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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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SCHEDULE 14D-9
Solicitation/Recommendation Statement under Section 14(d)(4)
of the Securities Exchange Act of 1934
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TELOCITY DELAWARE, INC.
(Name of Subject Company)
TELOCITY DELAWARE, INC.
(Names of Persons Filing Statement)
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Common Stock, Par Value $.001 Per Share
(Title of Class of Securities)
87971D103
(CUSIP Number of Class of Securities)
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Scott Martin
Executive Vice President, Chief Administrative Officer and Corporate Secretary
10355 North De Anza Boulevard
Cupertino, California 95014
(408) 863-6600
(Name, address, and telephone numbers of person authorized to
receive notices and communications on behalf of the persons filing statement)
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With copies to:
Diane Holt Frankle
Gray Cary Ware & Freidenrich, LLP
400 Hamilton Avenue
Palo Alto, California 94301
(650) 833-2000
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[_]Check the box if filing relates solely to preliminary communications made
before the commencement of a tender offer.
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Item 1. Subject Company Information.
The name of the subject company is Telocity Delaware, Inc., a Delaware
corporation ("Telocity" or the "Company"). The address of the principal
executive office of Telocity is 10355 North De Anza Boulevard, Cupertino,
California 95014, and its telephone number is (408) 863-6600.
The title of the class of equity securities to which this
Solicitation/Recommendation Statement on Schedule 14D-9 (the "Statement")
relates is the Company's common stock, par value $.001 per share (the
"Shares"). As of January 30, 2001, there were 81,356,495 Shares issued and
outstanding.
Item 2. Identity and Background of Filing Person.
The filing person of this Statement is the subject company, Telocity. The
business address and telephone number of Telocity are as set forth in Item 1
above.
This Statement relates to the tender offer being made by DIRECTV Broadband
Inc., a Delaware corporation ("Purchaser") and a wholly-owned subsidiary of
Hughes Electronics Corporation, a Delaware corporation ("Hughes"), to purchase
all outstanding Shares at a purchase price of $2.15 per share, net to the
seller in cash (less any required withholding taxes), without interest thereon.
The tender offer is being made on the terms and subject to the conditions set
forth in the Offer to Purchase, dated February 1, 2001, and in the related
Letter of Transmittal. The Offer to Purchase, together with the Letter of
Transmittal, as they may be amended or supplemented from time to time,
constitute the "Offer." Copies of the Offer to Purchase and the Letter of
Transmittal are filed as Exhibit (a)(1) and (a)(2) herewith, respectively, and
are incorporated herein by reference in their entirety. The Offer is described
in a Tender Offer Statement on Schedule TO, dated February 1, 2001, (the
"Schedule TO") which was filed with the Securities and Exchange Commission (the
"SEC") on February 1, 2001.
The Offer is being made pursuant to an Agreement and Plan of Merger dated as
of December 21, 2000 (the "Merger Agreement") by and among Hughes, the
Purchaser and Telocity. The Merger Agreement provides that, among other things,
as soon as practicable following consummation of the Offer and satisfaction of
other conditions set forth in the Merger Agreement, the Purchaser shall be
merged with and into Telocity (the "Merger") with Telocity continuing as the
surviving corporation (the "Surviving Corporation"). In the Merger, each
outstanding share of common stock (other than shares held by Telocity or Hughes
or any of their respective subsidiaries and by stockholders who perfect and do
not withdraw or otherwise lose their appraisal rights under Delaware law) will
be converted into the right to receive the merger consideration, which will be
$2.15 per share, net to the seller in cash, without interest (less any required
withholding taxes), or any higher price paid per share in the Offer. The Merger
Agreement was previously filed with the SEC on December 28, 2000 in connection
with the Company's Current Report on Form 8-K and is incorporated herein by
reference in its entirety.
Concurrently with the execution of the Merger Agreement, Hughes and the
Purchaser entered into a Tender and Stockholder Support Agreement (the "Tender
Agreement") with the stockholders set forth on Annex A thereto (each a
"Significant Stockholder") under which each Significant Stockholder has, among
other things, agreed to tender (and not withdraw) all of such Significant
Stockholder's Shares in the Offer upon the terms and conditions set forth
therein. The Tender Agreement was previously filed with the SEC on December 28,
2000 in connection with the Company's Current Report on Form 8-K and is
incorporated herein by reference in its entirety.
The Schedule TO states that the principal executive offices of Hughes are
located at 200 North Sepulveda Boulevard, El Segundo, California, 90245.
Item 3. Past Contacts, Transactions, Negotiations and Agreements.
Effects of The Merger on Certain Arrangements Between Telocity and its
Executive Officers, Directors and Affiliates
Except as described or referred to in this Item 3, there exists on the date
hereof no material agreement, arrangement or understanding and no actual or
potential conflict of interest between Telocity and its affiliates
1
and either (i) Telocity, its executive officers, directors or affiliates or
(ii) Hughes or the Purchaser or any of their respective executive officers,
directors or affiliates. For a complete description of the stock ownership of
Telocity's executive officers and directors, please see the Section entitled
"Security Ownership of Certain Beneficial Owners and Management" in Annex A
attached hereto.
Effect of Acceleration on Outstanding Options
Under the terms of the Merger Agreement, Hughes, the Purchaser and Telocity
agreed to confer and work together in good faith to agree upon mutually
acceptable employee benefit and compensation arrangements with respect to
Telocity's employees as soon as practicable after the Merger Agreement was
signed. After evaluating the terms of Telocity's stock option plans, on January
26, 2001, representatives of Hughes and Telocity's management discussed the
treatment of Telocity's unvested stock options and the Shares of stock obtained
upon the early exercise of options. During the discussion, Hughes advised
Telocity that it would neither assume nor substitute Telocity's outstanding
stock options and proposed that, as a result of the effect of such termination
on employee morale, all unvested stock options and Shares of stock obtained
upon the early exercise of options be accelerated under the plans. On January
28, 2001, after receiving advice from the Company's outside legal counsel and
independent accountants, Telocity's Compensation Committee executed a unanimous
written consent authorizing the amendment of option agreements evidencing all
outstanding options and governing all outstanding shares of stock obtained upon
early exercise of options to provide for full vesting of all unvested shares
and to provide a net exercise mechanism for all outstanding options. Such
acceleration is conditioned on the consummation of the Offer. As a result of
this acceleration, Shares and options to purchase Shares held by the following
directors and executive officers which otherwise would not vest upon a change
of control will vest contingent on the consummation of the Offer:
Number of
Unvested Exercise Value
Name Shares(1) Price(2) Realized
---- --------- -------- -------------
Patti Hart............................... 1,814,779 $ 0.35 $3,266,602.20
President, Chief Executive Officer and
Director 200,000 $ 5.56 --
Randall Strahan.......................... 25,000 $12.00 --
Director 41,667 $ 3.2812 --
20,000 $ 5.38 --
Ned Hayes................................ 231,459 $ 3.00 --
Executive Vice President and 18,750 $12.00 --
Chief Financial Officer 160,000 $ 5.5625 --
125,000 $ 3.28 --
Scott Martin............................. 168,437 $ 3.00 --
Executive Vice President, Chief
Administrative 25,000 $ 5.5625 --
Officer and Corporate Secretary
David Finley............................. 500,000 $ 4.50 --
Chief Operating Officer 125,000 $ 3.2812 --
Regina Wiedemann......................... 150,000 $ 1.50 $ 97,500.00
Senior Vice President, Business
Development 40,000 $ 5.5625 --
Jim Morrissey............................ 499,999 $ 0.75 $ 699,998.60
Executive Vice President and Chief
Marketing Officer
Thomas Obenhuber......................... 106,250 $ 9.00 --
Senior Vice President, Corporate
Development
Kevin Grundy............................. 106,250 $ 9.00 --
Senior Vice President, Engineering
Robert Sandor............................ 130,000 $ 4.9375 --
Senior Vice President, Operations
Vicki Foshee............................. 60,379 $ 3.00 --
Senior Vice President, Service Delivery
and Support 100,000 $ 5.50 --
David Wilson............................. 70,833 $ 9.00 --
Vice President, Financial Services 69,000 $ 5.375 --
83,333 $ 3.2812 --
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(1) Unvested Share totals are as of April 2, 2001, the initial expiration date
of the Offer.
(2) Despite the acceleration of these options, we expect that options with an
exercise price above $2.15 per Share (the price per Share to be paid by the
Purchaser in the Offer) will not be exercised by the foregoing executive
officers and directors because the exercise price is in excess of the offer
price. If unexercised, these options will terminate and be of no further
effect upon consummation of the Offer.
2
2000 Outside Directors Stock Plan
In January 2000, the Company's Board of Directors adopted the Company's 2000
Outside Directors Stock Plan (the "Directors Plan"). The adoption of the
Directors Plan was approved by the Company's stockholders in March 2000. The
Directors Plan establishes an initial automatic grant of an option to purchase
40,000 shares of the Company's common stock (the "Initial Options") to non-
employee directors. The Directors Plan also provides that upon the date of each
annual stockholders meeting, each non-employee director who has been a member
of the Company's Board of Directors for at least six months shall receive an
automatic grant of an option to purchase 10,000 shares of Common Stock (the
"Annual Options"). The Initial Options and the Annual Options each have an
exercise price equal to the fair market value of a share of the Company's
common stock on the date of grant. The Initial Options vest and become
exercisable in four equal annual installments. The Annual Options vest and
become exercisable in full on the day immediately preceding the date of the
first annual stockholders' meeting following the date of grant. Upon a change
of control, all outstanding Initial Options and Annual Options become fully
vested and exercisable. For purposes of the Directors Plan, a "change of
control" is defined as having occurred upon a transaction or series of related
transactions wherein the stockholders of the Company do not retain immediately
after the transaction direct or indirect beneficial ownership of more than
fifty percent of the total combined voting power of the outstanding voting
stock of the Company. Because the consummation of the Offer constitutes a
change of control under the Directors Plan, all of the outstanding Initial
Options will become fully vested and exercisable. As a result, Shares and
options to purchase Shares issued under the Directors Plan and held by the
following directors will vest upon consummation of the Offer:
Number of
Unvested Exercise Value
Name Shares(1) Price Realized
---- --------- -------- ---------
Christie Hefner.............................. 40,000 5.50 -- (2)
Director
Elisabeth Sami............................... 40,000 2.00 $6,000.00
Director
James Scheinman.............................. 40,000 2.00 $6,000.00
Director
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(1) Unvested Share totals are as of April 2, 2001, the initial expiration date
of the Offer.
(2) Despite the acceleration of these options, we expect that options with an
exercise price above $2.15 per Share (the price per Share to be paid by the
Purchaser in the Offer) will not be exercised by the foregoing directors
because the exercise price is in excess of the offer price. If unexercised,
these options will terminate and be of no further effect upon consummation
of the Offer.
Employment Agreements with Executive Officers
The Company has entered into employment agreements with certain of its
executive officers which will be affected by the merger. Each of these
employment agreements is described below. For purposes of these employment
agreements, a "change of control" or "ownership change event" is defined as
having occurred upon, among other things, the direct or indirect sale or
exchange in a single or series of related transactions by the stockholders of
the Company of more than fifty percent of the voting stock of the Company. The
consummation of the Offer constitutes a change of control under these
agreements. Each of these employment agreements provides for acceleration of
unvested Shares and options to purchase Shares held by the employee under
certain circumstances following a change of control; however, these provisions
are not discussed below, because as a result of the action of the Compensation
Committee on January 28, 2001, all outstanding unvested Shares and options to
purchase Shares were accelerated. For a description of the terms of the
acceleration, see the section entitled "Effect of Acceleration on Outstanding
Options."
3
Whenever the term "for cause" or "good reason" is used below, it means "for
cause" or "good reason," respectively, as defined in the individual's
employment agreement, each of which is filed as an exhibit hereto and is
incorporated by reference herein.
On May 5, 1999, the Company entered into an at will employment agreement
with Patti Hart, President and Chief Executive Officer of the Company, which
provides that if Ms. Hart is terminated other than for cause or resigns for
good reason sixty days prior to or within twelve months following an ownership
change event, Ms. Hart is entitled to (i) a lump sum severance payment equal to
twelve months salary, (ii) a lump sum payment of her then current target annual
performance bonus and (iii) continued benefits for twelve months.
On December 3, 1999, the Company entered into an at will employment
agreement with Edward Hayes, Executive Vice President and Chief Financial
Officer of the Company, which was subsequently amended on November 29, 2000 and
December 17, 2000. As amended the employment agreement provides that if
Mr. Hayes is terminated without cause or he resigns for good reason, the
Company will pay him a lump sum severance payment equal to 12 months of salary
and target incentive bonus. Mr. Hayes' agreement also provides that in
consideration for devoting his full energies to the Company and foregoing the
consideration of other opportunities, provided he is not terminated for cause,
resigns other than for good reason or seeks alternate employment prior to such
date, he will be entitled to a retention bonus of $750,000 on the earlier of
(i) the date he is terminated by the Company without cause, (ii) the date he
resigns for good reason or (iii) April 1, 2001.
On September 14, 1999, the Company entered into an at will employment
agreement with Jim Morrissey, Executive Vice President and Chief Marketing
Officer of the Company, pursuant to which the Company provides Mr. Morrissey a
housing allowance of $20,000 a month for twenty-four (24) months which
commenced on October 1, 1999. Mr. Morrissey must repay all housing allowance
payments on October 1, 2001 unless on such date the Shares are not publicly
traded or trade at a price of less than $20 per Share. If the Shares are not
publicly traded on October 1, 2001, Mr. Morrissey's agreement requires that the
Company forgive the full amount of the housing allowance loaned to Mr.
Morrissey and pay him an additional amount of cash to cover the tax effect of
such loan forgiveness. Upon consummation of the Merger, Purchaser will own all
outstanding Shares and such Shares will cease to be publicly traded.
On September 13, 1999, the Company entered into an at will employment
agreement with Regina Wiedemann, Senior Vice President, Business Development of
the Company, which provides that if, following a change of control, the Company
terminates Ms. Wiedemann other than for cause or she resigns for good reason,
she is entitled to six months continued salary and benefits.
On December 8, 1999, the Company entered into an employment agreement with
Scott Martin, Executive Vice President, Chief Administrative Officer and
Corporate Secretary of the Company, which provides that if Mr. Martin is
terminated without cause, or he resigns for good reason, within one month prior
to or within one year after a change of control, the Company will continue to
pay Mr. Martin his base salary for six months.
On December 10, 1999, the Company entered into an employment agreement with
Vicki Foshee, Senior Vice President, Service Delivery and Support of the
Company, which was subsequently amended on October 10, 2000. As amended the
employment agreement provides that in the event Ms. Foshee is terminated
without cause or resigns for good reason within one year after a change of
control, she is entitled to six months continued salary and benefits.
On July 14, 2000, the Company entered into an at will employment agreement
with David Finley, Chief Operating Officer of the Company, which was
subsequently amended on November 29, 2000 and December 17, 2000. As amended the
employment agreement provides that if Mr. Finley is terminated without cause or
he resigns for good reason within one year of a change of control, he will
receive (i) a lump sum payment equal to 50% of his annual salary, (ii) 12 equal
monthly payments thereafter of the remaining 50% of his annual salary, (iii) a
lump sum payment of his then current annual target bonus and (iv) reimbursement
for
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the cost of continuing his medical coverage for himself and any eligible
dependents under COBRA for one year following the date of his termination or
resignation. Mr. Finley's agreement also provides that in consideration for
devoting his full energies to the Company and foregoing the consideration of
other market opportunities and provided he is not terminated for cause, resigns
other than for good reason or seeks alternate employment prior to such date, he
will be entitled to a retention bonus of $750,000 on the earlier of (i) the
date he is terminated by the Company without cause, (ii) the date he resigns
for good reason or (iii) April 1, 2001.
On August 16, 2000, the Company entered into an employment agreement with
Robert Sandor, Senior Vice President of Operations of the Company, which
provides that if he is terminated without cause or resigns for good reason
within one year after a change of control, he is entitled to six months
continued salary and benefits.
Founder Stock Purchase and Repurchase Agreements
On December 23, 1997, the Company entered into Founder Stock Purchase
Agreements with Peter Olson, Michael Solomon and Thomas Obenhuber (the
"December 23, 1997 Agreements"), each of which is filed as an exhibit hereto
and incorporated herein by reference. Pursuant to the December 23, 1997
Agreements, Messrs. Olson, Solomon and Obenhuber purchased 4,662,000, 1,554,000
and 480,000 shares, respectively, at a price of $0.0005 per share. The shares
are subject to the Company's right of repurchase which lapsed 11/32 on October
3, 1997, for Messrs. Olson and Solomon, and 1/8 on February 3, 1998, for Mr.
Obenhuber. The remaining shares vest at a rate of 1/42 per month. The Company's
option to repurchase the unvested Shares terminates upon a change of control,
as defined and set forth in the December 23, 1997 Agreements.
In order to reallocate its founders' stock, the Company entered into
agreements to repurchase certain founder's shares. On June 1, 1998, the Company
entered into Founder Stock Repurchase Agreements with Mr. Olson and Mr. Solomon
to repurchase 2,662,000 shares of the Company's common stock from Mr. Olson at
a price of $0.0005 per share, and 154,000 shares of the Company's common stock
from Mr. Solomon at a price of $0.0005 per share. On June 10, 1998, the Company
entered into supplemental Founder Stock Purchase Agreements (the "June 10, 1998
Agreements") with Mr. Obenhuber and Kevin Grundy pursuant to which
Mr. Obenhuber and Mr. Grundy purchased 1,120,000 and 1,600,000 shares,
respectively, at a price of $0.005 per share. The shares purchased pursuant to
the June 10, 1998 Agreements are subject to the Company's right of repurchase
which lapsed 7/48 on December 3, 1997 and 1/42 per month thereafter. The
Company's option to repurchase the unvested shares terminates upon the
occurrence of certain events within one year of a change of control, as defined
in the June 10, 1998 Agreements.
With respect to the June 10, 1998 Agreements, the Company's right to
repurchase unvested options terminates if within one year of the change of
control (as defined in the December 23, 1997 Agreements): (i) there is a
decrease in the employee's base salary, benefits and/or bonus compensation,
(ii) there is a material breach by the Company of the June 10, 1998 Agreement
or the applicable founder's employment agreement or (iii) the Company fails to
obtain the assumption of the June 10, 1998 Agreement or the applicable
founder's employment agreement by the Company's successor or assign.
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With respect to the December 23, 1997 Agreements, a change of control shall
be deemed to have occurred and the Company's right to repurchase unvested
options terminates, upon, among other things, the direct or indirect sale or
exchange by the stockholders of the Company of all or substantially all of the
stock of the Company where the stockholders of the Company before such sale or
exchange do not retain, directly or indirectly, at least a majority of the
beneficial interest in the voting stock of the Company. The closing of the
Offer constitutes a change of control under the December 23, 1997 Agreements.
As a result, upon the consummation of the Offer, Shares held by the following
founders will vest:
Number of
Unvested
Shares Exercise Value
Name (1) Price Realized
- ---- --------- -------- -----------
Michael Solomon................................. 24,281 $0.0005 $ 52,192.01
Director
Peter Olson..................................... 57,143 $0.0005 $122,828.88
Executive Vice President,
Chief Technical Officer and Director
Thomas Obenhuber................................ 50,000 $0.0005 $107,475.00
Senior Vice President, 46,647 $ 0.005 $100,057.81
Corporate Development
Kevin Grundy.................................... 66,667 $ 0.005 $143,000.72
Senior Vice President,
Engineering
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(1) Unvested Shares as of April 2, 2001, the initial expiration date of the
Offer.
Rescission Agreements
Prior to the Company's initial public offering, a provision in the Company's
stock option plans permitted employees to exercise their stock options by
issuing the Company a full recourse promissory note, secured by the stock
obtained upon exercise of the option. This provision was designed to allow
employees to obtain shares when the exercise price equalled the then current
fair market value which provided these employees a potential personal income
tax benefit. From adoption of the Company's first stock option plan until the
date of the Company's initial public offering, most of the Company's employees
who received stock options exercised them through the issuance of promissory
notes. Due to the decline in share price of the Company's stock in recent
months, in December 2000 the principal amounts of many outstanding promissory
notes were greater than the value of the respective shares of stock securing
such notes (the "Underwater Notes"). As a result of the large number of
employees with outstanding Underwater Notes, many with significant outstanding
principal amounts, employee morale was threatened. In addition, the Company had
received several threats of litigation by current and former employees
challenging the Underwater Notes.
Under the Merger Agreement, it is a condition to the closing of the Offer
that prior to December 31, 2000 the Company enter into rescission agreements
with, and obtain releases from, holders of at least 80% of the aggregate
outstanding principal amount of all Underwater Notes issued during 2000 (the
"2000 Promissory Notes"). In addition, the Merger Agreement requires that the
Company enter into rescission agreements and releases with all other persons
holding Underwater Notes prior to the closing of the Merger. On December 20,
2000, in connection with, and conditioned on, the approval of the Merger
Agreement, after considering the reasons for the transaction with Hughes, and
determining that the rescission complied with the requirements of Delaware law,
the Board of Directors of the Company approved the rescission of the option
exercises and transactions in which Underwater Notes were issued.
On December 21, 2000, the date of the Merger Agreement, the aggregate
outstanding principal amount of the 2000 Promissory Notes was $12,015,540.
Between the date the Merger Agreement was executed and
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December 31, 2000, the Company entered into Option Exercise and Note Rescission
Agreements (the "Rescission Agreements") and Mutual Releases (the "Releases"),
forms of which are filed as exhibits hereto and incorporated by reference, with
67 persons representing $11,971,890 in aggregate outstanding principal amount
under the 2000 Promissory Notes (or 99.6% of the total aggregate outstanding
principal amount under the 2000 Promissory Notes). Accordingly, the condition
to the closing of the Offer relating to the rescission of the Underwater Notes
and associated option exercises has been satisfied. The net result of the
rescission is that employees hold options at the original exercise price. No
cash exchanged hands in connection with the original option exercise or at the
rescission.
Each Rescission Agreement provides for the rescission of the note maker's
option exercise and promissory note, the cancellation and re-conveyance of the
promissory note to such note maker (including cancellation of the principal
amount and all accrued interest on such promissory notes) and the tender of the
shares issued upon exercise of such note maker's option to the Company. The
Release provides that the Company and the note maker each release and discharge
any and all claims they may have against each other. As of January 31, 2001,
the Company had entered into Rescission Agreements and Releases with 76 people
representing 100% of the total $12,804,540 in outstanding principal amount
under the Underwater Notes.
The following director and executive officers of the Company entered into a
Rescission Agreement and Release with the Company providing for the rescission
of his or her option exercise and promissory note, the cancellation and re-
conveyance of his or her promissory note and the tender to the Company of the
shares issued upon exercise of his or her option:
Option Shares Principal Amount of
Name & Title Exercise Price Rescinded Note Rescinded
------------ -------------- --------- -------------------
Randall Strahan................ $12.00 50,000 $ 600,000
Director
Kevin Grundy................... $ 9.00 150,000 $1,350,000
Senior Vice President,
Engineering
Thomas Obenhuber............... $ 9.00 150,000 $1,350,000
Senior Vice President,
Corporate Development
Edward Hayes................... $ 3.00 370,000 $1,110,000
Executive Vice President and
Chief Financial Officer
David Wilson................... $ 9.00 100,000 $ 900,000
Vice President, Financial
Services
Scott Martin................... $ 3.00 245,000 $ 735,000
Executive Vice President,
Chief Administrative Officer
and
Corporate Secretary
Vicki Foshee................... $ 3.00 85,000 $ 255,000
Senior Vice President,
Service Delivery and Support
Indemnification; Directors and Officers' Insurance
The Merger Agreement provides that the surviving corporation in the merger
(the "Surviving Corporation") shall keep in effect provisions in its bylaws for
a period of not less than six years from the effective time of the Merger (the
"Effective Time") that provide for exculpation of director and officer
liability and indemnification (and advancement of expenses related thereto) of
the past and present officers and directors of the Company and its subsidiaries
to the fullest extent permitted by the Delaware General Corporation Law (the
"DGCL"). Such provisions shall not be amended except as required by applicable
law or except to make changes permitted by law that would enhance the rights of
past or present officers and directors to indemnification or advancement of
expenses, and shall observe the indemnification agreements existing in favor of
past and present officers and directors of the Company and its subsidiaries.
7
The Merger Agreement provides that the Surviving Corporation shall maintain
in effect the Company's and its subsidiaries' current directors' and officers'
liability insurance policies covering those persons who are currently covered
by such policies with respect to actions or omissions occurring prior to the
Effective Time for a period of six years from the Effective Time; provided,
however, that in no event shall the Surviving Corporation be required to expend
in any one year an amount in excess of 150% of the annual premiums currently
paid by the Company and its subsidiaries for such insurance coverage, and,
provided further, that if the annual premiums of such insurance coverage exceed
such amount, the Surviving Corporation shall be obligated to obtain policies
with the greatest coverage available for a cost not exceeding such amount.
The Merger Agreement also provides that the Company shall indemnify and hold
harmless, to the fullest extent permitted under applicable law, each person who
is, or has been at any time prior to the date of the Merger Agreement or who
becomes prior to the Effective Time, an officer, director or similar person of
the Company or any subsidiary of the Company, against all losses, claims,
damages, liabilities, costs or expenses (including attorneys' fees), judgments,
fines, penalties and amounts paid in settlement in connection with any claims,
actions, suits, proceedings, arbitrations, investigations or audits arising
before or after the Effective Time out of or pertaining to acts or omissions,
or alleged acts or omissions, by them in their capacities as such, which acts
or omissions occurred prior to the Effective Time. Without limiting the
foregoing, the Surviving Corporation shall periodically advance expenses as
incurred with respect to the foregoing to the fullest extent permitted under
applicable law provided that the person to whom the expenses are advanced
provides an undertaking to repay such advance if it is ultimately determined
that such person is not entitled to indemnification.
Amendment Agreement with NBCi
On December 21, 2000, Telocity and NBC Internet, Inc. ("NBCi") entered into
an Amendment Agreement (the "Amendment") pursuant to which the parties agreed
to terminate the NBCi/Telocity Operating Agreement dated December 10, 1999 (the
"Operating Agreement") and concurrently amended the Advertising Agreement dated
December 14, 1999 by and between Telocity and NBCi (the "Advertising
Agreement"). The Amendment provides, among other things, that upon the
consummation of the Merger, the Operating Agreement will terminate, provided
that, however, certain provisions of the Operating Agreement will survive. The
Advertising Agreement was amended to include an additional $3.6 million in
online, television and radio advertising through December 31, 2002. The
Amendment also requires that Telocity and NBCi conduct good faith discussions
regarding the possibility of an ongoing commercial relationship.
Waiver by NBCi of Right of First Negotiation
On December 14, 2000, Telocity and NBCi entered into a letter agreement
whereby NBCi agreed to waive its right of first negotiation as set forth in the
Second Amended and Restated Investor Rights Agreement dated December 13, 1999
by and among Telocity and certain stockholders of Telocity (the "Rights
Agreement"). The waiver is conditioned upon the execution of the Merger
Agreement and the closing of the Merger on or before June 1, 2001 at a per
share price of not less than $2.00 per share.
NBC Amendment and Waiver
On December 20, 2000, Telocity and National Broadcasting Company ("NBC")
entered into an amendment to the Advertising Agreement dated December 13, 1999
by and among Telocity and certain of its stockholders including NBC (the "NBC
Amendment"). The NBC Amendment amends the Advertising Agreement to include an
additional advertising expenditure of $3.0 million by Telocity through July
2002. The NBC Amendment further provides that the advertising spots provided by
NBC between the fourth quarter of 2000 and June 14, 2002 will be broadcast
according to a certain schedule. The NBC Amendment is executed by DIRECTV,
Inc., a subsidiary of Hughes, as a third party beneficiary. In addition, the
NBC Amendment also waives NBC's right of first negotiation as set forth in the
Rights Agreement.
8
Item 4. The Solicitation or Recommendation.
Since its inception in 1997, Telocity's customer acquisition costs have
comprised a significant portion of its operating costs, including advertising,
order fulfillment, installation, customer care and the cost of its proprietary
residential gateway. Because of the significant up-front investment in each
customer, a long business cycle elapses from the time of initiation of service
until Telocity begins making a profit on that customer. As a result, given the
fact that it only began shipping a significant number of residential gateways
in early 2000, Telocity has not yet achieved profitability and requires
additional financing in order to fund its operations.
In May 2000, in light of significant operating losses and declining cash
balances despite having met its operational goals, Telocity's management
advised its Board of Directors that it needed to increase its capital base.
Telocity considered issuing additional equity or other securities in the
private and/or public market or selling all or part of the company or its
assets, including the sale of its residential gateway business division.
At the direction of the Board with these considerations in mind, from June
2000 to December 2000 Telocity's management, with the assistance of Donaldson,
Lufkin & Jenrette Securities Corporation (subsequently acquired by an affiliate
of Credit Suisse First Boston), explored various strategic alternatives
including contacting many potential acquirors. During this period, Telocity
contacted DIRECTV Global Digital Media, Inc. ("DGDM"), a wholly owned
subsidiary of Hughes, and other potential investors it believed to be capable
of and potentially interested in a purchase of, or significant investment in,
Telocity.
At the same time, Telocity retained Broadview International, LLC to explore
the possible sale of its residential gateway business division. From October
2000 to December 2000, Broadview International, LLC approached various entities
that it and Telocity had identified as potential acquirors of the gateway
division and held meetings with several interested companies. Telocity received
several preliminary verbal expressions of interest regarding an acquisition of
the gateway business division. In each case, the proposed aggregate purchase
price was far below Telocity's desired price, and the highest preliminary offer
provided only enough cash, based on management's estimates, to support
Telocity's ongoing cash requirements for approximately three or four additional
months without access to additional funding. In addition, all of these offers
required Telocity to enter into supply contracts with the purchaser to buy
gateways at prices that guaranteed the buyer a profit on each unit, and, in
management's judgment, would require the negotiation of complex terms and posed
a significant risk of nonconsummation.
On June 29, 2000, members of DGDM management participated in a telephone
conference with members of Telocity's management during which Telocity's
management presented an overview of Telocity's corporate structure and business
operations. In July, 2000, members of DGDM management called Telocity's
management to discuss potential business opportunities.
From June 29, 2000 to July 18, 2000, the parties continued discussions.
On July 18, 2000, members of DGDM management participated in a telephone
conference with members of Telocity's management during which Telocity's
management presented an overview of Telocity's technological capabilities.
On July 28, 2000, DGDM and Telocity entered into a confidentiality letter
agreement.
On July 31, 2000, members of management of DGDM and Hughes met with
Telocity's management at Telocity's headquarters in Cupertino, California. The
Telocity representatives presented a general overview of the management and
operations of Telocity. The representatives from DGDM and Hughes presented a
general overview of DGDM's business and its plans for future growth. The
parties engaged in general discussions about potential business opportunities
between the two companies.
On September 22, 2000, DGDM informed Telocity of DGDM's interest in further
discussions about strategic business opportunities between the companies.
9
On October 6, 2000, at Telocity's request, members of DGDM management met
with Telocity's management and Credit Suisse First Boston at Telocity's
headquarters regarding a strategic relationship with Telocity.
On October 12, 2000, members of DGDM's management met with members of
Telocity's management at Telocity's headquarters to review Telocity's financial
and business models.
From October 17, 2000 to October 31, 2000, members of DGDM's management
continued discussions with members of Telocity's management regarding a
possible transaction and alternative structures for the transaction.
At a meeting of the Board on November 2, 2000, Patti Hart, Telocity's
President and Chief Executive Officer, and Ned Hayes, Telocity's Chief
Financial Officer, briefed the Board on the progress on each of the
transactions Telocity had been pursuing, including a possible transaction with
DGDM. Ms. Hart and Mr. Hayes discussed with the Board the risks and benefits of
each transaction and indicated that at that time, the potential transaction
with DGDM and its parent, Hughes, was continuing to progress and was emerging
as the most viable option.
From November 2, 2000 to November 3, 2000, and on November 7, 2000, members
of Telocity's, DGDM's and Hughes' respective management and representatives of
Chase H&Q, a division of Chase Securities Inc., Hughes' financial advisor, met
in El Segundo, California to continue reviewing Telocity's business and
financial models.
At a meeting of the Board held on November 15, 2000, representatives of
Broadview International, LLC updated the Board as to the progress of the
potential sale of the gateway business division and representatives of Credit
Suisse First Boston reviewed the progress on a possible transaction with DGDM,
as well as with other companies. Ms. Hart reviewed with the Board several cash
conservation scenarios prepared by management as well as employee retention and
morale issues.
On November 17, 2000, members of DGDM's management called Telocity's
management to update Telocity on DGDM's and Hughes' interest in engaging in a
transaction with Telocity.
On November 20, 2000, representatives of an outside consultant hired by
Hughes met with Mr. Obenhuber, Mr. Hayes and various Telocity employees at
Telocity's offices and conducted technical due diligence.
On November 21, 2000, the Executive Committee of the Board of Directors of
Hughes and members of DGDM's management evaluated and discussed the potential
for acquiring or entering into a strategic relationship with Telocity.
On November 22, 2000, DGDM management submitted a letter of interest to
Telocity (the "November 22 Letter"). Subject to several conditions, Hughes
and/or DGDM made a non-binding proposal to acquire all of the fully diluted
outstanding shares of Telocity pursuant to a definitive agreement to be
negotiated during an exclusive period between the parties.
At a special meeting of the Board held on November 27, 2000, the Board
reviewed Telocity's financing and acquisition alternatives, including the
proposal of Hughes and DGDM in the November 22 Letter. Outside legal counsel to
Telocity advised the Board as to its fiduciary duties in connection with a
proposal for a business combination. In addition, Telocity's management
presented the preliminary verbal expressions of interest for an acquisition of
the gateway division. The Board discussed the fact that the amount of cash that
might result from the sale of the gateway business division under these
proposals, based on management's estimates, would extend Telocity's available
cash by only approximately three to four months. The Board then discussed the
terms of the preliminary acquisition proposal contained in the November 22
Letter. The Board noted that there were no other parties interested in
discussing an acquisition of the entire company at that time.
10
The Board deferred a decision until reviewing the final proposed written
response to Hughes and the views of Telocity financial advisors regarding such
proposal.
At a special meeting of the Board held on November 28, 2000, the Board
reviewed with Telocity's management, legal advisors and Credit Suisse First
Boston a proposed counter-proposal by Telocity to the November 22 Letter.
Credit Suisse First Boston reviewed with the Board the results of its
discussions with potential interested acquirers and strategic partners and
confirmed that no other parties had expressed interest in acquisition
discussions at that time. The Board approved the counter-proposal, but directed
management to continue discussions relating to the possible sale of the gateway
division as an alternative. Following the meeting, Telocity sent its counter
proposal to Hughes.
In the morning of November 29, 2000, the Board of Directors of Hughes met
and discussed the potential acquisition of Telocity. The Board of Directors of
Hughes discussed the merits of the proposed transaction and the financial
analysis thereof, and delegated authority to the Executive Committee of the
Board of Directors of Hughes to authorize entering into the merger agreement
and associated agreements to purchase all of the fully diluted outstanding
shares of Telocity on terms and conditions approved by the Executive Committee,
subject to a limitation on the aggregate consideration to be paid.
On November 29, 2000, representatives of Hughes and DGDM contacted Patti
Hart, to respond to Telocity's counter-proposal and to proposed revised terms.
At a special meeting of the Board held on November 29, 2000, the Board reviewed
the response from Hughes and DGDM to Telocity's counter-proposal with
management, Credit Suisse First Boston and its legal advisors. Credit Suisse
First Boston confirmed that it had not received any indication of interest from
any other potential acquirer. After discussion, the Board authorized management
to continue negotiations with Hughes and DGDM for the acquisition of Telocity.
Outside legal counsel to Telocity advised the Board as to the next steps in the
proposed transaction, and the Board's continuing fiduciary duties. The Board
also directed management to seek waivers from NBC and NBCi of their respective
rights of first negotiation under the Rights Agreement.
On November 30, 2000, Ms. Hart advised representatives of DGDM of the
Board's authorization to continue negotiations with Hughes. From November 30,
2000 to December 4, 2000, DGDM, Hughes and Telocity negotiated the terms of a
letter agreement with respect to confidentiality and exclusivity (the
"Confidentiality and Exclusivity Agreement"), including a "no shop" covenant.
On December 4, 2000, Hughes and Telocity entered into the Confidentiality and
Exclusivity Agreement, with carve outs permitting the continuation of
discussions for the possible sale of the gateway division, provided no
agreement was entered into during the exclusivity period, and discussions with
NBC and NBCi regarding their rights of first negotiation.
On November 30, 2000, Mr. Martin sent a letter to NBC and NBCi seeking a
waiver of their respective rights of first negotiation with respect to an
acquisition of Telocity under the Rights Agreement. In addition, management
commenced discussions with representatives of NBC and NBCi for the termination
of the Operating Agreement and the modification of advertising agreements with
each of NBC and NBCi. Between November 30, 2000 and December 21, 2000,
representatives of Telocity, NBC and NBCi negotiated the terms of these
agreements.
From December 6, 2000 to December 18, 2000, representatives from Hughes and
DGDM visited Telocity headquarters and met with Telocity representatives, as
well as representatives from their respective financial advisors, and continued
their due diligence review.
On December 8, 2000, members of DGDM and Telocity management met with
representatives of NBCi at the offices of NBCi in San Francisco, California to
discuss the restructuring of the Telocity/NBCi relationship and the waivers
from NBC and NBCi of their respective rights of first negotiation pursuant to
the Rights Agreement, dated as of December 13, 1999, by and among Telocity and
certain of its stockholders. The representatives of NBCi agreed to respond by
December 12, 2000.
11
On December 12, 2000, Hughes' legal counsel provided Telocity's legal
counsel with a draft of the Merger Agreement. Also on December 12, 2000,
members of DGDM and Telocity management met with representatives of NBCi at
Telocity's headquarters to follow up on the discussions that took place on
December 8, 2000. The parties began to negotiate the termination of the
Operating Agreement, and the waivers of the rights of first negotiation.
On December 13, 2000, the Board met at a regularly scheduled meeting. Ms.
Hart reviewed the status of Telocity's ongoing negotiations with Hughes and
DGDM. Telocity's outside legal counsel reviewed the directors' fiduciary duties
in considering an acquisition proposal and reviewed the terms of the initial
draft of the Merger Agreement, including the two-step structure of the
transaction, the conditions to the closing of the Offer and the Merger,
termination provisions, and triggering events for break-up fees, outlined a
negotiating strategy, and responded to questions from the directors. The Board
received a status update on negotiations with NBC and NBCi regarding their
waivers and the termination of the Operating Agreement and modification of the
related advertising agreements.
From December 12, 2000 to December 19, 2000, representatives of Telocity
continued to negotiate with representatives of Hughes and DGDM regarding the
terms of the transaction, including price.
At a special meeting of the Board held on December 19, 2000, the Board
reviewed with its advisors the status of the negotiations with Hughes and DGDM.
Telocity's outside legal counsel reviewed the terms of the revised draft of the
Merger Agreement with the Board, including a new condition that certain option
exercises and related promissory notes be rescinded. The Board directed
management to continue negotiations to secure interim financing from Hughes and
DGDM, and to negotiate revisions to the Merger Agreement and revisions to
certain related agreements. Credit Suisse First Boston then reviewed with the
Board financial aspects of the proposed acquisition and responded to questions
from the Board.
From December 20, 2000 through December 21, 2000, management of Hughes and
DGDM and their legal and financial advisors met with Telocity's management and
legal and financial advisors in Palo Alto, California to negotiate final
business terms for the acquisition, including the terms of the proposed Tender
Agreement with the Significant Stockholders and the interim financing.
On December 20, 2000, the Executive Committee of the Board of Directors of
Hughes unanimously approved the proposed Merger Agreement, the Offer, and the
proposed Tender Agreement.
At a meeting of the Board on December 20, 2000, Telocity's outside legal
counsel reviewed the results of negotiations of the terms of the proposed
Merger Agreement and Tender Agreement and reviewed a proposal for interim
financing. The Board then authorized Telocity's management and legal and
financial advisors to continue to negotiate the terms of interim financing and
the Merger Agreement and Tender Agreement. The Board also reviewed with its
legal advisor the legal requirements for the rescission of certain option
exercises and related promissory notes as set forth in the draft Merger
Agreement.
A second meeting of the Board was held later in the evening on December 20,
2000 to review the status of the negotiations between Telocity, DGDM and
Hughes. The Board reviewed with Telocity's management and legal and financial
advisors the results of negotiations on the terms of interim financing and the
Merger Agreement and Tender Agreement. The Board reviewed with its legal
advisor the no shop covenant, termination rights and fees, the terms of the
Tender Agreement and the other terms and conditions of the transaction and
considered with its outside legal counsel the effect of these provisions on a
competing transaction, concluding that the provisions, separately and as a
whole, were not preclusive. The Board also considered the condition in the
Merger Agreement requiring that Telocity rescind certain option exercises and
related promissory notes prior to the closing of the Merger and the accounting
implications thereof. Credit Suisse First Boston reviewed with the Board its
financial analysis of the $2.15 per Share cash consideration payable in the
Offer and the Merger and delivered to the Board its oral opinion (which opinion
was subsequently confirmed by delivery of a written opinion dated December 21,
2000) to the effect that, as of the
12
date of the opinion and based on and subject to the matters stated in such
opinion, the $2.15 per Share cash consideration to be received in the Offer and
the Merger, taken together, by the holders of Shares (other than Hughes and its
affiliates) was fair, from a financial point of view, to such holders. After
full discussions, the Board unanimously approved the Merger Agreement, the
Offer and the Merger, concluding that the Offer and Merger were fair to and in
the best interests of the Telocity stockholders. The Board also approved the
termination of the Operating Agreement and the amendment of the NBC and the
NBCi advertising agreements, subject to receipt of a waiver from NBC and NBCi
of their rights of first negotiation. In connection with, and conditioned on,
the approval of the Merger Agreement, after considering the reasons for the
transaction with Hughes, and determining that the rescission complied with the
requirements of Delaware law, the Board approved the rescission of the option
exercises and related promissory notes.
On December 21, 2000, NBC and NBCi delivered their respective waivers of
their rights of first negotiation and agreed to amend their respective
advertising agreements. NBCi also agreed to terminate the Operating Agreement.
Also on December 21, 2000, the Significant Stockholders, Hughes and the
Purchaser entered into the Tender Agreement and Hughes, the Purchaser and
Telocity executed the Merger Agreement. The Merger Agreement and the Offer were
announced before the opening of business on December 21, 2000 by the issuance
of a joint press release by Hughes and Telocity.
Recommendation of the Board
At a meeting held on December 20, 2000, the Board unanimously (i) approved
the terms of the Merger Agreement, the Offer, the Merger and the other
transactions contemplated by the Merger Agreement, (ii) determined that the
Offer, the Merger and the other transactions to be effected pursuant to the
Merger Agreement are fair and in the best interests of the stockholders of the
Company and (iii) resolved to recommend that the stockholders of the Company
accept the Offer, approve the Merger Agreement and tender their Shares pursuant
to the Offer.
Reasons for the Recommendation
The following discussion of the factors considered by the Board is not
intended to be exhaustive but summarizes all material factors considered by the
Board in making its recommendation. In view of the wide variety of factors
considered by the Board, the Board did not find it practical to and did not
quantify or assign any relative or specific weights to the following factors or
determine that any factor was of particular importance, nor did it specifically
characterize any factor as positive or negative, except as described below. The
Board viewed its position and recommendation as being based on the totality of
the information presented. In addition, individual members of the Board may
have given differing weights to differing factors and may have viewed certain
factors more positively or negatively than others. Throughout its
deliberations, the Board consulted with our management and legal and financial
advisors. In reaching its conclusion that the Offer and the Merger are fair to
and in the best interest of the Company and its stockholders, the Board
principally considered the material factors listed below:
(i) the business, results of operations, financial condition and future
prospects of the Company if it were to retain its current ownership
structure;
(ii) the alternatives available to the Company, including continuing to
maintain the Company as an independent company and not engaging in any
extraordinary transaction;
(iii) the Company's rapidly declining cash position, and the fact that
without a significant capital infusion, the Company could not survive as an
independent company;
(iv) the impact on the valuation of the Company if it were required to
take the steps necessary to reduce its rate of cash consumption in the
likely event the Company is unable to secure the additional financing that
it requires to continue as an independent company;
(v) the Company's need for approximately $750 million to $800 million in
additional financing to fund its business to the point where it was
projected to be cash flow positive and the potential impact of these
capital requirements on the likelihood of alternative offers to acquire the
Company;
13
(vi) the recent rapidly declining market values of companies in the DSL
services industry in light of the lack of available capital in the current
market environment and the low probability that these market values would
recover over the short-term;
(vii) the fact that despite meeting or exceeding the Company's
operational goals, the current market conditions make it extremely unlikely
that the Company would be able to secure the significant additional
financing that it needs in the short term to continue as an independent
company;
(viii) the risk of significant employee defection at all levels in the
near term as a result of employee concerns regarding the Company's limited
cash reserves and declining market value and the likely effect of such
defections on the Company's attractiveness as an acquisition candidate;
(ix) the fact that prior to announcement of the signing of the Merger
Agreement, (A) the Company's vendors had begun to scale back their
installations of the Company's residential gateways, due in part to
concerns over the Company's declining cash reserve (B) the Company's
management advised that if the Company could not secure financing in the
near term, its vendors would likely cease installations of the Company's
products and (C) the Company's other suppliers and service providers would
also likely cease supplying products and services due to concerns over the
Company's ability to meet its obligations;
(x) the results of a comprehensive review of potential partners,
including inquiries made by the Company and its financial advisors to
likely interested participants in the DSL and related industries and other
possible interested buyers, regarding a strategic alliance, partnership,
business combination or similar transaction with the Company, which
inquiries indicated that, other than some preliminary interest in a
potential sale of the Company's gateway division, none of those companies,
except Hughes, had any significant interest in entering into any such
transaction;
(xi) initial discussions with certain companies regarding the sale of
the Company's gateway division, which discussions indicated that the terms
for such a sale were likely to be complex and would not provide that the
Company could purchase gateways from the acquiror of the gateway division
through a credit arrangement with such acquiror, would require extensive
negotiation and would involve a significant risk of non-consummation; and
that the likely range of proceeds from such a transaction would provide
cash sufficient for only a few additional months of working capital;
(xii) the substantial premium which the $2.15 per Share cash
consideration payable in the Offer and the Merger represents over current
and recent trading prices for the Shares and the fact that such
consideration represents a premium of over 50% to the closing sale price of
the Shares of $1.406 on December 20, 2000 (the trading day immediately
prior to the date on which the Company announced the signing of the Merger
Agreement);
(xiii) the provisions of the Merger Agreement pursuant to which Hughes
agreed to lend to the Company up to $20 million on February 1, 2001,
pursuant to a convertible promissory note, or sooner under some
circumstances, and the fact that the Company would have access to this
capital even if Hughes terminated the Merger Agreement, except in certain
limited circumstances;
(xiv) the extensive arms-length negotiations between the Company and
Hughes, leading the Board to believe that $2.15 per Share represented the
highest price per Share that could be negotiated with Hughes;
(xv) the opinion dated December 21, 2000 of Credit Suisse First Boston
to the Board as to the fairness, from a financial point of view and as of
the date of the opinion, of the $2.15 per Share cash consideration to be
received in the Offer and the Merger by holders of Shares (other than
Hughes and its affiliates). The full text of Credit Suisse First Boston's
written opinion dated December 21, 2000, which sets forth the assumptions
made, matters considered and limitations on the review undertaken by Credit
Suisse First Boston, is attached hereto as Annex B and is incorporated
herein by reference. Credit Suisse First Boston's opinion is directed only
to the fairness, from a financial point of view, of the $2.15 per Share
cash consideration to be received in the Offer and the Merger by holders of
Shares (other than Hughes and its affiliates) and is not intended to
constitute, and does not constitute, a
14
recommendation as to whether any stockholder should tender Shares in the
Offer or as to any other matters relating to the Offer or the Merger.
Holders of Shares are urged to read such opinion carefully in its entirety;
(xvi) the fact that the provisions of the Merger Agreement limit the
risk of non-consummation and allow the Company, under certain circumstances
and upon payment of a termination fee and expense reimbursement, to
terminate the Merger Agreement to accept a transaction representing a
Superior Proposal (as defined in the Merger Agreement);
(xvii) the fact that, in the Board's opinion, the amount of the
termination fee and expense reimbursement that would be required to be paid
in the event a Superior Proposal is accepted does not represent a material
impediment to any serious potential bidder;
(xviii) the view of the Board, based in part on the factors noted in
clauses (v), (x) and (xi) above, regarding the likelihood of a Superior
Proposal arising;
(xix) the fact that the Offer need not be commenced until February 1,
2001, and need not be closed until April 2, 2001, which was a later start
to the Offer and a longer offer period than would be typical for a tender
offer, but that risks of non-consummation despite the longer Offer period
were not believed to be significant in light of the fact that the
conditions to Hughes' obligation to consummate the Offer were customary,
not unduly onerous, and in particular, that the Tender Agreements delivered
by the Significant Stockholders required the tender of sufficient shares to
satisfy the minimum condition that a majority of Shares be tendered;
(xx) the fact that Hughes was willing to accept any and all validly
tendered Shares in the Offer, followed by a second-step Merger at the same
price, and as a result of this two-step structure, there was a reasonable
possibility that Telocity stockholders could sell their Shares to Hughes in
the Offer earlier than if the transaction were effected as a one-step
merger;
(xxi) the fact that non-tendering stockholders would receive the payment
for their Shares in the Merger at the earliest possible time since Hughes
would likely be able to effect a short-form merger given the high
percentage of Shares required to be tendered under the Tender Agreements
and that the Company had provided Hughes an option to purchase, if
necessary, a sufficient number of newly issued Shares to meet the
requirements of a short-form merger under Delaware law;
(xxii) the fact that the transaction was for cash, which meant the
Company's stockholders would no longer have an equity interest in the
Company, but that a stock transaction had not been, and was considerably
less certain to be, approved by Hughes and its affiliates and was likely to
take longer to consummate, creating additional uncertainty and risk for
Company's stockholders; and
(xxiii) the potential conflicts of interest between the Company and one
of its directors and certain of its executive officers with respect to the
Offer and Merger, particularly in connection with the condition contained
in the Merger Agreement requiring the Company to rescind certain option
exercises and related promissory notes issued by employees in connection
with such exercises (all as described in Item 3 hereof).
Intent to Tender
To the best of the knowledge of Telocity, after making reasonable inquiry,
each of Telocity's executive officers, directors and affiliates currently
intend to tender pursuant to the Offer all Shares held of record or
beneficially owned by them as of the date of the Merger Agreement.
Item 5. Person/Assets, Retained, Employed, Compensated or Used.
The Company has retained Credit Suisse First Boston as its exclusive
financial advisor in connection with the Offer and the Merger. Pursuant to the
terms of Credit Suisse First Boston's engagement, the Company has
15
agreed to pay Credit Suisse First Boston for its financial advisory services in
connection with the Offer and the Merger an aggregate fee equal to a percentage
of the total consideration payable in the Offer and the Merger. The aggregate
fee payable to Credit Suisse First Boston is currently estimated to be
approximately $3.75 million. The Company also has agreed to reimburse Credit
Suisse First Boston for reasonable out-of-pocket expenses, including reasonable
fees and expenses of its legal counsel, and to indemnify Credit Suisse First
Boston and certain related parties against certain liabilities, including
liabilities under the federal securities laws, arising out of Credit Suisse
First Boston's engagement. Credit Suisse First Boston and its affiliates in the
past have provided services to the Company and to Hughes and certain of its
affiliates, and currently are providing services to Hughes and certain of its
affiliates, unrelated to the Offer and the Merger, for which services Credit
Suisse First Boston has received, and will receive, compensation. Credit Suisse
First Boston's advisory team for the Company, which advisory team had been part
of Donaldson, Lufkin & Jenrette Securities Corporation prior to its acquisition
by an affiliate of Credit Suisse First Boston, did not include any member of
Credit Suisse First Boston's advisory team currently providing services to
Hughes and certain of its affiliates. In the ordinary course of business,
Credit Suisse First Boston and its affiliates may actively trade the debt and
equity securities of the Company and of Hughes and its affiliates for their and
their affiliates' own accounts and for the accounts of customers and,
accordingly, may at any time hold long or short positions in such securities.
Item 6. Interest in Securities of the Subject Company.
On October 31, 2000, the following officers of the Company acquired shares
of the Company's common stock pursuant to the Company's Employee Stock Purchase
Plan:
Price
Number of Per
Name Shares Share
---- --------- -----
Vicki Foshee................................................ 1,167 $2.44
Kevin Grundy................................................ 1,167 $2.44
Patti Hart.................................................. 1,167 $2.44
Edward Hayes................................................ 1,167 $2.44
Scott Martin................................................ 1,167 $2.44
Jim Morrissey............................................... 1,167 $2.44
Thomas Obenhuber............................................ 1,167 $2.44
Peter Olson................................................. 1,167 $2.44
In the 60 days prior to January 30, 2001, pursuant to the Company's stock
option plan the Company has granted options to purchase 58,960 Shares to
current employees and repurchased 106,627 Shares from terminated employees in
the ordinary course of business.
Except as set forth in this Item 6, no transactions in Telocity's common
stock during the 60 days prior to January 30, 2001, have been effected by
Telocity or, to the best of Telocity's knowledge, by any executive officer,
director, affiliate or subsidiary of Telocity.
Item 7. Purposes of the Transaction and Plans or Proposal.
Except as described or referred to in this Statement, no negotiation is
being undertaken or engaged in by Telocity which relates to or would result in
(i) a tender offer or other acquisition of Telocity's common stock by Telocity,
any of its subsidiaries or any other person (ii) an extraordinary transaction,
such as a merger, reorganization, or liquidation involving Telocity or any of
its subsidiaries, (iii) a purchase, sale or transfer of a material amount of
assets by Telocity or any of its subsidiaries or (iv) any material change in
the present dividend rate or policy, or indebtedness or capitalization of
Telocity. The information set forth under "Purpose of the Offer; Plans for
Telocity" and "Certain Effects of the Offer" in the Offer to Purchase is
incorporated herein by reference.
16
Except as described or referred to in this Statement, there are no
transactions, resolutions of the Board, agreements in principle, or signed
contracts entered into in response to the Offer that would relate to one or
more of the matters referred to in the preceding paragraph.
Item 8. Additional Information.
Delaware General Corporation Law
As a Delaware corporation, the Company is subject to Section 203 of the
DGCL. In general, Section 203 would prevent an "interested stockholder"
(generally defined as a person beneficially owning 15% or more of a
corporation's voting stock) from engaging in a "business combination" (as
defined in Section 203) with a Delaware corporation for three years following
the date such person become an interested stockholder unless: (i) before such
person became an interested stockholder, the board of directors of the
corporation approved the transaction in which the interested stockholder became
an interested stockholder or approved the business combination, (2) upon
consummation of the transaction which resulted in the interested stockholder
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 for purposes of determining the number of
shares of outstanding stock held by directors who are also officers and by
employee stock plans that do not allow plan participants to determine
confidentially whether to tender shares), or (3) following the transaction in
which such person became an interested stockholder, the business combination is
(x) approved by the board of directors of the corporation and (y) authorized at
a meeting of stockholders by the affirmative vote of the holders of a least 66
2/3% of the outstanding voting stock of the corporation not owned by the
interested stockholder. In accordance with the provisions of Section 203, the
Board of Directors has approved the Merger Agreement, as described in Item 4
above and, therefore, the restrictions of Section 203 are inapplicable to the
Merger and the transactions contemplated under the Merger Agreement.
Under the DGCL, if the Purchaser acquires, pursuant to the Offer or
otherwise, at least 90% of the outstanding shares of Common Stock, the
Purchaser will be able to effect the Merger after consummation of the Offer
without the approval of the Company's stockholders. However, if the Purchaser
does not acquire at least 90% of the shares of Common Stock pursuant to the
Offer or otherwise and a vote of the Company's stockholders is required under
the DGCL, a significantly longer period of time will be required to effect the
Merger. However, pursuant to the Merger Agreement, the Company has granted
Hughes the option to purchase that number of shares of the Company's common
stock equal to the lowest number of shares, that when added to the shares of
the Company's common stock acquired by Hughes pursuant to the Offer, is equal
to one share more than 90% of the shares of the Company's common stock then
outstanding. Hughes may exercise this option at any time after Hughes has
acquired less than 90% of the shares outstanding and prior to (i) the Effective
Time or (ii) the termination of the Merger Agreement by its terms.
Regulatory Filings
Under the Hart-Scott-Rodino Antitrust Improvements Act ("HSR Act"), and the
rules that have been promulgated thereunder by the Federal Trade Commission
("FTC"), certain acquisition transactions may not be consummated unless certain
information has been furnished to the Antitrust Division of the United States
Department of Justice (the "Antitrust Division") and the FTC and certain
waiting period requirements have been satisfied. The acquisition of Shares by
Purchaser pursuant to the Offer is subject to such requirements.
Pursuant to the HSR Act, the Company and General Motors Corporation, the
parent company of Hughes, each filed a Premerger Notification and Report Form
in connection with the purchase of Shares pursuant to the Offer with the
Antitrust Division and the FTC on January 23, 2001. Under the provisions of the
HSR Act applicable to the Offer, the purchase of Shares under the Offer may not
be consummated until the expiration of a 15 day waiting period following the
filing by GM, unless such waiting period is earlier terminated by the FTC and
the Antitrust Division. Such waiting period may be extended by a request from
the FTC or the Antitrust Division for additional information or documentary
material prior to the expiration of the waiting
17
period. Pursuant to the HSR Act, GM and the Company have requested early
termination of the waiting period applicable to the Offer. There can be no
assurance, however, that the 15 day HSR Act waiting period will be terminated
early. If either the FTC or the Antitrust Division were to request additional
information or documentary material from Parent with respect to the Offer, the
waiting period with respect to the Offer would expire at 11:59 p.m., New York
City time, on the tenth calendar day after the date of substantial compliance
with such request. Thereafter, the waiting period could be extended only by
court order. If the acquisition of Shares is delayed pursuant to a request by
the FTC or the Antitrust Division for additional information or documentary
material pursuant to the HSR Act, the Offer must be extended (if the sole
condition remaining unsatisfied is the expiration or termination of the
applicable waiting period under the HSR Act) and, in any event, the purchase of
and payment for Shares will be deferred until ten days after the request is
substantially complied with, unless the waiting period is sooner terminated by
the FTC and the Antitrust Division. Only one extension of such waiting period
pursuant to a request for additional information is authorized by the HSR Act
and the rules promulgated thereunder, except by court order. Any such extension
of the waiting period will not give rise to any withdrawal rights not otherwise
provided for by applicable law. It is a condition to the Offer that the HSR Act
waiting period applicable to the Offer expires or is terminated.
The Antitrust Division and the FTC frequently scrutinize the legality under
the antitrust laws of transactions such as the acquisition of Shares by
Purchaser pursuant to the Offer. At any time before or after the consummation
of any such transactions, the Antitrust Division or the FTC could,
notwithstanding termination of the waiting period, take such action under the
antitrust laws as it deems necessary or desirable in the public interest,
including seeking to enjoin the purchase of Shares pursuant to the Offer or
seeking divestiture of Shares so acquired or divestiture of substantial assets
of Parent or the Company or any of their respective subsidiaries. State
attorneys general may also bring legal actions under the antitrust laws, and
private parties may bring such actions under certain circumstances.
While the Company does not believe that the acquisition of Shares by
Purchaser will violate the antitrust laws, there can be no assurance that a
challenge to the Offer on antitrust grounds will not be made, or if such a
challenge is made, what the result will be.
18
EXHIBITS
(a)(1) Offer to Purchase dated February 1, 2001 (incorporated by reference
to Exhibit (a)(1) to the Schedule TO filed by Purchaser with respect
to the Company on February 1, 2001 ("Schedule TO"))
(a)(2) Letter of Transmittal (incorporated by reference to Exhibit (a)(2)
to Schedule TO)
(a)(3) Information Statement Pursuant to Section 14(f) of the Securities
Exchange Act of 1934 and Rule 14f-1 thereunder (incorporated by
reference and attached hereto as Annex A)
(a)(4) Opinion of Credit Suisse First Boston Corporation, dated December
21, 2000 (incorporated by reference and attached hereto as Annex B)
++(a)(5) Press Release, dated December 21, 2000, regarding the proposed
transaction between Hughes Electronics Corporation and Telocity
Delaware, Inc.
++(a)(6) Transcript of teleconference, dated December 22, 2000, concerning
the proposed agreement between Hughes Electronics Corporation and
Telocity Delaware, Inc.
(a)(7) Letter to Telocity Stockholders dated February 1, 2001
++(a)(8) Press Release dated January 25, 2001, concerning financial results
for the fourth quarter and year-ended December 31, 2000
++(a)(9) Transcript of conference call, dated January 25, 2001, concerning
financial results for the fourth quarter and year-ended December 31,
2000
++(a)(10) Telocity employee question and answer document dated December 21,
2000
++(a)(11) Telocity employee transaction newsletter dated January 18, 2001,
concerning the proposed transaction between Hughes and the Company
(a)(12) Press Release, issued jointly by Hughes Electronics Corporation and
Telocity Delaware, Inc. filed February 1, 2001 (incorporated by
reference to Exhibit (a)(10) to Schedule TO)
++(e)(1) Agreement and Plan of Merger among Hughes Electronics Corporation,
DIRECTV Broadband Inc. and Telocity Delaware, Inc. dated as of
December 21, 2000 (incorporated by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K previously filed on
December 28, 2000. (File No. 000-30125))
++(e)(2) Tender and Stockholder Support Agreement, dated as of December 21,
2000, by and among Hughes Electronics Corporation, DIRECTV Broadband
Inc., and certain stockholders of Telocity Delaware, Inc.
(incorporated by reference to Exhibit 2.2 to the Registrant's
Current Report on Form 8-K previously filed on December 28, 2000.
(File No. 000-30125))
(e)(3) Employment Agreement between the Company and Patti Hart dated May 5,
1999
(e)(4) Employment Agreement between the Company and Edward Hayes dated
December 3, 1999, as amended
(e)(5) Employment Agreement between the Company and Jim Morrissey dated
September 14, 1999
(e)(6) Employment Agreement between the Company and Regina Wiedemann dated
September 13, 1999
(e)(7) Employment Agreement between the Company and Scott Martin dated
December 8, 1999
(e)(8) Employment Agreement between the Company and Vicki Foshee dated
December 10, 1999, as amended
(e)(9) Employment Agreement between the Company and David Finley dated July
14, 2000, as amended
(e)(10) Employment Agreement between the Company and Robert Sandor dated
August 16, 2000
(e)(11) Founder Stock Purchase Agreement between the Company and Peter Olson
dated December 23, 1997
(e)(12) Founder Stock Purchase Agreement between the Company and Michael
Solomon dated December 23, 1997
(e)(13) Founder Stock Purchase Agreements between the Company and Thomas
Obenhuber dated December 23, 1997 and June 10, 1998
(e)(14) Founder Stock Purchase Agreement between the Company and Kevin
Grundy dated June 10, 1998
(e)(15) Form of Option Exercise and Note Rescission Agreement between the
Company and certain executive officers and a director of the Company
(e)(16) Form of Mutual Release and certain executive officers and a director
of the Company
(e)(17) Form of Indemnification Agreement between the Company and each of
its officers and directors
(e)(18) NBCi/Telocity Operating Agreement dated December 10, 1999 by and
among NBC Internet, Inc. and the Company, as amended
(e)(19) Advertising Agreement dated December 14, 1999, by and among NBC
Internet, Inc. and the Company, as amended
(e)(20) Second Amended and Restated Investor Rights Agreement by and among
the Company and certain stockholders of the Company dated December
13, 1999
(e)(21) NBC TV Advertising Inventory Agreement by and among National
Broadcasting Company, Inc. and the Company, as amended
- --------
++Previously filed
19
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify that
the information set forth in this statement is true, complete and correct.
TELOCITY DELAWARE, INC.
/s/ Scott Martin
By: _________________________________
Scott Martin
Executive Vice President, Chief
Administrative Officer and
Corporate Secretary
20
ANNEX A
TELOCITY DELAWARE, INC.
10355 North De Anza Boulevard
Cupertino, California 95014
----------------
INFORMATION STATEMENT PURSUANT TO SECTION 14(f)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND
RULE 14f-1 THEREUNDER
This Information Statement is being mailed on or about February 1, 2001, as
part of the Solicitation/ Recommendation Statement on Schedule 14D-9 (the
"Schedule 14D-9") to holders of shares of common stock, $0.001 par value per
share (the "Shares"), of Telocity Delaware, Inc., a Delaware corporation (the
"Company"). Capitalized terms used herein and not otherwise defined herein
shall have the meanings set forth in the Schedule 14D-9. You are receiving this
Information Statement in connection with the possible election of persons
designated by DIRECTV Broadband Inc., a Delaware corporation ("Purchaser"), and
a wholly owned subsidiary of Hughes Electronics Corporation, a Delaware
corporation ("Hughes"), to at least a majority of the seats on the board of
directors of the Company (the "Company Board"). Such designation is to be made
pursuant to Section 1.4 of the Agreement and Plan of Merger, dated December 21,
2000 (the "Merger Agreement"), among Hughes, Purchaser and the Company.
This Information Statement is required by Section 14(f) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14f-1
thereunder. YOU ARE URGED TO READ THIS INFORMATION STATEMENT CAREFULLY. YOU ARE
NOT, HOWEVER, REQUIRED TO TAKE ANY ACTION.
Pursuant to the Merger Agreement, on February 1, 2001, Purchaser commenced a
cash tender offer to acquire all of the issued and outstanding Shares (the
"Offer"). The Offer is scheduled to expire at 5:00 p.m., New York time, on
April 2, 2001, unless the Offer is extended. Following the successful
completion of the Offer, upon approval by a stockholder vote, if required, and
subject to certain other conditions, Purchaser will be merged with and into the
Company (the "Merger") and the Company shall become a wholly owned subsidiary
of Hughes.
The information contained in this Information Statement concerning Purchaser
has been furnished to the Company by Purchaser, and the Company assumes no
responsibility for the accuracy or completeness of such information.
GENERAL INFORMATION REGARDING THE COMPANY
General
The Shares are the only class of securities outstanding having the right to
vote for the election of the Company's directors. Each Share entitles its
record holder to one vote. As of January 30, 2000, there were 81,356,495 Shares
issued and outstanding.
The Company's Board of Directors
If Purchaser purchases Shares pursuant to the Offer, the Merger Agreement
provides that Hughes will be entitled to designate such number of directors,
rounded up to the next whole number, on the Company Board as is equal to the
product of (i) the number of authorized directors on the Board of Directors
(giving effect to the directors elected pursuant to this paragraph) and (ii)
the percentage that the number of Shares purchased by Purchaser or any
affiliate thereof bears to the aggregate number of Shares then outstanding (the
"Percentage"),
A-1
and the Company shall, upon the election and request by Purchaser, promptly
increase the size of the Board of Directors and/or secure the resignations of
such number of directors as is necessary to enable Purchaser's designees to be
elected to the Board of Directors and shall cause Purchaser's designees to be
so elected. At the request of Purchaser, the Company will cause such
individuals designated by Purchaser to constitute the same Percentage of (i)
each committee of the Board, (ii) the board of directors of each subsidiary of
the Company and (iii) the committees of each such board of directors.
Notwithstanding the foregoing, the Company, Purchaser and Hughes shall use
their respective reasonable efforts to ensure that at least three of the
members of the Board of Directors shall at all times prior to the effective
time of the Merger be Continuing Directors (as defined below). After the time
that Purchaser's designees constitute at least a majority of the Board of
Directors and until the effective time of the Merger, any (i) amendment or
termination of the Merger Agreement by or on behalf of the Company, (ii)
exercise or waiver of any of the Company's rights or remedies under the Merger
Agreement, extension of time for the performance or waiver of any of the
obligations or other acts of Hughes or Purchaser under the Merger Agreement or
(iii) other action by the Company in connection with the Merger Agreement,
shall require the approval of a majority of the then-serving directors, if any,
who are not designees of Purchaser (the "Continuing Directors"), except to the
extent that applicable law requires that such action be acted upon by the full
Board of Directors, in which case such action will require the concurrence of
both a majority of the Board of Directors and a majority of the Continuing
Directors. If a vacancy among the Continuing Directors exists, the remaining
Continuing Director or Directors shall be entitled to designate persons to fill
such vacancies, who shall be deemed Continuing Directors for purposes of the
Merger Agreement. In the event there is only one remaining Continuing Director
and he or she resigns or is removed, or if all Continuing Directors resign or
are removed, he, she or they, as applicable, shall be entitled to designate
his, her or their successors, as the case may be, each of whom shall be deemed
a Continuing Director for purposes of the Merger Agreement.
As of the date of this Information Statement, Hughes has not determined who
will be Hughes' Designees. However, Hughes' Designees will be selected from
among the persons listed in Schedule I attached hereto. Schedule I also
includes certain information with respect to each such person. Each of the
persons listed in Schedule I has consented to serve as a director of the
Company if appointed or elected. None of such persons currently is a director
of, or holds any positions with the Company. Hughes and the Purchaser have
advised the Company that, to the best of their knowledge, none of the persons
listed on Schedule I or any of their affiliates beneficially owns any equity
securities or rights to acquire any such securities of the Company, nor has any
such person been involved in any transaction with the Company or any of its
directors, executive officers or affiliates that is required to be disclosed
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC") other than with respect to transactions between Hughes, the Purchaser
and the Company that have been described in the Schedule TO or this Information
Statement.
Hughes has advised the Company that none of the persons listed in the table
above has during the last five years been convicted in a criminal proceeding
(excluding traffic violations and similar misdemeanors) or was a party to a
civil proceeding of a judicial or administrative body of competent jurisdiction
and as a result of such proceeding was, or is, subject to a judgment, decree or
final order enjoining future violations of, or prohibiting activities subject
to, federal or state securities laws or finding any violation of such laws or
is involved in any other legal proceeding which is required to be disclosed
under Item 401(f) of Regulation S-K promulgated by the SEC.
It is expected that Hughes' Designees may assume office at any time
following the purchase by Purchaser of a majority of outstanding Shares
pursuant to the Offer, which purchase cannot be earlier than twenty business
days after February 1, 2001 and that, upon assuming office, Hughes' Designees
will thereafter constitute at least a majority of the Board.
A-2
DIRECTORS AND EXECUTIVE OFFICERS
Executive Officers and Directors
The following table sets forth certain information with respect to the
Company's directors, executive officers and other key employees as of December
31, 2000.
Name Age Position
---- --- --------
Patti Hart.............. 44 President, Chief Executive Officer and Director
Peter Olson............. 58 Executive Vice President, Chief Technical Officer and Director
David Finley............ 35 Chief Operating Officer
Edward Hayes............ 45 Executive Vice President and Chief Financial Officer
Scott Martin............ 44 Executive Vice President, Chief Administrative Officer and Corporate Secretary
Jim Morrissey........... 51 Executive Vice President and Chief Marketing Officer
Kevin Grundy............ 43 Senior Vice President, Engineering
Thomas Obenhuber........ 45 Senior Vice President, Corporate Development
Regina Wiedemann........ 39 Senior Vice President, Business Development
Vicki Foshee............ 43 Senior Vice President, Service Delivery & Support
Robert Sandor........... 47 Senior Vice President, Operations
David Wilson............ 33 Vice President, Financial Services
David Cowan............. 34 Director
Christie Hefner......... 48 Director
Andrew Rappaport........ 43 Director
Elisabeth Sami.......... 32 Director
James Scheinman......... 34 Director
Michael Solomon......... 48 Director
Randall Strahan......... 48 Director
Patti Hart has served as President, Chief Executive Officer and as a member
of the Company's 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 the Company's 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 the Company's
incorporation in August 1997 until July 1998. Mr. Olson has served on the
Company's Board of Directors since August 1997. 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 the Company's 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
A-3
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.
Scott Martin has served as the Company's Executive Vice President, Chief
Administrative Officer 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 the Company's 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 the Company's 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 the Company's 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.
Vicki Foshee has served as the Company's Senior Vice President, Service
Delivery and Support since January 2000. From February 1999 to January 2000,
Ms. Foshee served as General Manager, Vice President Service Delivery at
NorthPoint Communications, a provider of digital subscriber line technology.
From February 1998 through February 1999, Ms. Foshee was the Senior Director of
Southwestern Bell Corp for SBC Telecom, Inc., a provider of telecommunications
services. From January 1995 through February 1998, Ms. Foshee was the Director
of AT&T ICSC centers for SBC Telecom, Inc.
David Wilson has served as the Company's Vice President, Financial Services
since April 2000. From September 1990 to January 2000, Mr. Wilson was an
auditor for PriceWaterhouseCoopers, where he last held the position of Senior
Manager.
David Finley has served as the Company's Chief Operating Officer since July
2000. From May 1999 to July 2000, Mr. Finley served as President of Hardwood
Technologies, an Information Technology consulting company. From August 1997 to
May 1999, Mr. Finley served as Chief Operating Officer and Assistant to the
President at Sprint Corporation's Long Distance Division. From May 1994 to
August 1997, Mr. Finley served as National Account Manager for Sprint Long
Distance.
Robert Sandor has served as the Company's Senior Vice President, Operations
since September 2000. From September 1999 to September 2000, Mr. Sandor was
Vice President of Operations with Engage, Inc., an Internet advertising
company. From August 1998 to September 1999, Mr. Sandor was Vice President of
Network Operations and Customer Service with General Magic, Inc., an Internet
services company. From
A-4
October 1997 to March 1998, Mr. Sandor was Vice President of Operations with
Internex, an Internet services company. From April 1993 to October 1997, Mr.
Sandor was Director of Network Operations and Information Technology with
Gemstar, an interactive television company.
Regina Wiedemann has served as the Company's 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 she
last held the position was Executive Assistant to the President of Multimedia.
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.
Christie Hefner has served on the Board of Directors since May 2000. Ms.
Hefner is the Chairman and Chief Executive Officer of Playboy Enterprises, a
multimedia company, a position which she has held since November 1988. Ms.
Hefner is a member of the board of directors of Playboy Enterprises, Inc.
Andrew Rappaport has served on the 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.
Elisabeth Sami has served on the Board of Directors since December 2000. Ms.
Sami has been the Vice President of Business Development at NBC, Inc. since
March 1997. From May 1993 to March 1997, Ms. Sami was Vice President of
Business Development at Discovery Communications, Inc.
James Scheinman has served on the Board of Directors since December 2000.
Mr. Scheinmann has been the Senior Vice President of Business Development at
NBC Internet, Inc. since October 1998. From October 1995 to October 1998, Mr.
Scheinman was an associate with the law firm Gray Cary Ware & Freidenrich LLP.
Michael Solomon, one of the Company's founders, has served on the Board of
Directors since the Company's incorporation 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 the 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.
Meetings of the Board and Committees
During 2000, the Company Board held 19 meetings. All directors attended at
least 75% of the aggregate number of meetings held by the Company Board and
meetings held by all committees on which each such
A-5
director served during his or her term of office. The Company Board has an
Audit Committee and a Compensation Committee, but does not have a Nominating
Committee.
The Audit Committee currently consists of Andrew Rappaport, Randall Strahan
and Michael Solomon. Mr. Rappaport serves as Chairman of the Audit Committee.
The functions of the Audit Committee include recommending the independent
auditors to the Company Board, reviewing and approving the planned scope of the
annual audit, proposed fee arrangements and the results of the annual audit,
reviewing the adequacy of accounting and financial controls, reviewing the
independence of the independent auditors, approving all assignments to be
performed by the independent auditors, reviewing transactions between the
Company and its officers and directors and instructing the independent
auditors, as deemed appropriate, to undertake special assignments. During the
year 2000, the Audit Committee held five formal meetings. The Company Board has
adopted a written charter for the Audit Committee (the "Audit Committee
Charter"). As of February 1, 2001, the Company's annual audit had not been
completed and, therefore, the Audit Committee had neither reviewed nor
discussed the year 2000 audited financial statements with management and had
not recommended to the Board of Directors that the audited financial statements
be included in the Company's Annual Report. The Audit Committee has discussed
with the independent auditors the matters required to be discussed by Statement
on Auditing Standards 61. Additionally, the Audit Committee has received the
written disclosures and the letter from the independent accounts required by
Independence Standards Board Standard No. 1 and has discussed with the
independent accountants their independence. The members of the Audit Committee
are independent as independence is defined in Rule 4200(a)(14) of the National
Association of Securities Dealers' listing standards.
The Compensation Committee currently consists of David Cowan and Michael
Soloman. Mr. Cowan serves as Chairman of the Compensation Committee. The
Compensation Committee reviews and recommends salaries, bonuses and other
compensation for corporate executive officers and other members of senior
management. During the year 2000, the Compensation Committee held three
meetings.
Compensation Committee Interlocks and Insider Participation
The Company's Board established the Compensation Committee in December 1999.
Prior to establishing the Compensation Committee, the Board of Directors as a
whole performed the functions delegated to the Compensation Committee. No
member of the 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 the Company's Board of Directors or
Compensation Committee. Since the formation of the Compensation Committee, none
of its members has been an officer or employee of the Company.
A-6
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning the
compensation paid to or accrued by the Company for the fiscal years ended
December 31, 1998, and 1999, and 2000 for of the Company's Chief Executive
Officer and the Company's four other most highly compensated officers whose
compensation exceeded $100,000 for the period (hereinafter referred to as the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
-------------------------------------- -----------------------
Securities
Name and Principal Other Annual Underlying All Other
Position Year Salary Bonus Compensation(1) Options Compensation
- ------------------ ---- -------- -------- --------------- ---------- ------------
Patti Hart(2)........... 2000 $350,000 $ 65,962 0 200,000 0
President and Chief 1999 $140,000 0 $ 3,097 3,226,274 $150,000(3)
Executive Officer 1998 -- -- -- -- --
Peter Olson............. 2000 $280,000 $ 61,565 0 0 0
Executive Vice 1999 $223,333 0 $ 9,961 7,714 0
President 1998 $135,000 0 $ 7,485 82,286 0
and Chief Technical
Officer
Edward Hayes(4)......... 2000 $284,114 $ 39,343 0 335,000 325,000(5)
Executive Vice 1999 -- -- -- 370,000 --
President 1998 -- -- -- -- --
and Chief Financial
Officer
Scott Martin(6)......... 2000 $211,020 $ 32,517 0 25,000 150,000(7)
Executive Vice 1999 $ 12,279 0 0 245,000 0
President, 1998 -- -- -- -- --
Chief Administrative
Officer and Corporate
Secretary
Jim Morrissey(8)........ 2000 $275,000 $360,465 0 0 $942,735(9)
Executive Vice 1999 $ 77,211 0 $80,939(10) 800,000 $357,992(11)
President 1998 -- -- -- -- --
and Chief Marketing
Officer
- --------
(1) Includes only health insurance premiums paid by the Company unless
otherwise noted.
(2) Ms. Hart became an executive officer of the Company in June 1999.
(3) The Company paid Ms. Hart a $150,000 signing bonus pursuant to her
employment agreement.
(4) Mr. Hayes became an executive officer of the Company in January 2000.
(5) The Company paid Mr. Hayes a $325,000 signing bonus pursuant to his
employment agreement.
(6) Mr. Martin became an executive officer of the Company in December 1999.
(7) The Company paid Mr. Martin a $150,000 signing bonus pursuant to his
employment agreement.
(8) Mr. Morrissey became an executive officer of the Company in September
1999.
(9) Includes $666,667 in debt forgiveness and $36,068 for costs related to
housing and moving. Also includes $240,000 in contingent compensation that
Mr. Morrissey is required to repay to the Company if the Company's stock
is publicly traded at $20 or more per share on October 1, 2001.
(10) Includes $1,422 in health insurance premiums paid by the Company and
$79,517 in debt forgiveness pursuant to Mr. Morrissey's employment
agreement.
(11) 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
that Mr. Morrissey is required to repay to the Company in the event the
Company's stock is publicly traded at $20 or more per share on October 1,
2001, all of which the Company paid pursuant to Mr. Morrissey's employment
agreement. Also includes a $150,000 signing bonus paid to Mr. Morrissey
pursuant to his employment agreement.
A-7
Option Grants in 2000
The following table sets forth information concerning grants of stock
options to the Named Executive Officers who received stock options during 2000.
All options granted to the Named Executive Officers in the last fiscal year
were granted under the Telocity Delaware, Inc. 2000 Equity Incentive Plan (the
"Plan"). The percent of the total options set forth below is based on an
aggregate of 6,012,365 options granted to employees during the year ended
December 31, 2000.
Stock Option Grants In Last Fiscal Year
% of Total Potential Realizable Value
Number of Options at Assumed Annual rates
Securities Granted to Exercise Of Stock Price Appreciation
Underlying Employees Price for Option Terms(3)
Options During Per Expiration ---------------------------
Name Granted(1) Period Share(2) Date 5% 10%
- ---- ---------- ---------- -------- ---------- ---------------------------
Patti Hart.............. 200,000 3.32% $ 5.56 6/21/10 $ 699,326 $ 1,772,194
Jim Morrissey........... 0 -- -- -- -- --
Peter Olson............. 0 -- -- -- -- --
Edward Hayes............ 25,000 0.42% $12.00 3/28/10 $ 188,667 $ 478,110
160,000 2.66% $ 5.56 6/21/10 $ 559,461 $ 1,417,756
150,000 2.49% $ 3.28 9/29/10 $ 309,414 $ 784,100
Scott Martin ........... 25,000 0.42% $ 5.56 6/21/10 $ 87,471 $ 221,524
- --------
(1) Generally, initial grants of options granted in 2000 under the Plan vest
according to the following schedule: 1/4 of the options vest on the first
anniversary of the date of grant and 1/48 of the options vest monthly
thereafter.
(2) All options were granted at an exercise price equal to the fair market
value of the common stock on the date of grant.
(3) 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 the Company's common stock
appreciates at 5% and 10% over the option term of ten years based on per-
share market price at the time of grant 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 the
Company's estimate or projection of the Company's future common stock
price.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
Option Exercises in 2000 and Values at December 31, 2000
The following table provides information with respect to the Named Executive
Officers concerning the exercise of options during the last fiscal year and
unexercised options held as of the end of the fiscal year:
Number of
Securities Underlying
Shares Unexercised Options
Acquired at December 31, 2000
on Value --------------------------
Name Exercise Realized Exercisable Unexercisable
- ---- -------- -------- ----------- -------------
Patti Hart....................... 0 $ 0 200,000 0
Jim Morrissey.................... 0 0 0 0
Peter Olson...................... 0 0 0 0
Edward Hayes .................... 370,000(1) 0 705,000(1) 0
Scott Martin .................... 0 0 270,000(2) 0
A-8
- --------
(1) Mr. Hayes had exercised 370,000 options on January 5, 2000, however, this
exercise was rescinded on December 22, 2000 and the Shares are now deemed
exercisable options. See "Rescission Agreements."
(2) Mr. Martin had exercised 245,000 options on December 16, 1999, however,
this exercise was rescinded on December 22, 2000 and the Shares are now
deemed exercisable options. See "Rescission Agreements."
Employment Agreements and Termination of Employment Arrangements
Unless otherwise specified below, for purposes of the Company's employment
agreements with its executive officers, a "change of control" or "ownership
change event" is defined as and shall be deemed to have occurred if any of the
following occurs: (i) the direct or indirect sale or exchange in a single or
series of related transactions by the stockholders of the Company of more than
fifty percent of the voting stock of the Company; (ii) a merger or
consolidation in which the Company is a party; (iii) the sale, exchange, or
transfer of all or substantially all of the assets of the Company; or (iv) a
liquidation or dissolution of the Company. Therefore, the closing of the
Offering constitutes a change of control or ownership change event under these
agreements.
Whenever the term "for cause" or "good reason" is used below, it means "for
cause" or "good reason," respectively as defined in that individual's
employment agreement, each of which is filed as an exhibit hereto and is
incorporated by reference herein.
On May 5, 1999, the Company entered into an at will employment agreement
with Patti Hart, President and Chief Executive Officer of the Company, pursuant
to which Ms. Hart received a salary of $300,000 per year. Ms. Hart's current
salary is $400,000 per year. Ms. Hart also received a signing bonus of $150,000
and a bonus of $100,000 at the end of her first year of service as the
Company's Chief Executive Officer. After two years of service as the Company's
Chief Executive Officer and for each year of employment after that, Ms. Hart is
eligible under her agreement to earn a performance bonus in accordance with a
performance bonus plan. The agreement also provides for a stock option grant
for the purchase of up to 3,226,274 shares of the Company's common stock. Ms.
Hart exercised this option in full on June 22, 1999, at an exercise price of
$0.35 per share. The shares obtained upon exercise of the option are subject to
the Company's right of repurchase which lapses as the shares vest at a rate of
1/48 per month of employment. If Ms. Hart is terminated other than for cause or
she resigns for good reason sixty days prior to or within twelve months
following an ownership change event, Ms. Hart is entitled to (i) a lump sum
payment of twelve months salary, (ii) a lump sum payment of her target annual
performance bonus for the term in which her employment is terminated,
(iii) continued benefits for twelve months, and (iv) vesting of one half of any
unvested shares. If the Company terminates Ms. Hart's employment without cause
absent a change of control, Ms. Hart is entitled to (i) continued payment of
her salary for twelve months following her termination, (ii) a pro rata portion
of her target performance bonus for the year, and (iii) twelve months vesting
of any unvested shares. In connection with the Offer, the Compensation
Committee accelerated all of Ms. Hart's unvested shares. For a description of
the terms of the acceleration, see Item 3 of the Schedule 14D-9 of which this
Annex A is a part.
Effective January 1, 1998, the Company entered into at will employment
agreements with Peter Olson and Thomas Obenhuber under which they were to
receive salaries of $180,000 and $120,000 per year, respectively; their current
salaries are $280,000 and $225,000 per year, respectively. In addition, under
their agreements, Messrs. Olson and Obenhuber are each eligible for a
performance bonus for each year of employment based upon the achievement of
performance objectives. The amount of these bonuses is to be negotiated
annually. If Messrs. Olson or Obenhuber are terminated without cause or if any
of them resign for good reason, the individual so terminated 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, the Company entered into an employment agreement
with Kevin Grundy containing the same material terms, except that Mr. Grundy
was to receive a salary of $120,000 per year. Mr. Grundy's current salary is
$225,000.
A-9
On December 3, 1999, the Company entered into an at will employment
agreement with Edward Hayes, Executive Vice President and Chief Financial
Officer of the Company, which was subsequently amended on November 29, 2000 and
December 17, 2000. Pursuant to the agreement as amended, Mr. Hayes receives a
salary of $250,000 per year. Mr. Hayes also received a signing bonus of
$325,000 and he is eligible to participate in the Company's bonus program. The
agreement also provides for a stock option grant for the purchase of up to
370,000 shares of the Company's common stock. Mr. Hayes exercised this option
in full on January 5, 2000, at an exercise price of $3.00 per share. On
December 22, 2000, Mr. Hayes rescinded the exercise of these options pursuant
to an Option Exercise and Note Rescission Agreement with the Company. For a
more detailed discussion of this rescission see Item 3 of the Schedule 14D-9 of
which this Annex A is a part. The shares subject to the option grant vest 1/4
after 12 months of employment, and an additional 1/48 per month of employment
thereafter. If Mr. Hayes is terminated without cause or he resigns for good
reason, we will pay him 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 75% of his unvested stock options or an amount equivalent
to an additional six months of vesting. In connection with the Offer, the
Compensation Committee accelerated all of Mr. Hayes' unvested shares. For a
description of the terms of the acceleration see Item 3 of the Schedule 14D-9
of which this Annex A is a part. Mr. Hayes' agreement also provides that in
consideration for devoting his full energies to the Company and foregoing the
consideration of other marketing opportunities, provided he is not terminated
for cause, resigns other than for good reason, or seeks alternate employment
prior to such date, he will be entitled to a retention bonus of $750,000 on the
earlier of (i) the date he is terminated by the Company without cause, (ii) the
date he resigns for good reason or (iii) April 1, 2001.
On September 14, 1999, the Company entered into an at will employment
agreement with Jim Morrissey, Executive Vice President and Chief Marketing
Officer of the Company, under which Mr. Morrissey receives a salary of $275,000
per year. Mr. Morrissey also 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 for meeting certain objectives mutually agreed upon by
Mr. Morrissey and the Company. Upon our initial public offering, Mr. Morrissey
received a bonus of $150,000 based upon certain objectives. 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 for the
purchase of up to 800,000 shares of the Company's common stock, which Mr.
Morrissey exercised in full on September 14, 1999, at a an exercise price of
$0.75 per share. The shares obtained upon exercise of the option are subject to
the Company's right of repurchase which lapses at a rate of 1/4 after one year
of employment, and an additional 1/48 per month of employment thereafter. In
order to leave his previous employment, Mr. Morrissey was required to make
payments to his former employer. To facilitate his departure, the Company
loaned Mr. Morrissey $2 million as follows: on December 6, 1999 the Company
provided Mr. Morrissey with a $900,000 loan and on January 5, 2000, the Company
provided Mr. Morrissey with a $1,100,000 loan, the principal and interest on
both loans will be forgiven by the Company at a rate of 1/36 per month over
three years beginning on September 20, 1999 and January 1, 2000, respectively.
Upon Mr. Morrissey's termination for cause or his voluntary resignation other
than for good reason, the loans become due within 90 days. Pursuant to Mr.
Morrissey's agreement the Company provides Mr. Morrissey with a monthly housing
allowance of $20,000 for 24 months beginning on October 1, 1999. If the
Company's stock trades at $20 or more per share on October 1, 2001, then Mr.
Morrissey will be required to repay the allowance; otherwise, the Company will
forgive the entire housing allowance. If Mr. Morrissey is terminated 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, Mr. Morrissey will vest the greater of one half of his
unvested shares subject to the stock option or an amount equivalent to an
additional six months vesting. In connection with the Offer, the Compensation
Committee accelerated all of Mr. Morrissey's unvested shares. For a description
of the terms of the acceleration see Item 3 of the Schedule 14D-9 of which this
Annex A is a Part.
A-10
On December 8, 1999, the Company entered into an at will employment
agreement with Scott Martin, Executive Vice President, Chief Administrative
Officer and Corporate Secretary of the Company, pursuant to which Mr. Martin
received a salary of $190,000 per year. Mr. Martin's current salary is $200,000
per year. Mr. Martin also received a signing bonus of $150,000. The agreement
also provides for a stock option grant for the purchase of up to 245,000 shares
of the Company's common stock. Mr. Martin exercised the option in full on
December 16, 1999, at a price of $3.00 per share. Mr. Martin subsequently
rescinded the exercise of these options pursuant to an Option Exercise and Note
Rescission Agreement with the Company. For a more detailed discussion of this
rescission see Item 3 of the Schedule 14D-9 of which this Annex A is a part.
The shares subject to the option grant vest 1/8 after six months of employment,
and an additional 1/48 per month of employment thereafter. If Mr. Martin is
terminated without cause, or he resigns for good reason, one month prior to or
within one year after a change of control, the Company 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 Mr. Martin is terminated
without cause or he resigns for good reason absent a change in control, the
Company 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. In
connection with the Offer, the Compensation Committee accelerated all of Mr.
Martin's unvested shares. For a description of the terms of the acceleration
see Item 3 of the Schedule 14D-9 of which this Annex A is a part.
On September 13, 1999, the Company entered into an at will employment
agreement with Regina Wiedemann, Senior Vice President, Business Development of
the Company, pursuant to which Ms. Wiedemann received a salary of $140,000 per
year. Ms. Wiedemann's current salary is $220,000. The agreement also provides
for a stock option grant for the purchase of up to 240,000 shares of the
Company's common stock. Ms. Wiedemann exercised the option in full on October
26, 1999 at a price of $1.50 per share. The shares obtained upon exercise of
the option are subject to the Company's right of repurchase which lapses 1/8
after six months of employment, and an additional 1/48 per month of employment
thereafter. If, following a change of control, Ms. Wiedemann is terminated or
she resigns for good cause, Ms. Wiedemann shall receive an additional six
months of salary, benefits and vesting. In connection with the Offer, the
Compensation Committee accelerated all of Ms. Wiedemann's unvested shares. For
a description of the terms of the acceleration see Item 3 of the Schedule 14D-9
of which this Annex A is a part.
On July 14, 2000, the Company entered into an at will employment agreement
with David Finley, Chief Operating Officer of the Company, which was
subsequently amended on November 29, 2000 and December 17, 2000. Pursuant to
the agreement as amended, Mr. Finley receives a salary of $280,000 per year.
Mr. Finley also received a signing bonus of $150,000. If Mr. Finley voluntarily
resigns his employment without good reason before the first anniversary of his
commencement of employment, he shall repay a pro rata share of the signing
bonus based on the time remaining in his first year of service. The agreement
also provides for a stock option grant for the purchase of up to 500,000 shares
of the Company's common stock at a price of $3.28 per share. The shares subject
to the option grant vest 1/4 after 12 months of employment, and an additional
1/48 per month of employment thereafter. Under Mr. Finley's agreement, the
Company extended to Mr. Finley a full recourse promissory note in an amount not
to exceed $400,000 in connection with his purchase of a home. The promissory
note is secured by a second lien on Mr. Finley's home and accrues interest at a
rate of 8% per annum. Interest accrues quarterly to principal, and principal
plus all accrued interest on the note is due and payable upon the first to
occur of (i) 60 months from the commencement of his employment with the
Company, (ii) 12 months following termination of Mr. Finley's employment with
the Company and (iii) upon Mr. Finley's sale or transfer of 100,000 shares of
the Company's stock. Mr. Finley's agreement provides that if he is terminated
without cause or resigns for good reason absent a change of control, he will
receive (i) a lump sum payment equal to 50% of his annual salary, (ii) 12 equal
payments thereafter of the remaining 50% of his annual salary, (iii) a lump sum
payment of his then current annual target bonus, (iv) reimbursement for the
cost of continuing his medical coverage for himself and any eligible dependents
under COBRA for one year following the date of his termination or resignation,
and (v) vesting of 50% of any remaining unvested shares. Mr. Finley's agreement
also provides that if Mr. Finley is terminated without cause or resigns for
good reason within one year of a change of control, he will receive (i) a lump
sum payment equal to 50% of his annual salary,
A-11
(ii) 12 equal payments thereafter of the remaining 50% of his annual salary,
(iii) a lump sum payment of his then current annual target bonus, (iv)
reimbursement for the cost of continuing his medical coverage for himself and
any eligible dependents under COBRA for one year following the date of his
termination or resignation, and (v) the equivalent of vesting of 36 months of
any unvested stock options if his termination or resignation occurs prior to
the one year anniversary of his commencement of employment with the Company or,
if he is terminated or resigns after the one year anniversary of his
commencement of employment with the Company, vesting of 75% of any unvested
stock options. In connection with the Offer, the Compensation Committee
accelerated all of Mr. Finley's unvested shares. For a description of the terms
of the acceleration see Item 3 of the Schedule 14D-9 of which this Annex A is a
part. Mr. Finley's agreement also provides that in consideration for devoting
his full energies to the Company and foregoing the consideration of other
marketing opportunities, provided he is not terminated for cause, resigns other
than for good reason, or seeks alternate employment prior to such date, he will
be entitled to a retention bonus of $750,000 on the earlier of (i) the date he
is terminated by the Company without cause, (ii) the date he resigns for good
reason or (iii) April 1, 2001.
On December 10, 1999, the Company entered into an employment agreement with
Vicki Foshee, Senior Vice President, Service Delivery and Support of the
Company, pursuant to which she was to receive an annual salary of $150,000. Ms.
Foshee's current salary is $190,000. Ms. Foshee also received a signing bonus
of $20,000. The agreement also provides for a stock option grant on December
15, 1999, for the purchase up to 85,000 shares of the Company's common stock.
Ms. Foshee exercised the option in full on January 18, 2000. On December 26,
2000 Ms. Foshee rescinded the exercise of these options pursuant to an Option
Exercise and Note Rescission Agreement with the Company. For a more detailed
discussion of this rescission see Item 3 of the Schedule 14D-9 of which this
Annex A is a part. The agreement also provides for a stock option grant on May
24, 2000, for the purchase of up to an additional 100,000 shares of the
Company's common stock at an exercise price of $5.50 per share. The shares
subject to the option grants vest 1/8 after six months of employment, and an
additional 1/42 per month of employment thereafter. On October 10, 2000, the
Company entered into an amendment to Ms. Foshee's employment agreement which
provides that in the event Ms. Foshee is terminated without cause or resigns
for good reason within one year after a change of control, she is entitled to
(i) a waiver of the 6 month vesting cliff applicable to each of the option
grants, (ii) six months acceleration per option grant, or an amount of
acceleration that would bring her to 50% vesting in each of her option grants,
which ever is greater, and (iii) six months continued salary and benefits. In
connection with the Offer, the Compensation Committee accelerated all of Ms.
Foshee's unvested shares. For a description of the terms of the acceleration
see Item 3 of the Schedule 14D-9 of which this Annex A is a part.
On January 24, 2000, the Company entered an employment agreement with David
Wilson, Vice President, Financial Services of the Company, pursuant to which
Mr. Wilson receives an annual salary of $150,000. The agreement also provides
for a stock option grant for the purchase of up to 100,000 shares of the
Company's common stock, Mr. Wilson exercised the option in full on February 24,
2000 at an exercise price of $9.00 per share. On December 27, 2000, Mr. Wilson
subsequently rescinded the exercise of these options pursuant to an Option
Exercise and Note Rescission Agreement with the Company. For a more detailed
discussion of this rescission see Item 3 of the Schedule 14D-9 of which this
Annex A is a part. The shares subject to the option grant vest 1/4 after twelve
months of employment, and an additional 1/30 per month thereafter. Mr. Wilson's
agreement provides that if Mr. Wilson is terminated without cause or resigns
for good reason, he is entitled to a lump sum cash payment equal to three
months of his then-existing salary. In connection with the Offer, the
Compensation Committee accelerated all of Mr. Wilson's unvested shares. For a
description of the terms of the acceleration see Item 3 of the Schedule 14D-9
of which this Annex A is a part.
On August 16, 2000, the Company entered into an employment agreement with
Robert Sandor, Senior Vice President, Operations of the Company, pursuant to
which Mr. Sandor receives an annual salary of $200,012.04. The agreement also
provides for a performance bonus of $33,000 upon the completion of certain
objectives. The agreement provides for a stock option grant for the purchase of
up to 130,000 shares of the Company's common stock, and an additional 25,000
shares upon successful completion of the bonus objectives. The shares subject
to the option grants vest 1/4 after one year of employment, and an additional
A-12
1/36 per month of employment thereafter. Mr. Sandor's agreement also provides
that if he is terminated without cause or resigns for good reason within one
year after a change of control, he is entitled to (i) a waiver of the one year
vesting cliff, (ii) six months acceleration per grant, or an amount of
acceleration that would bring him to 50% vesting, which ever is greater, and
(iii) six months continued salary and benefits. In connection with the Offer,
the Compensation Committee accelerated all of Mr. Sandor's invested shares. For
a description of the terms of the acceleration see Item 3 of the Schedule 14D-9
of which this Annex A is a part.
Founder Stock Purchase and Repurchase Agreements
On December 23, 1997, the Company entered into Founder Stock Purchase
Agreements with Peter Olson, Michael Solomon and Thomas Obenhuber (the
"December 23, 1997 Agreements"), pursuant to which Mr. Olson, Mr. Solomon and
Mr. Obenhuber purchased 4,662,000, 1,554,000 and 480,000 shares, respectively
at a price of $0.0005 per share. The shares are subject to the Company's right
of repurchase which lapsed 11/32 on October 3, 1997 for Messrs. Olson and
Solomon, and 1/8 on February 3, 1998 for Mr. Obenhuber. The remaining shares
vest at a rate of 1/42 per month. The Company's option to repurchase the
unvested shares terminates upon a change of control, as defined and set forth
in the December 23, 1997 Agreements. The December 23, 1997 Agreements give the
Company a right of first refusal before a founder may transfer or sell any of
their shares. The December 23, 1997 Agreements also provide each founder
piggyback registration rights as set forth in the agreements.
In order to reallocate its founders' stock, the Company entered into
agreements to repurchase certain founder's shares. On June 1, 1998, the Company
entered into Founder Stock Repurchase Agreements with Mr. Olson and Mr. Solomon
to repurchase 2,662,000 shares of the Company's common stock from Mr. Olson at
a price of $0.0005 per share, and 154,000 shares of the Company's common stock
from Mr. Solomon at a price of $0.0005 per share. On June 10, 1998, the Company
entered into supplemental Founder Stock Purchase Agreements (the "June 10, 1998
Agreements") with Mr. Obenhuber and Kevin Grundy pursuant to which
Mr. Obenhuber and Mr. Grundy purchased 1,120,000 and 1,600,000 shares,
respectively at a price of $0.005 per share. The shares purchased pursuant to
the June 10, 1998 Agreements are subject to the Company's right of repurchase
which lapsed 7/48 on December 3, 1997 and 1/42 per month thereafter. The
Company's option to repurchase the unvested shares terminates upon the
occurrence of certain events within one year of a change of control, as defined
in the June 10, 1998 Agreements. The June 10, 1998 Agreements give the Company
a right of first refusal before a founder may transfer or sell any of his
shares.
With respect to the June 10, 1998 Agreements, the Company's right to
repurchase unvested options terminates if within one year of the change of
control (as defined in the December 23, 1997 Agreements): (i) there is a
decrease in the employee's base salary, benefits and/or bonus compensation,
(ii) there is a material breach by the Company of the June 10, 1998 Agreement
or the applicable founder's employment agreement or (iii) the Company fails to
obtain the assumption of the June 10, 1998 Agreement or the applicable
founder's employment agreement by the Company's successor or assign.
With respect to the December 23, 1997 Agreements, a change of control shall
be deemed to have occurred and the Company's right to repurchase unvested
options terminates, upon any of the following events: (i) the direct or
indirect sale or exchange by the stockholders of the Company of all or
substantially all of the stock of the Company where the stockholders of the
Company before such sale or exchange do not retain, directly or indirectly, at
least a majority of the beneficial interest in the voting stock of the Company;
(ii) a merger in which the stockholders of the Company before the merger do not
retain, directly or indirectly, at least a majority of the beneficial interest
in the voting stock of the Company; or (iii) the sale, exchange, or transfer of
all or substantially all of the Company's assets (other than a sale, exchange,
or transfer to one or more corporations where the stockholders of the Company
before such sale, exchange, or transfer retain, directly or indirectly, at
least a majority of the beneficial interest in the voting stock of the
corporation(s) to which the assets were transferred). Therefore the closing of
the Offer constitutes a change of control under the December 23, 1997
Agreements.
A-13
Rescission Agreements
Prior to the Company's initial public offering, the Company's stock option
plans permitted employees to exercise their stock options by issuing the
Company a full recourse promissory note, secured by the stock obtained upon
exercise of the option. This provision in the Company's stock option plans was
designed to allow employees to obtain shares when the exercise price equalled
the then current fair market value. From adoption of the Company's first stock
option plan until the date of the Company's initial public offering, most of
the Company's employees who received stock options exercised them through the
issuance of promissory notes. Due to the decline in share price of the
Company's stock in recent months, in December 2000 the principal amounts of
many outstanding promissory notes were greater than the value of the respective
shares of stock securing such notes (the "Underwater Notes"). As a result of
the large number of employees with outstanding Underwater Notes, many with
significant outstanding principal amounts, employee morale was threatened. In
addition, the Company had received several threats of litigation by current and
former employees challenging the Underwater Notes.
Under the Merger Agreement it is a condition to the closing of the Offer
that prior to December 31, 2000 the Company enter into rescission agreements
with, and obtain releases from, holders of at least 80% of the aggregate
outstanding principal amount of all Underwater Notes issued during 2000 (the
"2000 Promissory Notes"). In addition, it is a condition of the Merger that the
Company enter into rescission agreements and releases with all other persons
holding Underwater Notes prior to the closing of the Merger. On December 20,
2000, in connection with, and conditioned on, the approval of the Merger
Agreement, after considering the reasons for the transaction with Hughes, and
determining that the rescission complied with the requirements of Delaware law,
the Board of Directors of the Company approved the rescission of the option
exercises and transactions in which Underwater Notes were issued.
On December 21, 2000, the date of the Merger Agreement, the aggregate
outstanding principal amount of the 2000 Promissory Notes was $12,015,540.
Between the date the Merger Agreement was executed and December 31, 2000, the
Company entered into Option Exercise and Note Rescission Agreements (the
"Rescission Agreements") and Mutual Releases (the "Releases"), forms of which
are filed as exhibits hereto and incorporated by reference, with 67 persons
representing $1,971,890 in aggregate outstanding principal amount under the
2000 Promissory Notes (or 99.6% of the total aggregate outstanding principal
amount under the 2000 Promissory Notes). Accordingly, the condition in the
Merger Agreement relating to the rescission of the Underwater Notes and
associated option exercises has been satisfied. The net result of the
rescission is that employees hold options at the original exercise price. No
cash exchanged hands in connection with the original option exercise or at the
rescission.
Each Rescission Agreement provides for the rescission of the note maker's
option exercise and promissory note, the cancellation and re-conveyance of the
promissory note to such note maker and the tender of the shares issued upon
exercise of such note maker's option to the Company. The Release provides that
the Company and the note maker each release and discharge any and all claims
they may have against each other. As of January 31, 2001, the Company had
entered into Rescission Agreements and Releases with 76 people representing
100% of the total $12,804,540 in outstanding principal amount under the
Underwater Notes.
A-14
The following director and executive officers of the Company entered into a
Rescission Agreement and Release with the Company providing for the rescission
of his or her option exercise and promissory note, the cancellation and re-
conveyance of his or her promissory note and the tender to the Company of the
shares issued upon exercise of his or her option:
Option Shares Principal Amount of
Name & Title Exercise Price Rescinded Note Rescinded
------------ -------------- --------- -------------------
Randall Strahan................ $12.00 50,000 $ 600,000
Director
Kevin Grundy................... $ 9.00 150,000 $1,350,000
Senior Vice President,
Engineering
Thomas Obenhuber............... $ 9.00 150,000 $1,350,000
Senior Vice President,
Corporate Development
Edward Hayes................... $ 3.00 370,000 $1,110,000
Executive Vice President and
Chief Financial Officer
David Wilson................... $ 9.00 100,000 $ 900,000
Vice President, Financial
Services
Scott Martin................... $ 3.00 245,000 $ 735,000
Executive Vice President,
Chief Administrative Officer
and
Corporate Secretary
Vicki Foshee................... $ 3.00 85,000 $ 255,000
Senior Vice President,
Service Delivery and Support
401(k) Plan
The Company has 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 his or her 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 the Company 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 full 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 the Company has 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.
Director Compensation
All non-employee directors who commence service following the initial public
offering are granted an option to purchase 40,000 Shares on the date on which
they commence their board service. These Shares will vest and become
exercisable in four equal annual installments. The exercise price shall be the
closing price of the stock on the date of grant.
All non-employee directors who have served for at least six (6) months prior
to the Company's annual stockholder meeting will be granted an additional
option to purchase 10,000 Shares on the date of the annual meeting. These
Shares will vest and become exercisable in full on the day immediately
preceding the date of the next annual meeting. The exercise price shall be the
closing price of the stock on the date of grant.
A-15
Non-employee, non-affiliate directors shall receive an annual cash retainer
of $18,000 paid quarterly ($4,500 per quarter) at the end of each quarter and
an additional $5,000 paid quarterly ($1,250 per quarter) at the end of each
quarter for each committee on which such director serves. In lieu of a
quarterly cash payment a director may elect to take such payment in the form of
stock or stock options. If a director elects to receive stock, the number of
Shares to be issued will be determined by dividing the payment to be received
by the closing price of the stock on the date of payment. If a director elects
to receive a stock option, the number of Shares subject to the option will be
determined by dividing the payment to be received by 50% of the closing price
and the exercise price of the option shall be 50% of the closing price.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent of a registered
class of the Company's equity securities, to file with the SEC initial reports
of ownership and reports of changes in ownership of Shares and other equity
securities of the Company. Officers, directors, and greater than ten-percent
stockholders are required to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely upon a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the last fiscal year ended December 31, 2000, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with by such persons.
A-16
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial Ownership
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of January 30, 2001, 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 "Executive Compensation;"
. 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) 81,356,495 shares outstanding as of January 30,
2001. 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 subject to options exercisable within 60 days following
January 30, 2001 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 shown as
beneficially owned by them.
Shares Subject
Shares Percent of to Right of
Beneficially Shares Repurchase as
Name or Group of Beneficial Owners Owned Outstanding of 12/31/00
---------------------------------- ------------ ----------- --------------
Directors and Executive Officers
David Cowan....................... 9,050,088(1) 11.12% --
Bessemer Ventures Partners
535 Middlefield Road, Suite 245
Menlo Park, California 94025
Patti Hart........................ 3,577,137 4.40% 2,016,421
Christie Hefner................... 0 * --
Peter Olson....................... 2,500,065 3.07% --
Andrew Rappaport ................. 15,026,102(2) 18.50% --
August Capital
2480 Sand Hill Road, Suite 101
Menlo Park, California 94025
James Scheinman .................. 6,382,632(3) 7.75% --
NBC Internet, Inc.
225 Bush Street
San Francisco, California 94104
Elisabeth Sami ................... 8,779,198(4) 10.65% --
National Broadcasting Company,
Inc.
30 Rockefeller Plaza
New York, NY 10112
A-17
Shares Subject
Shares Percent of to Right of
Name or Group of Beneficial Beneficially Shares Repurchase as
Owners Owned Outstanding of 12/31/00
--------------------------- ------------ ----------- --------------
Michael Solomon ................. 8,538,355(5) 10.49% 72,844
Mohr, Davidow Ventures
2775 Sand Hill Road
Menlo Park, California 94025
Randall Strahan ................. 311,500(6) * --
Mohr, Davidow Ventures
2775 Sand Hill Road
Menlo Park, California 94025
Scott Martin..................... 246,167(7) * --
Edward Hayes..................... 371,167(8) * --
Jim Morrissey.................... 800,000 * 533,334
All directors and officers as a
group (Twelve persons)(12)...... 55,582,411(9) 68.10% 2,622,599
5% Stockholders:
Entities affiliated with August 15,026,102(2) 17.76% --
Capital, L.P ...................
2480 Sand Hill Road, Suite 101
Menlo Park, California 94025
NBC Internet, Inc. .............. 6,382,632(3) 7.75% --
225 Bush Street
San Francisco, California 94104
Entities affiliated with National
Broadcasting Company, Inc ...... 8,779,198(4) 10.65% --
30 Rockefeller Plaza
New York, NY 10112
Entities affiliated with Bessemer 9,050,088(1) 11.12% --
Venture Partners ...............
1400 Old Country Road, Suite 407
Westbury, New York 11590
Entities affiliated with Mohr, 8,849,855(10) 10.87% 72,844
Davidow Ventures ...............
2775 Sand Hill Road
Menlo Park, California 94025
- --------
* Represents less than 1%
(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.
A-18
(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 Shares held 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 subject to a warrant exercisable within 60
days of December 31, 2000. James Scheinman disclaims beneficial ownership
of these shares except to the extent of his pecuniary interest in NBC
Internet, Inc.
(4) 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 per share and warrants to
purchase 200,000 Shares held by General Electric Company, all of which are
exercisable at $12.00 per share. Elisabeth Sami disclaims beneficial
ownership of these Shares except to the extent of her pecuniary interest in
National Broadcasting Company, Inc.
(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. 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 owns 1,893,662 Shares in his own name which includes 72,844 Shares
subject to the Company's right of repurchase as of January 3, 2001, which
lapses over time so long as Mr. Solomon continues to serve as an advisor to
us.
(6) Includes 50,000 Shares subject to options exercisable within 60 days of
December 31, 2000. These options had been exercised on March 14, 2000,
however, this exercise was rescinded on December 22, 2000, and the Shares
are now deemed exercisable options (see section entitled "Rescission
Agreements").
(7) Represents 245,000 Shares subject to options exercisable within 60 days of
December 31, 2000. These options had been exercised on December 16, 1999,
however, this exercise was rescinded on December 22, 2000, and the Shares
are now deemed exercisable options.
(8) Includes 370,000 Shares subject to options exercisable within 60 days of
December 31, 2000. These options had been exercised on January 5, 2000,
however, this exercise was rescinded on December 22, 2000, and the Shares
are now considered exercisable options.
A-19
(9) Includes the Shares beneficially owned by the all directors and named
executive officers.
(10) 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 beneficially owned by Mr. Solomon personally
and 311,500 Shares beneficially owned by Mr. Strahan personally.
Agreements Concerning Change of Control
Tender Agreements with Certain Officers, Directors and other Stockholders
In connection with the Merger Agreement, Hughes, Purchaser and the
stockholders identified in the chart below have entered into a Tender and
Stockholder Support Agreement (the "Tender Agreement"), dated December 21,
2000, pursuant to which the stockholders identified below have (i) agreed to
tender and sell their Shares to the Purchaser pursuant to the Offer, (ii)
agreed not to withdraw any Shares tendered in the Offer, (iii) agreed to vote
such Shares in favor of the Merger and the Merger Agreement and against any
acquisition proposal other than the Merger and (iv) granted to Hughes and
certain officers of Hughes an irrevocable proxy to vote such Shares in favor of
the transactions contemplated by the Merger Agreement.
Shares of
Name and Address Common Stock
---------------- ------------
Entities affiliated with August Capital......................... 15,026,102
Entities affiliated with Bessemer Ventures Partners ............ 9,050,088
Entities affiliated with Mohr, Davidow Ventures................. 8,799,855
NBC Internet, Inc............................................... 5,343,511
NBC-TLCT Holding, Inc. ......................................... 6,679,389
Kevin Grundy.................................................... 1,619,075
Edward Hayes.................................................... 1,167
Patti Hart...................................................... 3,577,137
Christie Hefner................................................. 0
Scott Martin.................................................... 1,167
Thomas Obenhuber................................................ 1,505,467
Peter Olson..................................................... 2,500,065
Matthew Stepovich............................................... 1,056,184
Merger Agreement
The Company entered into the Merger Agreement pursuant to which: (i)
Purchaser shall commence an offer to purchase all outstanding Shares, of the
Company at a price of $2.15 per Share, net to the seller in cash (the "Offer")
without interest; and (ii) following the successful completion of the Offer,
upon approval by a stockholder vote, if required, and subject to certain other
conditions, Purchaser will be merged with and into the Company, with the
Company continuing as the surviving corporation and a wholly owned subsidiary
of Hughes.
A-20
EXHIBIT A
TELOCITY DELWARE, INC. AUDIT COMMITTEE CHARTER
Item 1. Statement of Policy
This Charter specifies the scope of the Audit Committee's (the "Committee")
responsibilities, and how it carries out those responsibilities, including the
structure, processes, and membership requirements. The primary function of the
Committee is to assist the Board of Directors (the "Board") in fulfilling its
financial oversight responsibilities by reviewing and reporting to the Board
upon: the financial reports and other financial information provided by the
Company to any governmental body or to the public; the Company's systems of
internal and external controls regarding finance, accounting, legal compliance
and ethics that management and the Board have established; and the Company's
auditing, accounting and financial reporting processes in general. Consistent
with this function, the Committee should encourage continuous improvement of,
and should foster adherence to, the Company's financial policies, procedures
and practices at all levels.
The Committee's primary duties and responsibilities are to:
Serve as an independent and objective party to monitor the Company's
financial reporting process and internal control systems.
Review and appraise the audit efforts and independence of the Company's
auditors.
Provide an open avenue of communication among the independent auditors,
financial and senior management, and the Board.
The Committee will primarily fulfill these responsibilities, and others as may
be prescribed by the Board from time to time, by carrying out the activities
enumerated in Section IV of this Charter.
Item 2. Organization and Membership Requirements
The Committee shall be comprised of three or more directors as determined by
the Board, each of whom shall be independent directors, and free from any
relationship that, in the opinion of the Board, would interfere with the
exercise of his or her independent judgment as a member of the Committee. A
member of the Committee shall be considered independent if, among other things,
such Director:
a. Is not an employee of the Company or its affiliates and has not been
employed by the Company or its affiliates within the past three years.
b. Is not a member of the immediate family of an executive officer of
the Company or its affiliates who currently serves in that role or did so
during the past three years.
c. Has not accepted more than $ 60,000 in compensation from the Company
during the previous fiscal year (excluding compensation and the related
benefits for Board service, retirement plan benefits or non-discretionary
compensation).
d. Has not been a partner, controlling stockholder or an executive
officer of any for-profit business to which the Company made, or from which
it received, payments (other than those which arise solely from investments
in the Company's securities) that exceed five percent of the Company's
consolidated gross revenues for that year, or $200,000, whichever is more,
in any of the past three years.
e. Is not an executive of another corporation on whose Compensation
Committee any of the Company's current executives serves.
All members of the Committee must be able to read and understand fundamental
financial statements, including a balance sheet, income statement, and cash
flow statement. In addition, at least one member must
A-21
have past employment experience in finance or accounting, professional
certification in accounting, or other comparable experience or background
resulting in the individual's financial sophistication, including being or
having been a chief executive, chief financial, or other senior officer with
financial oversight responsibilities.
The members of the Committee shall be elected by the Board at the annual
organizational meeting of the Board and shall serve until their successors
shall be duly elected and qualified. Unless a chairman is elected by the full
Board, the members of the Committee may designate a chairman by majority vote
of the full Committee membership.
Item 3. Meetings
As part of its job to foster open communication, the Committee must meet at
least annually with management and the independent auditors in separate
executive sessions to discuss any matters that the Committee or each of these
groups believe should be discussed privately. In addition, the Committee or at
least its Chair should meet with the independent auditors and management
quarterly to review the Company's financial statements consistent with Item 4
Part 6 below.
Item 4. Processes
To fulfill its responsibilities and duties the Committee shall:
Documents/Reports Review
1. Obtain the Board members' approval of this Charter.
2. Review the organization's annual audited financial statements and any
reports or other financial information submitted to any governmental body,
or the public, including any certification, report, opinion, or review
rendered by the independent auditors.
3. Review the regular Management Letter to management prepared by the
independent auditors and management's response.
4. Review related party transactions for potential conflicts of
interests.
5. Review the interim financial statements with financial management and
the independent auditors prior to the filing of the Company's Form 10-K and
Form 10-Qs. The chairman of the Committee may represent the entire
Committee for purposes of this review. These meetings should include a
discussion of the independent auditors judgment quality of the Company's
accounting and any uncorrected misstatements as a result of the auditors
quarterly review.
6. Maintain written minutes of its meetings, which minutes will be filed
with the minutes of the meetings of the Board. The Committee will also
record its summaries of recommendations to the Board in written form that
will be incorporated as part of the minutes of the Board meeting at which
those recommendations are presented.
Independent Auditors
7. Recommend to the Board the selection of the independent auditors,
considering independence and effectiveness.
8. Obtain from the independent auditors a formal written statement
delineating all relationships between the auditor and the Company, and
discussing with the auditor any disclosed relationships or services that
may impact auditor objectivity and independence (consistent with
Independence Standards Board Standard No. 1).
9. Taking, or recommending that the Board take, appropriate action to
oversee the independence of the outside auditor.
A-22
10. Review the performance of the independent auditors and approve any
proposed discharge of the independent auditors when circumstances warrant.
11. Periodically consult with the independent auditors out of the
presence of management about internal controls and the fullness and
accuracy of the Company's financial statements.
Financial Reporting Processes
12. In consultation with the independent auditors, review the integrity
of the Company's financial reporting processes, both internal and external.
13. Consider the independent auditors' judgments about the quality and
appropriateness of the Company's accounting principles as applied in its
financial reporting.
14. Consider and approve, if appropriate, major changes to the Company's
auditing and accounting principles and practices as suggested by the
independent auditors or management.
Process Improvement
15. Review with both management and the independent auditors any
significant judgments made in management's preparation of the financial
statements and the view of each as to appropriateness of such judgments.
16. Review with both management and the independent auditors any
significant difficulties encountered during the course of the audit,
including any restrictions on the scope of work or access to required
information.
17. Review any significant disagreement among management and the
independent auditors in connection with the preparation of the financial
statements.
18. Review with the independent auditors and management the extent to
which changes or improvements in financial or accounting practices, as
approved by the Committee, have been implemented.
19. Provide oversight and review the Company's asset management
policies, including an annual review of the Company's investment policies
and performance for cash and short-term investments.
A-23
SCHEDULE I
As of the date of this Information Statement, Hughes has not determined who
will be Hughes' Designees. However, Hughes' Designees will be selected from the
following list of directors and officers of Hughes or its affiliates. The
information contained herein concerning Hughes and its directors and executive
officers and those of its affiliates has been furnished by Hughes and the
Purchaser. The Company assumes no responsibility for the accuracy or
completeness of such information.
The name, present principal occupation or employment and five-year
employment history of each of the persons is set forth below. None of the
persons listed below owns any Shares or has engaged in transactions with
respect to Shares during the past 60 days. During the last five years, none of
the persons listed below has been convicted in a criminal proceeding (excluding
traffic violations or similar misdemeanors) nor was such person a party to a
civil proceeding of a judicial or administrative body of competent
jurisdiction, and as a result of such proceeding was or is subject to a
judgment, decree or final order enjoining future violations of, or prohibiting
activities subject to, federal or state securities laws or finding any
violation of such laws. None of the persons listed below (i) is currently a
director of, or holds any position with, the Company, (ii) has a familial
relationship with any director or executive officers of the Company, or (iii)
based on information provided to the Company by Hughes (which is to the best of
Hughes' knowledge), beneficially owns any securities (or any right to acquire
securities) of the Company. The Company has been advised by Hughes that, to the
best knowledge of Hughes, none of the Hughes' Designees listed below have been
involved in any transactions with the Company or any of its directors, officers
or affiliates which are required to be disclosed pursuant to the rules and
regulations of the Securities and Exchange Commission, except as may be
disclosed herein
HUGHES' DESIGNEES
The following table sets forth the name, present principal occupation or
employment and material occupations, positions, offices or employments for the
past five years of each of Hughes' Designees. Unless otherwise indicated, the
current business address of each person is 200 North Sepulveda Boulevard, El
Segundo, California 90245. Unless otherwise indicated, each such person is a
citizen of the United States and each occupation set forth opposite an
individual's name refers to employment with Hughes.
Designees include:
Present Principal Occupation or Employment;
Name Material Positions Held During the Past Five Years
---- --------------------------------------------------
Michael T. Smith ......... Chairman of the Board and Chief Executive Officer
of Hughes from October 1997 to the present. Vice
Chairman of the Board of Hughes from May 1992 to
October 1997.
Eddy W. Hartenstein ...... Chairman of the Board of DIRECTV Broadband Inc.
Chairman of the Board of DIRECTV Enterprises, Inc.
from January 1994 to the present. Senior Executive
Vice President of Hughes from February 2000 to the
present. President of DIRECTV Enterprises, Inc.
from January 1994 to April 2000. Vice President of
Hughes from December 1997 to January 1999. Senior
Vice President of Hughes from January 1999 to
February 2000.
Lawrence N. Chapman ...... President of DIRECTV Broadband Inc. Executive Vice
2230 East Imperial Highway President of DIRECTV Enterprises, Inc. from May
El Segundo, CA 90245 1998 to the present. Senior Vice President of
DIRECTV Enterprises, Inc. from November 1994 to May
1998.
Roxanne S. Austin ........ Senior Vice President and Chief Financial Officer
of DIRECTV Broadband Inc. Senior Vice President and
Chief Financial Officer of Hughes from August 1997
to the present. Vice President and Controller of
Hughes from 1993 to August 1997.
A-24
Present Principal Occupation or Employment;
Name Material Positions Held During the Past Five Years
---- --------------------------------------------------
Steven J. Cox............. Vice President of DIRECTV Broadband Inc. Executive
Vice President of
DIRECTV Global Digital Media, Inc. from April 2000
2230 East Imperial Highway to the present. Senior
El Segundo, CA 90245 Vice President of DIRECTV Enterprises, Inc. from
March 1997 to April 2000. Senior Vice President and
General Counsel of DIRECTV Enterprises, Inc. from
July 1995 to March 1997. Vice President and General
Counsel of DIRECTV Enterprises, Inc. from January
1995 to July 1995.
Larry D. Hunter........... Vice President of DIRECTV Broadband Inc. Chairman
and President of DIRECTV Japan Management, Inc. and
Corporate Vice President of Hughes from August 1998
to the present. Senior Vice President, General
Counsel and Secretary of DIRECTV Enterprises, Inc.
from April 1997 to August 1998. Assistant General
Counsel of Hughes from 1996 to April 1997.
A-25
ANNEX B
[LETTERHEAD OF CREDIT SUISSE FIRST BOSTON CORPORATION]
December 21, 2000
Board of Directors
Telocity Delaware, Inc.
10355 North De Anza Boulevard
Cupertino, California 95014
Members of the Board:
You have asked us to advise you with respect to the fairness, from a financial
point of view, to the holders of the common stock of Telocity Delaware, Inc.
("Telocity"), other than Hughes Electronics Corporation ("Hughes") and its
affiliates, of the Cash Consideration (as defined below) set forth in the
Agreement and Plan of Merger, dated as of December 21, 2000 (the "Merger
Agreement"), among Hughes, DIRECTV Broadband Inc., a wholly owned subsidiary of
Hughes ("Sub"), and Telocity. The Merger Agreement provides for, among other
things, (i) a tender offer by Sub to purchase all outstanding shares of the
common stock, par value $0.001 per share, of Telocity ("Telocity Common Stock")
at a purchase price of $2.15 per share, net to the seller in cash (the "Cash
Consideration" and, such tender offer, the "Tender Offer") and (ii) subsequent
to the Tender Offer, the merger of Sub with and into Telocity (the "Merger"
and, together with the Tender Offer, the "Transaction") pursuant to which each
outstanding share of Telocity Common Stock not acquired in the Tender Offer
will be converted into the right to receive the Cash Consideration.
In arriving at our opinion, we have reviewed the Merger Agreement and certain
publicly available business and financial information relating to Telocity. We
also have reviewed certain other information relating to Telocity, including
financial forecasts, provided to or discussed with us by Telocity, and have met
with the management of Telocity to discuss the business and prospects of
Telocity, including the liquidity needs of, and capital resources available to,
Telocity. We have considered certain financial and stock market data of
Telocity, and we have compared those data with similar data for other publicly
held companies in businesses similar to Telocity, and we have considered, to
the extent publicly available, the financial terms of certain other business
combinations and other transactions which have recently been effected. We also
considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which we deemed
relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
such information being complete and accurate in all material respects. With
respect to the financial forecasts, we have been advised, and have assumed,
that such forecasts have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the management of Telocity as to
the future financial performance of Telocity. We have not been requested to
make, and we have not made, an independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of Telocity, nor have we been
furnished with any such evaluations or appraisals. Our opinion is necessarily
based upon information available to us, and financial, economic, market and
other conditions as they exist and can be evaluated, on the date hereof. In
connection with our engagement, we were requested to approach third parties to
solicit indications of interest in a possible acquisition of, or a strategic
transaction involving, Telocity, and we held discussions with certain of these
parties prior to the date hereof. Our opinion does not address the relative
merits of the Transaction and other business strategies available to Telocity,
nor does it address Telocity's decision to proceed with the Transaction.
We have acted as financial advisor to Telocity in connection with the
Transaction and will receive a fee for such services, a significant portion of
which is contingent upon the consummation of the Transaction. We also will
receive a fee upon the delivery of this opinion. We and our affiliates in the
past have provided services to
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Board of Directors
Telocity Delaware, Inc.
December 21, 2000
Page 2
Telocity and to Hughes and certain of its affiliates, and currently are
providing services to Hughes and certain of its affiliates, unrelated to the
proposed Transaction, for which services we have received, and will receive,
compensation. In the ordinary course of business, we and our affiliates may
actively trade the debt and equity securities of Telocity and of Hughes and its
affiliates for our and our affiliates' own accounts and for the accounts of
customers and, accordingly, may at any time hold long or short positions in
such securities.
It is understood that this letter is for the information of the Board of
Directors of Telocity in connection with its evaluation of the Transaction and
does not constitute a recommendation to any stockholder as to whether such
stockholder should tender shares of Telocity Common Stock pursuant to the
Tender Offer or how such stockholder should vote with respect to any matter
relating to the Merger.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the Cash Consideration to be received in the Transaction by the holders
of Telocity Common Stock, other than Hughes and its affiliates, is fair, from a
financial point of view, to such holders.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
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