomon(4)............................. 8,538,355 11.7 10.2
Mohr, Davidow Ventures
2775 Sand Hill Road
Menlo Park, California 94025
</TABLE>
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<PAGE> 84
<TABLE>
<CAPTION>
PERCENT OF SHARES
SHARES OUTSTANDING SHARES SUBJECT
BENEFICIALLY -------------------- TO RIGHT OF
OWNED PRIOR PRIOR TO AFTER REPURCHASE AS
NAME OR GROUP OF BENEFICIAL OWNERS TO OFFERING OFFERING OFFERING OF 2/29/00
- ---------------------------------- ------------ -------- -------- --------------
<S> <C> <C> <C> <C>
Randall Strahan(5)............................. 6,956,193 9.5 8.3
Mohr, Davidow Ventures
2775 Sand Hill Road
Menlo Park, California 94025
Kevin Grundy................................... 1,768,908 2.4 2.1 650,144
Jim Morrissey.................................. 800,000 1.0 * 800,000
Thomas Obenhuber............................... 1,734,300 2.3 2.1 659,984
All directors and officers as a group (16
persons)(6).................................. 51,968,754 71.2 61.9 7,103,259
5% STOCKHOLDERS:
Entities affiliated with August Capital,
L.P.(2)...................................... 15,026,102 20.6 17.9
2480 Sand Hill Road, Suite 101
Menlo Park, California 94025
NBC Internet, Inc.(3).......................... 6,382,632 8.8 7.5
225 Bush Street
San Francisco, California 94104
Entities affiliated with National Broadcasting
Company Inc.(7).............................. 8,779,198 12.0 10.3
30 Rockefeller Plaza
New York, NY 10112
Entities affiliated with Bessemer Venture
Partners(1).................................. 9,050,088 12.4 10.8
1400 Old Country Road, Suite 407
Westbury, New York 11590
Entities affiliated with Mohr, Davidow
Ventures(8).................................. 8,849,815 12.1 10.6
2775 Sand Hill Road
Menlo Park, California 94025
</TABLE>
- ---------------
* Less than 1.0%.
(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> 85
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 beneficially owns 1,893,662 shares, which includes 306,222
shares subject to our right of repurchase as of February 29, 2000, 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 beneficially owns
311,500 shares, including 50,000 options exercisable within 60 days.
187,500 of these shares are subject to our right of repurchase which lapses
over time.
(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.
(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 and warrants to
purchase 200,000 shares held by General Electric Company, all of which are
exercisable at $12.00 a share.
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<PAGE> 86
(8) 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.
Also includes 1,893,662 shares held by Mr. Solomon personally and 311,500
shares held by Mr. Strahan personally.
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<PAGE> 87
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 February 29, 2000, there were 72,800,129 shares of common stock
outstanding which were held of record by approximately 360 stockholders. There
will be 83,800,129 shares of common stock outstanding (assuming no exercise of
the underwriters' over-allotment option and no exercise of outstanding options
after February 29, 2000) after giving effect to the sale of our common stock in
this offering. There are outstanding unexercised options to purchase a total of
1,017,652 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> 88
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
83
<PAGE> 89
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, and the holders of shares entitled to cast not less than ten
percent of the votes at the meeting 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> 90
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> 91
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
February 29, 2000, we will have outstanding 83,800,129 shares of common stock,
assuming (1) the issuance of 11,000,000 shares of common stock in this offering,
(2) no exercise of the underwriters' over-allotment option, and (3) no exercise
of options after February 29, 2000.
All of the 11,000,000 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 72,800,129 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 72,800,129 shares, 48,468,068 shares
will become eligible for sale 180 days after the effective date subject to Rules
144 and 701.
As of February 29, 2000, there were a total of 1,017,652 shares of common
stock subject to outstanding options, 157,571 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 183,992 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 838,001 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> 92
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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<PAGE> 93
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, Donaldson, Lufkin & Jenrette Securities
Corporation and SoundView Technology Group, Inc. 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.........
SoundView Technology Group, Inc. ...........................
----------
Total.......................................... 11,000,000
----------
</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.
Generally, we have agreed to indemnify each underwriter against liability
arising out of any untrue statement contained in the registration statement, any
preliminary prospectus or the final prospectus, or the omission of a material
fact required to be stated in the registration statement or such prospectus
necessary to make the statements in the registration statement or such
prospectus not misleading. In addition, we have agreed to indemnify each
underwriter against liability arising out of violations of laws or regulations
of foreign jurisdictions where reserved shares have been offered. The
underwriters have agreed to indemnify us against liability with respect to
untrue statements or omissions, or alleged untrue statements or omissions, made
in the registration statement, any preliminary prospectus or the final
prospectus in reliance upon and in conformity with written information furnished
to us by that underwriter through Merrill Lynch expressly for use in the
registration statement, such preliminary prospectus or the prospectus. For more
detailed information on the terms of indemnification contained in the purchase
agreement, please see Exhibit 1.1 to the registration statement.
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.
A prospectus in electronic format is being made available on a web site
maintained by Wit SoundView's affiliate, Wit Capital Corporation. In addition,
all dealers purchasing shares from Wit SoundView in this offering have agreed to
make a prospectus in electronic format available on web sites maintained by each
of those dealers.
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.
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<PAGE> 94
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.
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 1,650,000
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.
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<PAGE> 95
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.
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.
90
<PAGE> 96
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, 1998 and 1999, and for the
period August 18, 1997, (date of incorporation) to December 31, 1997 and the
year ended December 31, 1998 and 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.
91
<PAGE> 97
TELOCITY DELAWARE, 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> 98
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Telocity Delaware, Inc.
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 Delaware, 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.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 28, 2000, except for Note 1
for which the date is March 27, 2000
F-2
<PAGE> 99
TELOCITY DELAWARE, 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> 100
TELOCITY DELAWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(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>
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> 101
TELOCITY DELAWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE AND PER 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> 102
TELOCITY DELAWARE, 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> 103
TELOCITY DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- FORMATION AND BUSINESS OF THE COMPANY:
Telocity Delaware, Inc. (the "Company") develops, markets, integrates and
delivers 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 January
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 which was consummated on March 27, 2000. The
reincorporation to Delaware will result in a change in par value, an increase in
authorized shares and a change in the Company's name from Telocity, Inc. to
Telocity Delaware, Inc. All share data, stock option plan information and
Company name 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> 104
TELOCITY DELAWARE, 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. Following the
launch of a co-developed interface, which is expected in June 2000, the Company
will recognize revenue from an advertising and revenue sharing agreement with
NBCi. Revenue will be recognized upon notification from NBCi, which will be
quarterly.
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.
F-8
<PAGE> 105
TELOCITY DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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> 106
TELOCITY DELAWARE, 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 56,912,594
== ========== ==========
</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> 107
TELOCITY DELAWARE, 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, respectively. Accumulated
amortization of assets under capital leases totaled
F-11
<PAGE> 108
TELOCITY DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$245,476 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 11.1% and are repayable
in installments between May 1998 and January 2002.
F-12
<PAGE> 109
TELOCITY DELAWARE, 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 each advance date. 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
non-cancelable operating leases and entered into certain non-cancelable service
agreements. These agreement have various expiration dates
F-13
<PAGE> 110
TELOCITY DELAWARE, 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> 111
TELOCITY DELAWARE, 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 than $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> 112
TELOCITY DELAWARE, 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 warrants, the fair value of which has been
estimated using the Black-Scholes pricing model at the date of grant, using the
term of the warrant and the following assumptions: Risk-free rate of 4.6% - 5.6%
and 5.8% - 6.2% in 1998 and 1999, respectively, no expected dividends and
volatility of 60%.
<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
F-16
<PAGE> 113
TELOCITY DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognized $6,875 as interest expense associated with these warrants for the
year ended December 31, 1999.
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
The Company has issued warrants, the fair value of which has been
estimated using the Black-Sholes pricing model at the date of grant, using the
term of the warrant and the following assumptions: Risk-free interest rate of
4.6% and 5.1% - 6.0% in 1998 and 1999, respectively, no expected dividends and
60% volatility.
<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 1999................... 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
F-17
<PAGE> 114
TELOCITY DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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> 115
TELOCITY DELAWARE, 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 estimated to be $40,062 and $1,096,805 for 1998
and 1999, respectively, using the Black-Scholes pricing model at the date of
grant, the expected term of the option and the following assumptions: Risk free
rate of 4.5%-4.6% and 4.6%-5.2% in 1998 and 1999, respectively, no expected
dividends and volatility of 60%. 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> 116
TELOCITY DELAWARE, 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.......................... (34.00)% (34.00)% (34.00)%
State taxes, net of federal tax benefit............... (5.84) (5.84) (5.84)
Permanent differences................................. -- 0.07 9.06
Other................................................. -- -- (1.91)
Valuation allowance................................... 39.84 39.77 32.69
------ ------ -------
-- -- --
====== ====== =======
</TABLE>
F-20
<PAGE> 117
TELOCITY DELAWARE, 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>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 3,305 $ 21,626
Other..................................................... 7 1,394
------- --------
3,312 23,020
Valuation allowance......................................... (3,236) (22,448)
------- --------
Net deferred tax asset...................................... 76 572
Deferred tax liabilities:
Depreciation.............................................. $ (76) $ (572)
------- --------
Net deferred tax assets..................................... -- --
======= ========
</TABLE>
At December 31, 1999, the Company had approximately $54,290,000 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 $19,212,000, respectively.
F-21
<PAGE> 118
TELOCITY DELAWARE, 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> 119
TELOCITY DELAWARE, 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 (UNAUDITED)
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> 120
TELOCITY DELAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock options
During 2000 the Company issued the following stock options:
- In January 2000, the Company issued options to purchase 864,080 shares
of common stock to employees and 117,500 to consultants and other
service providers with an exercise price of $9.00 per share. The Company
will record unearned stock based compensation for option grants to
employees of $3.5 million and this will be amortized over the vesting
period. The fair value of options issued to consultants and other
service providers estimated using the Black-Scholes pricing model at the
date of grant is $936,000 and will be recognized as earned.
- In February 2000, the Company issued options to purchase 58,000 shares
of common stock to employees and 338,360 to consultants and other
service providers with an exercise price of $12.00 per share. The
Company will record unearned stock based compensation for option grants
to employees of $174,000 and this will be amortized over the vesting
period. The fair value of options issued to consultants and other
service providers estimated using the Black-Scholes pricing model at the
date of grant is $2.9 million and will be recognized as earned.
Financing agreements
In February, 2000 in connection with a line of credit, the Company issued
warrants to acquire 11,667 shares of common stock to Comdisco, Inc. with an
exercise price of $9.00 per share. The fair value of the warrants of $137,000
has been estimated using the Black-Scholes pricing model at the date of grant,
using the terms of the warrant and the following assumptions: Risk free rate of
6%, no expected dividends and 60% volatility. The fair value of the warrants
will be amortized to interest expense over the term of the line of credit.
Sales agreement
In February 2000, the Company entered into a two year master broadband
services agreement with GE and its affiliates. Under the services agreement, the
Company will provide residential services to GE and its affiliates'
telecommuters, other employees at discounted rates, as well as non-employee
users introduced to the Company by GE. In addition, under this agreement GE will
help market and promote the Company services. The Company has issued GE warrants
for the contingent purchase of up to 200,000 shares of our common stock at an
exercise price of $12.00 per share based upon achievement of certain
customer-based milestones during the term of the agreement.
GE must meet these milestones within 30 months and the warrants must be
exercised within 12 months of reaching the associated milestone. The warrants
will be valued using the Black-Scholes pricing model and revalued at each
reporting date until the milestones are met. The fair value attributable to
these warrants will be recorded when it is probable that the milestone will be
met.
F-24
<PAGE> 121
BACK COVER:
NATIONWIDE MANAGED NETWORK
We currently provide service to customers in more than 50 metropolitan
statistical areas in the Southeast, Northeast, upper Midwest and mid-Atlantic
states. By the end of 2000, our network will grow to cover approximately 150
metropolitan statistical areas throughout the nation which we estimate will
allow us to provide service to at least 20% of all U.S. households.
[Image of light blue US network map]
[Image of satellite]
SATELLITE COMMUNICATIONS
By duplicating and storing frequently accessed content locally at metropolitan
hubs via satellite communications, we reduce redundant data traffic on the
network and speed data delivery to our customers.
[Image of three network operations personnel]
NETWORK OPERATIONS CENTER
We manage and monitor customer activity 24-hours-a-day, 7-days-a-week,
providing secure, reliable service.
DEDICATED CIRCUITS
Customer traffic is brought together through dedicated, secure circuits into our
local metropolitan hubs.
[Telocity logo]
METROPOLITAN HUBS
We aggregate customer traffic in metropolitan hubs, which are data distribution
centers in each metropolitan area. Our network directs each customer's data
request to the closest available server containing the requested content or
service.
MANAGED NETWORK
HIGH CAPACITY NETWORK
Between metropolitan hubs, customer traffic travels on a high capacity network,
which is interconnected to the Internet and to other network providers at
Internet exchange points.
[Image of mother and daughter at a computer]
PERSONAL COMPUTER
The network begins with the connection of a customer's personal computer, or
home network of computers, to our residential gateway.
THE RESIDENTIAL GATEWAY
[Image of Residential Gateway]
[Image of telephone prong and wall jack]
SERVICES TO THE HOME
We have the capability to configure our gateway easily to support many
high-speed local access technologies, including wireless, cable and satellite,
although we currently deliver our services and content using digital subscriber
line technology.
<PAGE> 122
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
11,000,000 SHARES
[TELOCITY LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH & CO.
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
WIT SOUNDVIEW
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 123
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.......................... 95,000
Printing and engraving costs................................ 325,000
Legal fees and expenses..................................... 365,000
Accounting fees and expenses................................ 425,000
Blue Sky fees and expenses.................................. 10,000
Transfer Agent and Registrar fees........................... 5,000
Miscellaneous expenses...................................... 24,900
----------
Total............................................. $1,300,000
==========
</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 February 29, 2000, the Registrant granted
stock options to purchase an aggregate of 15,243,878 shares of common
stock to employees and consultants with aggregate exercise prices
ranging from $0.05 to $12.00 per share pursuant to the Registrant's
stock option plan. As of February 29, 2000, 13,981,226 shares of
common stock have been issued upon exercise of options.
II-1
<PAGE> 124
(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> 125
(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.
(16) In February 2000, the Registrant issued to Comdisco, Inc. a warrant
to purchase 11,667 shares of common stock at an exercise price of
$9.00 per share in connection with a letter of credit.
(17) In February 2000, the Registrant issued to General Electric Company
warrants to purchase an aggregate of 200,000 shares of common stock
at an exercise price of $12.00 per share in connection with a Master
Broadband Services Agreement.
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, as
amended, to be in effect after the offering
3.2** Bylaws of Registrant
4.1 Specimen of stock certificates
5.1** Opinion of Gray Cary Ware & Freidenrich 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.
</TABLE>
II-3
<PAGE> 126
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
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
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** Secured Promissory Note between Registrant and Comdisco,
Inc. dated March 27, 1998
10.41** Secured Promissory Note between Registrant and Comdisco,
Inc. dated November 10, 1998
10.42** Secured Promissory Note between Registrant and Comdisco,
Inc. dated December 24, 1998
10.43** Subordinated Promissory Note between Registrant and
Comdisco, Inc. dated September 3, 1999
10.44** Subordinated Promissory Note between Registrant and
Comdisco, Inc. dated September 9, 1999
</TABLE>
II-4
<PAGE> 127
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
10.45** Subordinated Promissory Note between Registrant and
Comdisco, Inc. dated September 24, 1999
10.46** Subordinated Promissory Note between Registrant and
Comdisco, Inc. dated September 24, 1999
10.47** Subordinated Promissory Note between Registrant and
Comdisco, Inc. dated October 19, 1999
10.48** Subordinated Promissory Note between Registrant and MMC/GATX
Partnership No. 1 dated September 30, 1999
10.49** Master Broadband Network Services Agreement and Form of
Warrant Agreement between Registrant and General Electric
Company
10.50** Consent of Jupiter Communications
10.51** Consent of Forrester Research
10.52 Consent of International Data Corporation
21.1** Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.2** Consent of Counsel (see Exhibit 5.1)
23.3 Consent of Patton Boggs LLP
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.
(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.
II-5
<PAGE> 128
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-6
<PAGE> 129
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 27th day of March 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 Officer March 27, 2000
- --------------------------------------------- and Director (Principal
Patti Hart Executive Officer)
/s/ EDWARD HAYES Executive Vice President and Chief March 27, 2000
- --------------------------------------------- Financial Officer (Principal
Edward Hayes Financial and Accounting
Officer)
/s/ DAVID COWAN* Director March 27, 2000
- ---------------------------------------------
David Cowan
/s/ PETER OLSON* Executive Vice President, Chief March 27, 2000
- --------------------------------------------- Technical Officer and Director
Peter Olson
/s/ ANDREW RAPPAPORT* Director March 27, 2000
- ---------------------------------------------
Andrew Rappaport
/s/ EDMOND SANCTIS* Director March 27, 2000
- ---------------------------------------------
Edmond Sanctis
/s/ MICHAEL SOLOMON* Director March 27, 2000
- ---------------------------------------------
Michael Solomon
/s/ RANDALL STRAHAN* Director March 27, 2000
- ---------------------------------------------
Randall Strahan
*By: /s/ EDWARD HAYES
---------------------------------------
Edward Hayes
Attorney-in-Fact
</TABLE>
II-7
<PAGE> 130
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
1.1** Form of Underwriting Agreement
3.1** Restated Certificate of Incorporation of Registrant, as
amended, to be in effect after the offering
3.2** Bylaws of Registrant
4.1 Specimen of stock certificates
5.1** Opinion of Gray Cary Ware & Freidenrich 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> 131
<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** Secured Promissory Note between Registrant and Comdisco,
Inc. dated March 27, 1998
10.41** Secured Promissory Note between Registrant and Comdisco,
Inc. dated November 10, 1998
10.42** Secured Promissory Note between Registrant and Comdisco,
Inc. dated December 24, 1998
10.43** Subordinated Promissory Note between Registrant and
Comdisco, Inc. dated September 3, 1999
10.44** Subordinated Promissory Note between Registrant and
Comdisco, Inc. dated September 9, 1999
10.45** Subordinated Promissory Note between Registrant and
Comdisco, Inc. dated September 24, 1999
10.46** Subordinated Promissory Note between Registrant and
Comdisco, Inc. dated September 24, 1999
10.47** Subordinated Promissory Note between Registrant and
Comdisco, Inc. dated October 19, 1999
10.48** Subordinated Promissory Note between Registrant and MMC/GATX
Partnership No. 1 dated September 30, 1999
10.49** Master Broadband Network Services Agreement and Form of
Warrant Agreement between Registrant and General Electric
Company
10.50** Consent of Jupiter Communications
10.51** Consent of Forrester Research
10.52 Consent of International Data Corporation
21.1** Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.2** Consent of Counsel (see Exhibit 5.1)
23.3 Consent of Patton Boggs LLP
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 4.1
- ------ ------
NUMBER SHARES
- ------ ------
TELOCITY
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE IN NEW YORK, NY AND RIDGEFIELD PARK, NY
THIS CERTIFIES THAT:
IS THE RECORD HOLDER OF:
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, OF
TELOCITY, INC., TRANSFERABLE ON THE BOOKS OF THE CORPORATION IN PERSON OR BY
DULY AUTHORIZED ATTORNEY ON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED.
THIS CERTIFICATE SHALL NOT BE VALID UNTIL COUNTERSIGNED AND REGISTERED BY THE
TRANSFER AGENT AND REGISTRAR. WITNESS THE FACSIMILE SEAL OF THE CORPORATION AND
THE SIGNATURES OF ITS DULY AUTHORIZED OFFICERS.
DATED:
CHASEMELLON SHAREHOLDER SERVICES
<PAGE> 1
EXHIBIT 10.52
[INTERNATIONAL DATA CORPORATION LETTERHEAD]
March 23, 2000
Telocity, Inc.
10355 North De Anza Boulevard
Cupertino, California 95014
RE: CONCURRENCE WITH INFORMATION USED IN PROSPECTUS
To whom it may concern:
We make reference to your request for concurrence with statements made in
Telocity's prospectus regarding statistics obtained from our company. Telocity
has filed a Registration Statement with the Securities Exchange Commission
(the "SEC") to register its shares for an initial public offering. You have
sought our concurrence with statements made in your prospectus regarding
statistics obtained from our Company.
We hereby concur with the attached statements in Telocity's S-1 using
information obtained from our company.
/s/ [SIGNATURE ILLEGIBLE]
-------------------------
Name:
Title:
<PAGE> 2
Exhibit 10.52 (cont'd)
Page 35
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.
Page 36
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.
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.
<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, except for Note 1 for which the date is March
27, 2000 relating to the consolidated financial statements of Telocity Delaware,
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.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 27, 2000
<PAGE> 1
EXHIBIT 23.3
CONSENT OF COUNSEL
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement on Form S-1 and related Prospectus of Telocity, Inc.,
for the registration of 12,650,000 shares of its common stock.
/s/ PATTON BOGGS LLP
---------------------------
PATTON BOGGS LLP
Washington, D.C.
March 24, 2000
