-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NGMbzUDmvgb28Lxf2GwEErjjckrYmiHt89kwi79LkW1JYVvldZ1/SWjcNEPhCd7Z T6mK/Kky3/Oi4YBYoKyFwg== 0001012870-98-001657.txt : 19980624 0001012870-98-001657.hdr.sgml : 19980624 ACCESSION NUMBER: 0001012870-98-001657 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19980622 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITYSEARCH INC CENTRAL INDEX KEY: 0001006637 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954546874 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-57437 FILM NUMBER: 98652010 BUSINESS ADDRESS: STREET 1: 4502 DYER STREET CITY: LA CRESCENTA STATE: CA ZIP: 91214 BUSINESS PHONE: 6264050050 MAIL ADDRESS: STREET 1: 790 E COLORADO BLVD STREET 2: SUITE 200 CITY: PASADENA STATE: CA ZIP: 91101 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 22, 1998 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- CITYSEARCH, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- DELAWARE 7375 95-4546874 (STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.) INCORPORATION OR ---------------- ORGANIZATION) CITYSEARCH, INC. 790 E. COLORADO BOULEVARD, SUITE 200 PASADENA, CA 91101 (626) 405-0050 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- CHARLES CONN CHIEF EXECUTIVE OFFICER CITYSEARCH, INC. 790 E. COLORADO BOULEVARD, SUITE 200 PASADENA, CA 91101 (626) 405-0050 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ---------------- COPIES TO: LARRY W. SONSINI GLEN R. VAN LIGTEN JOHN T. SHERIDAN CRAIG E. SHERMAN NAN H. KIM ADAM J. ROSENBERG WILSON SONSINI GOODRICH & ROSATI VENTURE LAW GROUP PROFESSIONAL CORPORATION A PROFESSIONAL CORPORATION 650 PAGE MILL ROAD 2800 SAND HILL ROAD PALO ALTO, CA 94304 MENLO PARK, CA 94025 (650) 493-9300 (650) 854-4488 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ---------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] ---------------- CALCULATION OF REGISTRATION FEE
===================================================================================== PROPOSED MAXIMUM TITLE OF EACH PROPOSED MAXIMUM AGGREGATE AMOUNT OF CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE - ------------------------------------------------------------------------------------- Common Stock, $.01 par value................. $ $50,000,000 $14,750 =====================================================================================
(1)Includes shares that the Underwriters have the option to purchase to cover over-allotments, if any. (2)Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) promulgated under the Securities Act of 1933, as amended. ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION DATED JUNE 22, 1998 SHARES [LOGO OF CITYSEARCH.COM APPEARS HERE] COMMON STOCK All of the shares of Common Stock offered hereby are being offered by CitySearch, Inc. ("CitySearch" or the "Company"). Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price per share will be between $ and $ per share. See "Underwriting" for a discussion of factors to be considered in determining the initial public offering price. USA Networks, Inc., an existing stockholder of the Company that owns 11.8% of the Company prior to this offering (on a fully diluted, as-converted basis), has the right to purchase that number of shares of this offering that will enable USA Networks to own up to 14.9% of the Company after this offering (on a fully diluted, as converted basis), subject to certain limitations. See "Certain Transactions" and "Underwriting." Application has been made to have the Common Stock approved for listing on the Nasdaq National Market under the symbol "CTYS". THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Price to Underwriting Proceeds to Public Discount(1) Company(2) - -------------------------------------------------------------------------------- Per Share..................................... $ $ $ Total(3)...................................... $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) See "Underwriting" for information concerning indemnification of the Underwriters and other matters. (2) Before deducting offering expenses payable by the Company estimated at $ . (3) The Company has granted to the Underwriters a 30-day option to purchase up to an additional shares of Common Stock solely to cover over- allotments, if any. If the Underwriters exercise this option in full, the Price to Public will total $ , the Underwriting Discount will total $ and the Proceeds to Company will total $ . See "Underwriting." The shares of Common Stock are offered by the Underwriters named herein, subject to receipt and acceptance by them, and subject to their right to reject any order in whole or in part. It is expected that delivery of the certificates representing said shares will be made against payment therefor at the office of NationsBanc Montgomery Securities LLC on or about , 1998. ----------- NationsBanc Montgomery Securities LLC BancAmerica Robertson Stephens Donaldson, Lufkin & Jenrette Securities Corporation , 1998 [ARTWORK] The inside cover will contain four images consisting of screen shots from the Company's city guide web sites. An image of the Company's home page (www.citysearch.com) primarily containing a map of the U.S. will appear in the upper left corner. An arrow will point from the area of the map indicating the location of Toronto, Ontario to an image in the upper right area of the page containing a screen shot from the home page of the Toronto city guide web site (www.starcitysearch.com). Another arrow will lead from the area of the U.S. map indicating the location of Raleigh/Durham/Chapel Hill to an image in the lower right area of the page containing a screen shot from the home page of the Raleigh/Durham/Chapel Hill city guide web site (www.citysearch11.com). A third arrow will lead from the area of the U.S. map indicating the location of San Francisco to an image in the lower left area of the page containing a screen shot from the home page of the San Francisco city guide web site (www.citysearch7.com). CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING THE PURCHASE OF THE COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." The CitySearch logo is a registered United States trademark of the Company. "CitySearch" is a registered United States trademark of a third party, and the Company is the exclusive third party licensee of this trademark in its field of use. See "Risk Factors--Uncertain Protection of Intellectual Property; Risks of Third Party Licenses." This Prospectus also contains trademarks and tradenames of other companies. 2 The page will be divided by a vertical line roughly two-thirds of the distance across the page. The left area of the page will contain four screen shots from the Company's web site. The first screen shot depicts a home page from one of the Company's city guides. The second screen shot depicts an "arts and entertainment" topic page indicating a search for "jazz" events in the search box. The third screen shot depicts an event description created by the Company describing a jazz event. The fourth screen shot depicts the Web site of a business customer that hosts jazz events. The right column of the page will describe the content available on each of the four pages, e.g., "The home page indicates the content areas within the site, and contains the branding of CitySearch and its local market media partners." The page will contain three boxes. The first box will contain the names and/or logos of the Company's licensees, including washingtonpost.com, Los Angeles Times, the Toronto Star, The Melbourne Age, Big Colour Pages, The Sydney Morning Herald, The Dallas Morning News, Schibsted ASA, Scandinavia Online and The Baltimore Sun. The second box will contain names and/or logos of the Company's marketing partners, including American Express, Earthlink, Internet Travel Network, Guess?, WebTV Networks, Inc. etc. The third box will contain names and/or logos of the Company's local market media partners organized by the city in which the service is available, including KGO-TV, WTVD, other television stations and radio stations owned by CBS, Citadel Communications Corp., Clear Channel, and others who consent to use of their trademarks. PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including "Risk Factors" and Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. The discussion in this Prospectus includes forward-looking statements. The outcome of the events described in said forward-looking statements is subject to risks and uncertainties. The Company's actual results may differ materially from those discussed in such forward-looking statements. Factors that may cause or contribute to such differences include those discussed in sections entitled "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as those discussed elsewhere in this Prospectus. Except as otherwise specified, all information in this Prospectus reflects (i) the conversion of each outstanding share of Preferred Stock into Common Stock upon completion of this offering and (ii) no exercise of the Underwriters' over-allotment option. THE COMPANY CitySearch produces and delivers comprehensive local city guides on the World Wide Web (the "Web"), providing up-to-date information regarding arts and entertainment events, community activities, recreation, businesses, shopping, professional services and news/sports/weather to consumers in metropolitan areas. Each local city guide primarily consists of original content developed and designed specifically for the Web by the Company and its partners. The Company designs and produces custom-built Web sites and related services for local and regional businesses, aggregates them in a local city guide environment and provides business customers the ability to regularly update and expand the sites. This service offers local and regional businesses the opportunity to reach and interact with targeted consumers. The Company builds its city sites with the involvement of local government, community and volunteer associations, business and professional groups, educational institutions and local media companies. In addition, content generated by consumers through e-mail and bulletin boards, available in most sites, enhances the sense of community in CitySearch sites. CitySearch and its partners create comprehensive locally-focused content within a database that enables targeted, sophisticated searches across all content residing on a CitySearch site. In contrast, many search engines and navigational guides access pre-existing content from third party Web sites that may be incomplete or out of date. In its owned and operated markets, CitySearch offers a broad array of updated, local content that is relevant to consumers. In certain markets, CitySearch provides local media companies with the necessary technology and business expertise for its partners to design, launch and operate a co-branded CitySearch site. The Company's city guides have received numerous awards and recognition for design, functionality and content including PC Magazine's Editor's Choice, USA Today/Intelliquest's survey leader, the 1998 Webby award for best travel site, recognition by the New York Times as best overall online guide to New York City, How Magazine's Design Award and Net Guide's Platinum "Best of the Web" Award. CitySearch launched its initial site in the Raleigh-Durham-Chapel Hill metropolitan area in May 1996. The Company and its partners have since launched additional local city guides in Austin, Los Angeles, Nashville, New York City, Portland, Salt Lake City/Utah, the San Francisco Bay Area and Washington, D.C. in the U.S., and in Melbourne, Sydney and Toronto internationally. The Company plans to expand its service to additional national and international markets both by leveraging the standardized roll-out model it has developed through previous city launches and by partnering with major media companies in certain cities. The Company has, for instance, partnered with The Baltimore Sun, The Dallas Morning News, the Los Angeles Times, The Washington Post, The Melbourne Age, Schibsted ASA/Scandinavia Online, The Sydney Morning Herald and the Toronto Star. These major media partners bring capital, brand recognition, promotional strength and local knowledge to their CitySearch sites and allow the Company to build out its national and international network of sites faster than it could solely through owned and operated sites. The Company was organized under the laws of Delaware in September 1995. The Company's principal executive offices are located at 790 E. Colorado Boulevard, Suite 200, Pasadena, California 91101, and its telephone number at that address is (626) 405-0500. 3 THE OFFERING Common Stock offered................ shares Common Stock to be outstanding shares(1) after this offering................. Use of proceeds..................... The Company intends to use the net proceeds of this offering for general corporate purposes, including working capital, capital expenditures relating to the CitySearch site (such as enhancements to the Company's server and networking infrastructure) and expansion of its sales and marketing capabilities. See "Use of Proceeds." Proposed Nasdaq symbol.............. CTYS SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIOD FROM THREE MONTHS SEPTEMBER 20, 1995 YEAR ENDED ENDED (DATE OF FORMATION) DECEMBER 31, MARCH 31, TO DECEMBER 31, ---------------- -------------- 1995 1996 1997 1997 1998 ------------------- ------- ------- ------ ------ CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Subscription and services.............. $ -- $ 203 $ 4,913 $ 470 $2,563 Licensing and royalty.. -- -- 1,271 -- 528 ------- ------- ------- ------ ------ Total revenues....... -- 203 6,184 470 3,091 Loss from operations.... (313) (14,112) (36,741) (9,165) (8,150) Net loss................ (308) (13,897) (36,526) (9,081) (7,977) Historical basic and diluted net loss per share(2)............... $ (0.04) $ (1.58) $ (3.86) $(0.97) $(0.82) Pro forma basic and diluted net loss per share(2)............... $ (0.04) $ (1.10) $ (1.96) $(0.54) $(0.33) Shares used in computing historical basic and diluted historical net loss per share(2)...... 7,894 8,785 9,451 9,407 9,777 Shares used in computing pro forma basic and diluted net loss per share (2).............. 8,460 12,647 18,666 16,889 23,932
MARCH 31, 1998 ------------------------ ACTUAL AS ADJUSTED (3) ------- --------------- BALANCE SHEET DATA: Cash and cash equivalents............................. $16,455 $ Working capital....................................... 11,658 Total assets.......................................... 23,724 Long-term obligations, less current portion........... 2,758 Redeemable Convertible Preferred Stock................ 70,882 Total stockholders' equity (deficit).................. (55,795)
- -------- (1) Based on shares outstanding as of March 31, 1998. Does not include (i) 2,287,101 shares of Common Stock issuable upon exercise of options outstanding at March 31, 1998 at a weighted average price of $1.10 per share under the Company's 1996 Stock Option Plan, (ii) 479,739 shares of Common Stock available for future grant or issuance under the Company's 1996 Stock Option Plan and (iii) 93,305 shares of Common Stock issuable upon exercise of an outstanding warrant at an exercise price of $8.84 per share held by NationsBanc Montgomery Securities LLC. See "Capitalization," "Management--Employee Benefit Plans," "Underwriting" and Note 7 of Notes to Consolidated Financial Statements. (2) See Note 1 of Notes to Consolidated Financial Statements for an explanation of the determination of the number of shares used to compute basic and diluted pro forma and historical net loss per share. (3) Adjusted to reflect (i) the sale and issuance of the shares of Common Stock offered hereby at an assumed initial public offering price of $ per share and after deducting the underwriting discount and estimated offering expenses and (ii) the conversion of all outstanding shares of Preferred Stock into Common Stock upon the closing of this offering. See "Capitalization." 4 RISK FACTORS This offering involves a high degree of risk. In addition to the other information set forth in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing any of the shares of Common Stock of the Company. This Prospectus contains certain forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Prospectus should be read as being applicable to all forward-looking statements wherever they appear in this Prospectus. The Company's actual results could differ materially from the results discussed in this Prospectus. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in this Prospectus. LIMITED OPERATING HISTORY The Company was incorporated in September 1995 and launched its initial local city guide service in the Raleigh-Durham-Chapel Hill metropolitan area in May 1996. Accordingly, the Company has an extremely limited operating history upon which an evaluation of the Company and its prospects can be based. The Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets such as the Company's. Such risks include, but are not limited to, an evolving and unpredictable business model, management of growth, the Company's ability to anticipate and adapt to a developing market, acceptance by Internet users and business customers of the Company's local city guide concept and the ability of the Company to enter into relationships with additional media partners. To address these risks, the Company must, among other things, attract and retain an audience of frequent users of its service in its target markets, maintain its customer base and attract a significant number of new business customers in its target markets, respond to competitive developments, continue to form and maintain relationships with media partners, continue to attract, retain and motivate qualified persons, provide superior customer service, and continue to develop and upgrade its technologies and commercialize its services incorporating such technologies. There can be no assurance that the Company will be successful in addressing such risks, and a failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." ANTICIPATED CONTINUED OPERATING LOSSES The Company incurred net losses of $308,000, $13.9 million and $36.5 million for the period from September 20, 1995 (date of formation) to December 31, 1995, and the years ended December 31, 1996 and 1997, respectively, and $8.0 million for the three months ended March 31, 1998. At March 31, 1998, the Company had an accumulated deficit of $58.7 million. The Company believes that its future profitability and success will depend in large part on, among other things, its ability to generate sufficient revenues from sales of business Web sites to businesses and the licensing of its technology and business systems to partners setting up CitySearch services in partner-led markets, its ability to effectively maintain existing relationships with its media partners and its ability to successfully enter into new strategic relationships for distribution and increased usage of its offerings. Accordingly, the Company intends to expend significant financial and management resources on the roll- out of its service in new owned and operated and partner-led markets, site and content development, strategic relationships, technology and operating infrastructure. As a result, the Company expects to incur significant additional losses and continued negative cash flow from operations for the foreseeable future. There can be no assurance that the Company's revenues will increase or even continue at their current levels or that the Company will achieve or maintain profitability or generate cash from operations in future periods. In view of the rapidly evolving nature of the Company's business and its limited operating history, the Company believes that period-to-period comparisons of its operating results are not meaningful and should not be relied upon as an indication of future performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 5 FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING The Company requires substantial working capital to fund its business and expects to use a significant portion of the net proceeds of this offering to fund its operating losses. Since inception, the Company has experienced negative cash flow from operations and expects to continue to experience significant negative cash flow from operations for the foreseeable future. The Company currently believes that its existing capital resources, combined with the net proceeds of this offering, will be sufficient to meet its presently anticipated cash requirements through at least the next 12 months. Thereafter, the Company may be required to raise additional funds. No assurance can be given that the Company will not be required to raise additional financing prior to such time. If additional funds are raised through the issuance of equity securities, stockholders of the Company may experience significant dilution. Furthermore, there can be no assurance that additional financing will be available when needed or that if available, such financing will include terms favorable to the Company or its stockholders. If such financing is not available when required or is not available on acceptable terms, the Company may be unable to develop or enhance its services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." UNPREDICTABILITY OF FUTURE REVENUES; FLUCTUATIONS IN OPERATING RESULTS As a result of the Company's limited operating history and the emerging nature of the local city guide market in which the Company competes, the Company is unable to accurately forecast its revenues. The Company's current and future expense levels are based predominantly on its operating plans and estimates of future revenues and are to a large extent fixed. The Company's business model, particularly in its owned and operated markets, requires significant staffing to develop content and to create and maintain relationships with small and medium size businesses. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenues would likely have an immediate material adverse effect on the Company's business, financial condition and results of operations. Further, the Company currently intends to increase its operating expenses to roll out its service in new markets, to fund increased sales and marketing and customer service operations and to further develop its technology infrastructure. To the extent such expenses precede or are not subsequently followed by increased revenues, the Company's operating results will fluctuate and net anticipated losses in a given quarter may be greater than expected. The Company expects to experience significant fluctuations in its future operating results due to a variety of factors, many of which are outside of the Company's control. Factors that may adversely affect the Company's operating results include, but are not limited to, the ability of its partners to meet roll-out schedules for the Company's city guide service, the timing and amount of license and royalty payments from the Company's partners, the Company's ability to retain existing business customers, attract new business customers at a steady rate and maintain customer satisfaction, the timing and volume of new business Web site orders and the Company's capacity to meet such orders, the Company's ability to maintain or increase current rates of sales productivity, the announcement or introduction of new or enhanced sites and services by the Company or its competitors, the amount of traffic on the Company's online sites, the amount of expenditures for online advertising by businesses, the level of use of online services and consumer acceptance of the Internet for services such as those offered by the Company, the Company's ability to upgrade and develop its systems and attract personnel in a timely and effective manner, the amount and timing of operating costs and capital expenditures relating to expansion of the Company's business and infrastructure, technical difficulties, system downtime or Internet brownouts, political or economic events affecting the cities in which the Company operates and general economic conditions. Unfavorable changes in any of the above factors could adversely affect the Company's revenues, gross margins and results of operations in future periods. Accordingly, the Company believes that period-to-period comparisons of its results of operations should not be relied upon as an indication of future performance. In addition, the results of any quarterly period are not indicative of results to be expected for a full fiscal year. Finally, as a result of the foregoing factors, the Company's annual or quarterly results of 6 operations may be below the expectations of public market analysts or investors, in which case the market price of the Common Stock could be materially and adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." NEW AND UNCERTAIN MARKET; UNPROVEN MARKET ACCEPTANCE The markets for the Company's service have only recently begun to develop, are rapidly evolving and are characterized by a number of entrants that have introduced or plan to introduce online city guides. As is typical in the case of a new and rapidly evolving industry, demand and market acceptance for recently introduced services are subject to a high level of uncertainty and risk. Because the markets for the Company's services are new and evolving, it is difficult to predict the size and future growth rate, if any, of these markets. There can be no assurance that the markets for the Company's services will develop or that demand for the Company's services will emerge or become economically sustainable. In particular, the success of the Company's city guide service will depend on the willingness of local businesses to pay for custom business Web sites developed by the Company and to retain the service, which in turn may depend on the popularity of the guides to consumers and on the actual or perceived revenues attributable to the Company's services. If such businesses are unwilling to pay for the Company's service or retain the service, if the markets for the Company's service otherwise fail to develop or develop more slowly than anticipated, or if business customer turnover rates are higher than projected by the Company, the Company's business, financial condition and results of operations will be materially and adversely affected. In addition, the turnover rate of business customers using the Company's service has been higher than the Company anticipated in some of its initial markets and there can be no assurance that such turnover rates would be at levels which would not in the future materially and adversely affect the Company's business, financial condition and results of operations. RELIANCE ON STRATEGIC RELATIONSHIPS IN PARTNER-LED MARKETS An important element of the Company's current business strategy is to enter into agreements with local media companies to establish and support city guides. The Company has entered into, and intends to enter into agreements with media companies in the future to address opportunities in certain markets. In these markets, the Company develops and designs a city guide for local media companies and licenses certain intellectual property to such companies in exchange for certain up-front and continuing license payments and royalty payments. These royalty payments are based on the amount of revenues generated by such companies through the partner-led city guides. The Company currently anticipates that royalty payments from such agreements will constitute a significant portion of its revenues in future periods. Accordingly, the Company's success will depend in large part upon the ability of its partners to timely launch city guides in the Company's partner-led markets and the extent to which these partners are able to generate revenue through their city guides. Under the terms of the Company's agreements with its media company partners, the Company has very limited control over the amount of time and financial resources that a partner devotes to the launch of a city guide or over the day-to-day operations and management of the city guide, including the marketing and sale of business Web sites to potential business customers. For example, one of the Company's partners did not launch its city guide in accordance with the Company's initial expectations, thereby delaying revenues subject to royalty payments payable to the Company. There can be no assurance that the Company's partners that are in the process of developing new city guides or the Company's future partners will launch their sites in a timely manner, or at all, or that if launched, such sites will generate revenues consistent with the Company's expectations. There also can be no assurance that the Company will successfully enter into partnerships with media companies in additional cities. Furthermore, due to the Company's limited experience with partner-led city guides, the Company is unable to accurately forecast its revenues to be derived from these agreements with such partners. In addition, certain of the Company's agreements with its media company partners may be terminated for non-performance or material breach. Any failure by one of the Company's proposed partner-led city guides to launch in a timely manner or by one of the Company's existing partner-led city guides to generate sufficient revenues, or a failure by the Company to enter into or to renew agreements with media company partners on terms favorable to the Company, or early termination of certain existing agreements could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Strategic Alliances." 7 DEPENDENCE ON SALES PERSONNEL The Company currently derives and, for the foreseeable future, intends to derive a substantial portion of its revenues from sales of business Web sites to local businesses in markets in which the Company owns and operates city guides. The Company depends on its direct sales force to sell business Web sites in cities in these markets. The creation of new revenue from the Company's city guide service and its roll-out in additional cities requires the services of a highly trained sales force working directly for the Company. Accordingly, a shortage in the number of trained salespeople could limit the Company's ability to sell business Web sites as it rolls out its service in new cities or to maintain or increase its number of business customers in cities in which the Company already operates. The Company has in the past and expects in the future to experience a high rate of turnover in its direct sales force. There can be no assurance that such turnover will not increase in the future or otherwise have a material adverse effect on the usage of the Company's services, which could have a material adverse effect on the Company's business, financial condition and results of operations. UNCERTAIN ACCEPTANCE AND MAINTENANCE OF CITYSEARCH BRAND The Company believes that establishing and maintaining the CitySearch brand is critical to its efforts to attract consumers and business customers to its sites and that the importance of brand recognition will increase due to the growing number of Internet sites and relatively low barriers to entry to providing Internet content. Promotion of the CitySearch brand will depend largely on the success of the Company and its media company partners in providing high quality Internet content. Under the terms of its agreements with its media company partners, the Company has very limited control over the content provided on the partners' sites. If consumers and business customers do not perceive the content of the Company's or its partners' existing sites to be of high quality, the Company will be unsuccessful in promoting and maintaining its brand. Furthermore, not all of the Company's partners promote the CitySearch brand on their services with a high level of prominence. Other than links to the Company's city sites, the Company has not entered into a significant distribution relationship with any major online search or navigation company. In order to attract and retain consumers and business customers, and to promote the CitySearch brand in response to competitive pressures, the Company may find it necessary to increase its budget for content or otherwise to increase substantially its financial commitment to creating and maintaining a distinct brand loyalty among consumers and business customers. If either the Company or its media company partners are unable to provide high quality content or otherwise fail to promote and maintain the CitySearch brand, or if the Company incurs excessive expenses in an attempt to improve its content or promote and maintain its brand, the Company's business, financial condition and results of operations will be materially and adversely affected. The Company has also entered into a large number of marketing agreements with local television, radio and other entities to promote its brand and increase usage of the city sites. There can be no assurance that such relationships will be successful or continue in the future on terms acceptable to the Company. RISKS ASSOCIATED WITH ROLL-OUT OF CITYSEARCH SERVICE The Company's future success will depend to a significant extent on the Company's ability, on its own and with partners, to rapidly roll out its local city guide service in additional cities in the United States and internationally. As of June 1, 1998, the Company had launched its local city guide service in 12 metropolitan areas and intends to expand its service in additional cities in the U.S. and internationally. There can be no assurance that the Company will be able to launch its service in additional markets in a cost-effective or timely manner or in accordance with its planned schedule, or that any newly launched service will achieve market acceptance. Any new service that is not favorably received by local businesses or consumers could damage the Company's reputation or the CitySearch brand. Launching the CitySearch service will also require significant additional expenses and will strain the Company's management, financial and operational resources. In particular, the launch of the CitySearch service in additional cities will require the Company to expand and upgrade its technology infrastructure and business systems, including its enterprise management system (i.e., an integrated set of software tools and business processes for sales force management, Web site production, customer service and billing) and its business Web site production system. The Company is in the process of launching a new version of the back office software underlying its CitySearch service. There can be no assurance that this new version will function as intended, and any failure of the Company's software could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, the strain 8 placed on the Company's resources by simultaneous launches in multiple cities may adversely affect the roll-out schedule or quality of the service in a particular city. The Company's failure to launch its service in new markets in a timely and cost effective manner in accordance with its planned schedule or the lack of market acceptance of new services will have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION The markets for local interactive content and services are highly competitive. Currently, the Company's primary competitors include Digital City, Inc., a company wholly owned by America Online, Inc. and Tribune Company, Microsoft Corporation (Sidewalk) and Zip2 Corporation. The Company also competes against search engine and other site aggregation companies such as Excite, Inc. (City.Net), Lycos, Inc. (Lycos City Guide) and Yahoo! Inc. (Yahoo! Local) which primarily serve to aggregate links to sites providing local content. In addition, the Company competes against offerings from media companies, including Cox Interactive Media and Knight-Ridder, Inc., as well as offerings from several telecommunications and cable companies and Internet service providers that provide local interactive programming such as SBC Communications Inc. (At Hand) and U.S. West, Inc. (Dive-In). Many of these companies have greater financial and marketing resources than the Company and may have significant competitive advantages through other lines of business and existing business relationships. There are also numerous niche competitors which focus on a specific category or geography and compete with specific content offerings provided by CitySearch. The Company may also compete with online services and other Web site operators, as well as traditional media such as television, radio and print for a share of advertisers' total advertising budgets. Furthermore, additional major media and other companies with financial and other resources greater than those of the Company may introduce new Internet products and services addressing these markets in the future. There can be no assurance that the Company's competitors will not develop services that are superior to those of the Company or that achieve greater market acceptance than the Company's offerings. The Company believes that the principal competitive factors in its markets include depth, quality and comprehensiveness of content, ease of use, distribution, search capability and brand recognition. There can be no assurance that the Company will be able to successfully compete against its current or future competitors or that competition will not have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, as a strategic response to changes in the competitive environment, the Company may make certain pricing, service or marketing decisions or enter into acquisitions or new ventures that could have a material adverse effect on the Company's business, financial condition and results of operations. RISKS ASSOCIATED WITH OFFERING NEW SERVICES The Company plans to introduce new and expanded services in order to generate additional revenues, attract more consumers and respond to competition. For example, the Company recently introduced business Web sites containing new and enhanced functionality for its business customers. The Company also may in the future offer services facilitating the purchase of goods by consumers from the Company's business customers. There can be no assurance that the Company will be able to offer any new services in a cost- effective or timely manner or that any such efforts would be successful. Furthermore, any new service launched by the Company that is not favorably received by consumers could damage the Company's reputation or its brand name. Expansion of the Company's services in this manner would also require significant additional expenses and development and may strain the Company's management, financial and operational resources. The Company's inability to generate revenues from such expanded services sufficient to offset their cost could have a material adverse effect on the Company's business, financial condition and results of operations. MANAGEMENT GROWTH; RISKS ASSOCIATED WITH EXPANSION The Company's business has grown rapidly in recent periods. The growth of the Company's business and expansion of its business customer base have placed a significant strain on the Company's management and operations. The Company's expansion has resulted, and is expected in the future to result, in growth in the 9 number of its employees; in the establishment of offices in disparate regions of the country and in increased responsibility for both existing and new management personnel and to put additional pressure on the Company's existing operational, financial and management information systems. The Company's success depends to a significant extent on the ability of its executive officers and other members of senior management, none of whom has any prior executive management experience in public companies, to operate effectively, both independently and as a group. To manage its growth, the Company must continue to implement and improve its operational, financial and management systems and hire and train additional qualified personnel, including sales and marketing staff. There can be no assurance that the Company will be able to manage its recent or any future expansions successfully, and any failure of the Company to do so could have a material adverse effect on the Company's business, financial condition and results of operations. There also can be no assurance that the Company will be able to sustain the rate of expansion that it has experienced in the past. See "Management--Executive Officers and Directors." DEPENDENCE UPON KEY PERSONNEL; NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL The Company's success depends to a significant degree upon the continued contributions of its executive management team, including Charles Conn, the Company's co-founder and Chief Executive Officer, and Thomas Layton, the Company's President and Chief Operating Officer. The loss of the services of Mr. Conn or Mr. Layton or other members of the Company's management team could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's success will also depend upon the continued service of the other members of its senior management team and its technical, marketing and sales personnel. The Company's employees, including its senior officers, may voluntarily terminate their employment with the Company at any time and competition for qualified employees is intense. The Company's success also depends upon its ability to attract and retain additional highly qualified management, technical and sales and marketing personnel. The process of locating and hiring such personnel with the combination of skills and attributes required to carry out the Company's strategy is often lengthy. The loss of the services of key personnel or the inability to attract additional qualified personnel could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE UPON CONTINUED CONTENT DEVELOPMENT The Company's success depends in part upon its ability to deliver compelling interactive content such as arts and entertainment events, community activities, businesses and news information in order to attract consumers with demographic characteristics valuable to the Company's business customers. The markets for the Company's services are characterized by rapidly changing technology, emerging industry standards and consumer requirements that are subject to rapid change and frequent new service introductions. These characteristics are exacerbated by the emerging nature of the local interactive content and service market and the expectation that many companies may introduce new Internet products and services addressing this market in the near future. There can be no assurance that the Company will be successful in developing new content and services or enhancing its existing local city guide service on a timely basis, or that such content and services will effectively address consumer requirements and achieve market acceptance. If the Company, for technological or other reasons, is unable to develop and enhance its local interactive content and service in a manner compatible with emerging industry standards and that allows it to attract, retain and expand a consumer base possessing demographic characteristics attractive to business customers, the Company's business, financial condition and results of operations would be materially and adversely affected. DEPENDENCE ON INCREASED USAGE AND STABILITY OF THE INTERNET AND THE WEB The usage of the Web for services such as those offered by the Company will depend in significant part on continued rapid growth in the number of households and commercial, educational and government institutions with access to the Web, in the level of usage by individuals and in the number and quality of products and services designed for use on the Web. Because usage of the Web as a source for information, products and services is a relatively recent phenomenon, it is difficult to predict whether the number of users drawn to the Web will continue to increase and whether any significant market for usage of the Web for such purposes will continue to develop and expand. There can be no assurance that Internet usage patterns will not decline as the 10 novelty of the medium recedes or that the quality of products and services offered online will improve sufficiently to continue to support user interest. Failure of the Web to stimulate user interest and be accessible to a broad audience at moderate costs would jeopardize the markets for the Company's local city guide service. Moreover, issues regarding the stability of the Internet's infrastructure remain unresolved. The rapid rise in the number of Internet users and increased transmission of audio, video, graphical and other multimedia content over the Web has placed increasing strains on the Internet's communications and transmission infrastructures. Continuation of such trends could lead to significant deterioration in transmission speeds and reliability of the Web and could reduce the usage of the Web by businesses and individuals. In addition, to the extent that the Web continues to experience significant growth in the number of users and level of use without corresponding increases and improvements in the Internet infrastructure, there can be no assurance that the Internet will be able to support the demands placed upon it by such continued growth. Any failure of the Internet to support such increasing number of users due to inadequate infrastructure or otherwise would seriously limit the development of the Web as a viable source of local interactive content and services, which could materially and adversely affect the acceptance of the Company's services, which would, in turn, materially and adversely affect the Company's business, financial condition and results of operations. SUSCEPTIBILITY TO GENERAL ECONOMIC CONDITIONS The Company's revenues and results of operations will be subject to fluctuations based upon the general economic conditions of the United States and other countries in which its local city guide service is offered. If there were to be a general economic downturn or a recession in the United States or any other country in which the Company's service is provided, the Company expects that business enterprises, including its customers and potential customers, will substantially and immediately reduce their advertising and marketing budgets. In the event of such an economic downturn, the Company's business, financial condition and results of operations could be materially and adversely affected. RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION A key component of the Company's strategy is to continue to expand its local city guide service into international markets. The Company anticipates that it will expend significant financial and management resources to operate overseas and create localized user interfaces through the launch of additional partner- led markets. If the revenues generated by these international operations are insufficient to offset the expense of establishing and maintaining such operations, the Company's business, financial condition and results of operations will be materially and adversely affected. To date, the Company has limited experience in developing localized versions of its online sites and marketing and distributing its products and services internationally. There can be no assurance that the Company or its partners will be able to successfully market or sell its services in these international markets. In addition to the uncertainty as to the Company's ability to expand its international presence, there are certain risks inherent in conducting business on an international level, such as unexpected changes in regulatory requirements, tariffs and other trade barriers, difficulties in staffing and managing foreign operations, political instability, currency rate fluctuations, and potentially adverse tax consequences. There can be no assurance that one or more of the foregoing factors will not have a material adverse effect on the Company's current and future international operations and, consequently, on its business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." CONTROL BY DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT STOCKHOLDERS As of June 1, 1998, the directors, executive officers and stockholders owning 5% of the Company's Common Stock and their respective affiliates in the aggregate beneficially own approximately 61.1% of the outstanding Common Stock (on an as converted basis and including shares issuable upon exercise of stock options to purchase shares of Common Stock which are exercisable within 60 days of June 1, 1998). In addition, USA Networks, Inc., formerly HSN, Inc. ("USA Networks"), which beneficially owns approximately 11.8% of 11 the outstanding Common Stock as of June 1, 1998 prior to this offering (in a fully diluted, as-converted basis), has a right to purchase that number of shares of this offering that will enable it to own up to 14.9% of the Company after the offering (on a fully diluted, as-converted basis), subject to certain limitations. Furthermore, USA Networks has the right to elect a member of Board of Directors until November 12, 2007, subject to certain limitaitons. Pursuant to a voting agreement, certain holders of the Company's Preferred Stock and Common Stock are required to vote all of the Company's voting securities owned by them to elect to the Board of Directors a designee of the holders of a majority of the shares of Series C Preferred Stock outstanding immediately prior to the closing of this offering. As of June 1, 1998, entities affiliated with Goldman, Sachs & Co. own approximately 79.6% of the outstanding Series C Preferred Stock. As a result, these stockholders will possess significant influence over the Company, giving them the ability, among other things, to elect a majority of the Company's Board of Directors and approve significant corporate transactions. Such share ownership and control may also have the effect of delaying or preventing a change in control of the Company, impeding a merger, consolidation, takeover or other business combination involving the Company or discourage a potential acquiror from making a tender offer or otherwise attempting to obtain control of the Company which could have a material adverse effect on the market price of the Company's Common Stock. See "Management--Board Composition" and "Certain Transactions." CAPACITY CONSTRAINTS AND SYSTEM DISRUPTIONS The satisfactory performance, reliability and availability of the Company's city guides and its network infrastructure are critical to attracting Web users and maintaining relationships with business customers and consumers. System interruptions that result in the unavailability of the Company's sites or slower response times for consumers would reduce the number of business Web sites and advertisements purchased and reduce the attractiveness of the Company's local city guides to business customers and consumers. The Company has experienced system interruptions in the past and believes that such interruptions will continue to occur from time to time in the future. Additionally, any substantial increase in traffic on the Company's local city services will require the Company to expand and adapt its network infrastructure. The Company's inability to add additional software and hardware to accommodate increased traffic on its local city guides may cause unanticipated system disruptions and result in slower response times. In addition, the Company currently depends on a limited number of suppliers for certain key technologies used to roll out and manage the CitySearch service. There can be no assurance that the Company will be able to expand its network infrastructure on a timely basis to meet increased demand or that key technology suppliers will continue to provide the Company with products and services that meet the Company's requirements. Any increase in system interruptions or slower response times resulting from the foregoing factors could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond the Company's control. Substantially all of the Company's server equipment is currently located in California in areas that are susceptible to earthquakes. The Company's business interruption insurance may not be sufficient to compensate the Company for losses that may occur, and any losses or damages incurred by the Company could have a material adverse effect on its business, financial condition and results of operations. See "Business--Technology" and "-- Facilities." LIABILITY FOR ONLINE CONTENT The Company may face potential liability for defamation, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of the materials that appear on the Company's or its partners' online sites. Such claims have been brought, and sometimes successfully pressed, against online services. Although the Company carries general liability insurance, the Company's insurance may not cover claims of these types or may not be adequate to indemnify the Company for any liability that may be imposed. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage, could have a material adverse effect on the Company's reputation and its business, financial condition and results of operations. 12 UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY; RISKS OF THIRD PARTY LICENSES The Company regards its copyrights, service marks, trademarks, trade dress, trade secrets and similar intellectual property as critical to its success, and relies on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with the Company's employees, customers, partners and others to protect its proprietary rights. The Company pursues the registration of certain of its key trademarks and service marks in the United States and internationally. Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which the Company's products and services are made available online. The Company has licensed in the past, and expects that it may license in the future, certain of its proprietary rights, such as trademarks or copyrighted material, to third parties. In addition, the Company has licensed in the past, and expects that it may license in the future, certain content, including trademarks and copyrighted material, from third parties. While the Company attempts to ensure that the quality of its brand is maintained by such licensees, there can be no assurance that such licensees will not take actions that might materially adversely affect the value of the Company's proprietary rights or reputation, which could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate or that third parties will not infringe or misappropriate the Company's copyrights, trademarks, trade dress and similar proprietary rights. In addition, there can be no assurance that other parties will not assert infringement claims against the Company. The Company licenses the trademark "CitySearch" from a third party, and there can be no assurance that the Company will continue to license the trademark according to terms acceptable to the Company. The Company may be subject to legal proceedings and claims from time to time in the ordinary course of its business, including claims of alleged infringement of the trademarks and other intellectual property rights of third parties by the Company and its licensees. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources which could result in a material adverse effect on the Company's business, financial condition and results of operations. RISK ASSOCIATED WITH REGULATORY MATTERS The Company is subject to regulations applicable to businesses generally and laws or regulations directly applicable to access to online commerce. Although there are currently few laws and regulations directly applicable to the Internet and commercial online services, it is possible that a number of laws and regulations may be adopted with respect to the Internet or commercial online services covering issues such as user privacy, pricing, content, copyrights, distribution, antitrust and characteristics and quality of products and services. Furthermore, the growth and development of the market for online commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on those companies conducting business online. The adoption of any additional laws or regulations may decrease the growth of the Internet or commercial online services, which could, in turn, decrease the demand for the Company's products and services and increase the Company's cost of doing business, or otherwise have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, the applicability to the Internet and commercial online services of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. For example, tax authorities in a number of states are currently reviewing the appropriate tax treatment of companies engaged in online commerce, and new state tax regulations may subject the Company to additional state sales and income taxes. Any such new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to the Company's business, or the application of existing laws and regulations to the Internet and commercial online services could have a material adverse effect on the Company's business, financial condition and results of operations. RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS As part of its business strategy, the Company may make acquisitions of, or significant investments in, complementary companies, products or technologies, although the Company has no present understandings, commitments or agreements with respect to any acquisition or investment. Any such future acquisitions would 13 be accompanied by the risks commonly encountered in acquisitions of companies. Such risks include, among other things, the difficulty of assimilating the operations and personnel of the acquired companies, the potential disruption of the Company's ongoing business, the diversion of resources from the Company's existing businesses, sites and technologies, the inability of management to maximize the financial and strategic position of the Company through the successful incorporation of the acquired technology into the Company's products and services, additional expense associated with amortization of acquired intangible assets, the maintenance of uniform standards, controls, procedures and policies and the impairment of relationships with employees and customers as a result of any integration of new management personnel. There can be no assurance that the Company would be successful in overcoming these risks or any other problems encountered with such acquisitions, and the Company's inability to overcome such risks could have a material adverse effect on its business, financial condition and results of operations. SECURITY RISKS Although the Company has not in the past experienced attempts by programmers or "hackers" to penetrate the Company's network security, there can be no assurance that such actions will not occur in the future. If successful, such actions could have a material adverse effect on the Company's business, financial condition and results of operations. A party who is able to penetrate the Company's network security could misappropriate proprietary information or cause interruptions in the Company's Web site. The Company may be required to expend significant capital and resources to protect against the threat of such security breaches or to alleviate problems caused by such breaches. Concerns over the security of Internet transactions and the privacy of users may also inhibit the growth of the Internet generally, particularly as a means of conducting commercial transactions. Security breaches or the inadvertent transmission of computer viruses could expose the Company to a risk of loss or litigation and possible liability. There can be no assurance that contractual provisions attempting to limit the Company's liability in such areas will be successful or enforceable, or that other parties will accept such contractual provisions as part of the Company's agreements, any of which could have a material adverse effect on the Company's business, results of operations and financial condition. RISKS ASSOCIATED WITH DOMAIN NAMES The Company currently holds various Web domain names relating to its brand, including the "citysearch.com" domain name. The acquisition and maintenance of domain names generally is regulated by governmental agencies and their designees. For example, in the United States, the National Science Foundation has appointed Network Solutions, Inc. as the exclusive registrar for the ".com," ".net" and ".org" generic top-level domains. The regulation of domain names in the United States and in foreign countries is subject to change. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, there can be no assurance that the Company will be able to acquire or maintain relevant domain names in all countries in which it conducts business. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. The Company, therefore, may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of its trademarks and other proprietary rights. Any such inability could have a material adverse effect on the Company's business, financial condition and results of operations. YEAR 2000 RISK Many older computer systems and software products currently in use are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in less than two years, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. Significant uncertainty exists in the software industry concerning the potential effects associated with such compliance. Although the Company licenses to its partners software products that are designed to be Year 2000 compliant, there can be no assurance that the Company's software products contain all necessary date changes. In addition, although the Company licenses software from third parties that it believes are Year 2000 compliant, there can be no assurance that such software will be compliant. Any Year 2000 compliance problems could result in a material adverse affect on the Company's business, financial condition and results of operations. 14 LACK OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE Prior to this offering, there has been no public market for the Company's Common Stock, and there can be no assurance that an active trading market will develop or be sustained. The initial public offering price for the Common Stock to be sold by the Company has been established by negotiations among the Company and the Representatives of the Underwriters and may bear no relationship to the price at which the Common Stock will trade after completion of the offering. See "Underwriting" for factors to be considered in determining such offering price. The market price of the Common Stock could be subject to significant fluctuations in response to quarter-to-quarter variations in the Company's operating results, announcements of technological innovations or new products by the Company or its competitors, and other events or factors. For example, a shortfall in revenues or net income, or an increase in losses from levels expected by securities analysts, could have an immediate and significant adverse effect on the market price of the Company's Common Stock. In addition, the stock market in recent years has experienced extreme price and volume fluctuations that have particularly affected the market prices of many high technology companies and that have often been unrelated or disproportionate to the operating performance of companies. These fluctuations, as well as general economic and market conditions, may adversely affect the market price for the Common Stock. ANTITAKEOVER EFFECT OF CERTAIN CHARTER AND CONTRACTUAL PROVISIONS Certain provisions of the Company's Restated Certificate of Incorporation and Bylaws which will become effective upon the closing of this offering will have the effect of delaying, deferring or preventing a change of control of the Company. These provisions will provide, among other things, that the Board of Directors is divided into three classes to serve staggered three-year terms, that stockholders may not take actions by written consent, that certain provisions of the Company's Restated Certificate of Incorporation and Bylaws may be amended only by the affirmative vote of 66 2/3% of the Common Stock and that the stockholders may not call special meetings. After completion of this offering, the Company will be authorized to issue up to 2,000,000 shares of Preferred Stock. The Board of Directors is authorized, subject to limitations prescribed by Delaware law, to provide for the issuance of additional shares of Preferred Stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the powers, designations, preferences and rights of the shares of each wholly unissued series and designate any qualifications, limitations or restrictions thereon and to increase or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding) without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change of control of the Company and may adversely affect the voting and other rights of the holders of Common Stock, which could have an adverse impact on the market price of the Common Stock. In addition, the Company will be subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law ("DGCL"), which will prohibit the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Such provisions may have the effect of preventing changes in the management of the Company. The Sixth Amended and Restated Stockholders' Agreement by and among the Company and certain stockholders of the Company dated May 26, 1998 (the "Stockholders' Agreement') provides that the Company may not (i) adopt a rights agreement (or other similar device) with an ownership threshold that would limit USA Networks' ability to own or purchase securities of the Company or (ii) amend its bylaws, certificate of incorporation or fail to take an action under Section 203 of the DGCL, in each case which would limit USA Networks' ability to own or purchase securities of the Company. See "Certain Transactions," "Description of Capital--Antitakeover Effects of Provisions of Certificate of Incorporation and Bylaws" and "-- Effect of Delaware Antitakeover Statute." SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market after this offering or the anticipation of such sales could have a material adverse effect on then-prevailing market prices. Upon completion of the 15 offering, the Company will have shares of Common Stock outstanding, assuming no exercise of currently outstanding options. Of these shares, the shares sold in this offering (plus any additional shares sold upon exercise of the Underwriters' over-allotment option) will be freely transferable without restriction under the Securities Act of 1933, as amended (the "Securities Act"), unless they are held by "affiliates" of the Company as that term is used under the Securities Act and the regulations promulgated thereunder ("Affiliates"). The remaining 25,118,827 shares of Common Stock held by existing stockholders are "restricted securities" as that term is defined in Rule 144 of the Securities Act (the "Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act. As a result of contractual restrictions and the provisions of Rules 144 and 701, additional shares will be available for sale in the public market as follows: (i) approximately 1,239,279 Restricted Shares will be eligible for immediate sale on the effective date of this Offering; (ii) approximately 676,578 Restricted Shares will be eligible for sale 90 days after the date; (iii) approximately 19,505,560 Restricted Shares will be eligible for sale 180 days upon expiration of pre-existing contractual lock-up agreements and lock- up agreements with the Underwriters and upon expiration of their respective holding periods under Rule 144; and (iv) the remainder of the Restricted Shares will be eligible for sale from time to time thereafter upon expiration of their respective holding periods under Rule 144. In addition, 1,601,285 shares will be issuable upon exercise of vested stock options 180 days after the effective date of this offering upon the expiration pre-existing contractual lock-up agreements. NationsBanc Montgomery Securities LLC, on behalf of the Underwriters, may, in its sole discretion and at any time without notice, release all or any portion of securities subject to the lock- up agreement with the Underwriters. Upon the effective date of this offering, the holders of 13,128,789 shares of Common Stock have the right in certain circumstances to require the Company to register their shares under the Securities Act for resale to the public. If such holders, by exercising their demand registration rights, cause a large number of shares to be registered and sold in the public market, such sales could have a material adverse effect on the market price for the Company's Common Stock. If the Company were required to include in a Company-initiated registration shares held by such holders and holders of an additional 10,756,878 shares of Common Stock pursuant to the exercise of their piggyback registration rights, such sales may have a material adverse affect on the Company's ability to raise new capital. In addition, the Company expects to file a registration statement on Form S-8 registering a total of approximately 4,368,340 shares of Common Stock subject to outstanding stock options or reserved for issuance under the Company's 1996 Stock Plan, 1998 Directors Option Plan and 1998 Employee Stock Purchase Plan. The Form S-8 registration statement is expected to be filed and to become effective 180 days following the effective date of this offering. Shares registered under such registration statement will be available for sale in the open market, subject to Rule 144 value limitations applicable to Affiliates, unless such shares are subject to vesting restrictions with the Company or the lock-up agreements described above. See "Description of Capital Stock--Registration Rights" and "Shares Eligible for Future Sale." NO SPECIFIC USE OF PROCEEDS The Company has not designated any specific use for the net proceeds from the sale by the Company of the Common Stock offered hereby. The Company intends to use the net proceeds of this offering for general corporate purposes, including working capital, capital expenditures relating to the CitySearch site (such as enhancements to the Company's server and networking infrastructure) and expansion of its sales and marketing capabilities. Accordingly, management will have significant flexibility in applying the net proceeds of this offering. The failure of management to apply such funds effectively could have a material adverse effect on the Company's business, financial condition and results of operations. See "Use of Proceeds." DILUTION The initial public offering price is substantially higher than the book value per share of the outstanding Common Stock. At an assumed initial public offering price of $ per share, investors purchasing shares of Common Stock in the offering will incur immediate, substantial dilution in the amount of $ per share. In addition, investors purchasing shares of Common Stock in this offering will incur additional dilution to the extent outstanding options and warrants are exercised. See "Dilution." 16 USE OF PROCEEDS The net proceeds to the Company from the sale of shares of Common Stock offered hereby are estimated to be million ( million if the over- allotment option is exercised in full) at an assumed initial public offering price of $ per share and after reducing the underwriting discount and estimated offering expenses. The Company intends to use the net proceeds of this offering for general corporate purposes, including working capital, capital expenditures relating to the CitySearch site (such as enhancements to the Company's server and networking infrastructure) and expansion of its sales and marketing capabilities. A portion of the proceeds also may be used to acquire or invest in complementary businesses, technologies or service offerings. In the ordinary course of business, the Company evaluates potential acquisitions of such businesses, technologies or service offerings. However, the Company has no present understandings, commitments or agreements with respect to any such acquisition, and the Company is not currently engaged in any negotiations with respect to any such transaction. Pending use of the net proceeds for the above purposes, the Company intends to invest such funds in short-term, interest-bearing, investment-grade securities. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its capital stock to date. The Company currently anticipates that it will retain any future earnings for use in its business and does not anticipate paying any cash dividends for the foreseeable future. 17 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1998 (i) on an actual basis, and (ii) the on an as adjusted basis to reflect the conversion of all outstanding shares of Preferred Stock into Common Stock upon the closing of this offering at the receipt of the net proceeds from the sale of the shares of Common Stock offered hereby at an assumed initial public offering price of $ per share and after deducting the underwriting discount and estimated offering expenses.
MARCH 31, 1998 -------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Long-term obligations, less current portion(1)............ $ 2,758 $ Redeemable Convertible Preferred Stock (2)................ 70,882 Stockholders' (deficit) equity (3): Preferred Stock, $0.01 par value: 2,241,173 shares authorized, actual; 2,000,000 shares authorized, as adjusted; 2,016,521 shares issued and outstanding, actual; no shares issued and outstanding, as adjusted... 2,610 Common stock, $0.01 par value; 75,000,000 shares authorized, actual; 9,973,517 shares issued and outstanding, actual; shares issued and outstanding, as adjusted................................ 870 Deferred stock compensation............................... (567) Accumulated deficit....................................... (58,708) ------- ---- Total stockholders' equity (deficit)...................... (55,795) ------- ---- Total capitalization..................................... $17,845 $ ======= ====
- -------- (1) See Notes 2 and 5 of Notes to Consolidated Financial Statements. (2) See Note 6 of Notes to Consolidated Financial Statements. (3) Based on shares outstanding as of March 31, 1998. Does not include (i) 2,287,101 shares of Common Stock issuable upon exercise of options outstanding at March 31, 1998 at a weighted average price of $1.01 per share under the Company's 1996 Stock Option Plan, (ii) 479,739 shares of Common Stock available for future grant or issuance under the Company's 1996 Stock Option Plan and (iii) 93,305 shares of Common Stock issuable upon exercise of an outstanding warrant at an exercise price of $8.84 per share held by NationsBanc Montgomery Securities LLC. See "Management-- Employee Benefit Plans," "Underwriting," and Note 7 of Notes to Consolidated Financial Statements. 18 DILUTION The pro forma net tangible book value of the Company as of March 31, 1998 was $15.1 million, or $1.60 per share of Common Stock, assuming the conversion of all outstanding shares of Preferred Stock into shares of Common Stock. "Pro forma net tangible book value per share" is determined by dividing the number of outstanding shares of Common Stock into the net tangible book value of the Company (total tangible assets less total liabilities). After giving effect to the application of the estimated net proceeds from the sale by the Company of the shares of Common Stock offered hereby (based upon an assumed initial public offering price of $ per share and after deducting the underwriting discount and estimated offering expenses), the pro forma net tangible book value of the Company as of March 31, 1998 would have been approximately $ million, or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors purchasing shares at the initial public offering price. The following table illustrates the per share dilution: Assumed initial public offering price............................... $ Pro forma net tangible book value as of March 31, 1998............ $1.60 Increase in pro forma net tangible book value attributable to new investors........................................................ ----- Pro forma net tangible book value after offering.................... ---- Dilution to new investors........................................... $ ====
The following table summarizes on a pro forma basis as of March 31, 1998, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid by the existing stockholders and by the investors purchasing shares of Common Stock in this offering, based upon an assumed initial public offering price of $ per share (before deducting the underwriting discount and estimated offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------ ------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- --------- Existing stockholders(1)....... 24,129,228 $76,349,245 $3.16 New Investors(1)............... ---------- --- ----------- --- Total........................ ========== === =========== ===
- -------- (1) If the Underwriters' over-allotment is exercised in full the number of shares held by new investors will be increased to , or % of the total shares of Common Stock to be outstanding after this offering. The foregoing computations assume no exercise of any outstanding stock options or warrants. As of March 31, 1998, there were options outstanding to purchase a total of 2,287,101 shares of Common Stock at a weighted average exercise price of $1.10 per share and warrants outstanding to purchase a total of 93,305 shares of Common Stock at an exercise price of $8.84 per share. In addition, as of March 31, 1998, 479,739 shares of Common Stock were reserved for future issuance under the Company's 1996 Stock Option Plan. To the extent that any shares available for issuance upon exercise of outstanding stock options or warrants or reserved for future issuance under the Company's 1996 Stock Option Plan, 1998 Directors Option Plan or 1998 Employee Stock Purchase Plan issued, there will be future dilution to new investors. See "Management-- Employee Benefit Plans," "Underwriting" and Note 7 to Consolidated Financial Statements. 19 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data presented below for the period from September 20, 1995 (date of formation) through December 31, 1995 and for, and as of the end of, each of the years in the two-year period ended December 31, 1997, are derived from the consolidated financial statements of the Company, which consolidated financial statements have been audited by Ernst & Young LLP, independent certified public accountants, and are included elsewhere in this Prospectus. The consolidated balance sheet data as of December 31, 1995 is derived from audited consolidated financial statements of the Company that are not included herein. The consolidated statements of operations data for the three-month periods ended March 31, 1997 and 1998 and the consolidated balance sheet data at March 31, 1998 are derived from unaudited consolidated financial statements included elsewhere in this Prospectus. In the opinion of management, the unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and contain all adjustments, consisting only of normal recurring adjustment, necessary for a fair presentation of the Company's results of operations for such periods and financial condition at such dates. The results of operations for the three months ended March 31, 1998 are not necessarily indicative of the results to be expected for the full year or future periods. The selected consolidated financial data set forth is qualified in its entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus.
PERIOD FROM SEPTEMBER 20, 1995 (DATE OF YEAR ENDED THREE MONTHS FORMATION) TO DECEMBER 31, ENDED MARCH 31, DECEMBER 31, ------------------ ---------------- 1995 1996 1997 1997 1998 ------------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Subscription and services................ $ -- $ 203 $ 4,913 $ 470 $ 2,563 Licensing and royalty.... -- -- 1,271 -- 528 ------ -------- -------- ------- ------- Total revenues......... -- 203 6,184 470 3,091 Costs and expenses: Cost of revenues......... -- 2,908 10,846 2,040 3,450 Sales and marketing...... 57 6,369 19,014 4,519 4,568 Research and development. 152 2,563 7,182 1,713 1,655 General and administrative.......... 104 2,475 5,883 1,363 1,568 ------ -------- -------- ------- ------- Total costs and ex- penses................ 313 14,315 42,925 9,635 11,241 ------ -------- -------- ------- ------- Loss from operations...... (313) (14,112) (36,741) (9,165) (8,150) Interest income, net...... 5 217 223 84 173 ------ -------- -------- ------- ------- Loss before provision for income taxes............. (308) (13,895) (36,518) (9,081) (7,977) Provision for income taxes.................... -- (2) (8) -- -- ------ -------- -------- ------- ------- Net loss.................. $ (308) $(13,897) $(36,526) $(9,081) $(7,977) ====== ======== ======== ======= ======= Historical basic and diluted net loss per share.................... $(0.04) $ (1.58) $ (3.86) $ (0.97) $ (0.82) ====== ======== ======== ======= ======= Pro forma basic and diluted net loss per share.................... $(0.04) $ (1.10) $ (1.96) $ (0.54) $ (0.33) ====== ======== ======== ======= ======= Shares used to compute basic and diluted historical net loss per share.................... 7,894 8,785 9,451 9,407 9,777 ====== ======== ======== ======= ======= Shares used to compute basic and diluted pro forma net loss per share. 8,460 12,647 18,666 16,889 23,932 ====== ======== ======== ======= =======
MARCH 31, DECEMBER 31, 1998 ----------------------- --------- 1995 1996 1997 ------ ------- ------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equiva- lents.................. $1,413 $ 7,527 $25,227 $16,455 Working capital......... 1,323 4,257 19,375 11,658 Total assets............ 1,490 13,370 31,655 23,724 Long-term obligations, less current portion... -- 1,451 2,420 2,758 Redeemable Convertible Preferred Stock........ -- 20,309 70,882 70,882 Stockholders's equity (deficit).............. 8,366 (11,943) (47,911) (55,795)
20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Consolidated Financial Statements and the related Notes thereto included elsewhere in this Prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this Prospectus. OVERVIEW CitySearch produces and delivers comprehensive local city guides on the World Wide Web (the "Web"), providing up-to-date information regarding arts and entertainment events, community activities, recreation, businesses, shopping, professional services and news/sports/weather to consumers in metropolitan areas. Each local city guide primarily consists of original content developed and designed specifically for the Web by the Company and its partners. The Company designs and produces custom-built Web sites and related services for local and regional businesses, aggregates them in a local city guide environment and provides business customers the ability to regularly update and expand their sites. From the Company's founding and incorporation in September 1995 through May 1996, the Company's operating activities consisted primarily of recruiting employees, performing product and technology development, raising capital, engaging in marketing activities, and negotiating strategic partnerships. The Company launched its first city guide in Chapel Hill, North Carolina in May 1996. The Company first commenced selling business Web sites to local businesses in February 1996 and recognized its initial revenues in June 1996. CitySearch has two primary means of providing its local city guides. In its "owned and operated" markets, the Company systematically produces the majority of its own content, hires and rapidly deploys a direct sales force to sell custom-built Web sites as well as related services to local and regional businesses and launches a presence in approximately six months. In other markets, the Company partners with a local media company that contracts with CitySearch to assist in developing, designing and launching a city guide. These partners license CitySearch's systems and provide royalty payments to the Company for revenues derived from operations. While the Company's initial site launches were all on an "owned and operated" basis, the Company is increasingly launching city guides in conjunction with local newspaper companies in its partner-led markets. These major media partners bring capital, brand recognition, promotional strength and local knowledge to their CitySearch sites and allow the Company to build out its national and international network of sites faster than it could solely through owned and operated sites. The Company's current owned and operated sites include Austin, Nashville, New York City, Portland, Raleigh-Durham-Chapel Hill, Salt Lake City/Utah and the San Francisco Bay Area, and current partner-led markets include Los Angeles, Washington D.C., Melbourne, Sydney and Toronto. Additional partner-led markets where roll-out teams have been deployed include Baltimore, Copenhagen, Dallas, and Stockholm. In its owned and operated markets, the Company derives its revenues primarily from subscription fees resulting from creating local business Web sites, and to a lesser extent, from banner advertising derived from national and regional advertisers, as well as barter agreements with television, radio and media alliances. With barter agreements, the Company receives television and radio advertising in exchange for Web site design, hosting and maintenance. The Company recognizes revenue from sales of local business Web sites on a monthly basis over the term of the contract as services are rendered. Business customers typically enter into 12 month agreements that automatically convert to month to month contracts upon expiration. The Company's business customers in its owned and operated markets increased from approximately 1,800 as of January 31, 1997 to approximately 9,300 online as of March 31, 1998. The average monthly revenue in these markets for new business customers signed up in January 1997 was approximately $50, in December 1997 was approximately $100 and in March 1998 was approximately $125. Banner revenue is recognized as earned. Barter revenue is recognized monthly over the term of each contract. For each barter agreement, revenue and expense are equal, and are recognized at a rate based on the estimated cost of the specific services provided by the Company. 21 In partner-led markets, the Company derives revenues from licensing its business and technology systems, from royalties on partner-led Web site subscriptions, banners, sponsorships and other ancillary offerings, and from providing consulting and technology customization services, and from hosting and back office services, including site production, customer service and billing. Royalty, consulting and technology customization revenues have not been significant to date, but are expected to increase as a percentage of revenues as partner-led markets mature and as more partner-led market sites are launched. Licensing revenue under license agreements entered into prior to December 31, 1997 is recognized upon the completion and installation of the Company's business and technology systems and training of partner personnel in each partner-led market. Beginning with contracts signed in 1998 pursuant to SOP 97-2, the Company is recognizing revenues from the sale of licenses for use of the Company's business and technology systems over the term of the license agreement or the period over which the relevant services are delivered. See Note 1 of Notes to Consolidated Financial Statements. Royalty revenue is recognized as earned and is typically a percentage of partner-led Web site subscriptions, banners, sponsorships and other ancillary offerings. In the second quarter of 1998, the Company began to derive revenue from providing back office services, including business Web site design, hosting, customer service and billing, to certain of its partners. The Company has recorded deferred stock compensation of $255,000 for the year ended December 31, 1997 and $352,000 for the three months ended March 31, 1998 as a result of stock options granted during 1997 and the first three months of 1998. Amortization of deferred stock compensation of $10,000 was recognized in 1997, and $30,000 was recognized in the three months ended March 31, 1998. Amortization of deferred stock compensation is allocated to costs of revenues and to all operating expense lines identified on the statement of operations. Deferred stock compensation is amortized over the vesting period of the options, generally four years. As a result, amortization of deferred stock compensation will adversely impact the Company's operating results for the next four years. The Company incurred net losses of $308,000, $13.9 million and $36.5 million for the period from September 20, 1995 (date of formation) to December 31, 1995, and the years ended December 31, 1996 and 1997, respectively, and $8.0 million for the three months ended March 31, 1998. At March 31, 1998, the Company had an accumulated deficit of $58.7 million. The net losses and accumulated deficit resulted from the Company's lack of substantial revenues and the significant operation, infrastructure and other costs incurred in the development and initial roll-outs of the Company's services. Given its limited operating history, the Company believes that an analysis of its cost and expense categories as a percentage of revenue is not meaningful. As a result of its aggressive expansion plans, the Company expects to incur significant additional losses from operations for the foreseeable future. Although the Company has experienced revenue growth in recent periods, there can be no assurance that such growth rates are sustainable and, therefore, they should not be considered indicative of future operating results. There can be no assurance that the Company will ever achieve significant revenues or profitability or, if significant revenues and profitability are achieved, that they could be sustained. RESULTS OF OPERATIONS Revenues. The Company's revenues increased from $470,000 for the three months ended March 31, 1997 to $3.1 million for the three months ended March 31, 1998, and increased from $203,000 for the year ended December 31, 1996 to $6.2 million for the year ended December 31, 1997. The Company did not recognize any revenue from September 20, 1995 (date of formation) to December 31, 1995 (the "Inception Period"). The Company has two revenue sources: (i) subscription and services revenue and (ii) licensing and royalty revenue. Subscription and services revenue was $470,000 and $2.6 million for the three months ended March 31, 1997 and 1998, respectively, and was $203,000 and $4.9 million for the years ended December 31, 1996 and 1997 respectively. Subscription and services revenue increased in each period primarily as the result of increases in business Web site subscription revenue due to increases in the number of city guides launched, an increased number of business Web sites in each city guide market, and an increase in the average sales price for business Web sites. The increases in subscription and services revenue also resulted from increases in consulting revenue, barter revenue, and banner revenue. Licensing and royalty revenue was $0 and $528,000 for the three months ended March 31, 1997 and 1998, respectively, and was $0 and $1.3 million for the years ended December 31, 1996 and 1997, respectively. 22 Cost of Revenues. Cost of revenues consists primarily of the expenses associated with the design, layout, photography, customer service and editorial resources used in the production and maintenance of business Web sites and editorial content, network infrastructure maintenance and the provision of consulting services in partner-led markets. Cost of revenues is expensed as incurred. The Company had no cost of revenues for the Inception Period. Cost of revenues were $2.0 million and $3.5 million for the three months ended March 31, 1997 and 1998, respectively, and were $2.9 million and $10.8 million for the years ended years December 31, 1996 and 1997, respectively. The increases were due primarily to increased personnel and freelance labor required to produce and maintain the increased number of business Web sites and amount of editorial content. Sales and Marketing Expenses. Sales and marketing expenses consist primarily of the costs related to compensation of sales and marketing personnel, advertising, public relations, travel, sales force training and marketing literature. Sales and marketing expenses were $4.5 million and $4.6 million for the three months ended March 31, 1997 and 1998, respectively, and were $57,000, $6.4 million and $19.0 million for the Inception Period and for the years ended December 31, 1996 and 1997, respectively. These increases were due primarily to increased headcount and, to a lesser extent, increases in marketing and advertising programs. The rate of growth of sales and marketing expenses slowed as the Company has reduced its advertising expenses due to the increased number of barter media alliances. The Company expects that sales and marketing expenses will continue to increase in absolute dollars as the Company expands its direct sales force, hires additional marketing personnel and increases expenditures for marketing and promotional activities. Research and Development Expenses. Research and development expenses include the costs to develop, test and upgrade the CitySearch online service and the enterprise management systems. These costs consist primarily of salaries for product development personnel, contract labor expense, consulting fees, software licenses, hardware costs and recruiting fees. Research and development expenses were $1.7 million and $1.7 million for the three months ended March 31, 1997 and 1998, respectively, and were $152,000, $2.6 million and $7.2 million for the Inception Period and for the years ended December 31, 1996 and 1997, respectively. The increases in research and development expenses were primarily attributable to increased staffing levels required to design, test, deploy and support expanded city guide functionality and back- office systems. The Company believes that timely deployment of new and enhanced products and technology are critical to attaining its strategic objectives and to remain competitive. Accordingly, the Company intends to continue recruiting and hiring experienced research and development personnel and make other investments in research and development. As such, the Company expects that research and development expenditures will increase in absolute dollars in future periods. The Company has expensed research and development costs as incurred. General and Administrative Expenses. General and administrative expenses consist primarily of administrative and executive personnel costs, fees for professional services and the costs of in-house infrastructure to support the operations of the Company. General and administrative expenses were $1.4 million and $1.6 million for the three months ended March 31, 1997 and 1998, respectively, and were $104,000, $2.5 million and $5.9 million for the Inception Period and for the years ended December 31, 1996 and 1997, respectively. These increases were due primarily to increased staffing levels to manage and support the Company's expanding operations. The Company anticipates hiring additional personnel and incurring additional costs related to being a publicly held entity, including directors' and officers' liability insurance, investor relations programs and professional service fees. Accordingly, the Company anticipates that general and administrative expenses will continue to increase in absolute dollars. Interest Income, Net. Net interest income consists primarily of interest earned on the Company's cash, cash equivalents and short term investments, less interest expense on capital lease obligations. The Company had net interest income of $84,000 and $173,000 for the three months ended March 31, 1997 and 1998, respectively, and $5,000, $217,000 and $223,000 for the Inception Period and for the years ended December 31, 1996 and 1997, respectively. The Company invests its cash balances in short-term investment grade, interest-bearing securities. 23 INCOME TAXES The provision for income, franchise and capital taxes of $800, $1,600 and $8,330 for the Inception Period and for the years ended December 31, 1996 and December 31, 1997, respectively is based solely on minimum state tax requirements. The Company's effective tax rate differs from the statutory federal income tax rate, primarily as a result of operating losses not benefited. Due to the uncertainty surrounding the timing or realizing the benefits of its favorable tax attributes in future tax returns, the Company has placed a valuation allowance against its otherwise recognizable deferred tax assets. At December 31, 1997, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $47.5 million. The federal carryforwards expire principally in the period from 2010 to 2012, and the state carryforwards expire principally in 2003. The Tax Reform Act of 1986 imposes substantial restrictions on the utilization of net operating losses and tax credits in the event of an "ownership change" of a corporation. The Company's ability to utilize net operating loss carryforwards may be limited as a result of an "ownership change" as defined in the Internal Revenue Code. See Note 4 of Notes to Consolidated Financial Statements. SELECTED QUARTERLY OPERATING RESULTS The following table sets forth certain consolidated statement of operations data for the Company's five most recent quarters. This information has been derived from the Company's unaudited, consolidated financial statements. In management's opinion, this unaudited information has been prepared on the same basis as the annual consolidated financial statements and includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation for the quarters presented. This information should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus. The operating results for any quarter are not necessarily indicative of results for any future period.
THREE MONTHS ENDED ------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, 1997 1997 1997 1997 1998 --------- -------- --------- -------- --------- (IN THOUSANDS) Revenues: Subscription and services...... $ 470 $ 1,038 $ 1,478 $ 1,927 $ 2,563 Licensing and royalty.......... -- -- 677 594 528 ------- ------- ------- ------- ------- Total revenues............... 470 1,038 2,155 2,521 3,091 Costs and expenses: Costs of revenues.............. 2,040 2,416 3,156 3,234 3,450 Sales and marketing............ 4,519 4,691 4,506 5,298 4,568 Research and development....... 1,713 1,506 1,730 2,233 1,655 General and administrative..... 1,363 1,381 1,519 1,620 1,568 ------- ------- ------- ------- ------- Total costs and expenses..... 9,635 9,994 10,911 12,385 11,241 ------- ------- ------- ------- ------- Loss from operations............ (9,165) (8,956) (8,756) (9,864) (8,150) Interest income, net............ 84 19 -- 120 173 ------- ------- ------- ------- ------- Provision for income tax........ -- -- -- (8) -- ------- ------- ------- ------- ------- Net loss........................ $(9,081) $(8,937) $(8,756) $(9,752) $(7,977) ======= ======= ======= ======= =======
The Company's operating results have varied on a quarterly basis during its short operating history and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside the Company's control. Factors that may affect the Company's quarterly operating results include, but are not limited to, the ability of its partners to meet roll-out schedules for the Company's city guide service, the timing and amount of license and royalty payments from the Company's partners, the Company's ability to retain existing business customers, attract new business customers at a steady rate and maintain customer satisfaction, the timing and 24 volume of new business Web site orders and the Company's capacity to meet such orders, the Company's ability to maintain or increase current rates of sales productivity, the announcement or introduction of new or enhanced sites and services by the Company or its competitors, the amount of traffic on the Company's online sites, the amount of expenditures for online advertising by businesses, the level of use of online services and consumer acceptance of the Internet for services such as those offered by the Company, the Company's ability to upgrade and develop its systems and attract personnel in a timely and effective manner, the amount and timing of operating costs and capital expenditures relating to expansion of the Company's business and infrastructure, technical difficulties, system downtime or Internet brownouts, political or economic events affecting the cities in which the Company operates and general economic conditions. Unfavorable changes in any of the above factors could adversely affect the Company's revenues, gross margins and results of operations in future periods. Accordingly, the Company believes that period-to-period comparisons of its results of operations should not be relied upon as an indication of future performance. In addition, the results of any quarterly period are not indicative of results to be expected for a full fiscal year. Finally, as a result of the foregoing factors, the Company's annual or quarterly results of operations may be below the expectations of public market analysts or investors, in which case the market price of the Common Stock could be materially and adversely affected. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has primarily financed its operations through both the private placement of equity securities, raising $81.0 million and capital equipment leases. At March 31, 1998, the Company had approximately $16.5 million in cash, cash equivalents and short-term investments. The Company has had significant negative cash flows from operating activities in each fiscal and quarterly period to date. Net cash used in operating activities was $8.1 million and $8.5 million for the three months ended March 31, 1997 and 1998, respectively, and $213,000, $10.5 million and $30.1 million for the Inception Period and for the years ended December 31, 1996 and 1997, respectively. Cash used in operating activities from Inception through March 31, 1998 consisted primarily of net operating losses and increases in accounts receivable, which were partially offset by increases in deferred revenues, accrued expenses and accounts payable. Net cash used in investing activities was $681,000 and $49,000 for the three months ended March 31, 1997 and 1998, respectively, and was approximately $82,000, $3.5 million and $2.0 million for the Inception Period and for the years ended December 31, 1996 and 1997, respectively. Net cash used in investing activities in these periods consisted primarily of capital expenditures for computer equipment, purchased software, office equipment, and leasehold improvements. As of December 31, 1997 and March 31, 1998, the Company also had commitments under non-cancelable operating leases of $5.3 million and $5.3 million. Net cash provided by (used in) financing activities was $10.0 million and $(226,000) for the three months ended March 31, 1997 and 1998, respectively and was $1.7 million, $20.2 million and $49.7 million for the Inception Period and the years ended December 31, 1996 and 1997, respectively, attributable to the private sale of Preferred Stock. The Company believes that net proceeds from this offering, together with existing cash, cash equivalents and short-term investments, will be sufficient to meet its working capital and capital expenditures requirements for at least the next 12 months. Thereafter, the Company may be required to raise additional funds. No assurance can be given that the Company will not be required to raise additional financing prior to such time. If additional funds are raised through the issuance of equity securities, stockholders of the Company may experience significant dilution. Furthermore, there can be no assurance that additional financing will be available when needed or that if available, such financing will include terms favorable to the Company or its stockholders. If such financing is not available when required or is not available on acceptable terms, the Company may be unable to develop or enhance its products and services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors--Future Capital Needs; Uncertainty of Additional Funding." 25 RECENT ACCOUNTING PRONOUNCEMENT In October 1997, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") No. 97-2, Software Revenue Recognition, which supersedes SOP No. 91-1. The Company adopted SOP No. 97-2 prospectively for software transactions entered into beginning January 1, 1998. SOP No. 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. The fair value of an element must be based on evidence that is specific to the vendor. If a vendor does not have evidence of the fair value for all elements in a multiple-element arrangement, all revenue from the arrangement is deferred until such evidence exists or until all elements are delivered. Beginning with contracts signed in 1998 pursuant to SOP 97-2, the Company is recognizing revenues from the sale of licenses for use of the Company's business and technology systems over the term of the license agreement or the period over which the relevant services are delivered. See Note 1 of Notes to Consolidated Financial Statements. 26 BUSINESS The discussion in this Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." OVERVIEW CitySearch produces and delivers comprehensive local city guides on the World Wide Web (the "Web"), providing up-to-date information regarding arts and entertainment events, community activities, recreation, businesses, shopping, professional services and news/sports/weather to consumers in metropolitan areas. Each local city guide primarily consists of original content developed and designed specifically for the Web by the Company and its partners. The Company designs and produces custom-built Web sites and related services for local and regional businesses, aggregates the sites in a local city guide environment and provides business customers the ability to regularly update and expand their sites. This service offers local and regional businesses the opportunity to reach and interact with targeted consumers. The Company builds its city sites with the involvement of local government, community and volunteer associations, business and professional groups, educational institutions and local media companies. In addition, content generated by consumers through e-mail and bulletin boards, available in most sites, enhances the sense of community in CitySearch sites. CitySearch and its partners create comprehensive locally-focused content within a database that enables targeted, sophisticated searches across all content residing on a CitySearch site. In contrast, many search engines and navigational guides access pre-existing content from third-party Web sites that may be incomplete or out of date. In its owned and operated markets, CitySearch offers a broad array of updated, local content that is relevant to consumers. In other markets, CitySearch provides local media companies with the necessary technology and business expertise to effectively design, launch and operate a co-branded CitySearch site. The Company's city guides have received numerous awards and recognition for design, functionality and content, including PC Magazine's Editor's Choice, USA Today/Intelliquest's survey leader, the 1998 Webby award for best travel site, recognition by The New York Times as the best overall online guide to New York City, How Magazine's Design Award and Net Guide's Platinum "Best of the Web" Award. CitySearch launched its initial site in the Raleigh-Durham-Chapel Hill metropolitan area in May 1996. The Company and its partners have since launched additional local content guides in Austin, Los Angeles, Nashville, New York City, Portland, Salt Lake City/Utah, the San Francisco Bay Area and Washington, D.C. in the U.S., and in Melbourne, Sydney and Toronto internationally. The Company plans to expand its service to additional national and international markets by the end of 1998 both by leveraging the standardized roll-out model it has developed through previous city launches and by partnering with major media companies in certain cities. The Company has, for instance, partnered with The Baltimore Sun, The Dallas Morning News, the Los Angeles Times, The Washington Post, The Melbourne Age, Schibsted ASA/Scandinavia Online, The Sydney Morning Herald and the Toronto Star. These major media partners bring capital, brand recognition, promotional strength and local knowledge to their CitySearch sites and allow the Company to build out its national and international network of sites faster than it could solely through owned and operated sites. INDUSTRY BACKGROUND The Internet and the World Wide Web The Internet is an increasingly significant global interactive medium for communications, content and commerce. International Data Corporation ("IDC") estimates that the number of Web users worldwide will increase from 69 million at the end of 1997 to 320 million by the year 2002. According to The Media Audit, in certain of the markets where CitySearch has offerings, including Austin, San Francisco and Washington, D.C., more than four in ten adults are online. Growth in Internet usage has been fueled by a number of factors, 27 including the large and growing installed base of personal computers in the workplace and home, advances in the performance and speed of personal computers and modems, improvements in network infrastructure, easier and cheaper access to the Internet and increased awareness of the Internet among businesses and consumers. As Internet accessibility, usage and functionality continue to grow, the Internet is increasingly being used as a medium for direct communication among users (e.g., via e-mail and bulletin boards) as well as a rapidly growing sales and marketing channel. The Demand for Local, Community-Oriented Information over the Internet The Company believes that as users spend more time on the Web, they are increasingly seeking local information relevant to their daily lives. The Company believes that consumers spend a large majority of their time and money in their local communities and that, as a result, Web users are increasingly seeking targeted, relevant information concerning local events, places of interest, shopping and other information that is pertinent to their local activities. According to a survey conducted by Find/SVP, over half of U.S. Internet users accessed some type of online local news and information during the first three months of 1997. Additionally, businesses are seeking cost- effective means to target advertising and direct marketing efforts based on demographic characteristics, specific interests and geographic location. McCann-Erickson estimates that businesses spent approximately $77 billion in 1997 on traditional, indirect advertising efforts in local markets. With the Internet, businesses can directly interact with consumers, receive immediate feedback on their marketing efforts, and refine advertising campaigns on a real-time basis. The Company believes that the Web is becoming a more effective and efficient means for businesses to reach consumers. Consumers have limited Web resources available to provide focused and relevant local information. Similarly, many local businesses lack Web resources enabling them to effectively advertise to targeted local consumers. As the Internet has evolved, Web users have used sites devoted to local areas within navigational guides such as search engines and directories, and Web sites provided by newspapers and other traditional media sources. Local content within large navigational guides is often comprised of hypertext links to multiple, disparate Web sites that often provide the user with inconsistent and confusing user interfaces, outdated information and no common database to enable useful information searches. While Web sites for traditional media, including newspapers and television stations, effectively provide Web users with updated news coverage, they often lack the internal resources to structure easy-to-use, interactive guides for Web users, resulting in Web sites with limited functionality. In addition, the Company believes these sites frequently do not provide businesses with useful geographic and topical context for a business' Web presence. Finally, many traditional media organizations do not have experience in fielding, training and managing a sales and production force skilled at selling Web sites to local businesses, producing high quality Web-based advertising or providing necessary customer support. The Company believes there is a growing demand for online city guides that provide frequently updated local information organized in an intuitive manner and targeted at metropolitan consumers. The Company believes that consumers are seeking a guide that provides extensive information on local events, business listings and community activities, offers a user-friendly interface to facilitate rapid information access and allows users to search within a city-specific site. The Company also believes that as Internet users are increasingly seeking such information, traditional media sources are also seeking to partner with companies that are able to provide the appropriate technology and business processes to develop an online presence. Similarly, businesses are seeking content and technology solutions that not only offer Web users a rich and focused local guide so as to provide a highly effective context for the marketing of their goods and services, but also provide small and medium sized businesses a low cost, high quality Web presence. Indicative of this opportunity, Jupiter Communications estimates that the amount of local businesses advertising online will grow from 9% of total online advertising revenues in 1996 to 37% in 1998 and 54% of the $7.7 billion in online advertising in 2002. For local businesses seeking a means of establishing a Web presence, the current alternatives include either building their own Web site or placing an advertisement with an electronic yellow pages site. Most Web custom sites are expensive to develop and maintain, and may not attract high levels of Web site traffic without significant promotion. Placing an advertisement with an electronic yellow pages typically does not provide an appropriate 28 context for a local business' site and no assistance on how to effectively reach consumers. As a result, the Company believes a significant opportunity exists for a local city guide that meets consumers' demands for local information and businesses' objectives for targeting, interacting and selling to these local consumers. THE CITYSEARCH SOLUTION CitySearch produces and delivers comprehensive local city guides on the Web, providing up-to-date information regarding arts and entertainment events, community activities, recreation, businesses, shopping, professional services and news/sports/weather to consumers in metropolitan areas. Each local city guide primarily consists of original content developed and designed specifically for the Web by the Company and its partners. The Company designs and produces custom-built Web sites and related services for local and regional businesses, aggregates them in a local city guide environment and provides business customers the ability to regularly update and expand their sites. The CitySearch sites offer local and regional businesses the opportunity to reach and interact with targeted consumers. CitySearch typically targets medium to large sized cities with a combination of high personal computer penetration, high Internet use, strong population growth, significant high technology employment, a large university population and a government presence. CitySearch has two primary means of providing its local city guides. In its "owned and operated" markets, the Company systematically produces the majority of its own content, hires and rapidly deploys a direct sales force to sell custom-built Web sites as well as related services to local businesses and launches a presence in approximately six months. In other markets, the Company partners with a local media company that contracts with CitySearch to assist in developing, designing, launching and hosting a city guide. These partners license CitySearch's systems and provide royalty payments to the Company for revenues derived from operations. As of June 1, 1998, the Company provided local guides in 12 cities, seven of which are owned and operated and five of which are operated by its local newspaper partners ("partner-led markets"). The Company and its partners are in the process of rolling out their services in four additional partner-led markets in the U.S. and internationally including Baltimore, Copenhagen, Dallas and Stockholm. Key elements of the Company's solution include the following: Leading and Experienced Local Online Service. The Company is a leader in providing online local guides. CitySearch has launched or initiated a roll-out of Web-based local city guides with an easy-to-use interface in major national and international markets, including Austin, Baltimore, Dallas, Los Angeles, Nashville, New York City, Portland, Raleigh-Durham-Chapel Hill, Salt Lake City/Utah, the San Francisco Bay Area, Washington, D.C., Copenhagen, Melbourne, Stockholm, Sydney and Toronto. The Company believes the success of its approach is evidenced by the over 9,300 local and regional business Web sites that were online as of March 31, 1998 in its owned and operated markets. Differentiated Service Offering. The Company believes its local city guides differ substantially from competitive offerings. CitySearch develops and regularly updates its own content, both internally and in conjunction with local media partners, and offers consumers the opportunity to perform sophisticated searches since all Web content resides in the CitySearch site database. Unlike navigational guides that typically access content from third- party Web sites that may be incomplete or out of date, CitySearch sites encompass a broad array of updated, community-specific content that is easily accessed through CitySearch's common interface. The Company's city guides have received numerous awards and recognition for design, functionality and content including PC Magazine's Editor's Choice, USA Today/Intelliquest's survey leader, the 1998 Webby award for best travel site, recognition by the New York Times' as best overall online guide to New York City, How Magazine's Design Award and Net Guide's Platinum "Best of the Web" award. Strategic Partnerships. The Company is engaged in a number of strategic partnerships with media, content and other companies in order to build the CitySearch brand name and network of city guides. The Company has established or signed agreements to develop city guides in partnership with The Baltimore Sun, The Dallas 29 Morning News, Digital Ink Company, a subsidiary of The Washington Post Company, the Los Angeles Times, The Melbourne Age, Schibsted ASA/Scandinavia Online, The Sydney Morning Herald and the Toronto Star. Several of the Company's strategic relationships involve equity investments from the Company's partners, including The Washington Post Company, The Toronto Star and The Times-Mirror Company, owner of the Los Angeles Times and The Baltimore Sun. These major media partners also bring capital, brand recognition, promotional strength and local knowledge to their CitySearch sites and allow the Company to build out its national and international network of sites faster than it could solely through owned and operated sites. In CitySearch owned and operated markets, the Company partners with local media companies to assist it in developing content and expanding its promotional activities. For example, CitySearch has partnered in Raleigh- Durham-Chapel Hill with the ABC television station (WTVD) and with four radio stations owned by Capstar Broadcasting Corporation, in Salt Lake City/Utah with the CBS television station (KUTV) and six radio stations owned by Citadel Communications Corporation, and in San Francisco with the ABC television station (KGO) and two CBS-owned radio stations. In addition, the Company has entered into an agreement with American Express Travel Related Services Company, Inc. ("American Express") that provides for an equity investment by American Express in the Company, the distribution of co-branded marketing materials for the sale of business Web sites to American Express merchant customers on CitySearch guides, American Express sponsorship and banner advertising, introduction of electronic commerce products and services and sponsorship of other promotions. To further supplement the information and services it provides its consumers, the Company also entered into a relationship with Ticketmaster Group, Inc. ("Ticketmaster") to develop a system to enable consumers to purchase tickets to events listed on the CitySearch service. CitySearch has also reached agreements or arrangements with Earthlink Network, Inc., Microsoft Corporation's WebTV Networks, Inc., The Walt Disney Company's Family.com, C/Net Snap, Planet Direct and Internet Travel Network to expand its distribution efforts. Offer Local Businesses Differentiated Presence on the Web. The Company creates Web sites for local businesses, aggregates the Web sites in a local city guide environment and provides businesses the ability to regularly update and expand their sites. The Company believes its service offers local and regional businesses the opportunity to reach and interact with targeted audiences in a cost-effective manner. The Company provides business customers with integrated solutions to establish customized, multi-page Web sites including design, layout, photography, posting of updated information, hosting and maintenance. Businesses are able to provide a targeted audience with updated information about their products and services, including photographs, prices, store location, schedules of live entertainment, specials or sales and other relevant information. The Company typically creates a customized, multi- page Web site for its customers with a minimal up-front fee and monthly fees ranging from $60 to $750 per month. The Company believes its broad offering of services and prices compares favorably to other options available to businesses. Such options range from low cost, low quality scanned-in information to free-standing custom-designed sites that may cost in excess of $10,000 in up-front fees to produce and that rely on significant promotion to attract traffic. By providing a high quality Web presence at an affordable price, the Company's services address the demand of the large number of businesses whose online needs fall between these market extremes. Community-Based Approach. CitySearch differentiates itself from many national developers of local city guides by building many of its owned and operated sites with involvement from city governments, chambers of commerce, community associations, schools and others, and by focusing its hiring efforts within the local community. The Company builds free Web sites for selected community organizations, provides tools for e-mail to constituents and community forums and maintains guides to community services and volunteer opportunities, thereby enhancing the sense of community each CitySearch site provides. The Company believes that its community-based approach builds consumer interest in the site both directly, since the content it provides is of interest to many individuals and is not generally covered by competing city sites, and indirectly, because it builds broad support and "ownership" in the community. The Company has secured strong community support for its service in each of its markets, and the launch of many of its owned and operated markets has been presided over by the mayor or governor. 30 THE CITYSEARCH STRATEGY The Company's objective is to be the category leader for comprehensive local city guides that will attract a new and larger group of consumers to the Internet and to provide an easy-to-use resource for local information that is relevant to people's daily lives. The Company's strategy is focused on rapidly rolling out its service in the most attractive, Web-penetrated markets worldwide, establishing a dominant presence in these markets and using the CitySearch service as a platform for multiple revenue streams. The following are key elements of this strategy: Leverage Systematic City Launch Process. The Company believes it derives a competitive advantage from its ability to launch its service rapidly. CitySearch has developed and refined its detailed roll-out process in its 12 city guide launches to date. The Company's roll-out teams are led by experienced managers who prepare for launch by setting up operations, hiring and training local management teams, building the initial community relationships, negotiating promotional arrangements with local media, training a direct sales force of Internet Business Advisors ("IBAs") and selling initial sites. The Company's documented roll-out processes typically enable it to launch its service in approximately six months in owned and operated markets. In partner-led markets, the Company provides its roll-out expertise, professional personnel and technical infrastructure to assist its partners in creating an effective site and initiating a rapid and successful launch. Rapidly Build National and International Network and Brand Awareness. The Company intends to establish its service as the category leader for local information on the Web by linking its local city guides together in a national and international network. As of June 1, 1998, the Company's service operated in 12 metropolitan areas worldwide, and has initiated roll-out for launches in four additional metropolitan areas. The Company will continue to aggressively enter targeted markets through either an owned and operated market presence or by entering into partnerships and strategic alliances with major newspapers. The Company believes that as the number of its sites and usage of its service increases, it is creating a readily recognizable brand name for local content on the Internet. The Company believes that its branded worldwide network of local guides in Web-penetrated markets will increasingly attract local, regional and national advertisers that seek to efficiently target local markets and consumers seeking information about cities where they live or that they intend to visit. Continue Penetration of Established Markets. The Company emphasizes an aggressive, on-going process of increasing penetration of businesses in its metropolitan markets and continued community involvement. The Company strives to retain its business customers through continuing direct contact by Internet Marketing Advisers ("IMAs") employed by the Company in most cities and by providing customers with a high level of customer support. IMAs also educate existing customers about the benefits of upgrading and expanding their Web presence. The Company continues to emphasize local community involvement in each city by maintaining Web sites for and communication with selected city governments, chambers of commerce, community associations, schools, local charities and others. Through direct and ongoing contact with businesses and continuing emphasis on the community, the Company believes it creates a local presence that is difficult for subsequent competitive entrants to displace or replicate. Continue to Enter into Strategic Alliances. The Company intends to continue to differentiate its service by entering into agreements with local radio, television and other media companies in its future owned and operated markets and with major newspapers and other media companies in its partner-led markets. The Company intends to increase its number of local newspaper partnerships as a primary growth vehicle. The Company believes its partnerships with local newspapers provide a significant barrier to entry to competing local city guides that will be difficult to replicate. In addition, the Company intends to enter into additional strategic relationships, such as its current relationships with local television and radio stations, American Express and distribution partners. Develop Platform with Multiple Revenue Streams. The Company believes that its local city guides provide a platform for multiple revenue streams. In owned and operated markets, the Company derives recurring revenue fees from the sale of Web sites to local businesses in the communities CitySearch serves, as well as banner and 31 sponsorship advertising. Part of the Company's strategy is to increase average monthly revenue from new customers, in part through the introduction of new services. Between June 1997 and June 1998, average monthly revenue for new customers more than doubled. In partner-led markets, the Company derives licensing and royalty revenues from the licensing of the Company's technology and business systems, consulting revenues for CitySearch personnel provided to develop and establish local sites, and revenues for the provision of back office and hosting services. The Company also offers or intends to offer electronic commerce functionality and other innovative features allowing businesses to better serve consumers, including ticketing, reservations, sales events notifications, electronic coupons, newsletters and other transactions. The Company believes these types of services offer the Company the opportunity to further attract both consumers and businesses to its sites and to derive revenues through increased fees from businesses for additional services and potentially from online product sales. THE CITYSEARCH SERVICE FOR CONSUMERS CitySearch produces and delivers comprehensive local city guides on the Web, providing up-to-date information regarding arts and entertainment events, community activities, recreation, businesses, shopping, professional services and news/sports/weather to consumers in metropolitan areas. Each local city guide consists primarily of original content developed and designed specifically for the Web by the Company and its partners. The CitySearch service is topically organized by categories, which include arts and entertainment, restaurants and bars, community, shops and services, sports and outdoors, hotels and tourism, local news and professional services. By using the CitySearch service, consumers can search shopping areas, obtain maps, contact community organizations and vendors by e-mail, and engage in bulletin board discussions with individuals such as local public officials and celebrities. Some consumers can also access video streams from local television station partners, including recent news and other information. CitySearch offers local and regional businesses the opportunity to reach and interact with targeted consumers. In addition, content generated by consumers through e-mail and bulletin boards enhances the sense of community in CitySearch sites. 32 The CitySearch service has been launched in markets across the United States and in selected international markets. The Company plans to continue to expand its service both in owned and operated markets and by partnering with major media companies in certain markets. These major media partners bring capital, brand recognition, promotional strength and local knowledge to their city guides and allow the Company to build out its national and international network of sites faster than it could solely through owned and operated sites. The following table lists the Company's owned and operated and partner-led markets:
MARKETS DATE OF LAUNCH PARTNERS - ----------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- OWNED AND OPERATED: Raleigh-Durham-Chapel May 1996 WTVD (ABC) Hill Capstar Broadcasting Corporation (4 radio stations) WUNC (public radio) WCHL The Independent San Francisco Bay October 1996 KGO (ABC) Area CBS Radio (2 radio stations) Austin February 1997 KTBC (Fox) Clear Channel Communications, Inc. (4 radio stations) Salt Lake City/Utah March 1997 KUTV (CBS) Citadel Communications Corporation (6 radio stations) Nashville May 1997 WZTV (Fox) Dick Broadcasting (2 radio stations) Portland June 1997 KATU (ABC) Jacor Broadcasting (1 radio station) New York September 1997(/1/) Time Out New York (Weekly Arts and Entertainment Publication) PARTNER-LED: Melbourne July 1997 The Melbourne Age (Big Colour Pages) Sydney September 1997 The Sydney Morning Herald (Big Colour Pages) Toronto September 1997 the Toronto Star Washington, D.C. December 1997 The Washington Post (Washington Post Newsweek Interactive) Los Angeles(/2/) April 1998 the Los Angeles Times Baltimore 1998* The Baltimore Sun Copenhagen 1998* Schibsted ASA/Scandinavia Online Dallas 1998* The Dallas Morning News Stockholm 1998* Schibsted ASA/Scandinavia Online Oslo 1999* Schibsted ASA/Scandinavia Online
* Estimated launch dates (1) CitySearch acquired MetroBeat, Inc. in June 1996 and relaunched the MetroBeat site as a CitySearch site in September 1997. (2) Includes Pasadena, California, which was launched as a beta test site in January 1996. 33 [Black and white photographs of computer screens depicting a typical search on the Company's Web site.] THE CITYSEARCH SERVICE FOR BUSINESS CUSTOMERS The Company creates and hosts Web sites for local and regional businesses and organizations for a monthly fee. CitySearch offers local businesses a wide range of options in creating Web presences, from a basic Web presence costing as little as $60 per month to a multi-page site with additional features and functionality costing up to $750 per month. Most business customers have entered into a 12 month agreement that automatically converts into a month-to- month contract. By aggregating a customer's Web site with those of numerous other businesses in a comprehensive local city guide, CitySearch provides categorical and geographic context to a customer's Web presence to generate usage by consumers, as well as significant Internet traffic. Based on internal studies, the Company believes that CitySearch users are more evenly split between men and women, better educated, slightly older and have higher annual incomes than the typical Internet user. The Company believes that these demographics are attractive to its business customers. The Company provides an integrated solution for businesses to establish a Web presence, including design, photography, lay out, posting of updated information, hosting and maintenance. Businesses are able to provide a targeted audience with current information about their stores and services including photographs, prices, store location, schedules of live entertainment, sales and other relevant information. Unlike traditional media such as yellow-pages advertising, the Company offers business customers a certain number of free updates each month. CitySearch's business customers also receive usage reports, e-mails from interested consumers and access to an expanded base of potential buyers including tourists and out-of-town users. The Company has recently introduced a strategy of bundling enhanced features and functionality, including panoramic images and audio clips. These services, when bundled with the Company's basic services, are typically priced from $200 to $750 per month, and have accounted for significant increases in the average selling prices of the Company's offerings. The Company believes its broad offering of services and prices compares favorably to other options available to businesses. Such options range from low cost, low quality scanned-in information to free-standing custom-designed sites that may cost in excess of $10,000 in up-front fees to produce and that rely on significant promotion to attract traffic. By providing a high quality Web presence at an affordable price, the Company's services address the demand of the large number of businesses whose online needs fall between these market extremes. The Company's proprietary site design tools and production economies enable it to build customized multi-page Web sites for customers for a minimal up- front fee. The production of business Web sites for CitySearch owned and operated markets and certain partner-led markets is managed centrally in the Company's headquarters to better control quality and cost and provide rapid production. Business Web site creation follows a standardized process. First, IBAs in the field work with customers to design their sites and gather images and text. Once content is collected, IBAs forward this information to CitySearch's central production site in Pasadena, where data entry personnel input the text. Graphic designers then use the Company's proprietary software to combine the text and scanned images to create custom designed sites that reflect the nature and style of each business customer. Once the Web site designers have completed their work, the business Web site is checked for accuracy and published online after a 14 day customer proofing period. The entire process, from the receipt of content by the Company to putting a site online, takes approximately one month to complete. Each step of the sales and production process is monitored by a sophisticated enterprise management system to ensure that the process is consistent and complete. The Company believes the systems and processes it has developed to produce business Web sites allow it to create higher quality, more informative sites in a more cost-effective and timely manner than that of its competitors. The Company offers or intends to offer electronic commerce functionality and other innovative features allowing businesses to better serve consumers, including ticketing, reservations, sales events notifications, electronic coupons, newsletters and other transactions. These types of services offer the Company the opportunity to further attract both consumers and businesses to its sites and to derive revenues through increased fees from businesses for additional services and potentially from online product sales. 34 STRATEGIC ALLIANCES The Company has entered into partnerships and strategic alliances with third parties in order to (i) rapidly build its national and international network, (ii) generate licensing revenue in its partner-led markets, (iii) facilitate branding, (iv) gain access to additional content and (v) drive traffic on the CitySearch network of sites. Management intends to continue to negotiate further partnerships and alliances. Newspaper Partnerships. CitySearch has entered into strategic partnerships with major newspapers companies such as The Baltimore Sun, The Dallas Morning News, the Los Angeles Times, The Washington Post, Schibsted ASA/Scandinavia Online (Copenhagen, Oslo and Stockholm), The Melbourne Age, The Sydney Morning Herald and the Toronto Star. In these partner-led markets, the partner provides the capital and management, while CitySearch contributes technology, a business model, consulting services, and business systems and processes. CitySearch typically receives up-front license fees, ongoing license fees for delivery of upgrades and support and royalties based on revenues that the newspaper partner generates through the city guide service. In addition, the Company generally receives additional fees for consulting services in connection with the launch of the partner's city guides, custom engineering requested by particular partners, and compensation for business Web site production, customer service, billing and hosting services. The terms of the partner agreements are typically five to eight years in length, and contain customary termination rights in the event of material breach or non- performance. The Company believes these arrangements allow it to expand its national and international network of cities in a more rapid and cost- effective manner than a solely owned and operated network would allow. Television and Radio Media Alliances. CitySearch has entered into co- promotion agreements with local television and radio stations in most of its owned and operated markets. These relationships typically offer content sharing and co-promotion to both parties. CitySearch works with each partner to develop a multimedia Web site within the CitySearch site, while the partner offers promotion and a recognized brand within the market. CitySearch typically receives significant on-air promotion from these television and radio stations that increases brand awareness and drives traffic to the CitySearch site. For example, CitySearch has partnered in Raleigh-Durham- Chapel Hill with the ABC television station (WTVD) and radio stations owned by Capstar Broadcasting Corporation and in Salt Lake City/Utah with the CBS television station (KUTV), as well as radio stations owned by Citadel Communications Corporation. In San Francisco, the Company has agreements with the ABC television station (KGO) and radio stations owned by CBS. Marketing Agreements. The Company has entered into both local and national marketing agreements. For example, the Company recently reached a wide-ranging agreement with American Express simultaneously with its $4.0 million equity investment in the Company. The agreement provides for distribution of co- branded marketing materials to American Express merchant customers in the Company's local markets that will offer merchant customers online presences through the Company's local city guides. The parties intend to create areas within the Company's sites to aggregate promotions and discounts offered to consumers by American Express merchant customers as well as develop additional electronic commerce products. In addition, American Express will purchase sponsorships and banner advertising on the Company's sites. The Company has also entered into an agreement with Ticketmaster to develop a system to enable consumers to purchase tickets to Ticketmaster events featured on the CitySearch service along with local market online promotion of various Ticketmaster events. The Company also enters into a wide variety of national and local marketing agreements. For example, the Company has reached an agreement with Guess? Inc. that involves banner and in-store promotions in all of the Company's owned and operated markets, and an agreement with Levi Strauss Associates Inc.'s Dockers Khakis to provide sponsorship, editorial features and contests relating to two 1998 San Francisco film festivals. The Company intends to continue to aggressively pursue such marketing agreements in order to attract additional business customers and increase usage of the service by consumers. Distribution and Vertical Content Alliances. The Company has entered into agreements with a number of companies to expand its distribution efforts and user base. For example, the Company has entered into agreements or arrangements with Earthlink Network, Inc., Microsoft Corporation's WebTV Networks, Inc., The Walt Disney Company's Family.com, C/Net Snap, Planet Direct and Internet Travel Network to provide links across sites. 35 MARKETING AND SALES The Company emphasizes marketing activities in its owned and operated markets aimed at increasing awareness of its local city guides for both consumers and business customers. The Company seeks to build each site as a community project. From the outset, the Company approaches city councils, chambers of commerce, volunteer groups, community associations and clubs, visitors bureaus, schools and other local groups. The Company begins by creating an online presence for selected organizations free of charge. This approach builds consumer interest in the site, both directly, since this content is of interest to the community and not typically covered by commercial city sites, and indirectly because it builds goodwill with a broad group. The Company's roll-out teams are led by experienced professionals who prepare for launch by negotiating promotional arrangements with local media, training a direct sales force and selling initial sites. The roll-out team initiates advertising and public relations campaigns through low-cost "guerilla" marketing efforts and CitySearch's local media partners in radio, television and print advertising to both drive business customer sales and consumer usage. The Company also purchases targeted advertising on Web sites such as Infoseek, Preview Travel and Yahoo! as well as through traditional media such as radio, print and outdoor. Market roll-out is supported by integrated business system software that guides operations, production, billing and customer service. The roll-out strategy and software is designed to enable CitySearch to rapidly penetrate key targeted vendor categories and neighborhoods. These integrated, enterprise-wide tools facilitate lead management, sales cycle management, problem tracking resolution, mass mailing fulfillment, and in-bound and out- bound call handling. In partner-led markets, the Company's marketing efforts rely substantially on the partner's existing franchise and resources in the community. Partners typically market their city guide services through substantial print promotion and integration into a pre-existing news Web site. The partner's brand is also used in conjunction with the CitySearch brand to build credibility with local consumers. The Company both provides its partners with a roll-out team to launch the service, including assistance with recruiting, sales strategy, back office operations and ongoing support. Once a city site has been launched, the Company and its partners rely upon a direct sales force to accelerate the momentum established by the roll-out team. As of May 31, 1998, the Company employed approximately 140 IBAs in seven owned and operated markets selling directly to local businesses and approximately 15 IMAs in these markets to maintain regular contact with business customers and facilitate up-selling of Web site functionality. Each IBA and IMA completes a one week intensive training program at the Company's headquarters with follow up field training. The Company's proprietary enterprise management system tracks sales leads and prospect status and allows sales managers to track performance. IBAs and IMAs participate in ongoing training sessions in sales techniques and new products. OPERATIONS The Company has created a systematic approach to market roll-out that enables it to launch its service in owned and operated markets in approximately six months and to support a local service once launched. In addition, the Company licenses its roll-out capabilities to media companies in its partner-led markets. The Company has analyzed and documented the best practices associated with its early city launches to refine and standardize its field and home office production processes. CitySearch's software systems monitor much of the sales and customer care functions. Additionally, the Company has built custom systems that streamline the site creation and maintenance process. The Company's customer service operation is located in the Company's Pasadena headquarters. The Company's enterprise management systems enable customer service staff to view the customer's full profile, billing and interactive history as they take the call, and to use the software tools to make many changes to the business customer's site in real time. 36 TECHNOLOGY The Company has developed and implemented a number of technologies to support its local service and business operations, including (i) an online city guide application; (ii) a set of content development and management tools; and (iii) a suite of integrated enterprise management systems. CitySearch Online Application The CitySearch online application provides an user interface intended to support novice online users while providing easily accessible advanced features for experienced Web users. The core end-user functionality of the CitySearch application includes (i) concurrently performed keyword, spatial and temporal searches; (ii) personalization that permits consumers, for example, to receive newsletters in areas of interest, and register for special offers from CitySearch business customers that have chosen to implement a one- to-one marketing approach; (iii) dynamic map rendering and "nearby" functionality; (iv) real-time chat; and (v) message boards. CitySearch has to date employed an object-relational database to support Web publishing and searching. With version CS 2.5 of its service, the Company will employ a multi-tiered architecture, separating a standard relational database from business rules and presentation logic. With CS 2.5, city guide publishers will be able to create and change the appearance and, generally, the function of the product using any commercially available Web page design tool or text editor. As a result, the Company and its partners will be able to respond even more quickly to changes in the marketplace and evolving user preferences. In addition, the object-oriented architecture provides for rapid development cycles and code reuse. The Company has made a substantial investment in its product development infrastructure and intends to continue to release product enhancements that address changing demands of business customers and consumers. Content Creation and Management Tools The Company has created the following applications to support editorial and advertising content production: (i) SiteWorks, for design of business Web sites and editorial features; (ii) EditWorks, for editorial content entry; (iii) User Interface Tree editor, for defining and managing the site hierarchy; and (iv) MediaWorks, to enable remote content partners, typically television and radio stations, to submit content directly to the site. These tools are designed to minimize the technical knowledge that editorial and advertising content producers need to possess. Enterprise Management Systems CitySearch has developed and implemented a suite of integrated enterprise management systems designed to handle an increasing volume of business customers. The enterprise management system consists of third party and internally developed applications covering sales force automation and telemarketing, production management and tracking systems, customer service, accounting, billing and commissions systems. CitySearch has also designed a sophisticated tool to manage the planning, scheduling, forecasting and tracking of business Web sites, banners and other services through the various stages of design and production. This tool enables the Company to manage the large number of business Web sites and banners developed simultaneously and originating from numerous cities. The Company believes the systems and processes it has developed to produce business Web sites allow it to create high quality sites in a more cost- effective and timely manner. COMPETITION The markets for local interactive content and services are highly competitive. Currently, the Company's primary competitors include Digital City, Inc., a company wholly owned by America Online Inc. and Tribune Company, Microsoft Corporation (Sidewalk) and Zip2 Corporation. The Company also competes against search engine and other site aggregation companies such as Excite, Inc. (City.Net), Lycos, Inc. (Lycos City Guide) and Yahoo! Inc. (Yahoo! Local) which primarily serve to aggregate links to sites providing local content. In addition, 37 the Company competes against offerings from media companies, including Cox Interactive Media and Knight-Ridder, Inc., as well as offerings from several telecommunications and cable companies and Internet service providers that provide local interactive programming such as SBC Communications Inc. (At Hand) and U.S. West, Inc. (Dive-In). Many of these companies have greater financial and marketing resources than the Company and may have significant competitive advantages through other lines of business and existing business relationships. There are also numerous niche competitors which focus on a specific category or geography and compete with specific content offerings provided by CitySearch. The Company may also compete with online services and other Web site operators, as well as traditional media such as television, radio and print for a share of advertisers' total advertising budgets. Furthermore, additional major media and other companies with financial and other resources greater than those of the Company may introduce new Internet products and services addressing these markets in the future. There can be no assurance that the Company's competitors will not develop services that are superior to those of the Company or that achieve greater market acceptance than the Company's offerings. The Company believes that the principal competitive factors in its markets include depth, quality and comprehensiveness of content, ease of use, distribution, search capability and brand recognition. There can be no assurance that the Company will be able to successfully compete against its current or future competitors or that competition will not have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, as a strategic response to changes in the competitive environment, the Company may make certain pricing, service or marketing decisions or enter into acquisitions or new ventures that could have a material adverse effect on the Company's business, financial condition and results of operations. PROPRIETARY RIGHTS The Company regards its copyrights, service marks, trademarks, trade dress, trade secrets and similar intellectual property as critical to its success, and relies on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with the Company's employees, customers, partners and others to protect its proprietary rights. The Company pursues the registration of certain of its key trademarks and service marks in the United States and internationally. Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which the Company's products and services are made available online. The Company has licensed in the past, and expects that it may license in the future, certain of its proprietary rights, such as trademarks or copyrighted material, to third parties. In addition, the Company has licensed in the past, and expects that it may license in the future, certain content, including trademarks and copyrighted material, from third parties. While the Company attempts to ensure that the quality of its brand is maintained by such licensees, there can be no assurance that such licensees will not take actions that might materially and adversely affect the value of the Company's proprietary rights or reputation, which could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate or that third parties will not infringe or misappropriate the Company's copyrights, trademarks, trade dress and similar proprietary rights. In addition, there can be no assurance that other parties will not assert infringement claims against the Company. The Company licenses the trademark "CitySearch" from a third party, and there can be no assurance that the Company will continue to license the trademark according to terms acceptable to the Company. The Company may be subject to legal proceedings and claims from time to time in the ordinary course of its business, including claims of alleged infringement of the trademarks and other intellectual property rights of third parties by the Company and its licensees. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources which could result in a material adverse effect on the Company's business, financial condition and results of operations. EMPLOYEES As of May 31, 1998, CitySearch employed 560 persons (257 persons in functions related to cost of revenue, 199 persons in sales and marketing, 56 persons in research and development and 48 persons in general and administrative areas). None of the Company's employees is represented by a labor union, and CitySearch considers its employee relations to be good. 38 FACILITIES The Company's headquarters are located in Pasadena, California, where the Company currently leases approximately 28,000 square feet under a lease expiring in 2002. The Company also leases approximately 4,500 square feet in Austin, 3,900 square feet in Morrisville, North Carolina, 7,900 square feet in Research Triangle Park, North Carolina, 4,600 square feet in Nashville, 10,000 square feet in New York, 4,700 square feet in Portland, 4,600 square feet in Salt Lake City and 5,800 square feet in San Francisco under leases which expire in 2002, 2001, 2003, 2000, 2004, 2002, 2001 and 1999, respectively. The Company believes that its facilities are adequate in those cities in which the Company currently does business. LEGAL PROCEEDINGS The Company is not currently subject to any material legal proceedings. The Company may from time to time become a party to various legal proceedings arising in the ordinary course of business. 39 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information regarding the executive officers and directors of the Company as of June 1, 1998:
NAME AGE POSITION ---- --- -------- Charles Conn............ 36 Chief Executive Officer and Director Thomas Layton........... 35 President, Chief Operating Officer, Treasurer and Director Douglas McPherson....... 36 Chief Legal Officer and Vice President, Business Development Bradley Ramberg......... 34 Chief Financial Officer, Vice President, Finance and Administration and Secretary Robert Kavner(1)........ 54 Chairman of the Board Gerald Breslauer(2)..... 69 Director Jeffrey Brewer.......... 29 Director Barry Diller............ 56 Director Joseph Gleberman(2)..... 40 Director William Gross(1)........ 39 Director Yves Sisteron(2)........ 43 Director Alan Spoon.............. 46 Director Thomas Unterman(1)...... 53 Director
- -------- (1)Member of the Compensation Committee (2)Member of the Audit Committee Mr. Conn has served as Chief Executive Officer and a director since he co- founded the Company in September 1995 and served as President of the Company from September 1995 to October 1996. From September 1990 to September 1995, he was a consultant at McKinsey & Company, where he was elected Partner. From September 1986 to September 1988, Mr. Conn worked with the Boston Consulting Group in Boston and Tokyo and in 1989 with Canon, Inc. in Japan. Mr. Conn holds a B.A. from Boston University, a B.A. and M.A. from Oxford University, where he was a Rhodes Scholar and a M.B.A. from Harvard Business School, where he was a Baker Scholar. Mr. Layton has served as President since October 1996, Chief Operating Officer since November 1995, a director since May 1996 and Treasurer of the Company since September 1995. He also served as Vice President, Sales and Marketing from November 1995 to October 1996. From May 1994 to November 1995, he was with Score Learning Corporation, a leading educational learning center, where he was promoted from Chief Financial Officer to President and Chief Operating Officer. From February 1989 to September 1992, Mr. Layton was Vice President and General Manager of the Western Region for Leasecomm, Inc., a high growth national equipment leasing company, and was previously with the Boston Consulting Group. Mr. Layton holds a B.S. from the University of North Carolina at Chapel Hill and a M.B.A. from Stanford Business School. Mr. McPherson has served as Chief Legal Officer and Vice President, Business Development since he joined the Company in July 1996. From November 1992 to June 1996, Mr. McPherson was with the law firm of Heller Ehrman White & McAuliffe, where he specialized in intellectual property law and general commercial litigation. From September 1991 to September 1992, he served as a law clerk for a federal district judge. From 40 June 1986 to June 1988, he served as Assistant to the Vice President at The Rockefeller Foundation in New York City. He holds a B.A. from the University of North Carolina at Chapel Hill, a M.A. from the University of California, Berkeley and a J.D. from Stanford Law School. Mr. Ramberg has served as the Chief Financial Officer and Vice President, Finance and Administration since he joined the Company in April 1996 and as Secretary since February 1998. From January 1994 to April 1996, he was Vice President of Finance and Operations at the Fresh Gourmet Company, a joint venture between CPC International Inc. and Prepco. From December 1992 to January 1994, he was vice president, operations and finance at Pro-Towel, a start-up consumer products venture. He holds an A.B. from Brown University and a M.B.A. from Harvard Business School. Mr. Kavner has served as a director of the Company since December 1995 and Chairman of the Board of Directors since March 1996. Mr. Kavner has served as the Chief Executive Officer, President and a director of OnCommand, Inc., a provider of in-hotel room entertainment and movies, since September 1996 and was a consultant in the area of Internet services and content, interactive entertainment and telecommunications from August 1995. From June 1994 to August 1995, Mr. Kavner was the head of Creative Artists Agency's business advisory group. From 1984 to 1994, Mr. Kavner held a number of senior executive positions in AT&T Corp. Mr. Kavner has a B.A. from Adelphi University. He also serves as a director of Fleet Financial Corp., Tandem Computers Incorporated and Earthlink Network, Inc. Mr. Breslauer has served as a director of the Company since December 1995. Since June 1952, he has been a Partner of Breslauer & Rutman, a financial management company. Mr. Breslauer holds a B.A. from the University of California, Los Angeles. Mr. Brewer has served as a director of the Company since September 1995 and was Vice President, Technology and Secretary of the Company from September 1995 to January 1998. Since January 1998, he has served as Chief Executive Officer of GoTo.com, an internet search engine company. From June 1994 to September 1995, he served as Director of Online Development at Knowledge Adventure, a company which developed educational software for children. He holds a B.S. from Southern Methodist University. Mr. Diller has served as a director of the Company since December 1997. He has been a director and Chairman of the Board and Chief Executive Officer of USA Networks since August 1995. He was Chairman of the Board and Chief Executive Officer of QVC, Inc. from December 1992 through December 1994. From 1984 to 1992, Mr. Diller served as the Chairmen of the Board and Chief Executive Officer of Fox, Inc. Prior to joining Fox, Inc., Mr. Diller served for ten years as Chairman of the Board and Chief Executive Officer of Paramount Pictures Corporation. Mr. Diller is also a director of The Seagram Company, Ltd., Ticketmaster Group, Inc. and Golden Books Family Entertainment, Inc. Mr. Gleberman has served as a director of the Company since May 1996. He is a Managing Director in the Principal Investment Area of Goldman, Sachs & Co. He joined Goldman, Sachs & Co. in 1982. He holds a B.A. and M.A. from Yale University and a M.B.A. from Stanford University. Mr. Gleberman serves as a director of Applied Analytical Industries, Inc., Biofield Corp., and Dade International, Inc. Mr. Gross has served as a director of CitySearch since he co-founded it in September 1995. Mr. Gross is currently Chief Executive Officer of Bill Gross' idealab!, a corporation which generates ideas for and creates new companies. In 1991, he founded Knowledge Adventure, a corporation which developed educational software for children. He served as the Chairman of Knowledge Adventure from October 1991 to January 1997. He was a developer at Lotus Development Corporation from 1986 to 1991. Prior to joining Lotus Development Corporation, Mr. Gross founded, in 1980, GNP Loudspeaker, Inc. to manufacture and sell his patented designs. In 1995, Mr. Gross was elected to the Board of Trustees of California Institute of Technology as the first Young Alumni Trustee. Mr. Gross holds a B.S. from the California Institute of Technology. Mr. Sisteron has served as a director of the Company since December 1997. Mr. Sisteron has been a Managing Director of Global Retail Partners Fund, L.P. since January 1996 and a Managing Director, U.S. 41 Investments of Carrefour S.A. since March 1993. Mr. Sisteron has a J.D. and an L.L.M. from the Lyon Law School and an L.L.M. in Comparative Law from New York University School of Law. Mr. Spoon has served as a director of the Company since December 1997. Mr. Spoon has been President of The Washington Post Company since September 1993 and Chief Operating Officer and a director since May 1991. Prior to that, Mr. Spoon held a wide variety of positions at The Washington Post Company, including President of Newsweek from September 1989 to May 1991. Mr. Spoon has a B.S. from the Massachusetts Institute of Technology, a M.S. from the M.I.T. Sloan School of Management and a J.D. from Harvard Law School. He is also a director of American Management Systems, Inc. and Human Genome Sciences, Inc. Mr. Unterman has served as a director of the Company since June 1997. Since August 1995, he has served as a Senior Vice President and Chief Financial Officer of The Times Mirror Company. From February 1995 to August 1995, Mr. Unterman was a Senior Vice President and General Counsel, and from September 1992 to February 1995 was a Vice President and General Counsel, of The Times Mirror Company. He has an A.B. from Princeton University and a J.D. from the University of Chicago. BOARD COMPOSITION The Board of Directors is currently comprised of 11 directors, including nine non-employee directors. Messrs. Diller and Sisteron were elected pursuant to rights granted to USA Networks and Global Retail Partners, L.P. ("GRP"), respectively, under the Company's Restated Certificate of Incorporation. Pursuant to the Company's Restated Certificate of Incorporation, USA Networks has a right to elect one member of the Board of Directors until the earlier of (i) November 12, 2007 or (ii) the date USA Networks owns less than 50% of the capital stock of the Company that it owned on November 12, 1997. In the event that the Company grants any other stockholder or stockholders, voting as a separate class, a right to elect more than one director, USA Networks will be entitled to elect the same number of directors. The Company's Restated Certificate of Incorporation also provides that GRP has a right to elect one member of the Board of Directors until the earlier of (i) November 20, 1999, (ii) the one-year anniversary of the closing of this offering or (iii) the date GRP owns less than 100% of the capital stock of the Company that it owned on November 20, 1997. Mr. Gleberman was elected to the Board of Directors pursuant to the Company's Restated Certificate of Incorporation which provides that the holders of Series C Preferred Stock, voting together as a separate class, have a right to elect one member of the Board of Directors. This right terminates upon the closing of this offering. Certain holders of the Company's Preferred Stock and Common Stock have entered into a voting agreement (the "Voting Agreement") pursuant to which such stockholders are required to vote, from and after the closing of the offering, all of the shares of the Company's voting securities owned by them to elect to the Board of Directors the designee or designees (the "Series C Directors") of the holders of a majority of the shares of Series C Preferred Stock outstanding immediately prior to the closing of this offering (the "Series C Holders"). The Series C Holders are entitled to designate one candidate for election to the Board of Directors, except that if any other stockholder or stockholders, voting as a separate class, are entitled, by virtue of a right granted by the Company, to elect more than one director, the number shall be increased to the number of directors that such other stockholder or stockholders are entitled to elect. The Company has agreed to use its best efforts to cause the nomination and election of the Series C Directors in accordance with the Voting Agreement. The Voting Agreement terminates upon the date the Series C Holders hold less than 7.5% of the then outstanding Common Stock (on a fully diluted basis). As of June 1, 1998, the holders of the Series C Preferred hold 11.5% of the outstanding Common Stock of the Company (on a fully diluted basis, as converted basis). As of June 1, 1998, entities affiliated with Goldman, Sachs & Co. owned 79.6% of the outstanding Series C Preferred Stock. The Company's Restated Certificate of Incorporation to be effective upon the completion of this Offering provides that the Board of Directors will be divided into three classes to serve staggered three-year terms. The Board of Directors has a Compensation Committee, currently comprised of Mr. Kavner, Mr. Gross and Mr. Unterman that makes recommendations to the Board of Directors concerning salaries and incentive 42 compensation for officers and employees of the Company. The Board of Directors also has an Audit Committee, currently comprised of Mr. Breslauer, Mr. Gleberman and Mr. Sisteron, that reviews the results and scope of the annual audit and other accounting related matters. DIRECTOR COMPENSATION The members of the Board of Directors are not compensated for their services to the Company other than for reimbursement of their expenses incurred in connection with such services and their eligibility for stock option grants under the Company's 1996 Stock Option Plan. In March and April 1996, Mr. Kavner received options to purchase 50,000, 10,000 and 81,681 shares of Common Stock under the 1996 Stock Option Plan at an exercise price of $.10, $.10 and $.25 per share, respectively. In March 1996, Mr. Breslauer received an option to purchase 10,000 shares of Common Stock under the 1996 Stock Option Plan at an exercise price of $.10 per share. Upon completion of this offering, directors who are employees of the Company will be eligible to receive stock options pursuant to the 1996 Stock Option Plan, while non-employee directors will receive stock options pursuant to the automatic option grant provisions of the 1998 Director Option Plan. See "--Employee Benefit Plans." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of the Compensation Committee is an officer or employee of the Company. No interlocking relationship exists between the Company's Board of Directors or Compensation Committee and the board of directors or compensation committee of any other company, nor has such an interlocking relationship existed in the past. EXECUTIVE COMPENSATION The following table sets forth certain summary information concerning the compensation awarded to, earned by or paid for services rendered to the Company in all capacities during the year ended December 31, 1997 by the Company's Chief Executive Officer and the one executive officer who earned in excess of $100,000 in compensation during the fiscal year ended December 31, 1997 (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------ AWARDS ------------ ANNUAL COMPENSATION SECURITY ------------------- OTHER ANNUAL UNDERLYING NAME AND PRINCIPAL POSITIONS SALARY BONUS COMPENSATION OPTIONS (#) - ---------------------------- ------------------- ------------ ------------ Charles Conn..................... $ 93,333 $ 40,000 -- 125,000 Chief Executive Officer and Di- rector Thomas Layton.................... 86,667 25,000 -- 75,000 President, Chief Operating Officer, Treasurer and Director
43 OPTION GRANTS IN 1997 The following table sets forth certain information regarding option grants to each of the Named Executive Officers during the year ended December 31, 1997.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR INDIVIDUAL GRANTS OPTION TERMS(4) ---------------------------------------------------------- --------------------- NUMBER OF PERCENT OF TOTAL SECURITIES OPTIONS UNDERLYING GRANTED TO EXERCISE OPTIONS GRANTED EMPLOYEES IN PRICE(3) NAME (1) 1997(2) PER SHARE EXPIRATION DATE 5% 10% - ---- --------------- ---------------- --------- --------------- ---------- ---------- Charles Conn............ 125,000 12.2% $2.00 10/01/07 $ 157,224 $ 398,436 Thomas Layton........... 75,000 7.3 2.00 10/01/07 94,334 239,061
- -------- (1) All options were granted under the Company's 1996 Stock Option Plan and vest one forty-eighth per month at the end of each month commencing September 1, 1997; provided, however that upon a substantial merger or an acquisition of the Company, the unvested portion of such options will vest immediately. (2) Based on options to purchase 1,025,000 shares granted to employees, including the Named Executive Officers, during the fiscal year ended December 31, 1997 (excluding options to purchase 85,000 shares of Common Stock which were granted to employees and subsequently canceled during the fiscal year ended December 31, 1997). (3) The exercise price per share of each option was equal to the fair market value of the underlying Common Stock on the date of grant as determined by the Board of Directors. (4) Potential gains are calculated net of the exercise price but before taxes associated with the exercise. The 5% and 10% assumed annual rates of compounded stock appreciation are mandated by the rules of the Securities and Exchange Commission ("Commission") and do not represent the Company's estimate or projection of the future Common Stock price. Actual gains, if any, on stock option exercises are dependent on the future financial performance of the Company, overall market conditions and the option holder's continued employment through the vesting period. OPTION EXERCISES AND FISCAL YEAR-END VALUES The following table sets forth the number of shares acquired upon the exercise of stock options during the year ended December 31, 1997 and the number of shares covered by both exercisable and unexercisable stock options held by each of the Named Executive Officers at December 31, 1997.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT YEAR-END(1) AT YEAR-END(2) SHARES ACQUIRED VALUE ------------------------- ------------------------- NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- --------------- -------- ----------- ------------- ----------- ------------- Charles Conn............ -- $ -- 10,417 114,583 $ $ Thomas Layton........... -- -- 256,250 68,750
- -------- (1) Options shown were granted under the 1996 Stock Option Plan and are subject to vesting as described in footnote (1) to the option grant table above. See "Employee Benefit Plans" for a description of the material terms of these options. (2) Based on the assumed initial public offering price of $ per share, less the exercise price. EMPLOYMENT AGREEMENT On May 9, 1996 and July 2, 1997, respectively, the Company entered into at- will employment agreements with each of Charles Conn and Thomas Layton, the Company's Chief Executive Officer and President, respectively. Pursuant to such employment agreements, in the event that Mr. Conn's or Mr. Layton's, as the case may be, employment is terminated, each will be entitled to receive severance payments until the earlier of (i) such time as he is employed by a recognized company or (ii) six months after termination. Such severance payments will equal his full salary for the first three months after termination and half of his salary for the second three months after termination. 44 EMPLOYEE BENEFIT PLANS 1996 Stock Option Plan. The Board of Directors adopted and the stockholders approved the Company's 1996 Stock Option Plan (the "Stock Plan") and the reservation of 2,500,000 shares of Common Stock thereunder on March 1, 1996. On September 18, 1996, the Board of Directors and the stockholders approved an increase of 500,000 reserved for issuance under the Stock Plan. The Board of Directors and the stockholders approved a further increase of 1,000,000 shares on November 18, 1996 and November 20, 1996, respectively. Subject to approval by the stockholders, the Company plans to increase the number of shares reserved for issuance by 1,000,000 shares to an aggregate of 5,000,000 shares of the Common Stock reserved under the Stock Plan. The Stock Plan, as proposed to be amended, provides that the aggregate number of shares reserved thereunder will automatically be increased each year on the first day of the Company's fiscal year beginning in 1999 by a number of shares equal to the lesser of (i) 2,000,000 shares of Common Stock, (ii) 4% of the then outstanding shares of Common Stock on such date or (iii) a lesser amount determined by the Board of Directors. The Stock Plan provides for the granting to employees (including officers and employee directors) of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and for the granting to employees (including officers and employee directors) and consultants (including non-employee directors) of nonstatutory stock options. Unless terminated sooner, the Stock Plan will terminate automatically in March 2006. The Board of Directors has the authority to amend, suspend or terminate the Stock Plan, provided that no such action may affect any share of Common Stock previously issued and sold or any option previously granted under the Stock Plan. The Stock Plan may be administered by the Board of Directors or a committee consisting of members of the Board of Directors. The administrator has the power to determine the terms of each option granted, including the exercise price, the number of shares subject to the option and the exercisability thereof, and the form of consideration payable upon exercise. No employee or consultant may be granted, in any fiscal year of the Company, options to purchase more than 750,000 shares (plus 1,500,000 shares in the case of a new employee's or consultant's initial employment with the Company). Unless determined otherwise by the administrator, an option granted under the Stock Plan is not transferable by the optionee other than by will or by the laws of descent or distribution, and is exercisable during the lifetime of the optionee only by such optionee. An option granted under the Stock Plan must be exercised within three months after termination of the optionee's status as an employee or consultant of the Company (or within 12 months after termination of such status by death or disability), but in no event later than the expiration of the option in accordance with its terms. The exercise price of nonstatutory stock options is determined by the administrator, but with respect to nonstatutory stock options intended to a qualify as "performance- based compensation" within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, the exercise price must at least be equal to the fair market value of the Common Stock on the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of the Company's outstanding capital stock, the exercise price of any incentive stock option must equal at least 110% of the fair market value on the grant date and the term of the option must not exceed five years. The term of all other options granted under the Stock Plan may not exceed ten years. The shares subject to options granted under the Stock Plan may be fully and immediately exercisable or may be exercisable cumulatively over time or upon satisfaction of specified performance criteria, as determined by the administrator. In most cases, 25% of the shares subject to options granted under the Stock Plan are exercisable at the end of one year with one forty- eighth of the shares subject to the option becoming exercisable each month thereafter. The Stock Plan provides that in the event of a merger of the Company with or into another corporation, outstanding stock options will either be assumed by the acquiring corporation or terminated as of the date of the closing of the merger, and immediately prior to the consummation of any dissolution or liquidation of the Company, outstanding stock options will be terminated. 45 1998 Director Option Plan. Subject to approval by the stockholders, the Company intends to adopt the 1998 Director Option Plan (the "Director Plan"). The Director Plan provides for the automatic grant of nonstatutory stock options to non-employee directors. The Director Plan has a term of ten years, unless terminated sooner by the Board of Directors. A total of 300,000 shares of Common Stock have initially been reserved for issuance under the Director Plan. In addition, the Director Plan provides for annual increases on the first day of the Company's fiscal year beginning in 1999 by a number equal to the lesser of (i) the number of shares needed to restore the maximum aggregate number of shares available for sale under the Director Plan to 300,000 shares or (ii) a lesser number of shares determined by the Board of Directors. The Director Plan provides that each non-employee director who is a member of the Board of Directors on or after the effective date of this offering shall automatically be granted an option to purchase 20,000 shares of Common Stock (the "First Option") on the later of (i) the effective date of this offering or (ii) the date which such person first becomes a non-employee director. In addition to the First Option, each non-employee director shall automatically be granted an option to purchase 5,000 shares (a "Subsequent Option") on the date of each of the Company's annual meeting of stockholders, if on such date he or she shall have served on the Board of Directors for at least six months. Each First Option and Subsequent Option shall have a term of ten years. Twenty-five percent of the shares subject to the options will vest one year from the date of grant and one forty-eighth of the optioned stock shall vest each month thereafter, provided that the individual continues to serve as a director on such dates. The exercise price of each First Option and each Subsequent Option shall be 100% of the fair market value per share of the Common Stock on the date of grant. In the event of a merger of the Company or the sale of substantially all of the assets of the Company, each outstanding option may be assumed or an equivalent option substituted for by the successor corporation. If an option is assumed or substituted for by the successor corporation, it shall continue to vest as provided in the Director Plan so long as the optionee continues to serve as a director of the Company or the successor corporation, as applicable. However, if a non-employee director's status as a director of the Company or the successor corporation, as applicable, is terminated other than upon a voluntary resignation by the non-employee director, each option granted to such non-employee director shall become fully vested and exercisable. If the successor corporation does not assume an outstanding option or substitute for it an equivalent option, the option will terminate as of the closing of the merger or asset sale. Options granted under the Director Plan must be exercised within three months of the end of the optionee's tenure as a director of the Company, or within 12 months after such director's termination by death or disability, but in no event later than the expiration of the option's ten-year term. Options granted under the Director Plan are generally not transferable by the optionee other than by will or the laws of descent and distribution, and each option is exercisable, during the lifetime of the optionee, only by such optionee. 1998 Employee Stock Purchase Plan. Subject to approval by stockholders, the Company plans to adopt the 1998 Employee Stock Purchase Plan (the "Purchase Plan") and reserve an aggregate of 300,000 shares of Common Stock thereunder. The number of shares reserved will be increased automatically each year on the first day of the Company's fiscal year beginning in 1999 by an amount equal to the lesser of (i) 600,000 shares of Common Stock, (ii) 1.5% of the outstanding shares of Common Stock on such date or (iii) a lesser amount determined by the Board of Directors. The Purchase Plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Code. Under the Purchase Plan, the Board of Directors may authorize participation by eligible employees, including officers, in periodic offerings following the commencement of the Purchase Plan. Each offering period will run for 12 months and will be divided into consecutive purchase periods of approximately six months. The initial offering under the Purchase Plan will commence on the date of this Prospectus and terminate on October 31, 1999. Thereafter, new 12 month offering periods will commence every six months on each May 1 and November 1. Unless otherwise determined by the Board of Directors, employees are eligible to participate in the Purchase Plan only if they are customarily employed by the Company or a subsidiary of the Company designated by the Board of Directors for at least 20 hours per week and for at least five months per calendar year. Amounts deducted and accumulated by the participant are used to purchase shares of Common Stock at the end of each 46 purchase period. Employees who participate in an offering may have up to 15% compensation withheld pursuant to the Purchase Plan. The price of Common Stock purchased under the Purchase Plan will be equal to 85% of the fair market value of the Common Stock at the commencement date of each offering period or the relevant purchase date, whichever is lower. In the event the fair market value at the end of a purchase period is less than the fair market value at the beginning of the offering period, the participants will be withdrawn from the current offering period following exercise and automatically re-enrolled in a new offering period. The new offering period will use the lower fair market value as of the first date of the new offering period to determine the purchase price for future purchase periods. Employees may end their participation in any offering period at any time during any offering period, and participation ends automatically on termination of employment with the Company. The maximum number of shares that a participant may purchase during each purchase period is 5,000 shares during any purchase period. In addition, no person may purchase shares under the Purchase Plan to the extent such person would own 5% or more of the total combined value or voting power of all classes of the capital stock of the Company or any of its subsidiaries, or to the extent that such person's rights to purchase stock under all employee stock purchase plans would exceed $25,000 for any calendar year. The Purchase Plan will terminate ten years from the date of adoption of the Purchase Plan, unless terminated earlier in accordance with the provisions of the Purchase Plan. In the event of a proposed sale of all or substantially all the assets of the Company, or the merger of the Company with or into another corporation, each outstanding option will be assumed or an equivalent option substituted by the successor corporation. In the event the successor corporation does not assume or substitute for the option, any offering periods then in progress shall be shortened to a new date prior to the proposed sale or merger. The Board of Directors has the authority to amend or terminate the Purchase Plan, provided, that no such action may adversely affect any outstanding rights to purchase Common Stock. 401(k) Plan. The Company participates in a tax-qualified employee savings and retirement plan (the "401(k) Plan") which covers all of the Company's full-time employees who are at least 21 years of age and who have been employed with the Company for at least three months. Pursuant to the 401(k) Plan, eligible employees may defer up to 20% of their pre-tax earnings, subject to the Internal Revenue Service's annual contribution limit. The 401(k) Plan permits additional discretionary matching contributions by the Company on behalf of all participants in the 401(k) Plan in such a percentage amount as may be determined annually by the Board of Directors. To date, the Company has made no such matching contributions. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue of 1986, as amended, so that contributions by employees or by the Company to the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that contributions by the Company, if any, will be deductible by the Company when made. The trustee under the 401(k) Plan, at the direction of each participant, invests the assets of the 401(k) Plan in any of a number of investment options. LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS The Company's Restated Certificate of Incorporation, which will become effective upon the closing of this offering, limits the liability of directors for breach of fiduciary duty as a director to the maximum extent not prohibited by the DGCL. The DGCL provides that a corporation's certificate of incorporation may contain a provision eliminating or limiting the personal liability of a director for monetary damages for breach of their fiduciary duties as directors, except for liability (i) for any breach of their duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided for in Section 174 of the DGCL or (iv) for any transaction from which the director derived an improper personal benefit. The Company's Restated Certificate of Incorporation also provides that the Company is required to indemnify to the fullest extent permitted by law any director, officer or employee of the Company. The Company's Bylaws, which will also become effective upon the closing of this offering, provide that (i) the Company is required to indemnify its directors and officers to the maximum extent permitted by the DGCL, subject to certain very limited exceptions, (ii) the Company may indemnify its other employees and agents to the maximum extent permitted by the DGCL, (iii) the Company is required to advance expenses, as incurred, to its 47 directors and officers in connection with a legal proceeding, subject to certain very limited exceptions and (iv) the rights conferred in the Bylaws are not exclusive. The Company will enter into indemnification agreements with its officers and executive directors containing provisions that may require the Company, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors' and officers' insurance if available on reasonable terms. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent of the Company where indemnification will be required or permitted. The Company is not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. 48 CERTAIN TRANSACTIONS PRIVATE PLACEMENTS OF SECURITIES On September 22, 1995, the Company issued an aggregate of 6,622,857 shares of its Common Stock to William Gross, a co-founder and director of the Company, for services provided to the Company and aggregate proceeds of $5,000. On December 9, 1995, the Company repurchased 2,000,000 shares of Common Stock from Mr. Gross for an aggregate price of $1,510. On October 11, 1995 the Company sold an aggregate of 4,233,500 shares of its Common Stock to Charles Conn, Thomas Layton, Jeffrey Brewer and certain other key employees (together with shares of Common Stock issued to William Gross, the "Founders' Stock") for aggregate proceeds of $84,670. Pursuant to the terms of the applicable subscription agreement, Founders' Stock may not be transferred without the written consent of the Board of Directors. To date, 1,778,234 shares of Founders' Stock have been transferred by Mr. Gross and certain key employees with the approval of the Board of Directors. However, Mr. Gross retains voting power over 1,428,234 of shares transferred by him until the closing of this offering. Between May 15, 1996 and July 31, 1996, the Company issued and sold an aggregate of 3,261,024 shares of Series C Preferred Stock at a per share price of $3.4665. Entities affiliated with Goldman, Sachs & Co., which entities together hold more than 5% of the capital stock of the Company, purchased 2,596,278 of these shares for an aggregate purchase price of approximately $9.0 million. Mr. Gleberman, a director of the Company, is a Managing Director in the Principal Investment Area of Goldman, Sachs & Co. Between December 13, 1996 and October 22, 1997, the Company issued and sold an aggregate of 4,430,313 shares of Series D Preferred Stock at a per share price of $6.5251. These sales included the following: 766,272 shares to were sold to The Times Mirror Company for an aggregate purchase price of approximately $5.0 million; 475,085 shares were sold to entities affiliated with Goldman, Sachs & Co. for an aggregate purchase price of approximately $3.1 million; 459,753 shares were sold to Digital Ink Company, a wholly-owned subsidiary of The Washington Post Company, for an aggregate purchase price of approximately $3.0 million; and 12,674 shares were sold to Byters for an aggregate purchase price of approximately $83,000. Mr. Unterman, a director of the Company, is a Senior Vice President and Chief Financial Officer of The Times Mirror Company. Mr. Spoon, a director of the Company, is President of The Washington Post Company. Mr. Breslauer, a director of the Company, is a general partner of Byters. Between November 11, 1997 and November 26, 1997, the Company issued and sold an aggregate of 4,714,286 shares of Series E Preferred Stock at a per share price of $7.00. USA Networks purchased 2,857,143 of these shares for an aggregate purchase price of approximately $20.0 million. Mr. Diller, a director of the Company, is Chairman and Chief Executive Officer of USA Networks. In addition, 714,286 shares were sold to entities affiliated with Global Retail Partners, L.P. for an aggregate purchase price of approximately $5.0 million and 306,509 shares were sold to Digital Ink Company for an aggregate purchase price of approximately $2.1 million. Mr. Sisteron, a director of the Company, is a Managing Director of Global Retail Partners, L.P. On May 26, 1998, the Company issued and sold an aggregate of 1,000,000 shares of Series E Preferred Stock at a per share price of $7.00. USA Networks purchased 428,571 of these shares for an aggregate purchase price of approximately $3.0 million. Until the closing of this offering, the holders of the Series C Preferred Stock have a right to elect directors pursuant to the Company's Restated Certificate of Incorporation and from and after the closing of this offering pursuant to the Voting Agreement. USA Networks and GRP have a right to elect directors pursuant to the Company's Restated Certificate of Incorporation. See "Management--Board Composition." Pursuant to Stockholders' Agreement, USA Networks has a right to purchase that number of shares of this offering (the "IPO Shares") which will enable USA Networks to own up to 14.9% of the Company (on a fully diluted, as converted to Common Stock basis); provided that USA Networks may not purchase more than 50% 49 of the IPO Shares. As of June 1, 1998, USA Networks owns 12.9% of the Company (on a fully diluted, as converted to Common Stock basis). Pursuant to the Stockholders' Agreement, within ten days of USA Networks' receipt of a notice of the range of per share prices for the IPO Shares, USA Networks must give written notice of its intent to purchase the IPO Shares. If the actual price of the IPO Shares is above the range specified in the Company's notice, USA Networks will no longer be obligated to purchase any IPO Shares. In addition, the Stockholders' Agreement provides that the Company may not (i) adopt a rights agreement (or other similar device) with an ownership threshold that would limit USA Networks' ability to own or purchase securities of the Company or (ii) amend its bylaws, certificate of incorporation or fail to take an action under Section 203 of the DGCL which would limit USA Networks' ability to own or purchase securities of the Company. In May 1997, the Company entered into a cross-promotional agreement with Ticketmaster Group, Inc., an affiliate of USA Networks ("Ticketmaster"). Pursuant to the agreement, Ticketmaster agreed to provide banner advertising promoting the Company's owned and operated city sites on the Ticketmaster Web site, to provide access to Ticketmaster ticket and information Web pages and to provide "music-on-hold" and/or direct mail opportunities. CitySearch agreed to provide promotion of the Ticketmaster name and logo in selected advertising and marketing materials, to co-produce with Ticketmaster broadcast advertising, to provide banner advertising promoting Ticketmaster on the CitySearch Web sites and to promote Ticketmaster events and publications. In June 1997, the Company entered into a license and services agreement with the Los Angeles Times, a division of The Times Mirror Company. The agreement provides for the license of the Company's intellectual property and consulting services in exchange for an up-front license fee, ongoing royalties based on the revenues generated by the city guide developed by the parties and fees for consulting services. The agreement contains customary termination provisions for material breach or non-performance. In November 1997, the Company entered into a license and services agreement with Digital Ink Company, a wholly-owned subsidiary of The Washington Post Company. The agreement provides for the license of the Company's intellectual property and consulting services in exchange for an up-front license fee, ongoing royalties based on the revenues generated by the city guide developed by the parties and fees for consulting services. The agreement contains customary termination provisions for material breach or non-performance. The Company believes that the terms of each of the transactions described above, taken as a whole, were no less favorable than the Company could have obtained from unaffiliated third parties. All future transactions between the Company and its officers, directors and principal stockholders and their affiliates will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested outside directors. The Company has entered into employment agreements with each of Charles Conn and Thomas Layton, the Company's Chief Executive Officer and President, respectively. See "Management--Employment Agreement." 50 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock on an as converted on June 1, 1998 basis and as adjusted to reflect the sale of the shares of Common Stock offered hereby by (i) each person or entity who is known by the Company to own beneficially 5% or more of the Company's outstanding Common Stock; (ii) each director of the Company; (iii) each of the Named Executive Officers; and (iv) all directors and executive officers of the Company as a group.
PERCENTAGE OF SHARES BENEFICIALLY OWNED(2) NAME AND ADDRESS OF NUMBER OF SHARES ------------------------------ BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) BEFORE OFFERING AFTER OFFERING - ------------------- --------------------- --------------- -------------- William Gross(3).......... 3,535,446 14.1 Barry Diller(4)........... 3,251,541 12.9 USA Networks, Inc. ....... 3,251,541 12.9 (5) 152 West 57th Street, 38th Floor New York, NY 10019 Joseph Gleberman(6)....... 2,985,591 11.9 Entities affiliated with 11.9 Goldman, Sachs & Co.(7).. 2,985,591 85 Broad Street New York, NY 10004 Charles Conn(8)........... 1,614,467 6.4 Thomas Layton(9).......... 967,188 3.9 Thomas Unterman(10)....... 751,424 3.0 Alan Spoon(11)............ 749,933 3.0 Yves Sisteron(12)......... 706,855 2.8 Jeffrey Brewer............ 412,500 1.6 Robert Kavner(13)......... 224,322 * Gerald Breslauer(14)...... 91,616 * Executive officers and directors as a group (13 persons)(15)......... 15,352,960 61.1
- -------- * Less than 1% of the Company's outstanding Common Stock. (1) Unless otherwise indicated, the address of each of the named individuals is: c/o CitySearch, Inc., 790 E. Colorado Boulevard, Suite 200, Pasadena, CA 91101. (2) Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Except as indicated by footnote, and subject to community property laws where applicable and the terms of the Voting Agreement relating to the election of the Series C Director, the persons named in the table above have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. Percentage of beneficial ownership is based on 25,118,827 shares of Common Stock outstanding as of June 1, 1998, and shares of Common Stock after completion of this offering. Amounts shown in the above table and the following notes include shares issuable upon stock options to purchase shares of Common Stock which are exercisable within 60 days of June 1, 1998. (3) Excludes 1,178,234 shares which Mr. Gross transferred previously but as to which he retains voting power until the closing of this offering. Includes 590,823 shares held by Bill Gross' idealab!, as to which Mr. Gross disclaims beneficial ownership. (4) Includes 3,251,541 shares held by USA Networks, as to which Mr. Diller disclaims beneficial ownership. (5) Excludes the shares of Common Stock offered in this offering which may be purchased by USA Networks pursuant to the Stockholder Rights Agreement. See "Certain Transactions." (6) Includes 2,985,591 shares held by entities affiliated with Goldman, Sachs & Co., as to which Mr. Gleberman disclaims beneficial ownership. See footnote (7). (7) Includes 1,873,249 shares held by GS Capital Partners II, L.P., 744,693 shares held by GS Capital Partners II Offshore, L.P., 177,906 shares held by Stone Street Fund 1996, L.P., 120,650 shares held by Bridge Street Fund 1996, L.P. and 69,093 shares held by Goldman, Sachs & Co. Verwaltungs GmbH. 51 (8) Includes 28,646 shares issuable upon exercise of stock options to purchase shares of Common Stock which are exercisable within 60 days of June 1, 1998. (9) Includes 17,188 shares issuable upon exercise of stock options to purchase shares of Common Stock which are exercisable within 60 days of June 1, 1998. (10) Includes 744,356 shares held by The Times Mirror Company, as to which Mr. Unterman disclaims beneficial ownership and 7,068 shares held by The Thomas and Janet Unterman Living Trust dated 12/30/94. (11) Includes 749,933 shares held by Digital Ink Company, a wholly-owned subsidiary of The Washington Post Company, as to which Mr. Spoon disclaims beneficial ownership. (12) Includes 706,855 shares held by entities affiliated with Global Retail Partners, L.P., as to which Mr. Sisteron disclaims beneficial ownership. (13) Includes 109,039 shares issuable upon exercise of stock options to purchase shares of Common Stock which are exercisable by Mr. Kavner within 60 days of June 1, 1998. (14) Includes 81,616 shares held by Byters and 10,000 shares issuable upon exercise of stock options to purchase shares of Common Stock which are exercisable within 60 days of June 1, 1998. (15) See footnotes (2) through (14). Includes 164,873 shares issuable upon exercise of stock options to purchase shares of Common Stock which are exercisable within 60 days of June 1, 1998. 52 DESCRIPTION OF CAPITAL STOCK As of June 1, 1998, and assuming the conversion of all outstanding Preferred Stock into Common Stock as of June 1, 1998, there were 25,118,827 shares of Common Stock held of record by 248 stockholders and options to purchase 2,392,023 shares of Common Stock outstanding. COMMON STOCK Upon the closing of this offering, the Company will be authorized to issue 75,000,000 shares of Common Stock. Subject to preferences that may apply to shares of Preferred Stock outstanding from time to time, the holders of outstanding shares of Common Stock are entitled to receive dividends out of assets legally available therefor at such times and in such amounts as the Board of Directors may from time to time determine. Each stockholder is entitled to one vote for each share of Common Stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for in the Company's Restated Certificate of Incorporation; therefore, the holders of a majority of the shares voted can elect all of the directors then standing for election. The Common Stock is not entitled to preemptive rights and is not subject to conversion or redemption. Upon a liquidation, dissolution or winding-up of the Company, the assets legally available for distribution to stockholders are distributable ratably among the holders of the Common Stock and any participating Preferred Stock outstanding at that time after payment of liquidation preferences, if any, on any outstanding Preferred Stock and payment of other claims of creditors. Each outstanding share of Common Stock is, and all shares of Common Stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. PREFERRED STOCK Upon the closing of this offering, the Company will be authorized to issue 2,000,000 shares of Preferred Stock. The Board of Directors is authorized, subject to limitations prescribed by Delaware law, to provide for the issuance of shares of Preferred Stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the powers, designations, preferences and rights of the shares of each wholly unissued series and designate any qualifications, limitations or restrictions thereon and to increase or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding) without any further vote or action by the stockholders. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company and may adversely affect the voting and other rights of the holders of Common Stock, which could have an adverse impact on the market price of the Common Stock. The Company has no current plan to issue any shares of Preferred Stock. ANTITAKEOVER EFFECTS OF PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS The Company's Restated Certificate of Incorporation provides that, effective upon the closing of this offering, all stockholder actions must be effected at a duly called meeting and not by consent in writing. Provisions of the Restated Certificate of Incorporation and Bylaws provide that the stockholders may amend certain provisions of the Restated Certificate of Incorporation and the Bylaws only with the affirmative vote of holders of 66 2/3% of the Company's capital stock. Further, the Bylaws (i) provide that only the Board of Directors, the Chairman of the Board of Directors or the President may call special meetings of the stockholders and (ii) establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders of the Company, including proposed nominations of persons for election to the Board of Directors. In addition, the Restated Certificate of Incorporation provides that the Board of Directors will be divided into three classes to serve staggered three-year terms. These provisions of the Restated Certificate of Incorporation and Bylaws will have the effect of delaying, deferring or preventing a change of control of the Company. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the Board of Directors and in the policies formulated by the Board of Directors and to discourage certain types of transactions that may involve an actual or threatened change of control of the Company. These provisions are designed to reduce the vulnerability of the Company to an unsolicited acquisition proposal. The 53 provisions also are intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for the Company's shares and, as a consequence, they also may inhibit fluctuations in the market price of the Company's shares that could result from actual or rumored takeover attempts. Such provisions also may have the effect of preventing changes in the management of the Company. The Stockholders Agreement provides that the Company may not (i) adopt a rights agreement (or other similar device) with an ownership threshold that would limit USA Networks' ability to own or purchase securities of the Company or (ii) amend its bylaws, certificate of incorporation or fail to take an action under Section 203 of the DGCL, in each case which would limit USA Networks' ability to own or purchase securities of the Company. See "Risk Factors--Anti-takeover Effects of Certain Charter and Contractual Provisions." EFFECT OF DELAWARE ANTITAKEOVER STATUTE The Company is subject to Section 203 of the DGCL (the "Antitakeover Law"), which regulates corporate acquisitions. The Antitakeover Law prevents certain Delaware corporations, including those whose securities are listed for trading on the Nasdaq National Market, from engaging, under certain circumstances in a "business combination" with any "interested stockholder" for three years following the date that such stockholder became an interested stockholder. For purposes of the Antitakeover Law, a "business combination" includes, among other things, a merger or consolidation involving the Company and the interested stockholder and the sale of more than ten percent of the Company's assets. In general, the Antitakeover Law defines an "interested stockholder" as any entity or person beneficially owning 15% or more of the outstanding voting stock of the Company and any entity or person affiliated with or controlling or controlled by such entity or person. A Delaware corporation may "opt out" of the Antitakeover Law with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or bylaws resulting from amendments approved by the holders of at least a majority of the Company's outstanding voting shares. The Company has not "opted out" of the provisions of the Antitakeover Law. REGISTRATION RIGHTS After this offering, the holders of 23,885,667 shares of Common Stock will be entitled to certain rights with respect to the registration of such shares under the Securities Act. Under the terms of the agreement between the Company and the holders of such registrable securities, if the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders exercising registration rights, such holders are entitled to notice of such registration and are entitled to include shares of such Common Stock therein. Additionally, of such holders, holders of 13,128,789 shares of Common Stock are also entitled to certain demand registration rights pursuant to which they may require the Company to file a registration statement under the Securities Act at its expense with respect to their shares of Common Stock, and the Company is required to use its best efforts to effect such registration. All of these registration rights are subject to certain conditions and limitations, among them the right of the underwriters of an offering to limit the number of shares included in such registration and the right of the Company not to effect a requested registration within six months following an offering of the Company's securities, including the offering made hereby. TRANSFER AGENT The Transfer Agent and Registrar for the Common Stock is . 54 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock in the public market could materially adversely affect prevailing market prices. Furthermore, since only a limited number of shares will be available for sale shortly after the offering because of certain contractual and legal restrictions on resale described below, sales of substantial amounts of Common Stock of the Company in the public market after restrictions lapse could materially adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. Upon completion of the offering, the Company will have shares of Common Stock outstanding, assuming no exercise of currently outstanding options. Of these shares, the shares sold in this offering (plus any additional shares sold upon exercise of the Underwriters' over-allotment option) will be freely transferable without restriction under the Securities Act, unless they are held by "affiliates" of the Company as that term is used under the Securities Act and the regulations promulgated thereunder ("Affiliates"). The remaining 25,118,827 shares of Common Stock held by existing stockholders are "restricted securities" as that term is defined in Rule 144 of the Securities Act (the "Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act. As a result of contractual restrictions and the provisions of Rules 144 and 701, additional shares will be available for sale in the public market as follows: (i) approximately 1,239,279 Restricted Shares will be eligible for immediate sale on the effective date of this offering; (ii) approximately 676,578 Restricted Shares will be eligible for sale 90 days after the effective date of this offering; (iii) approximately 19,501,560 Restricted Shares will be eligible for sale 180 days after the effective date of this offering upon expiration of pre-existing contractual lock-up agreements and lock-up agreements with of the Underwriters and upon expiration of their respective holding periods under Rule 144; and (iv) the remainder of the Restricted Shares will be eligible for sale from time to time thereafter upon expiration of their respective holding periods under Rule 144. In addition, 1,601,285 shares will be issuable upon exercise of vested stock options 180 days after the effective date of this offering upon the expiration of contractual pre- existing lock-up agreements. NationsBanc Montgomery Securities LLC, on behalf of the Underwriters, may, in its sole discretion and at any time without notice, release all or any portion of securities subject to the lock-up agreement with the Underwriters. Upon the effective date of this offering, the holders of 13,128,789 shares of Common Stock have the right in certain circumstances to require the Company to register their shares under the Securities Act for resale to the public. If such holders, by exercising their demand registration rights, cause a large number of shares to be registered and sold in the public market, such sales could have a material adverse effect on the market price for the Company's Common Stock. If the Company were required to include in a Company-initiated registration shares held by such holders and holders of an additional 10,756,878 shares of Common Stock pursuant to the exercise of their piggyback registration rights, such sales may have a material adverse affect on the Company's ability to raise new capital. See "Description of Capital Stock-- Registration Risks." In addition, the Company expects to file a registration statement on Form S- 8 registering a total of approximately 4,368,340 shares of Common Stock subject to outstanding stock options or reserved for issuance under the Company's 1996 Stock Option Plan, 1998 Director Option Plan and 1998 Employee Stock Purchase Plan. The Form S-8 registration statement is expected to be filed and to become effective 180 days following the effective date of this offering. Shares registered under such registration statement will be available for sale in the open market, subject to Rule 144 value limitations applicable to Affiliates, unless such shares are subject to vesting restrictions with the Company or the lock-up agreements described above. In general, under Rule 144 as currently in effect, beginning 90 days after the effective date of the offering, an Affiliate of the Company or person (or persons whose shares are aggregated) who has beneficially owned restricted shares (as defined under Rule 144) for at least one year is entitled to sell within any three-month period a number of shares that does not exceed the greater of (i) one percent of the then outstanding shares of the Company's Common Stock or (ii) the average weekly trading volume of the Company's Common Stock in the Nasdaq National Market during the four calendar weeks immediately preceding the date on which the notice of 55 the sale is filed with the Commission. Sales pursuant to Rule 144 are subject to certain requirements relating to the manner of sale, notice, and availability of current public information about the Company. A person (or persons whose shares are aggregated) who is not an Affiliate of the Company at any time during the 90 days immediately preceding the sale, and who has beneficially owned restricted shares for at least two years is entitled to sell such shares under Rule 144(k) without regard to the limitations described above. An employee, officer or director of the Company or a consultant to the Company who purchased or was awarded shares or options to purchase shares pursuant to a written compensatory plan or contract is entitled to rely on the resale provisions of Rule 701 of the Securities Act, which permits Affiliates and non-Affiliates to sell their Rule 701 shares without having to comply with Rule 144's holding period restrictions, in each case commencing 90 days after the date of this Prospectus. In addition, non-Affiliates may sell Rule 701 shares without complying with the public information, volume and notice provisions of Rule 144. 56 UNDERWRITING The Underwriters named below (the "Underwriters"), represented by NationsBanc Montgomery Securities LLC, BancAmerica Robertson Stephens and Donaldson, Lufkin & Jenrette Securities Corporation (the "Representatives"), have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock indicated below opposite their respective names at the initial public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters are committed to purchase all of the shares if they purchase any.
NUMBER OF UNDERWRITERS SHARES ------------ --------- NationsBanc Montgomery Securities LLC.............................. BancAmerica Robertson Stephens..................................... Donaldson, Lufkin & Jenrette Securities Corporation................ --- Total............................................................ ===
The Representatives have advised the Company that the Underwriters initially propose to offer the shares of Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow to selected dealers a concession of not more than $ per share, and the Underwriters may allow, and such dealers may reallow, a concession of not more than $ per share to certain other dealers. After the offering, the offering price and concessions and other selling terms may be changed by the Representatives. No change in such terms shall change the amount of proceeds to be received by the Company as set forth on the cover page of this Prospectus. The Common Stock is offered subject to receipt and acceptance by the Underwriters and to certain other conditions, including the right to reject orders in whole or in part. The Company has granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to a maximum of additional shares of Common Stock to cover over-allotments, if any, at the same price per share as the initial shares to be purchased by the Underwriters. To the extent the Underwriters exercise this option, each of the Underwriters will be committed to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may purchase such shares only to cover over-allotments made in connection with this offering. The Underwriting Agreement provides that the Company will indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act, or will contribute to payments the Underwriters may be required to make in respect thereof. All of the Company's officers and directors and certain stockholders have agreed that, subject to certain exceptions, for a period of 180 days after the date of this Prospectus, they will not, without the prior written consent of NationsBanc Montgomery Securities LLC, directly or indirectly, sell, offer to sell or otherwise dispose of any such shares of Common Stock or any right to acquire such shares. In addition, the Company has agreed that, for a period of 180 days after the date of this Prospectus, it will not, without the prior written consent of NationsBanc Montgomery Securities LLC, issue, offer, sell, grant options to purchase or otherwise dispose of any of the Company's equity securities or any other securities convertible into or exchangeable for the Common Stock or other equity security, other than the grant of options to purchase Common Stock, or the issuance of shares of Common Stock under the Company's stock option and stock purchase plans, the issuance of shares of Common Stock in connection with certain acquisitions and the issuance of shares of Common Stock pursuant to the exercise of outstanding options. Prior to this offering, there has been no public market for the Common Stock. Consequently, the initial public offering price will be determined by negotiations between the Company and the Representatives. Among the factors to be considered in such negotiations will be the history of, and the prospects for, the Company and 57 the industry in which it competes, an assessment of the Company's management, the prospects for future earnings of the Company, the present state of the Company's development, the general condition of the securities markets at the time of the offering, the market prices of and demand for publicly traded common stock of comparable companies in recent periods and other factors deemed relevant. The Representatives, on behalf of the Underwriters, may engage in over- allotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Securities and Exchange Act of 1934. Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. Syndicate covering transactions involve purchases of shares of Common Stock in the open market after the distribution has been completed in order to cover syndicate short positions. Penalty bids permit the Representatives to reclaim a selling concession from a syndicate member when the shares of Common Stock originally sold by such syndicate member are purchased in a syndicate covering transaction to cover syndicate short positions. Such stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the Common Stock to be higher than it would otherwise be in the absence of such transactions. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. The Representatives have informed the Company that the Underwriters do not expect to make sales in excess of five percent of the number of shares of Common Stock offered hereby to accounts over which they exercise discretionary authority. In consideration of the services rendered by NationsBanc Montgomery Securities LLC as placement agent for the Company's Series E Preferred Stock financing, the Company paid to NationsBanc Montgomery Securities LLC a fee equal to $1,546,182 in November 1997. As additional consideration for such services, the Company granted to NationsBanc Montgomery Securities LLC a warrant to purchase 94,286 shares of Series E Preferred Stock. The warrant is exercisable at any time at an exercise price of $8.75 per share of Common Stock. Any unexercised portion of the warrant is automatically convertible into Common Stock immediately prior to the closing of this offering for that number of shares of Series E Preferred Stock equal to (x) the value of the unexercised portion as of the date of the closing of this offering, which value shall equal the difference between the aggregate exercise price and the aggregate value of the shares of Series E Preferred Stock issuable upon exercise of the unexercised portion of the warrant, at a per share price equal to the initial offering price divided by (y) the initial offering price. Bayview Investors, Ltd., an entity affiliated with BancAmerica Robertson Stephens, holds 25,199 shares of the Company's Common Stock (on an as converted basis). GRP and other entities affiliated with Donaldson, Lufkin & Jenrette Securities Corporation hold 706,855 shares of the Company's Common Stock (on an as converted basis). Under the Company's Restated Certificate of Incorporation, GRP is entitled to elect one member of the Board of Directors until the earlier of (i) November 20, 1999, (ii) the one-year anniversary of the closing of this offering or (iii) the date GRP owns less than 100% of the capital stock of the Company that it owned on November 20, 1997. 58 LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Venture Law Group, A Professional Corporation, is acting as counsel for the Underwriters in connection with certain legal matters relating to the shares of Common Stock offered hereby. EXPERTS The consolidated financial statements of the Company at December 31, 1996 and 1997 and for the period from September 20, 1995 (date of formation) to December 31, 1995 and for the years ended December 31, 1996 and 1997, included in this Prospectus have been audited by Ernst & Young LLP, independent auditors, as stated in their report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement and the exhibits and schedules filed as a part thereof. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete. In each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, and each such statement is qualified in all respects by such reference. The Registration Statement, including exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at Seven World Trade Center, Suite 1300, New York, New York 10048 and Northwestern Atrium Center, 500 Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Commission's Web site is http://www.sec.gov. 59 CITYSEARCH, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS CONTENTS Report of Independent Auditors............................................ F-2 Consolidated Balance Sheets at December 31, 1996 and 1997 and at March 31, 1998 (unaudited)......................................................... F-3 Consolidated Statements of Operations for the period from September 20, 1995 (date of formation) to December 31, 1995, the years ended December 31, 1996 and 1997 and the three months ended March 31, 1997 and 1998 (unaudited) ............................................................. F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the period from September 20, 1995 (date of formation) to December 31, 1995, the years ended December 31, 1996 and 1997 and the three months ended March 31, 1998 (unaudited)..................................................... F-5 Consolidated Statements of Cash Flows for the period from September 20, 1995 (date of formation) to December 31, 1995, the years ended December 31, 1996 and 1997 and the three months ended March 31, 1997 and 1998 (unaudited).............................................................. F-6 Notes to Consolidated Financial Statements................................ F-7
F-1 REPORT OF INDEPENDENT AUDITORS BOARD OF DIRECTORS AND SHAREHOLDERS CITYSEARCH, INC. We have audited the accompanying consolidated balance sheets of CitySearch, Inc. as of December 31, 1996 and 1997 and the related statements of operations, stockholders' equity, and cash flows for the period from September 20, 1995 (date of formation) to December 31, 1995 and for each of the two years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CitySearch, Inc. at December 31, 1996 and 1997, and the consolidated results of its operations and its cash flows for the period from September 20, 1995 (date of formation) to December 31, 1995 and for each of the two years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Ernst & Young LLP Los Angeles, California March 11, 1998, except for Note 10, as to which the date is May 26, 1998 F-2 CITYSEARCH, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
PRO FORMA STOCKHOLDERS' DECEMBER 31, EQUITY AT ---------------- MARCH 31, MARCH 31, 1996 1997 1998 1998 ------- ------- --------- ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents............ $ 7,527 $25,227 $16,455 Accounts receivable, net of allowance for doubtful accounts of $25 in 1997 and $44 in 1998..................... 34 100 286 Due from licensees................... -- 193 611 Prepaid expenses and other current assets.............................. 249 119 185 ------- ------- ------- Total current assets................ 7,810 25,639 17,537 Computers, software, equipment and leasehold improvements: Computers and software............... 2,074 7,716 8,560 Furniture and equipment.............. 391 194 194 Leasehold improvements............... 194 275 275 Enterprise system development in process............................. 1,315 -- -- ------- ------- ------- 3,974 8,185 9,029 Accumulated depreciation............. (329) (2,169) (2,842) ------- ------- ------- 3,645 6,016 6,187 Intangible asset, net of accumulated amortization of $422 in 1996......... 1,915 -- -- ------- ------- ------- Total assets........................ $13,370 $31,655 $23,724 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable..................... $ 1,975 $ 2,197 $ 1,903 Accrued payroll and related liabilities......................... 174 664 804 Other accrued liabilities............ 991 760 483 Deferred subscription and license revenue............................. 327 1,836 1,713 Current portion of obligations under capital leases...................... 86 807 976 ------- ------- ------- Total current liabilities........... 3,553 6,264 5,879 Deferred rent......................... 33 189 189 Deferred purchase price of subsidiary. 1,336 891 891 Obligations under capital leases, net of current portion................... 82 1,340 1,678 Commitments Redeemable Convertible Preferred Stock (Series C, D, and E): Authorized shares -- 12,500 at December 31, 1997 and March 31, 1998 (pro forma: none) Issued and outstanding -- 4,706 at December 31, 1996 and 12,406 at December 31, 1997 and March 31, 1998 (pro forma: none) Liquidation preference -- $20,731 at December 31, 1996 and $73,212 at December 31, 1997 and March 31, 1998 (pro forma: none)................... 20,309 70,882 70,882 $ -- Stockholders' equity (deficit): Convertible Preferred Stock $0.01 par value, (Series A and B): Authorized shares -- 2,241 at December 31, 1997 and March 31, 1998 Issued and outstanding -- 1,948 at December 31, 1996 and 2,016 at December 31, 1997 and March 31, 1998 (pro forma: none) Liquidation preference -- $2,165 at December 31, 1996 and $2,610 at December 31, 1997 and March 31, 1998 (pro forma: none)............. 2,165 2,610 2,610 -- Common Stock $0.01 par value: Authorized shares -- 75,000 at December 31, 1997 and March 31, 1998 Issued and outstanding shares -- 8,813 at December 31, 1996 and 9,539 at December 31, 1997 and 9,925 at March 31, 1998 (pro forma: 24,081)............................ 97 455 870 74,362 Deferred compensation................ -- (245) (567) (567) Accumulated deficit.................. (14,205) (50,731) (58,708) (58,708) ------- ------- ------- -------- Total stockholders' equity (deficit).......................... (11,943) (47,911) (55,795) $ 15,087 ------- ------- ------- ======== Total liabilities and stockholders' equity (deficit).. $13,370 $31,655 $23,724 ======= ======= =======
See accompanying notes to consolidated financial statements. F-3 CITYSEARCH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIOD FROM SEPTEMBER 20, THREE MONTHS 1995 (DATE OF YEAR ENDED ENDED FORMATION) TO DECEMBER 31, MARCH 31, DECEMBER 31, ------------------ ---------------- 1995 1996 1997 1997 1998 ------------- -------- -------- ------- ------- (UNAUDITED) Revenues: Subscription and services ......................... $ -- $ 203 $ 4,913 $ 470 $ 2,563 Licensing and royalty .... -- -- 1,271 -- 528 ------ -------- -------- ------- ------- -- 203 6,184 470 3,091 Cost and expenses: Cost of revenues.......... -- 2,908 10,846 2,040 3,450 Sales and marketing ...... 57 6,369 19,014 4,519 4,568 Research and development . 152 2,563 7,182 1,713 1,655 General and administrative ......................... 104 2,475 5,883 1,363 1,568 ------ -------- -------- ------- ------- 313 14,315 42,925 9,635 11,241 ------ -------- -------- ------- ------- Loss from operations....... (313) (14,112) (36,741) (9,165) (8,150) Interest income............ 5 229 494 124 279 Interest expense........... -- (12) (271) (40) (106) ------ -------- -------- ------- ------- 5 217 223 84 173 ------ -------- -------- ------- ------- Loss before provision for income taxes.............. (308) (13,895) (36,518) (9,081) (7,977) Provision for income taxes. -- (2) (8) -- -- ------ -------- -------- ------- ------- Net loss................... $ (308) $(13,897) $(36,526) $(9,081) $(7,977) ====== ======== ======== ======= ======= Historical basic and diluted net loss per share..................... $(0.04) $ (1.58) $ (3.86) $ (0.97) $ (0.82) ====== ======== ======== ======= ======= Pro forma basic and diluted net loss per share........ $(0.04) $ (1.10) $ (1.96) $ (0.54) $ (0.33) ====== ======== ======== ======= ======= Shares used in computing historical basic and diluted net loss per share..................... 7,894 8,785 9,451 9,407 9,777 ====== ======== ======== ======= ======= Shares used in computing pro forma basic and diluted net loss per share..................... 8,460 12,647 18,666 16,889 23,932 ====== ======== ======== ======= =======
See accompanying notes to consolidated financial statements. F-4 CITYSEARCH, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
CONVERTIBLE PREFERRED STOCK (SERIES A AND B) COMMON STOCK ----------------- -------------- DEFERRED ACCUMULATED SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT TOTAL -------- -------- ------ ------ ------------ ----------- -------- Initial issuance of Common Stock, September 20, 1995............... -- $ -- 6,623 $ 5 $ -- $ -- $ 5 Repurchase of Common Stock.................. -- -- (2,000) (2) -- -- (2) Issuance of Common Stock.................. -- -- 4,233 85 -- -- 85 Issuance of Convertible Preferred Stock........ 1,791 1,620 -- -- -- -- 1,620 Net loss................ -- -- -- -- -- (308) (308) ------- -------- ------ ---- ----- -------- -------- Balance at December 31, 1995............. 1,791 1,620 8,856 88 -- (308) 1,400 Repurchase of Common Stock.................. -- -- (116) (2) -- -- (2) Exercise of stock options................ -- -- 73 11 -- -- 11 Issuance of Series B Convertible Preferred Stock.................. 157 545 -- -- -- -- 545 Net loss................ -- -- -- -- -- (13,897) (13,897) ------- -------- ------ ---- ----- -------- -------- Balance at December 31, 1996............. 1,948 2,165 8,813 97 -- (14,205) (11,943) Exercise of stock options................ -- -- 726 103 -- -- 103 Issuance of Series B Convertible Preferred Stock.................. 68 445 -- -- -- -- 445 Deferred compensation... -- -- -- 255 (255) -- -- Amortization of deferred compensation........... -- -- -- -- 10 -- 10 Net loss................ -- -- -- -- -- (36,526) (36,526) ------- -------- ------ ---- ----- -------- -------- Balance at December 31, 1997............. 2,016 2,610 9,539 455 (245) (50,731) (47,911) Exercise of stock options (unaudited).... -- -- 386 63 -- -- 63 Deferred compensation (unaudited)............ -- -- -- 352 (352) -- -- Amortization of deferred compensation (unaudited)............ -- -- -- -- 30 -- 30 Net loss (unaudited).... -- -- -- -- -- (7,977) (7,977) ------- -------- ------ ---- ----- -------- -------- Balance at March 31, 1998 (unaudited)..... 2,016 $ 2,610 9,925 $870 $(567) $(58,708) $(55,795) ======= ======== ====== ==== ===== ======== ========
See accompanying notes to consolidated financial statements. F-5 CITYSEARCH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PERIOD FROM SEPTEMBER 20, THREE MONTHS 1995 (DATE OF YEAR ENDED ENDED FORMATION) TO DECEMBER 31, MARCH 31, DECEMBER 31, ------------------ ---------------- 1995 1996 1997 1997 1998 ------------- -------- -------- ------- ------- (UNAUDITED) OPERATING ACTIVITIES Net loss................... $ (308) $(13,897) $(36,526) $(9,081) $(7,977) Adjustments to reconcile net loss to net cash used in operating activities: Equity interest in loss from partnership......... -- -- 259 65 -- Write-down of investment in partnership........... -- -- 321 131 -- Depreciation.............. 5 325 1,841 289 673 Amortization.............. -- 422 1,915 453 -- Change in operating assets and liabilities, net of assets acquired and liabilities assumed: Accounts receivable....... -- (34) (67) (11) (185) Due from licensees........ -- -- (193) -- (419) Prepaid expenses and other current assets........... -- (249) 129 120 (65) Accounts payable.......... 90 2,537 317 (308) (293) Accrued payroll and related liabilities...... -- -- 489 198 140 Other accrued liabilities. -- -- (221) (332) (248) Deferred subscription and license revenue.......... -- 327 1,510 396 (123) Deferred rent............. -- 33 157 24 -- ------ -------- -------- ------- ------- Net cash used in operating activities.... (213) (10,536) (30,069) (8,056) (8,497) INVESTING ACTIVITIES Purchases of software, equipment and leasehold improvements.............. (82) (3,547) (1,391) (357) (49) Investment in partnership.. -- -- (580) (324) -- ------ -------- -------- ------- ------- Net cash used in investing activities................ (82) (3,547) (1,971) (681) (49) FINANCING ACTIVITIES Payments on capital leases. -- (121) (840) (286) (289) Exercise of stock options.. -- 11 103 -- 63 Issuance of Common Stock... 90 -- -- -- -- Repurchases of Common Stock..................... (2) (2) -- -- -- Issuance of Preferred Stock, net................ 1,620 20,309 50,477 10,270 -- ------ -------- -------- ------- ------- Net cash provided by financing activities...... 1,708 20,197 49,740 9,984 (226) ------ -------- -------- ------- ------- Net increase in cash and cash equivalents.......... 1,413 6,114 17,700 1,247 (8,772) Cash and cash equivalents at beginning of year...... -- 1,413 7,527 7,527 25,227 ------ -------- -------- ------- ------- Cash and cash equivalents at end of year............ $1,413 $ 7,527 $ 25,227 $ 8,774 $16,455 ====== ======== ======== ======= ======= Supplemental disclosure of cash flow information: Cash paid for: Interest.................. $ -- $ 12 $ 271 $ 44 $ 106 Income taxes.............. $ 800 $ 2 $ 8 $ -- $ --
NON-CASH INVESTING AND FINANCING ACTIVITIES During 1996 and 1997, the Company purchased computers and office equipment under financing leases totaling $288,000 and $2,820,000, respectively. On June 19, 1996, the Company acquired its wholly owned subsidiary Metrobeat, Inc. in exchange for an initial payment of Series B Preferred Stock valued at $544,497. During 1997, the Company made its second annual installment of Series B Convertible Preferred Stock valued at $445,495 pursuant to the acquisition. The remaining purchase price of $891,000 is payable in two annual installments, principally of Series B Convertible Preferred Stock. During 1997, the Company issued 14,670 shares of Series D Preferred Stock valued at $95,725 as payment for accrued advertising and recruiting fees. During the three months ended March 31, 1997 and 1998, the Company purchased computers and office equipment under financing leases totaling $1,205,000 and $795,000, respectively. See accompanying notes to consolidated financial statements. F-6 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY AND BASIS OF PRESENTATION CitySearch, Inc. (the "Company"), a Delaware corporation, was organized on September 20, 1995. The Company and its wholly owned subsidiaries Metrobeat, Inc. ("Metrobeat") and CitySearch Ontario, Inc ("CitySearch Ontario"), produces and delivers comprehensive local city guides on the World Wide Web (the "Web"), providing up-to-date information regarding arts and entertainment events, community activities, recreation, business, shopping, professional services and news/sports/weather to consumers in metropolitan areas. Each local city guide primarily consists of original content developed and designed specifically for the Web by the Company and its media partners. The Company designs and produces custom-built Web sites and related services for local businesses, aggregates them in a local city guide environment and provides business customers the ability to regularly update and expand their sites. The Company's sites include digital photographs, maps, sounds and windows with additional information, including menus, bills of service and interactive order and inquiry forms. Customers include restaurants, taverns, movie theaters, museums and retail stores. The Company currently owns and operates sites in Austin, TX, Nashville, TN, New York, NY, Portland, OR, Raleigh-Durham-Chapel Hill, NC, Salt Lake City, UT, Los Angeles, CA, and San Francisco, CA. Through partnership and licensing agreements, the Company has an internet presence in Washington D.C., Melbourne and Sydney, Australia, and Toronto, Canada, with sites expected soon to be launched in Baltimore, MD, and designated Scandinavian cities. The Company has experienced operating losses and negative cash flows from operations since its formation on September 20, 1995. Since its formation, the Company has raised significant capital through the sale of Preferred Stock to outside investors and expects to continue to raise capital in 1998. The Company has also successfully licensed its product domestically and internationally generating additional revenue streams. Through strategic partnerships, the Company is implementing additional ways of delivering its product. Management anticipates that its investment in new markets and technology will result in operating losses in the near term but believes that anticipated revenues, existing cash, cash equivalents, working capital and new capital contributions will be sufficient to fund operations over the next year. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Metrobeat and CitySearch Ontario. All significant intercompany amounts have been eliminated. INTERIM FINANCIAL INFORMATION The accompanying balance sheet as of March 31, 1998 and the statements of operations and cash flows for the three months ended March 31, 1997, and 1998 and the statement of changes in shareholders equity (deficit) for the three months ended March 31, 1998 are unaudited. In the opinion of management, the statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for the fair statement of interim periods. The data disclosed in these notes to the financial statements for these periods is also unaudited. The results of operations and cash flows for the interim period are not necessarily indicative of the results to be expected for any other interim future period. ESTIMATES USED IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates, although management does not believe that any differences would materially affect the Company's consolidated financial position or results of operations. F-7 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) REVENUE RECOGNITION The Company generates revenue from the sale of subscriptions for business Web sites and advertising on its owned and operated city guides on the internet, the sale of licenses for use of the Company's business and technology systems to its licensees establishing the CitySearch service in certain markets, the receipt of royalties under its license agreements in exchange for customer support and certain upgrade rights, and the performance of consultation and design services. The Company recognizes subscription revenues over the period the services are provided. Licensing revenue, under agreements entered into prior to December 31, 1997, for partner-led markets is recognized upon the completion of the delivery and installation of the business and technology systems and training of partner personnel in each partner-led-market. Royalty revenues are recognized when earned. Revenue from consultation and design services is recognized as the services are provided. Advertising revenues, which have not been significant, are recognized as earned and are included in subscription and service revenues. Effective January 1, 1998, the Company adopted Statement of Position 97-2 (SOP 97-2), "Software Revenue Recognition," which impacts the manner companies recognize revenue on sales and licensing of software. The Company, during 1997, accounted for licensing of its software under the provisions of SOP 91- 1. Under the provision of SOP 97-2 revenues from the sale of licenses for use of the Company's business and technology systems to its partner-led markets generally will be recognized over the term of the license agreement. The Company's license agreements have terms ranging from five to nine years. SOP 97-2 is not expected to have a material effect on revenues from royalties, services, and subscriptions. Deferred revenues arise upon the prepayment of subscription services and license agreements. CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable and cash deposits at financial institutions. Concentration of credit risk with respect to trade receivables is limited due to the large number of customers and their geographic dispersion. The Company requires no collateral from its customers. The Company places its cash deposits with high-credit quality financial institutions. At times, balances in the Company's cash accounts may exceed the Federal Deposit Insurance Corporation (FDIC) limit. COMPUTERS, SOFTWARE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Computers, software, equipment and leasehold improvements are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Assets acquired under capitalizable lease arrangements are recorded at the present value of the minimum lease payments. Amortization of assets capitalized under capital leases and leasehold improvements are computed using the straight-line method over the life of the asset or term of the lease, whichever is shorter, and is included in depreciation expense. F-8 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) RESEARCH AND DEVELOPMENT Research and development expenditures are charged to operations as incurred. Based on the Company's product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have been insignificant. ADVERTISING COSTS Advertising costs are expensed as incurred. Advertising costs for the years ended December 31, 1996 and 1997, amounted to $1,305,859 and $2,464,641, respectively. There was no advertising expense for the period from September 20, 1995 (date of formation) to December 31, 1995. During 1996 and 1997 the Company entered into several barter arrangements whereby the Company has assisted in the design of a Web site in exchange for broadcast advertising. The Company valued these barter transactions at $60,000 and $1,158,000 for the years ended December 31, 1996 and 1997, respectively, based on the estimated cost of the specific services provided by the Company. Such amounts are included in subscription and services revenue as well as recognized in sales and marketing expense in the accompanying consolidated statements of operations. Reciprocal noncash advertising on the Internet is not valued in the consolidated financial statements and no barter revenue is recorded for any such agreements. PRO FORMA AND HISTORICAL NET LOSS PER SHARE Pro forma net loss per share is computed using the weighted average number of shares of Common Stock outstanding. Common equivalent shares from convertible Preferred Stock (using the if converted method) have been included in the computation when dilutive, except that the Convertible Preferred Stock which will convert into Common Stock in connection with the Company's initial public offering is included as if converted at the original date of issuance, for both basic and diluted net loss per share, even though inclusion is antidilutive, based on the conversion price disclosed in Note 6. Historical net loss per share is computed as described above except that it excludes the Convertible Preferred Stock because it is antidilutive for periods which incurred a net loss. INTANGIBLE ASSET The intangible asset is stated at cost and consists of goodwill resulting from the purchase of Metrobeat in June 1996 (see Note 2). STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation" (SFAS 123), requires that stock awards granted subsequent to January 1, 1995, be recognized as compensation F-9 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) expense based on their fair value at the date of grant. Alternatively, a company may use Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," and disclose pro forma results of operations which would have resulted from recognizing such awards at their fair value. The Company will continue to account for stock-based compensation under APB 25 and make the required pro forma disclosures for compensation (see Note 8). Under APB 25 compensation expense is calculated based on the difference between the exercise price and the fair market value of the underlying stock on the date of grant. The amount of compensation expense calculated under APB 25 is recognized over the vesting period of the options. RECLASSIFICATIONS Certain reclassifications have been made to the prior years' balances to conform to the current year presentation. YEAR 2000 -- UNAUDITED The Company could be adversely affected if its computer systems and those of its service providers do not properly process and calculate date-related information and data from and after January 1, 2000. The Company is taking steps that it believes are reasonably designed to address these issues and to obtain reasonable assurances that comparable steps are being taken by each of the Company's service providers. Management believes such efforts and any remedies will be completed by 1999 and all expenses incurred in assessing and remedying this issue will be expensed as incurred and are not expected to be material to the consolidated financial statements. 2. ACQUISITION OF METROBEAT On June 19, 1996, the Company purchased Metrobeat for approximately $2,337,300. The Company assumed net liabilities of $456,303 and issued 157,074 shares of Series B Convertible Preferred Stock valued at $544,497. During 1997, the Company made its second annual installment of Series B Convertible Preferred Stock valued at $445,495. The remaining purchase price of $891,000 is payable in two annual installments, principally of Series B Convertible Preferred Stock. The remaining installments have been recorded as a deferred purchase price in the accompanying consolidated balance sheets. The transaction was accounted for using the purchase method of accounting. The excess of the purchase price over the net assets acquired has been allocated to goodwill and was initially to be amortized over three years. Effective January 1, 1997, the Company reassessed the future life of the goodwill recorded in connection with the Metrobeat acquisition and concluded the remaining life was one year. Accordingly, the unamortized goodwill as of December 31, 1996 was fully amortized to expense in 1997. 3. INVESTMENT IN PARTNERSHIP On February 17, 1997, CitySearch Ontario entered into a partnership, Toronto Star CitySearch, with others to launch CitySearch sites in Canada. CitySearch Ontario contributed the Company's technology through a licensing agreement valued by the other partners at $390,500 and cash of $319,171 in exchange for a 20% interest in the partnership. The other partners collectively contributed cash of $2,811,600 in exchange for the remaining 80% interest. Profits are shared in accordance with the respective partnership interests. Losses are allocated to one of the other partners up to a cumulative loss limit, and thereafter losses of the partnership shall be allocated to CitySearch Ontario and the other partners at a ratio of 10% and 90%, respectively. CitySearch Ontario is committed to funding up to 10% of any losses of the partnership. F-10 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) Summarized unaudited financial information of Toronto Star CitySearch as of and for the year ended December 31, 1997 is as follows (in thousands): As of December 31, 1997: Current assets.................................................... $ 1,520 Total liabilities................................................. 2,006 Partners' capital................................................. 758 For the period ended December 31, 1997: Revenues.......................................................... $ 123 Loss from operations.............................................. (2,658) Net loss.......................................................... (2,806)
CitySearch Ontario carries its investment in Toronto Star CitySearch at zero. CitySearch Ontario's share of partnership losses ($258,937) is included in costs of revenues and sales and marketing expenses. 4. INCOME TAXES Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax expense is determined by the change in the net asset or liability for deferred taxes. The provision for income, franchise and capital taxes of $800, $1,600 and $8,330 is based solely on minimum state tax requirements. The Company's effective tax rate differs from the statutory federal income tax rate, primarily as a result of operating losses not benefited. The tax effect of temporary differences resulted in net deferred income tax assets and liabilities at December 31 are as follows:
1996 1997 ------- -------- (IN THOUSANDS) Deferred tax assets: Net operating loss and tax credits...................... $ 5,485 $ 21,239 Various accruals........................................ 58 636 Deferred rent........................................... 14 77 ------- -------- 5,557 21,952 Less valuation allowance................................ (5,103) (19,650) ------- -------- Net deferred tax assets................................... 454 2,302 Deferred tax liabilities: Federal benefit for state income taxes.................. (427) (1,499) Excess of tax depreciation and amortization............. (27) (803) ------- -------- Deferred tax liabilities.................................. (454) (2,302) ------- -------- $ -- $ -- ======= ========
F-11 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) Due to the uncertainty surrounding the timing of the realization of the benefits from its favorable tax attributes in future tax returns, the Company has placed a valuation allowance against its otherwise recognizable deferred tax assets. The Company had federal and state operating loss carryforwards of $47,450,000 at December 31, 1997. The federal carryforwards expire principally in the period from 2010 to 2012, and the state carryforwards expire principally in 2003. The Company has generated tax credit carryforwards for federal and state purposes in the amounts of $329,723 and $107,353, respectively, at December 31, 1997. Utilization of the above carryforwards is subject to utilization limitations which may inhibit the Company's ability to use carryforwards in the future. The following table reconciles the provision for taxes based on income before taxes to the statutory federal income tax rate of 35%:
PERIOD FROM SEPTEMBER 20, 1995 (DATE OF FORMATION) TO YEAR ENDED DECEMBER 31, DECEMBER 31, ----------------------- 1995 1996 1997 -------------- ----------- ------------ (IN THOUSANDS) Tax benefit at statutory rate..... $(108) $ (4,864) $ (12,781) Increase related to: State taxes, net of federal bene- fit.............................. 1 1 5 Meals and entertainment......... 1 17 30 Amortization of goodwill........ -- 143 670 Foreign operations.............. -- -- 203 Valuation reserve on deferred taxes.......................... 106 4,705 11,881 ----- ----------- ------------ $ -- $ 2 $ 8 ===== =========== ============
F-12 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 5. COMMITMENTS LEASES The Company entered into noncancelable capital lease obligations for computers and equipment during the year ended December 31, 1997. In addition, the Company leases its facilities and other office equipment under noncancelable operating lease agreements expiring through 2004. Certain of the Company's leases provide for free rent and escalations. The Company is responsible for other costs such as property taxes, insurance, maintenance and utilities. The following is a schedule of future minimum lease payments:
OPERATING CAPITAL LEASES LEASES --------- ------- (IN THOUSANDS) December 31: 1998.................................................... $1,321 $1,115 1999.................................................... 1,191 1,028 2000.................................................... 1,167 517 2001.................................................... 1,043 4 2002.................................................... 265 -- Thereafter.............................................. 332 -- ------ ------ $5,319 2,664 ====== Less amount representing interest......................... 517 ------ Net present value of net minimum lease payments (including approximately $807,000 payable currently)................ $2,147 ======
Computers, software and equipment under capital leases had an original cost basis of $288,419 and $2,819,842 at December 31, 1996 and 1997, respectively. The net book value of the related computers, software and equipment was $231,267 and $2,157,717 at December 31, 1996 and 1997, respectively. Rent expense related to operating leases was $7,800, $291,000 and $1,372,000 for the period from September 20, 1995 (date of formation) to December 31, 1995 and for the years ended December 31, 1996 and 1997, respectively. F-13 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 6. CONVERTIBLE PREFERRED STOCK At December 31, 1997 and March 31, 1998, the Company was authorized to issue 14,741,082 shares of Convertible Preferred Stock with a par value of $0.01 per share. The Company has designated 1,791,173 shares as Series A Convertible Preferred Stock, 450,000 shares as Series B Convertible Preferred Stock, 3,261,024 shares as Series C Redeemable Convertible Preferred Stock, 4,430,313 shares as Series D Redeemable Convertible Preferred Stock, and 4,808,572 shares as Series E Redeemable Convertible Preferred Stock. Convertible Preferred Stock issued and outstanding as of December 31, 1997 and March 31, 1998 are as follows:
ORIGINAL AMOUNT PER SHARE SHARES (NET OF ISSUANCE OUTSTANDING ISSUANCE COST) PRICE DATE FIRST ISSUED ----------- -------------- --------- ----------------- (IN THOUSANDS) Series A............. 1,791 $ 1,620 $0.904 October 31, 1995 Series B............. 157 545 3.467 June 19, 1996 Series B............. 68 445 6.525 June 19, 1997 Series C............. 3,261 11,261 3.467 May 15, 1996 Series D............. 4,431 28,265 6.525 December 13, 1996 Series E............. 4,714 31,356 7.000 November 10, 1997 ------ ------- 14,422 $73,492 ====== =======
Preferred Stock contains a liquidation preference of an amount per share equal to the price for which such share of Preferred Stock was originally issued, adjusted for any stock dividends, combinations or splits with respect to such shares, plus any declared and unpaid dividends on the Preferred Stock. The Series C Preferred Stock contains a May 2006 mandatory redemption provision. The Series D and E Preferred Stock contain mandatory redemption provisions with a minimum of an 80% favorable vote, by the holders, beginning December 2004. Each share of Preferred Stock shall be, at the option of the holder, convertible at any time into the number of shares of Common Stock as determined by dividing the original issue price by the conversion price, as defined. At the date of issuance, the conversion price for each series of Preferred Stock was equal to the original per share issuance price. The conversion price is subject to adjustment for stock splits and stock combinations of the Company's outstanding Common Stock. The conversion price for Series C, D and E Preferred Stock is also adjusted for the forfeiture of Common Stock options outstanding from the date of issuance to the date of conversion. The Preferred Stock has an automatic conversion feature which provides for each share of Preferred Stock to be automatically converted into shares of Common Stock based on the then effective conversion price immediately upon the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of shares of the Corporation's Common Stock priced above $7.70 per share, with aggregate net proceeds to the Company of not less than $20,000,000. At March 31,1998, the unaudited pro forma per share conversion price, giving effect to Common Stock option forfeitures through June 1, 1998 as if they occurred as of March 31, 1998, of the Series A, B, C, D and E Preferred Stock was $0.904, $3.467, $3.580, $6.717, and $7.074, respectively. F-14 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 7. STOCK OPTIONS The Company has adopted the 1996 Stock Option Plan (the "Plan") which authorizes members of management to grant non-statutory stock options or incentive stock options to employees and consultants of the Company and its subsidiaries. The maximum number of shares of Common Stock to be issued under the plan is 4,000,000 shares. All options granted under the Plan have been made at prices not less than fair market value of the stock at the date of grant. Options granted under the Plan are exercisable at various dates over their ten-year life. Options granted under the Plan vest principally 25% after the first year and ratably over the remaining vesting period. The following table summarizes certain information related to options for Common Stock:
NUMBER OF SHARES PRICE PER SHARE -------------- ----------------- (IN THOUSANDS) Balance at January 1, 1996.................. -- Granted during 1996....................... 3,220 $ 0.10 to $ 0.75 Forfeited................................. 314 0.10 to 0.75 Exercised................................. 73 0.10 to 0.75 ----- ---------------- Outstanding at December 31, 1996............ 2,833 0.10 to 0.75 Granted during 1997....................... 1,110 0.75 to 3.00 Forfeited................................. 485 0.10 to 2.00 Exercised................................. 726 0.10 to 2.00 ----- ---------------- Outstanding at December 31, 1997............ 2,732 0.10 to 3.00 Granted................................... 172 3.00 to 3.00 Forfeited................................. 231 0.10 to 3.00 Exercised................................. 386 0.10 to 2.00 ----- ---------------- Outstanding at March 31, 1998............... 2,287 0.10 to 3.00 ===== ================
Options granted during the year ended December 31, 1997 and the three months ended March 31, 1998 resulted in a total compensation amount of $255,000 and $352,000, respectively, and was recorded as deferred compensation in stockholders equity. The deferred compensation amount will be recognized as compensation expense over the vesting period. During the year ended December 31, 1997 and the three months ended March 31, 1998, such compensation expense amounted to $10,000 and $30,000, respectively. Information with respect to stock options outstanding is as follows:
DECEMBER 31, -------------------------------- 1996 1997 ---------------- --------------- (NUMBER OF SHARES IN THOUSANDS) Weighted average price per share............ $0.2575 $ 0.8600 Exercisable options......................... 1,110 992 Options available for future grants......... 1,094 469 Weighted average remaining contractual life. 9.5 years 9 years
F-15 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) In connection with the Series E Redeemable Convertible Preferred Stock issuance, the Company granted warrants to a private placement selling agent to purchase 94,286 shares of Series E Redeemable Convertible Preferred Stock at an exercise price of $8.75 per share in exchange for services. The warrants expire upon a closing of an initial public offering or five years from the grant date, whichever is earlier. Pro forma information regarding the effect on operations is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using the minimum- value method, which utilizes a near-zero volatility factor.
1996 1997 ------- ------- Expected life (years)...................................... 6 years 5 years Risk-free interest rate.................................... 6.30% 6.30% Dividend yield............................................. -- --
This option valuation model requires input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option's vesting period. The Company's pro forma information follows:
YEAR ENDED DECEMBER 31, ------------------------ 1996 1997 ----------- ----------- (IN THOUSANDS) Net loss, as reported............................. $ (13,897) $ (36,526) Pro forma net loss................................ (13,953) (36,608) Pro forma basic and diluted loss per share........ $ (1.10) $ (1.96) Pro forma basic and diluted historical loss per share............................................ (1.58) (3.87)
The effects of applying Statement 123 in this pro forma disclosure may not be indicative of future amounts. Additional awards in future years are anticipated. 8. DEFINED CONTRIBUTION PLAN In July 1997, the Company established a defined contribution plan for certain qualified employees as defined in the plan. Participants may contribute from 1% to 20% of pretax compensation subject to certain liabilities. The plan does provide for certain discretionary contributions by the Company as defined in the plan. No Company contributions were made for the year ended December 31, 1997. 9. RELATED PARTY TRANSACTIONS Included in revenues for the year ended December 31, 1997 and the three months ended March 31, 1998 is approximately $1,049,000 and $714,000 of revenues, respectively, generated under the Company's license agreements with stockholders or other related parties. Included in due from licensees at December 31, 1997 and March 31, 1998 is $136,000 and $477,000, respectively, due from stockholders and other related parties. F-16 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) (INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 10. PROPOSED INITIAL PUBLIC OFFERING AND OTHER SUBSEQUENT EVENTS On May 26, 1998, the Company issued 1,000,000 shares of its Series E Redeemable Convertible Preferred Stock for $7.00 per share and received gross proceeds of $7,000,000. In connection with the issuance of the Series E Redeemable Convertible Preferred Stock, the Company amended its Certificate of Incorporation to increase the number of shares of Series E Redeemable Convertible Preferred Stock authorized to 5,808,572. The Company is contemplating filing a registration statement with the Securities and Exchange Commission, relating to an initial public offering of shares of its unissued Common Stock. If the initial public offering is consummated under the terms presently anticipated, all of the Preferred Stock outstanding will automatically convert into Common Stock. At March 31, 1998, on an unaudited pro forma basis, excluding the issuance of the Series E Redeemable Convertible Preferred Stock in May 1998, using a conversion price calculated based on Common Stock option forfeitures through June 1, 1998, 14,155,592 shares of Common Stock would be issued upon automatic conversion of Preferred Stock. The pro forma effect on stockholders' equity, as adjusted for the assumed conversion of the Preferred Stock, is set forth on the accompanying balance sheet. F-17 The back inside cover will contain a selection of five to fifteen overlapping screen shots of home pages of the Company's business customers. The screen shots will represent business customers in a variety of service categories (e.g., restaurants, professional services, entertainment venues, etc.). - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- No dealer, salesperson or other person has been authorized to give any infor- mation or to make any representations other than those contained in this Pro- spectus in connection with this offering and, if given or made, such informa- tion or representation must not be relied upon as having been authorized by the Company or any Underwriter. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered hereby in any jurisdiction to any person to whom it is unlawful to make such offer in such jurisdiction. Neither the delivery of this Prospectus nor any sale made hereun- der shall, under any circumstances, create any implication that the information herein is correct as of any time subsequent to the date hereof or that there has been no change in the affairs of the Company since such date. -------------------------- TABLE OF CONTENTS --------------------------
Page ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 5 Use of Proceeds........................................................... 17 Dividend Policy........................................................... 17 Capitalization............................................................ 18 Dilution.................................................................. 19 Selected Financial Data................................................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 21 Business.................................................................. 27 Management................................................................ 40 Certain Transactions...................................................... 49 Principal Stockholders.................................................... 51 Description of Capital Stock.............................................. 53 Shares Eligible for Future Sale........................................... 55 Underwriting.............................................................. 57 Legal Matters............................................................. 59 Experts................................................................... 59 Additional Information.................................................... 59 Index to Financial Statements............................................. F-1
--------------- Until , 1998 (25 days after the commencement of the Offering), all dealers effecting transactions in the Common Stock, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as Underwrit- ers and with respect to their unsold allotments or subscriptions. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SHARES [LOGO CITYSEARCH.COM] COMMON STOCK --------------- PROSPECTUS --------------- NationsBanc Montgomery Securities LLC BancAmerica Robertson Stephens Donaldson, Lufkin & Jenrette Securities Corporation , 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts, commissions and certain accountable expenses, payable by the Company in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee. SEC Registration Fee................................................ $14,750 NASD Filing Fee..................................................... 5,500 Nasdaq Listing Fee.................................................. Printing Fees and Expenses.......................................... Legal Fees and Expenses............................................. Accounting Fees and Expenses........................................ Blue Sky Fees and Expenses.......................................... Transfer Agent and Registrar Fees................................... Miscellaneous....................................................... ------- Total............................................................. $ =======
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law permits a corporation to include in its charter documents, and in agreements between the corporation and its directors and officers, provisions expanding the scope of indemnification beyond that specifically provided by the current law. The Registrant's Restated Certificate of Incorporation provides for the indemnification of directors to the fullest extent permissible under Delaware law. The Registrant's Bylaws provide for the indemnification of officers, directors and third parties acting on behalf of the Registrant if such person acted in good faith and in a manner reasonably believed to be in and not opposed to the best interest of the Registrant, and, with respect to any criminal action or proceeding, the indemnified party had no reason to believe his conduct was unlawful. The Registrant has entered into indemnification agreements with its directors and executive officers, in addition to indemnification provided for in the Registrant's Bylaws, and intends to enter into indemnification agreements with any new directors and executive officers in the future. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since inception of Registrant (September 20, 1995), the Registrant has issued and sold the following unregistered securities: (1) From September 20, 1995 to June 1, 1998, Registrant granted options to purchase 4,614,011 shares of Common Stock pursuant to its 1996 Stock Option Plan at exercise prices ranging from $.10 to $5.50. (2) From September 20, 1995 to June 1, 1998, Registrant issued and sold an aggregate of 1,233,160 shares of Common Stock to its employees, directors and consultants upon exercise of stock options granted pursuant to its 1996 Stock Option Plan at exercise prices ranging from $.10 to $3.00 for an aggregate consideration of $220,990.70. (3) In September 1995; at Registrant formation, Registrant issued and sold 6,622,857 shares of Common Stock to William Gross for an aggregate cash consideration of $5,000 and for services provided to the Company. II-1 (4) In October 1995, Registrant issued and sold an aggregate of 4,233,500 shares of its Common Stock for an aggregate cash consideration of $84,670. These shares were issued to the following key founding employees: Charles Conn, III; Thomas Layton; Jeffrey Brewer; Kristen Ding; Caskey Dickson; David Holtz; Tamar Halpern; Brad Haugaard; Taylor Wescoatt; Linda Gross; Karen DeDea; Lee Husiuk and Michael Radford. (5) From November 1995 to December 1995, Registrant issued and sold an aggregate 1,791,173 shares of Series A Preferred Stock for an aggregate cash consideration of approximately $1.6 million. Shares of Series A Preferred Stock were issued to the following: David M. Balkin; Robert McLean; Morris Ventures; Robert W. Shaw, Jr.; Philip E. Berney; WS Investment Company 95B; William N. Melton; Stuart Cohen; Robert Kavner; Edwin C. Cohen; Peter R. Bleyleben; Steven Spielberg; Gerald Breslauer; Barry S. Volpert; Pando Associates, Ltd.; John Wylie; Jeffrey Glynn and Victoria Jo Edwards, Co-Trustees of the Edwards Family Trust of 1995; Charles R. Conn, II; Taylor Wescoatt; North American Trust Co., TTEE FBO L&W Dickson #410280. (6) In June 1996, Registrant issued an aggregate 157,074 shares of Series B Preferred Stock at $3.4665 per share as part consideration for the acquisition of MetroBeat, Inc. Such shares were issued to the following shareholders of MetroBeat, Inc.: Mark Davies and Joshua White. (7) From May 1996 to July 1996, Registrant issued and sold an aggregate 3,261,024 shares of Series C Preferred Stock for an aggregate cash consideration of approximately $11.3 million. Shares of Series C Preferred Stock were issued to the following: GS Capital Partners II, L.P; GS Capital Partners II Offshore, L.P.; Goldman, Sachs & Co. Verwaltungs GmbH; The Goldman Sachs Group, L.P.; AT&T Venture Fund I, L.P.; AT&T Venture Fund II, L.P.; Steven Spielberg; Edwin C. Cohen; Pamela C. Alexander; Barry S. Volpert; Alexander Communications, Inc.; Jeffrey G. Edwards; IRA MSTC Custodian; Morris Ventures; Byters; David White; Robert W. Shaw, Jr.; Charles R. Conn, II; The Pacific Bank, N.A., Trustee E. Keith Thomson IRA; Michael Barton; Eric Higgs; Mark Lewyn; Emily Martin; Douglas M. McPherson; Ted Meisel. (8) From December 1996 to October 1997, Registrant issued and sold an aggregate 4,430,313 shares of Series D Preferred Stock for an aggregate cash consideration of approximately $28.0 million and for services provided to the Company. Such shares of Series D Preferred Stock were issued to the following: GS Capital Partners II, L.P.; GS Capital Partners II Offshore, L.P.; Goldman, Sachs & Co. Verwaltungs GmbH; Stone Street Fund 1996, L.P.; Bridge Street Fund 1996, L.P.; Edwin C. Cohen; EnCompass Group, Inc.; Michael Barton; Mark Lewyn; Brian A. Goler; Emily Bloomfield; Bradley Ramberg; Lamar Rutherford; Kristen Brown; James R. McGovern; AnneMarie Weibel; Debra J. Wilkens; Francesca Colloredo-Mansfeld; Kathryn Takach; Byters; Comcast CitySearch, Inc.; Far West Capital Partners, L.P.; Robert McLean; Morris Ventures; Steven Spielberg; David White; CPQ Holdings, Inc.; Intel Corporation; Bayview Investors, Ltd.; Toronto Star Newspapers Limited; AT&T Venture Fund I, L.P.; AT&T Venture Fund II, L.P.; Bill Gross' idealab!; Alexander Communications, Inc.; The Times Mirror Company; Paul S. Larsen; ServiceMaster Venture Fund L.L.C.; Digital Ink Company and Korn/Ferry International. (9) In June 1997, Registrant issued an aggregate 68,274 shares of Series B Preferred Stock at $6.5251 per share as additional consideration for the acquisition of Metro Beat, Inc. Such shares were issued to the following shareholders of MetroBeat, Inc.: Mark Davies and Joshua White. (10) In November 1997, Registrant issued and sold an aggregate 4,714,286 shares of Series E Preferred Stock for an aggregate cash consideration of approximately $33.0 million. Such shares of Series E Preferred Stock were issued to the following: USA Networks, Inc.; Comcast CitySearch, Inc.; Far West Capital Partners, LP; Intel Corporation; Endurance Fund; Gary Lauder; The Thomas and Janet Unterman Living Trust dated 12/30/94; East Peak Partners; Margaret L. Taylor; David A. Duffield Trust dated 7/14/88; Orchid & Co.; Digital Ink Company; Global Retail Partners, L.P.; DLJ Diversified Partners, L.P.; GRP Partners, L.P.; Global Retail Partners Funding, Inc.; DLJ First ESC L.P. and Schibsted ASA. II-2 NationsBanc Montgomery Securities LLC ("NationsBanc") acted as placement agent. As consideration for such services, Registrant paid NationsBanc $1,546,182 in cash and issued a warrant to purchase 94,286 shares of Series E Preferred Stock, which terms and conditions are described in item (11) below. (11) In November 1997, as part consideration for services provided as placement agent, Registrant issued to NationsBanc a warrant to purchase 94,286 shares of Series E Preferred Stock. The warrant is exercisable at any time at an exercise price equal to $8.75 per share and any unexercised portion of the warrant is automatically convertible immediately prior to the closing of this offering. (12) In May 1998, Registrant issued an sold an aggregate 1,000,000 shares of Series E Preferred Stock for an aggregate cash consideration of approximately $7.0 million. Such shares of Series E Preferred Stock were issued to the following: USA Networks, Inc. and American Express Travel Related Services, Inc. The sales of the securities described in Items 15(1) and 15(2) were deemed to be exempt from registration under the Securities Act in reliance on Rule 701 promulgated under Section 3(b) of the Securities Act as transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The sale of the securities described in Items 15(3) through 15(12) were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. All recipients either receive adequate information about the Registrant or had access, through employment or other relationships, to such information. II-3 ITEM 16. EXHIBITS (a) Exhibits 1.1 Form of Underwriting Agreement. 2.1* +Agreement and Plan of Reorganization, among Registrant, MS Acquisition Corporation, MetroBeat, Inc., Mark Davies and Joshua White, dated May 31, 1996. 3.1 Restated Certificate of Incorporation, as currently in effect. 3.2* Restated Certificate of Incorporation, to be filed prior to the consummation of the offering. 3.3* Restated Certificate of Incorporation, to be filed immediately following the consummation of the offering. 3.4* Bylaws, as currently in effect. 3.5 Restated Bylaws, to be effective upon the closing of the offering. 4.1* Specimen Common Stock Certificate. 4.2 Sixth Amended and Restated Stockholders' Agreement by and among Registrant and certain stockholders of the Registrant, dated May 26, 1998. 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, as to the legality of the securities being registered. 10.1 Form of Indemnification Agreement for directors and officers. 10.2* 1996 Stock Plan and form of agreement thereunder. 10.3* 1998 Employee Stock Purchase Plan. 10.4* 1998 Director Option Plan. 10.5* +License Agreement between Registrant and Perly, Inc., dated March 9, 1996. 10.6* +Marketing Agreement between Registrant and American Express Travel Related Services Company, Inc., dated May 26, 1998. 10.7 Employment Agreement between Registrant and Charles Conn, dated May 9, 1996. 10.8* +Partnership Agreement between Metroland Printing, Publishing & Distributing Ltd. 1217554 Ontario Inc., Registrant and Torstar Corporation, dated February 17, 1997. 10.9* +License and Services Agreement between Registrant and 1217554 Ontario Inc., dated February 17, 1997. 10.10* +Noncompetition Agreement between Registrant, 1217554 Ontario Inc., Torstar Corporation and Metroland Printing, Publishing & Distributing Ltd., dated February 17, 1997. 10.11* +Assignment Agreement between Registrant, 1217554 Ontario Inc., and Toronto Star CitySearch, dated February 17, 1997. 10.12* Lease Agreement by and between Registrant and West End Land Development Co., L.P., dated November 7, 1996. 10.13* Standard Form of Lease, Aeriel Center Executive Park, between Pizzagalli Investment Company and Registrant, dated May 8, 1996. 10.14* Standard Office Lease between Registrant and Sage Realty Corporation, dated May 6, 1997. 10.15* Standard Office Lease between Registrant and H. Naito Corporation, dated March 6, 1997. 10.16* Standard Office Lease between Registrant and Brazos Austin Centre, Ltd., dated August 15, 1996. 10.17* Standard Office Lease between Registrant and Judge Building Group, dated September 10, 1996. 10.18* Standard Office Lease between Registrant and Sobel Building Development, dated May 31, 1996. 10.19* Standard Office Lease between Registrant and BPG Pasadena, L.L.C. (later assigned to Spieker Properties), dated September 30, 1996. 10.20* Lease Agreement between Registrant and Secured Properties Investors II, L.P., dated May 13, 1998. 10.21 Amended and Restated Voting Agreement by and among Registrant and certain stockholders of Registrant, dated November 12, 1997. 10.22* Employment Agreement between Registrant and Thomas Layton, dated July 2,1997. 11.1* Calculation of earnings per share. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Independent Auditors. 23.2* Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-6). 27.1 Financial Data Schedule (available in EDGAR format only).
(b) Schedules Schedule II--Valuation and Qualifying Accounts - -------- * To be filed by amendment. + Confidential treatment requested. II-4 ITEM 17. UNDERTAKINGS The Registrant hereby undertakes to provide the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the provisions described in Item 14 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933, and will be governed by the final adjudication of such issue. The undersigned Registrant undertakes that: (1) for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus as filed as part of the registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective, and (2) for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT ON FORM S-1 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF PASADENA, STATE OF CALIFORNIA, ON THE 22 DAY OF JUNE, 1998. CITYSEARCH, INC. /s/ Charles Conn By___________________________________ CHARLES CONN CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Charles Conn and Bradley Ramberg and each one of them, acting individually and without the other, as his or her attorney-in-fact, each with full power of substitution, for him and her in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments), and to sign any registration statement for the same Offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED SIGNATURE TITLE DATE /s/ Charles Conn Chief Executive June 22, 1998 - ------------------------------------- Officer and CHARLES CONN Director (Principal Executive Officer) /s/ Bradley Ramberg Chief Financial June 22, 1998 - ------------------------------------- Officer and Vice BRADLEY RAMBERG President, Finance and Administration and Secretary (Principal Financial Officer and Principal Accounting Officer) /s/ Thomas Layton President, Chief June 22, 1998 - ------------------------------------- Operating Officer, THOMAS LAYTON Treasurer and Director II-6 SIGNATURE TITLE DATE /s/ Jeffrey Brewer Director June 22, 1998 - ------------------------------------- JEFFREY BREWER /s/ Gerald Breslauer Director June 22, 1998 - ------------------------------------- GERALD BRESLAUER Director - ------------------------------------- BARRY DILLER /s/ Joseph Gleberman Director June 22, 1998 - ------------------------------------- JOSEPH GLEBERMAN /s/ William Gross Director June 22, 1998 - ------------------------------------- WILLIAM GROSS /s/ Robert Kavner Director June 22, 1998 - ------------------------------------- ROBERT KAVNER Director - ------------------------------------- ALAN SPOON /s/ Yves Sisteron Director June 22, 1998 - ------------------------------------- YVES SISTERON /s/ Thomas Unterman Director June 22, 1998 - ------------------------------------- THOMAS UNTERMAN II-7 CITYSEARCH, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- ---------- --------------------- ---------- ---------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER THE END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ----------- ---------- ---------- ---------- ---------- ---------- Period from September 20 (date of formation) through December 31, 1995................... $ -- $ -- $-- $ -- $ -- Year ended December 31, 1996................... -- -- -- -- -- Year ended December 31, 1997................... -- 114,000 -- 89,000(a) 25,000
- -------- (a) Represents amounts written-off against the allowance for doubtful accounts, net of recoveries and reversals. EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- 1.1 Form of Underwriting Agreement. 2.1* +Agreement and Plan of Reorganization, among Registrant, MS Acquisition Corporation, MetroBeat, Inc., Mark Davies and Joshua White, dated May 31, 1996. 3.1 Restated Certificate of Incorporation, as currently in effect. 3.2* Restated Certificate of Incorporation, to be filed prior to the consummation of the offering. 3.3* Restated Certificate of Incorporation, to be filed immediately following the consummation of the offering. 3.4* Bylaws, as currently in effect. 3.5 Restated Bylaws, to be effective upon the closing of the offering. 4.1* Specimen Common Stock Certificate. 4.2 Sixth Amended and Restated Stockholders' Agreement by and among Registrant and certain stockholders of the Registrant, dated May 26, 1998. 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, as to the legality of the securities being registered. 10.1 Form of Indemnification Agreement for directors and officers. 10.2* 1996 Stock Plan and form of agreement thereunder. 10.3* 1998 Employee Stock Purchase Plan. 10.4* 1998 Director Option Plan. 10.5* +License Agreement between Registrant and Perly, Inc., dated March 9, 1996. 10.6* +Marketing Agreement between Registrant and American Express Travel Related Services Company, Inc., dated May 26, 1998. 10.7 Employment Agreement between Registrant and Charles Conn, dated May 9, 1996. 10.8* +Partnership Agreement between Metroland Printing, Publishing & Distributing Ltd. 1217554 Ontario Inc., Registrant and Torstar Corporation, dated February 17, 1997. 10.9* +License and Services Agreement between Registrant and 1217554 Ontario Inc., dated February 17, 1997. 10.10* +Noncompetition Agreement between Registrant, 1217554 Ontario Inc., Torstar Corporation and Metroland Printing, Publishing & Distributing Ltd., dated February 17, 1997. 10.11* +Assignment Agreement between Registrant, 1217554 Ontario Inc., and Toronto Star CitySearch, dated February 17, 1997. 10.12* Lease Agreement by and between Registrant and West End Land Development Co., L.P., dated November 7, 1996. 10.13* Standard Form of Lease, Aeriel Center Executive Park, between Pizzagalli Investment Company and Registrant, dated May 8, 1996. 10.14* Standard Office Lease between Registrant and Sage Realty Corporation, dated May 6, 1997. 10.15* Standard Office Lease between Registrant and H. Naito Corporation, dated March 6, 1997. 10.16* Standard Office Lease between Registrant and Brazos Austin Centre, Ltd., dated August 15, 1996. 10.17* Standard Office Lease between Registrant and Judge Building Group, dated September 10, 1996. 10.18* Standard Office Lease between Registrant and Sobel Building Development, dated May 31, 1996. 10.19* Standard Office Lease between Registrant and BPG Pasadena, L.L.C. (later assigned to Spieker Properties), dated September 30, 1996. 10.20* Lease Agreement between Registrant and Secured Properties Investors II, L.P., dated May 13, 1998. 10.21 Amended and Restated Voting Agreement by and among Registrant and certain stockholders of Registrant, dated November 12, 1997. 10.22* Employment Agreement between Registrant and Thomas Layton, dated July 2,1997. 11.1* Calculation of earnings per share. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Independent Auditors. 23.2* Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-6). 27.1 Financial Data Schedule (available in EDGAR format only).
- -------- * To be filed by amendment. + Confidential treatment requested. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 Draft of June 17, 1998 _______________ SHARES CITYSEARCH, INC. COMMON STOCK UNDERWRITING AGREEMENT DATED _________, 1998 TABLE OF CONTENTS SECTION 1. REPRESENTATIONS AND WARRANTIES....................................................... 2 COMPLIANCE WITH REGISTRATION REQUIREMENTS................................................... 2 OFFERING MATERIALS FURNISHED TO UNDERWRITERS................................................ 2 DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY............................................ 3 THE UNDERWRITING AGREEMENT.................................................................. 3 AUTHORIZATION OF THE COMMON SHARES.......................................................... 3 NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS.......................................... 3 NO MATERIAL ADVERSE CHANGE.................................................................. 3 INDEPENDENT ACCOUNTANTS..................................................................... 3 PREPARATION OF THE FINANCIAL STATEMENTS..................................................... 3 INCORPORATION AND GOOD STANDING OF THE COMPANY AND ITS SUBSIDIARIES......................... 4 CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS.............................................. 4 STOCK EXCHANGE LISTING;..................................................................... 5 NON-CONTRAVENTION OF EXISTING INSTRUMENTS; NO FURTHER AUTHORIZATIONS OR APPROVALS REQUIRED....................................................................... 5 NO MATERIAL ACTIONS OR PROCEEDINGS.......................................................... 5 INTELLECTUAL PROPERTY RIGHTS................................................................ 5 ALL NECESSARY PERMITS, ETC.................................................................. 6 TITLE TO PROPERTIES......................................................................... 6 TAX LAW COMPLIANCE.......................................................................... 6 COMPANY NOT AN INVESTMENT COMPANY........................................................... 6 INSURANCE................................................................................... 6 NO PRICE STABILIZATION OR MANIPULATION...................................................... 7 RELATED PARTY TRANSACTIONS.................................................................. 7 NO UNLAWFUL CONTRIBUTIONS OR OTHER PAYMENTS................................................. 7 COMPANY'S ACCOUNTING SYSTEM................................................................. 7 COMPLIANCE WITH ENVIRONMENTAL LAWS.......................................................... 7 ERISA COMPLIANCE............................................................................ 8 SECTION 2. PURCHASE, SALE AND DELIVERY OF COMMON SHARES......................................... 8 THE FIRM COMMON SHARES...................................................................... 8 THE FIRST CLOSING DATE...................................................................... 8 THE OPTIONAL COMMON SHARES; THE SECOND CLOSING DATE......................................... 9 PUBLIC OFFERING OF THE COMMON SHARES........................................................ 9 PAYMENT FOR THE COMMON SHARES............................................................... 9 DELIVERY OF THE COMMON SHARES............................................................... 10 DELIVERY OF PROSPECTUS TO THE UNDERWRITERS.................................................. 10 SECTION 3. ADDITIONAL COVENANTS [OF THE COMPANY]................................................ 10 REPRESENTATIVE'S REVIEW OF PROPOSED AMENDMENTS AND SUPPLEMENTS.............................. 10 SECURITIES ACT COMPLIANCE................................................................... 10 AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS AND OTHER SECURITIES ACT MATTERS............... 11 COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS.................................. 11 BLUE SKY COMPLIANCE......................................................................... 11 USE OF PROCEEDS............................................................................. 11 TRANSFER AGENT.............................................................................. 12 EARNINGS STATEMENT.......................................................................... 12 PERIODIC REPORTING OBLIGATIONS.............................................................. 12 AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES........................................ 12 FUTURE REPORTS TO THE REPRESENTATIVE........................................................ 12
-i- SECTION 4. PAYMENT OF EXPENSES.................................................................. 13 SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS.................................... 13 ACCOUNTANTS' COMFORT LETTER................................................................. 13 COMPLIANCE WITH REGISTRATION REQUIREMENTS; NO STOP ORDER, NO OBJECTION FROM NASD............ 14 NO MATERIAL ADVERSE CHANGE OR RATINGS AGENCY CHANGE......................................... 14 OPINION OF COUNSEL FOR THE COMPANY.......................................................... 14 OPINION OF COUNSEL FOR THE UNDERWRITERS..................................................... 14 OFFICERS' CERTIFICATE....................................................................... 15 BRING-DOWN COMFORT LETTER................................................................... 15 LOCK-UP AGREEMENT FROM CERTAIN STOCKHOLDERS OF THE COMPANY.................................. 15 ADDITIONAL DOCUMENTS........................................................................ 15 SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES.............................................. 16 SECTION 7. EFFECTIVENESS OF THIS AGREEMENT...................................................... 16 SECTION 8. INDEMNIFICATION...................................................................... 16 INDEMNIFICATION OF THE UNDERWRITERS......................................................... 16 INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS AND OFFICERS.................................. 17 NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES.......................................... 18 SETTLEMENTS................................................................................. 19 SECTION 9. CONTRIBUTION......................................................................... 19 SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS............................. 20 SECTION 11. TERMINATION OF THIS AGREEMENT.................................................. 21 SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY............................ 21 SECTION 13. NOTICES............................................................................. 22 SECTION 14. SUCCESSORS..................................................................... 23 SECTION 15. PARTIAL UNENFORCEABILITY............................................................ 23 SECTION 16. GOVERNING LAW PROVISIONS....................................................... 23 SECTION 17. GENERAL PROVISIONS.................................................................. 24
-ii- UNDERWRITING AGREEMENT ___________, 1998 NATIONSBANC MONTGOMERY SECURITIES LLC DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BANCAMERICA ROBERTSON STEPHENS As Representatives of the several Underwriters c/o NATIONSBANC MONTGOMERY SECURITIES LLC 600 Montgomery Street San Francisco, California 94111 Ladies and Gentlemen: INTRODUCTORY. CitySearch, Inc., a Delaware corporation (the "Company), proposes to issue and sell to the several underwriters named in Schedule A (the "Underwriters") an aggregate of [___] shares (the "Firm Common - ---------- Shares") of its Common Stock, par value $0.01 per share (the "Common Stock"). In addition, the Company has granted to the Underwriters an option to purchase up to an additional [___] shares (the "Optional Common Shares") of Common Stock, as provided in Section 2. The Firm Common Shares and, if and to the extent such option is exercised, the Optional Common Shares are collectively called the "Common Shares". Nationsbanc Montgomery Securities LLC ("NMS"), Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and BancAmerica Robertson Stephens ("BRS") have agreed to act as representatives of the several Underwriters (in such capacity, the "Representatives") in connection with the offering and sale of the Common Shares. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (File No. 333-[___]), which contains a form of prospectus to be used in connection with the public offering and sale of the Common Shares. Such registration statement, as amended, including the financial statements, exhibits and schedules thereto, in the form in which it was declared effective by the Commission under the Securities Act of 1933 and the rules and regulations promulgated thereunder (collectively, the "Securities Act"), including any information deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434 under the Securities Act, is called the "Registration Statement". Any registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act is called the "Rule 462(b) Registration Statement", and from and after the date and time of filing of the Rule 462(b) Registration Statement the term "Registration Statement" shall include the Rule 462(b) Registration Statement. Such prospectus, in the form first used by the Underwriters to confirm sales of the Common Shares, is called the "Prospectus"; provided, however, if the Company has, with the consent of the Representatives, elected to rely upon Rule 434 under the Securities Act, the term "Prospectus" shall mean the Company's prospectus subject to completion (each, a "preliminary prospectus") dated [___] (such preliminary prospectus is called the "Rule 434 preliminary prospectus"), together with the -1- applicable term sheet (the "Term Sheet") prepared and filed by the Company with the Commission under Rules 434 and 424(b) under the Securities Act and all references in this Agreement to the date of the Prospectus shall mean the date of the Term Sheet. All references in this Agreement to the Registration Statement, the Rule 462(b) Registration Statement, a preliminary prospectus, the Prospectus or the Term Sheet, or any amendments or supplements to any of the foregoing, shall include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). The Company hereby confirms its agreements with the Underwriters as follows: SECTION 1. REPRESENTATIONS AND WARRANTIES. The Company hereby represents, warrants and covenants to each Underwriter as follows : (a) Compliance with Registration Requirements. The Registration Statement and any Rule 462(b) Registration Statement have been declared effective by the Commission under the Securities Act. The Company has complied to the Commission's satisfaction with all requests of the Commission for additional or supplemental information. No stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement is in effect and no proceedings for such purpose have been instituted or are pending or, to the best knowledge of the Company, are contemplated or threatened by the Commission. Each preliminary prospectus and the Prospectus when filed complied in all material respects with the Securities Act and, if filed by electronic transmission pursuant to EDGAR (except as may be permitted by Regulation S- T under the Securities Act), was identical to the copy thereof delivered to the Underwriters for use in connection with the offer and sale of the Common Shares. Each of the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto, at the time it became effective and at all subsequent times, complied and will comply in all material respects with the Securities Act and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus, as amended or supplemented, as of its date and at all subsequent times, did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties set forth in the two immediately preceding sentences do not apply to statements in or omissions from the Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment thereto, or the Prospectus, or any amendments or supplements thereto, made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by the Representatives expressly for use therein. There are no contracts or other documents required to be described in the Prospectus or to be filed as exhibits to the Registration Statement which have not been described or filed as required. (b) Offering Materials Furnished to Underwriters. The Company has delivered to the Representatives three complete manually signed copies of the Registration Statement and of each consent and certificate of experts filed as a part thereof, and conformed copies of the Registration Statement (without exhibits) and preliminary prospectuses and the Prospectus, -2- as amended or supplemented, in such quantities and at such places as the Representatives have reasonably requested for each of the Underwriters. (c) Distribution of Offering Material By the Company. The Company has not distributed and will not distribute, prior to the later of the Second Closing Date (as defined below) and the completion of the Underwriters' distribution of the Common Shares, any offering material in connection with the offering and sale of the Common Shares other than a preliminary prospectus, the Prospectus or the Registration Statement. (d) The Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (e) Authorization of the Common Shares. The Common Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement, will be validly issued, fully paid and nonassessable. (f) No Applicable Registration or Other Similar Rights. There are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by this Agreement, except for such rights as have been duly waived. (g) No Material Adverse Change. Except as otherwise disclosed in the Prospectus, subsequent to the respective dates as of which information is given in the Prospectus: (i) there has been no material adverse change, or any development that could reasonably be expected to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business, operations or prospects, whether or not arising from transactions in the ordinary course of business, of the Company and its subsidiaries, considered as one entity (any such change is called a "Material Adverse Change"); (ii) the Company and its subsidiaries, considered as one entity, have not incurred any material liability or obligation, indirect, direct or contingent, not in the ordinary course of business nor entered into any material transaction or agreement not in the ordinary course of business; and (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company or, except for dividends paid to the Company or other subsidiaries, any of its subsidiaries on any class of capital stock or repurchase or redemption by the Company or any of its subsidiaries of any class of capital stock. (h) Independent Accountants. Ernst & Young LLP, which has expressed its opinion with respect to the financial statements (which term as used in this Agreement includes the related notes thereto) and supporting schedules filed with the Commission as a part of the Registration Statement and included in the Prospectus, are independent certified public accountants as required by the Securities Act. (i) Preparation of the Financial Statements. The financial statements filed with the Commission as a part of the Registration Statement and included in the Prospectus present -3- fairly the consolidated financial position of the Company and its subsidiaries as of and at the dates indicated and the results of their operations and cash flows for the periods specified. The supporting schedules included in the Registration Statement present fairly the information required to be stated therein. Such financial statements and supporting schedules have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved, except as may be expressly stated in the related notes thereto. No other financial statements or supporting schedules are required to be included in the Registration Statement. The financial data set forth in the Prospectus under the captions "Prospectus Summary--Summary Selected Financial Data", "Selected Financial Data" and "Capitalization" fairly present the information set forth therein on a basis consistent with that of the audited financial statements contained in the Registration Statement. (j) Incorporation and Good Standing of the Company and its Subsidiaries. Each of the Company and its subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and, in the case of the Company, to enter into and perform its obligations under this Agreement. Each of the Company and each subsidiary is duly qualified as a foreign corporation to transact business and is in good standing in the State of California and each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions (other than the State of California) where the failure to so qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change. All of the issued and outstanding capital stock of each subsidiary has been duly authorized and validly issued, is fully paid and nonassessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance or claim. The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the subsidiaries listed in Exhibit ____ to the Registration Statement. (k) Capitalization and Other Capital Stock Matters. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" (other than for subsequent issuances, if any, pursuant to employee benefit plans described in the Prospectus or upon exercise of outstanding options or warrants described in the Prospectus). The Common Stock (including the Common Shares) conforms in all material respects to the description thereof contained in the Prospectus. All of the issued and outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and nonassessable and have been issued in compliance with federal and state securities laws. None of the outstanding shares of Common Stock were issued in violation of any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any capital stock of the Company or any of its subsidiaries other than those accurately described in the Prospectus. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. -4- (l) Stock Exchange Listing. The Common Shares have been approved for inclusion on the Nasdaq National Market, subject only to official notice of issuance. (m) Non-Contravention of Existing Instruments; No Further Authorizations or Approvals Required. Neither the Company nor any of its subsidiaries is in violation of its charter or by-laws or is in default (or, with the giving of notice or lapse of time, would be in default) ("Default") under any indenture, mortgage, loan or credit agreement, note, contract, franchise, lease or other instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound or to which any of the property or assets of the Company or any of its subsidiaries is subject (each, an "Existing Instrument"), except for such Defaults as would not, individually or in the aggregate, result in a Material Adverse Change. The Company's execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby and by the Prospectus (i) have been duly authorized by all necessary corporate action and will not result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary, (ii) will not conflict with or constitute a breach of, or Default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, or require the consent of any other part to, any Existing Instrument, except for such conflicts, breaches, Defaults, liens, charges or encumbrances as would not, individually or in the aggregate, result in a Material Adverse Change and (iii) will not result in any violation of any law, administrative regulation or administrative or court decree applicable to the Company or any subsidiary. No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental or regulatory authority or agency, is required for the Company's execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby and by the Prospectus, except such as have been obtained or made by the Company and are in full force and effect under the Securities Act, applicable state securities or blue sky laws and from the National Association of Securities Dealers, Inc. (the "NASD"). (n) No Material Actions or Proceedings. There are no legal or governmental actions, suits or proceedings pending or, to the best of the Company's knowledge, threatened (i) against or affecting the Company or any of its subsidiaries, (ii) which has as the subject thereof any officer or director of, or property owned or leased by, the Company or any of its subsidiaries or (iii) relating to environmental or discrimination matters, where in any such case (A) there is a reasonable possibility that such action, suit or proceeding might be determined adversely to the Company or such subsidiary and (B) any such action, suit or proceeding, if so determined adversely, would reasonably be expected to result in a Material Adverse Change or adversely affect the consummation of the transactions contemplated by this Agreement. No material labor dispute with the employees of the Company or any of its subsidiaries exists or, to the best of the Company's knowledge, is threatened or imminent. (o) Intellectual Property Rights. The Company and its subsidiaries own or possess sufficient trademarks, trade names, patent rights, copyrights, licenses, approvals, trade secrets and other similar rights (collectively, "Intellectual Property Rights") reasonably necessary to conduct their businesses as now conducted; and the expected expiration of any of such Intellectual Property Rights would not result in a Material Adverse Change. Neither the Company nor any of its subsidiaries has received any notice of infringement or conflict with asserted Intellectual Property Rights of others, which infringement or conflict, if the subject -5- of an unfavorable decision, would result in a Material Adverse Change. (p) All Necessary Permits, etc. The Company and each subsidiary possess such valid and current certificates, authorizations or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct their respective businesses, and neither the Company nor any subsidiary has received any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, could result in a Material Adverse Change. (q) Title to Properties. The Company and each of its subsidiaries has good and marketable title to all the properties and assets reflected as owned in the financial statements referred to in Section 1(i) above (or elsewhere in the Prospectus), in each case free and clear of any security interests, mortgages, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company or such subsidiary. The real property, improvements, equipment and personal property held under lease by the Company or any subsidiary are held under valid and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such real property, improvements, equipment or personal property by the Company or such subsidiary. (r) Tax Law Compliance. The Company and its subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes required to be paid by any of them and, if due and payable, any related or similar assessment, fine or penalty levied against any of them. The Company has made adequate charges, accruals and reserves in the applicable financial statements referred to in Section 1 (i) above in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company or any of its subsidiaries has not been finally determined. (s) Company Not an "Investment Company". The Company has been advised of the rules and requirements under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Company is not, and after receipt of payment for the Common Shares will not be, an "investment company" within the meaning of Investment Company Act and will conduct its business in a manner so that it will not become subject to the Investment Company Act. (t) Insurance. Each of the Company and its subsidiaries are insured by recognized, financially sound and reputable institutions with policies in such amounts and with such deductibles and covering such risks as are generally deemed adequate and customary for their businesses including, but not limited to, policies covering real and personal property owned or leased by the Company and its subsidiaries against theft, damage, destruction, acts of vandalism and earthquakes. The Company has no reason to believe that it or any subsidiary will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Change. Neither of the Company nor any subsidiary has been denied any insurance coverage which it has sought or for which it has applied. -6- (u) No Price Stabilization or Manipulation. The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Common Shares. (v) Related Party Transactions. There are no business relationships or related-party transactions involving the Company or any subsidiary or any other person required to be described in the Prospectus which have not been described as required. (w) No Unlawful Contributions or Other Payments. Neither the Company nor any of its subsidiaries nor, to the best of the Company's knowledge, any employee or agent of the Company or any subsidiary, has made any contribution or other payment to any official of, or candidate for, any federal, state or foreign office in violation of any law or of the character required to be disclosed in the Prospectus. (x) Company's Accounting System. The Company maintains a system of accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (y) Compliance with Environmental Laws. Except as would not, individually or in the aggregate, result in a Material Adverse Change (i) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign law or regulation relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including without limitation, laws and regulations relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum and petroleum products (collectively, "Materials of Environmental Concern"), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environment Concern (collectively, "Environmental Laws"), which violation includes, but is not limited to, noncompliance with any permits or other governmental authorizations required for the operation of the business of the Company or its subsidiaries under applicable Environmental Laws, or noncompliance with the terms and conditions thereof, nor has the Company or any of its subsidiaries received any written communication, whether from a governmental authority, citizens group, employee or otherwise, that alleges that the Company or any of its subsidiaries is in violation of any Environmental Law; (ii) there is no claim, action or cause of action filed with a court or governmental authority, no investigation with respect to which the Company has received written notice, and no written notice by any person or entity alleging potential liability for investigatory costs, cleanup costs, governmental responses costs, natural resources damages, property damages, personal injuries, attorneys' fees or penalties arising out of, based on or resulting from the presence, or release into the environment, of any Material of Environmental Concern at any location owned, leased or operated by the Company or any of its subsidiaries, now or in the past (collectively, "Environmental Claims"), pending or, to the best of the Company's knowledge, threatened -7- against the Company or any of its subsidiaries or any person or entity whose liability for any Environmental Claim the Company or any of its subsidiaries has retained or assumed either contractually or by operation of law; and (iii) to the best of the Company's knowledge, there are no past or present actions, activities, circumstances, conditions, events or incidents, including, without limitation, the release, emission, discharge, presence or disposal of any Material of Environmental Concern, that reasonably could result in a violation of any Environmental Law or form the basis of a potential Environmental Claim against the Company or any of its subsidiaries or against any person or entity whose liability for any Environmental Claim the Company or any of its subsidiaries has retained or assumed either contractually or by operation of law. (z) ERISA Compliance. The Company and its subsidiaries and any "employee benefit plan" (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, "ERISA")) established or maintained by the Company, its subsidiaries or their "ERISA Affiliates" (as defined below) are in compliance in all material respects with ERISA. "ERISA Affiliate" means, with respect to the Company or a subsidiary, any member of any group of organizations described in Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the "Code") of which the Company or such subsidiary is a member. No "reportable event" (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any "employee benefit plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates. No "employee benefit plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates, if such "employee benefit plan" were terminated, would have any "amount of unfunded benefit liabilities" (as defined under ERISA). Neither the Company, its subsidiaries nor any of their ERISA Affiliates has incurred or reasonably expects to incur any liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code is so qualified and nothing has occurred, whether by action or failure to act, which would cause the loss of such qualification. Any certificate signed by an officer of the Company and delivered to the Representatives or to counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters set forth therein. SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES. (a) The Firm Common Shares. The Company agrees to issue and sell to the several Underwriters the Firm Common Shares upon the terms herein set forth. On the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Underwriters agree, severally and not jointly, to purchase from the Company the respective number of Firm Common Shares set forth opposite their names on Schedule A. The purchase price per Firm Common Share to be paid by the several - ---------- Underwriters to the Company shall be $[___] per share. (b) The First Closing Date. Delivery of certificates for the Firm Common -8- Shares to be purchased by the Underwriters and payment therefor shall be made at the offices of NMS, 600 Montgomery Street, San Francisco, California (or such other place as may be agreed to by the Company and the Representatives) at 6:00 a.m. San Francisco time, on [___], or such other time and date not later than 10:30 a.m. San Francisco time , on [___] as the Representatives shall designate by notice to the Company (the time and date of such closing are called the "First Closing Date"). The Company hereby acknowledges that circumstances under which the Representatives may provide notice to postpone the First Closing Date as originally scheduled include, but are in no way limited to, any determination by the Company or the Representatives to recirculate to the public copies of an amended or supplemented Prospectus or a delay as contemplated by the provisions of Section 10. (c) The Optional Common Shares; the Second Closing Date. In addition, on the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Company hereby grants an option to the several Underwriters to purchase, severally and not jointly, up to an aggregate of [___] Optional Common Shares from the Company at the purchase price per share to be paid by the Underwriters for the Firm Common Shares. The option granted hereunder is for use by the Underwriters solely in covering any over-allotments in connection with the sale and distribution of the Firm Common Shares. The option granted hereunder may be exercised at any time (but not more than once) upon notice by the Representatives to the Company, which notice may be given at any time within 30 days from the date of this Agreement. Such notice shall set forth (i) the aggregate number of Optional Common Shares as to which the Underwriters are exercising the option, (ii) the names and denominations in which the certificates for the Optional Common Shares are to be registered and (iii) the time, date and place at which such certificates will be delivered (which time and date may be simultaneous with, but not earlier than, the First Closing Date; and in such case the term "First Closing Date" shall refer to the time and date of delivery of certificates for the Firm Common Shares and the Optional Common Shares). Such time and date of delivery, if subsequent to the First Closing Date, is called the "Second Closing Date" and shall be determined by the Representatives and shall not be earlier than three nor later than five full business days after delivery of such notice of exercise. If any Optional Common Shares are to be purchased, each Underwriter agrees, severally and not jointly, to purchase the number of Optional Common Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Optional Common Shares to be purchased as the number of Firm Common Shares set forth on Schedule A opposite the name of ---------- such Underwriter bears to the total number of Firm Common Shares. The Representatives may cancel the option at any time prior to its expiration by giving written notice of such cancellation to the Company. (d) Public Offering of the Common Shares. The Representatives hereby advise the Company that the Underwriters intend to offer for sale to the public, as described in the Prospectus, their respective portions of the Common Shares as soon after this Agreement has been executed and the Registration Statement has been declared effective as the Representatives, in their sole judgment, have determined is advisable and practicable. (e) Payment for the Common Shares. Payment for the Common Shares shall be made at the First Closing Date (and, if applicable, at the Second Closing Date) by wire transfer of immediately available funds to the order of the Company. It is understood that the Representatives have been authorized, for their own -9- account and the accounts of the several Underwriters, to accept delivery of and receipt for, and make payment of the purchase price for, the Firm Common Shares and any Optional Common Shares the Underwriters have agreed to purchase. NMS, DLJ or BRS, individually and not as the Representatives of the Underwriters, may (but shall not be obligated to) make payment for any Common Shares to be purchased by any Underwriter whose funds shall not have been received by the Representatives by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under this Agreement. (f) Delivery of the Common Shares. The Company shall deliver, or cause to be delivered, to the Representatives for the accounts of the several Underwriters certificates for the Firm Common Shares at the First Closing Date, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. The Company shall also deliver, or cause to be delivered, to the Representatives for the accounts of the several Underwriters, certificates for the Optional Common Shares the Underwriters have agreed to purchase at the First Closing Date or the Second Closing Date, as the case may be, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. The certificates for the Common Shares shall be in definitive form and registered in such names and denominations as the Representatives shall have requested at least two full business days prior to the First Closing Date (or the Second Closing Date, as the case may be) and shall be made available for inspection on the business day preceding the First Closing Date (or the Second Closing Date, as the case may be) at a location in New York City as the Representatives may designate. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters. (g) Delivery of Prospectus to the Underwriters. Not later than 12:00 p.m. on the second business day following the date the Common Shares released by the Underwriters for sale to the public, the Company shall deliver or cause to be delivered copies of the Prospectus in such quantities and at such places as the Representatives shall request. SECTION 3. ADDITIONAL COVENANT. (a) Representatives' Review of Proposed Amendments and Supplements. During such period beginning on the date hereof and ending on the later of the First Closing Date or such date, as in the opinion of counsel for the Underwriters, the Prospectus is no longer required by law to be delivered in connection with sales by an Underwriter or dealer (the "Prospectus Delivery Period"), prior to amending or supplementing the Registration Statement (including any registration statement filed under Rule 462(b) under the Securities Act) or the Prospectus, the Company shall furnish to the Representatives for review a copy of each such proposed amendment or supplement, and the Company shall not file any such proposed amendment or supplement to which the Representatives reasonably object. (b) Securities Act Compliance. After the date of this Agreement, the Company shall promptly advise the Representatives in writing (i) of the receipt of any comments of, or requests for additional or supplemental information from, the Commission, (ii) of the time and date of any filing of any post-effective amendment to the Registration Statement or any amendment or supplement to any preliminary prospectus or the Prospectus, (iii) of the time and date that any post-effective amendment to the Registration Statement becomes effective and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of -10- the Registration Statement or any post-effective amendment thereto or of any order preventing or suspending the use of any preliminary prospectus or the Prospectus, or of any proceedings to remove, suspend or terminate from listing or quotation the Common Stock from any securities exchange upon which the it is listed for trading or included or designated for quotation, or of the threatening or initiation of any proceedings for any of such purposes. If the Commission shall enter any such stop order at any time, the Company will use its best efforts to obtain the lifting of such order at the earliest possible moment. Additionally, the Company agrees that it shall comply with the provisions of Rules 424(b), 430A and 434, as applicable, under the Securities Act and will use its reasonable efforts to confirm that any filings made by the Company under such Rule 424(b) were received in a timely manner by the Commission. (c) Amendments and Supplements to the Prospectus and Other Securities Act Matters. If, during the Prospectus Delivery Period, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if in the opinion of the Representatives or counsel for the Underwriters it is otherwise necessary to amend or supplement the Prospectus to comply with law, the Company agrees to promptly prepare (subject to Section 3(a) hereof), file with the Commission and furnish at its own expense to the Underwriters and to dealers, amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law. (d) Copies of any Amendments and Supplements to the Prospectus. The Company agrees to furnish the Representatives, without charge, during the Prospectus Delivery Period, as many copies of the Prospectus and any amendments and supplements thereto as the Representatives may request. (e) Blue Sky Compliance. The Company shall cooperate with the Representatives and counsel for the Underwriters to qualify or register the Common Shares for sale under (or obtain exemptions from the application of) the or state securities or blue sky laws or Canadian provincial securities laws of those jurisdictions designated by the Representatives, shall comply with such laws and shall continue such qualifications, registrations and exemptions in effect so long as required for the distribution of the Common Shares. The Company shall not be required to qualify as a foreign corporation or to take any action that would subject it to general service of process in any such jurisdiction where it is not presently qualified or where it would be subject to taxation as a foreign corporation. The Company will advise the Representatives promptly of the suspension of the qualification or registration of (or any such exemption relating to) the Common Shares for offering, sale or trading in any jurisdiction or any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any order suspending such qualification, registration or exemption, the Company shall use its best efforts to obtain the withdrawal thereof at the earliest possible moment. (f) Use of Proceeds. The Company shall apply the net proceeds from the sale of the Common Shares sold by it in the manner described under the caption "Use of Proceeds" in the Prospectus. -11- (g) Transfer Agent. The Company shall engage and maintain, at its expense, a registrar and transfer agent for the Common Stock. (h) Earnings Statement. As soon as practicable, the Company will make generally available to its security holders and to the Representatives an earnings statement (which need not be audited) covering the twelve-month period ending September 30, 1998 that satisfies the provisions of Section 11(a) of the Securities Act. (j) Periodic Reporting Obligations. During the Prospectus Delivery Period the Company shall file, on a timely basis, with the Commission and the Nasdaq National Market all reports and documents required to be filed under the Exchange Act. Additionally, the Company shall file with the Commission all reports on Form SR as may be required under Rule 463 under the Securities Act. (l) Agreement Not To Offer or Sell Additional Securities During the period of 180 days following the date of the Prospectus, the Company will not, without the prior written consent of NMS (which consent may be withheld at the sole discretion of NMS), directly or indirectly, sell, offer, contract or grant any option to sell, pledge, transfer or establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of or transfer, or announce the offering of, or file any registration statement under the Securities Act in respect of, any shares of Common Stock, options or warrants to acquire shares of the Common Stock or securities exchangeable or exercisable for or convertible into shares of Common Stock (other than as contemplated by this Agreement with respect to the Common Shares); provided, however, that the Company may issue shares of its Common Stock or options to purchase its Common Stock, or Common Stock upon exercise of options, pursuant to any stock option, stock bonus or other stock plan or arrangement described in the Prospectus, but only if the holders of such shares, options, or shares issued upon exercise of such options, agree in writing not to sell, offer, dispose of or otherwise transfer any such shares or options during such 180 day period without the prior written consent of NMS (which consent may be withheld at the sole discretion of the NMS). (m) Future Reports to the Representatives. During the period of five years hereafter the Company will furnish to the Representatives at 600 Montgomery Street, San Francisco, CA 94111 Attention: Steve Baum, (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public or certified public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report filed by the Company with the Commission, the NASD or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its capital stock. NMS, on behalf of the several Underwriters, may, in its sole discretion, waive in writing the performance by the Company of any one or more of the foregoing covenants or extend the time for their performance. -12- SECTION 4. PAYMENT OF EXPENSES. The Company agrees to pay all costs, fees and expenses incurred in connection with the performance of its obligations hereunder and in connection with the transactions contemplated hereby, including without limitation (i) all expenses incident to the issuance and delivery of the Common Shares (including all printing and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Common Stock, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of the Company's counsel, independent certified public accountants and other advisors, (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement (including financial statements, exhibits, schedules, consents and certificates of experts), each preliminary prospectus and the Prospectus, and all amendments and supplements thereto, and this Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by the Company or the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Common Shares for offer and sale under the state securities or blue sky laws or the provincial securities laws of Canada, and, if requested by the Representatives, preparing and printing a "Blue Sky Survey" or memorandum, and any supplements thereto, advising the Underwriters of such qualifications, registrations and exemptions, (vii) the filing fees incident to, and the reasonable fees and expenses of counsel for the Underwriters in connection with, the NASD's review and approval of the Underwriters' participation in the offering and distribution of the Common Shares, (viii) the fees and expenses associated with including the Common Shares on the Nasdaq National Market, and (ix) all other fees, costs and expenses referred to in Item 13 of Part II of the Registration Statement. Except as provided in this Section 4, Section 6, Section 8 and Section 9 hereof, the Underwriters shall pay their own expenses, including the fees and disbursements of their counsel. SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of the several Underwriters to purchase and pay for the Common Shares as provided herein on the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date, shall be subject to the accuracy of the representations and warranties on the part of the Company set forth in Section 1 hereof as of the date hereof and as of the First Closing Date as though then made and, with respect to the Optional Common Shares, as of the Second Closing Date as though then made, to the timely performance by the Company of its covenants and other obligations hereunder, and to each of the following additional conditions : (a) Accountants' Comfort Letter. On the date hereof, the Representatives shall have received from Ernst & Young LLP, independent certified public accountants for the Company, a letter dated the date hereof addressed to the Underwriters, in form and substance satisfactory to the Representatives, containing statements and information of the type ordinarily included in accountant's "comfort letters" to underwriters, delivered according to Statement of Auditing Standards No. 72 (or any successor bulletin), with respect to the audited and unaudited financial statements and certain financial information contained in the Registration Statement and the Prospectus (and the Representatives shall have received an additional [___] conformed copies of such accountants' letter for each of the several Underwriters). -13- (b) Compliance with Registration Requirements; No Stop Order; No Objection from NASD. For the period from and after effectiveness of this Agreement and prior to the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date: (i) the Company shall have filed the Prospectus with the Commission (including the information required by Rule 430A under the Securities Act) in the manner and within the time period required by Rule 424(b) under the Securities Act; or the Company shall have filed a post- effective amendment to the Registration Statement containing the information required by such Rule 430A, and such post-effective amendment shall have become effective; or, if the Company elected to rely upon Rule 434 under the Securities Act and obtained the Representatives' consent thereto, the Company shall have filed a Term Sheet with the Commission in the manner and within the time period required by such Rule 424(b); (ii) no stop order suspending the effectiveness of the Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment to the Registration Statement, shall be in effect and no proceedings for such purpose shall have been instituted or threatened by the Commission; and (iii) the NASD shall have raised no objection to the fairness and reasonableness of the underwriting terms and arrangements. (c) No Material Adverse Change or Ratings Agency Change. For the period from and after the date of this Agreement and prior to the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date: (i) in the judgment of the Representatives there shall not have occurred any Material Adverse Change; and (ii) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any securities of the Company or any of its subsidiaries by any "nationally recognized statistical rating organization" as such term is defined for purposes of Rule 436(g)(2) under the Securities Act. (d) Opinion of Counsel for the Company. On each of the First Closing Date and the Second Closing Date the Representatives shall have received the favorable opinion of Wilson Sonsini Goodrich & Rosati, counsel for the Company, dated as of such Closing Date, the form of which is attached as Exhibit A (and the Representatives shall have received an additional [___] --------- conformed copies of such counsel's legal opinion for each of the several Underwriters). (e) Opinion of Counsel for the Underwriters. On each of the First Closing Date and the Second Closing Date the Representatives shall have received the favorable opinion of Venture Law Group, A Professional Corporation, counsel for the Underwriters, dated as of such Closing Date, with respect to the matters set forth in paragraph (i), (vii) (with respect to subparagraph (i) only), (viii), (ix), (x), (xi), (xii) and (xiii) (with respect to the captions "Description of Capital Stock" and "Underwriting" under subparagraph (i) only), and the -14- next-to-last paragraph of Exhibit A (and the Representatives shall have --------- received an additional [___] conformed copies of such counsel's legal opinion for each of the several Underwriters). (f) Officers' Certificate. On each of the First Closing Date and the Second Closing Date the Representatives shall have received a written certificate executed by the Chairman of the Board, Chief Executive Officer or President of the Company and the Chief Financial Officer or Chief Accounting Officer of the Company, dated as of such Closing Date, to the effect set forth in subsections (b)(ii) and (c)(ii) of this Section 5, and further to the effect that: (i) for the period from and after the date of this Agreement and prior to such Closing Date, there has not occurred any Material Adverse Change; (ii) the representations, warranties and covenants of the Company set forth in Section 1 of this Agreement are true and correct with the same force and effect as though expressly made on and as of such Closing Date; and (iii) the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such Closing Date. (g) Bring-down Comfort Letter. On each of the First Closing Date and the Second Closing Date the Representatives shall have received from Ernst & Young LLP, independent certified public accountants for the Company, a letter dated such date, in form and substance satisfactory to the Representatives, to the effect that they reaffirm the statements made in the letter furnished by them pursuant to subsection (a) of this Section 5, except that the specified date referred to therein for the carrying out of procedures shall be no more than three business days prior to the First Closing Date or Second Closing Date, as the case may be (and the Representatives shall have received an additional [___] conformed copies of such accountants' letter for each of the several Underwriters). (h) Lock-Up Agreement from Certain Stockholders of the Company. On the date hereof, the Company shall have furnished to the Representatives an agreement in the form of Exhibit B hereto from each director, officer and --------- each beneficial owner of more than _____ shares of Common Stock (as defined and determined according to Rule 13d-3 under the Exchange Act, except that a one hundred eighty day period shall be used rather than the sixty day period set forth therein) and such agreement shall be in full force and effect on each of the First Closing Date and the Second Closing Date. (i) Additional Documents. On or before each of the First Closing Date and the Second Closing Date, the Representatives and counsel for the Underwriters shall have received such information, documents and opinions as they may reasonably require for the purposes of enabling them to pass upon the issuance and sale of the Common Shares as contemplated herein, or in order to evidence the accuracy of any of the representations and warranties, or the satisfaction of any of the conditions or agreements, herein contained. If any condition specified in this Section 5 is not satisfied when and as required to be satisfied, this Agreement may be terminated by the Representatives by notice to the Company at any time on or prior to the First Closing Date and, with respect to the Optional Common Shares, at any time prior to the Second Closing Date, which termination shall be without liability on the -15- part of any party to any other party, except that Section 4, Section 6, Section 8 and Section 9 shall at all times be effective and shall survive such termination. SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is terminated by the Representatives pursuant to Section 5, Section 7, Section 10 or Section 11, or if the sale to the Underwriters of the Common Shares on the First Closing Date is not consummated because of any refusal, inability or failure on the part of the Company to perform any agreement herein or to comply with any provision hereof, the Company agrees to reimburse the Representatives and the other Underwriters (or such Underwriters as have terminated this Agreement with respect to themselves), severally, upon demand for all out-of- pocket expenses that shall have been reasonably incurred by the Representatives and the Underwriters in connection with the proposed purchase and the offering and sale of the Common Shares, including but not limited to fees and disbursements of counsel, printing expenses, travel expenses, postage, facsimile and telephone charges. SECTION 7. EFFECTIVENESS OF THIS AGREEMENT. This Agreement shall not become effective until the later of (i) the execution of this Agreement by the parties hereto and (ii) notification by the Commission to the Company and the Representatives of the effectiveness of the Registration Statement under the Securities Act. Prior to such effectiveness, this Agreement may be terminated by any party by notice to each of the other parties hereto, and any such termination shall be without liability on the part of (a) the Company to any Underwriter, except that the Company shall be obligated to reimburse the expenses of the Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b) of any Underwriter to the Company, or (c) of any party hereto to any other party except that the provisions of Section 8 and Section 9 shall at all times be effective and shall survive such termination. SECTION 8. INDEMNIFICATION. (a) Indemnification of the Underwriters. The Company agrees to indemnify and hold harmless each Underwriter, its officers and employees, and each person, if any, who controls any Underwriter within the meaning of the Securities Act and the Exchange Act against any loss, claim, damage, liability or expense, as incurred, to which such Underwriter or such controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based (i) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (ii) upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment -16- or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; or (iii) in whole or in part upon any inaccuracy in the representations and warranties of the Company contained herein; or (iv) in whole or in part upon any failure of the Company to perform its obligations hereunder or under law; or (v) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Common Stock or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon any matter covered by clause (i) or (ii) above, provided that the Company shall not be liable under this clause (v) to the extent that a court of competent jurisdiction shall have determined by a final judgment that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its bad faith or willful misconduct; and to reimburse each Underwriter and each such controlling person for any and all expenses (including the fees and disbursements of counsel chosen by NMS) as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that the foregoing indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); and provided, further, that with respect to any preliminary prospectus, the foregoing indemnity agreement shall not inure to the benefit of any Underwriter from whom the person asserting any loss, claim, damage, liability or expense purchased Common Shares, or any person controlling such Underwriter, if copies of the Prospectus were timely delivered to the Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Common Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense. The indemnity agreement set forth in this Section 8(a) shall be in addition to any liabilities that the Company may otherwise have. (b) Indemnification of the Company, its Directors and Officers. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, against any loss, claim, damage, liability or expense, as incurred, to which the Company, or any such director, officer or controlling person may become subject, under the Securities Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based upon any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or arises out of or is based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in -17- each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus, the Prospectus (or any amendment or supplement thereto), in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use therein; and to reimburse the Company, or any such director, officer or controlling person for any legal and other expense reasonably incurred by the Company, or any such director, officer or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. The Company hereby acknowledges that the only information that the Underwriters have furnished to the Company expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) are the statements set forth (A) as the last two paragraphs on the inside front cover page of the Prospectus concerning stabilization and passive market making by the Underwriters and (B) in the table in the first paragraph and as the [second and eighth paragraphs] under the caption "Underwriting" in the Prospectus; and the Underwriters confirm that such statements are correct. The indemnity agreement set forth in this Section 8(b) shall be in addition to any liabilities that each Underwriter may otherwise have. (c) Notifications and Other Indemnification Procedures. Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for contribution or otherwise than under the indemnity agreement contained in this Section 8 or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it shall elect, jointly with all other indemnifying parties similarly notified, by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that a conflict may arise between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of such indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with local counsel), approved by the indemnifying party (NMS in the case of Section 8(b) and Section 9), representing the indemnified parties who are parties to such action) or (ii) the indemnifying party shall not have employed counsel satisfactory to the -18- indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party. (d) Settlements. The indemnifying party under this Section 8 shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party against any loss, claim, damage, liability or expense by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by Section 8(c) hereof, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement, compromise or consent to the entry of judgment in any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity was or could have been sought hereunder by such indemnified party, unless such settlement, compromise or consent includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding. SECTION 9. CONTRIBUTION. If the indemnification provided for in Section 8 is for any reason held to be unavailable to or otherwise insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount paid or payable by such indemnified party, as incurred, as a result of any losses, claims, damages, liabilities or expenses referred to therein (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, on the one hand, and the Underwriters, on the other hand, from the offering of the Common Shares pursuant to this Agreement or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and the Underwriters, on the other hand, in connection with the statements or omissions or inaccuracies in the representations and warranties herein which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Underwriters, on the other hand, in connection with the offering of the Common Shares pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Common Shares pursuant to this Agreement (before deducting expenses) received by the Company, and the total underwriting discount received by the Underwriters, in each case as set forth on the front cover page of the Prospectus (or, if Rule 434 under the Securities Act is used, the corresponding location on the Term Sheet) bear to the aggregate initial public offering price of the Common Shares as set forth on such cover. The relative fault of the Company, on the one hand, and the Underwriters, on the other hand, shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or -19- alleged omission to state a material fact or any such inaccurate or alleged inaccurate representation or warranty relates to information supplied by the Company, on the one hand, or the Underwriters, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Section 8(c), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The provisions set forth in Section 8(c) with respect to notice of commencement of any action shall apply if a claim for contribution is to be made under this Section 9; provided, however, that no additional notice shall be required with respect to any action for which notice has been given under Section 8(c) for purposes of indemnification. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 9. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the underwriting commissions received by such Underwriter in connection with the Common Shares underwritten by it and distributed to the public. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 9 are several, and not joint, in proportion to their respective underwriting commitments as set forth opposite their names in Schedule A. For purposes of this Section 9, each officer and employee of an - ---------- Underwriter and each person, if any, who controls an Underwriter within the meaning of the Securities Act and the Exchange Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company with the meaning of the Securities Act and the Exchange Act shall have the same rights to contribution as the Company. SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the several Underwriters shall fail or refuse to purchase Common Shares that it or they have agreed to purchase hereunder on such date, and the aggregate number of Common Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase does not exceed 10% of the aggregate number of the Common Shares to be purchased on such date, the other Underwriters shall be obligated, severally, in the proportions that the number of Firm Common Shares set forth opposite their respective names on Schedule A ---------- bears to the aggregate number of Firm Common Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as may be specified by the Representatives with the consent of the non-defaulting Underwriters, to purchase the Common Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Common Shares and the aggregate number of Common Shares with respect to -20- which such default occurs exceeds 10% of the aggregate number of Common Shares to be purchased on such date, and arrangements satisfactory to the Representatives and the Company for the purchase of such Common Shares are not made within 48 hours after such default, this Agreement shall terminate without liability of any party to any other party except that the provisions of Section 4, Section 8 and Section 9 shall at all times be effective and shall survive such termination. In any such case either the Representatives or the Company shall have the right to postpone the First Closing Date or the Second Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected. As used in this Agreement, the term "Underwriter" shall be deemed to include any person substituted for a defaulting Underwriter under this Section 10. Any action taken under this Section 10 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. SECTION 11. TERMINATION OF THIS AGREEMENT. Prior to the First Closing Date this Agreement may be terminated by the Representatives by notice given to the Company if at any time (i) trading or quotation in any of the Company's securities shall have been suspended or limited by the Commission or by the Nasdaq Stock Market, or trading in securities generally on either the Nasdaq Stock Market or the New York Stock Exchange shall have been suspended or limited, or minimum or maximum prices shall have been generally established on any of such stock exchanges by the Commission or the NASD; (ii) a general banking moratorium shall have been declared by any of federal, New York, Delaware or California authorities; (iii) there shall have occurred any outbreak or escalation of national or international hostilities or any crisis or calamity, or any change in the United States or international financial markets, or any substantial change or development involving a prospective substantial change in United States' or international political, financial or economic conditions, as in the judgment of the Representatives is material and adverse and makes it impracticable to market the Common Shares in the manner and on the terms described in the Prospectus or to enforce contracts for the sale of securities; (iv) in the judgment of the Representatives there shall have occurred any Material Adverse Change; or (v) the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as in the judgment of the Representatives may interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured. Any termination pursuant to this Section 11 shall be without liability on the part of (a) the Company to any Underwriter, except that the Company shall be obligated to reimburse the expenses of the Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b) any Underwriter to the Company, or (c) of any party hereto to any other party except that the provisions of Section 8 and Section 9 shall at all times be effective and shall survive such termination. SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers or directors or any controlling person, as the case may be, and will survive delivery of and payment for the Common Shares sold hereunder and any termination of this Agreement. -21- SECTION 13. NOTICES. All communications hereunder shall be in writing and shall be mailed, hand delivered or telecopied and confirmed to the parties hereto as follows: If to the Representatives: NationsBanc Montgomery Securities LLC 600 Montgomery Street San Francisco, California 94111 Facsimile: 415-249-5558 Attention: Richard A. Smith with a copy to: NationsBanc Montgomery Securities LLC 600 Montgomery Street San Francisco, California 94111 Facsimile: (415) 249-5553 Attention: David A. Baylor, Esq. -22- If to the Company: CitySearch, Inc. 790 E. Colorado Boulevard, Ste. 200 Pasadena, CA _________ Facsimile: (626) 660-2537 Attention: Brad Ramberg, Chief Financial Officer Any party hereto may change the address for receipt of communications by giving written notice to the others. SECTION 14. SUCCESSORS. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 10 hereof, and to the benefit of the employees, officers and directors and controlling persons referred to in Section 8 and Section 9, and in each case their respective successors, and personal representatives, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Common Shares as such from any of the Underwriters merely by reason of such purchase. SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. SECTION 16. (A) GOVERNING LAW PROVISIONS. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE. (b) Consent to Jurisdiction. Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby ("Related Proceedings") may be instituted in the federal courts of the United States of America located in the City and County of San Francisco or the courts of the State of California in each case located in the City and County of San Francisco (collectively, the "Specified Courts"), and each party irrevocably submits to the exclusive jurisdiction (except for proceedings instituted in regard to the enforcement of a judgment of any such court (a "Related Judgment"), as to which such jurisdiction is non-exclusive) of such courts in any such suit, action or proceeding. Service of any process, summons, notice or document by mail to such party's address set forth above shall be effective service of process for any suit, action or other proceeding brought in any such court. The parties irrevocably and unconditionally waive any objection to the laying of venue of any suit, action or other proceeding in the Specified Courts and irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such suit, action or other -23- proceeding brought in any such court has been brought in an inconvenient forum. SECTION 17. GENERAL PROVISIONS. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in two or more counterparts, each one of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement may not be amended or modified unless in writing by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit. The Table of Contents and the Section headings herein are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement. Each of the parties hereto acknowledges that it is a sophisticated business person who was adequately represented by counsel during negotiations regarding the provisions hereof, including, without limitation, the indemnification provisions of Section 8 and the contribution provisions of Section 9, and is fully informed regarding said provisions. Each of the parties hereto further acknowledges that the provisions of Sections 8 and 9 hereto fairly allocate the risks in light of the ability of the parties to investigate the Company, its affairs and its business in order to assure that adequate disclosure has been made in the Registration Statement, any preliminary prospectus and the Prospectus (and any amendments and supplements thereto), as required by the Securities Act and the Exchange Act. -24- If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to the Company the enclosed copies hereof, whereupon this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms. Very truly yours, CITYSEARCH, INC. By:__________________________ Charles Conn Chief Executive Officer The foregoing Underwriting Agreement is hereby confirmed and accepted by the Representatives in San Francisco, California as of the date first above written. NATIONSBANC MONTGOMERY SECURITIES LLC DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BANCAMERICA ROBERTSON STEPHENS Acting as Representatives of the several Underwriters named in the attached Schedule A. By NATIONSBANC MONTGOMERY SECURITIES LLC By: _____________________________ Richard A. Smith Managing Director -25- SCHEDULE A
NUMBER OF FIRM COMMON SHARES UNDERWRITERS TO BE PURCHASED NationsBanc Montgomery Securities LLC.............. [___] Donaldson, Lufkin & Jenrette Securities............ [___] Corporation BancAmerica Robertson Stephens..................... [___] [___].............................................. [___] [___].............................................. [___] Total..................................... [___]
A-1 EXHIBIT A The final opinion in draft form should be attached as Exhibit A at the time this Agreement is executed. Opinion of counsel for the Company to be delivered pursuant to Section 5(d) of the Underwriting Agreement. References to the Prospectus in this Exhibit A include any --------- supplements thereto at the Closing Date. (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. (ii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under the Underwriting Agreement. (iii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in the State of California and in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions (other than the State of California) where the failure to so qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change. (iv) Each significant subsidiary (as defined in Rule 405 under the Securities Act) has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and, to the best knowledge of such counsel, is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions where the failure to so qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change. (v) All of the issued and outstanding capital stock of each such significant subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance or, to the best knowledge of such counsel, any pending or threatened claim. (vi) The authorized, issued and outstanding capital stock of the Company (including the Common Stock) conform to the descriptions thereof set forth or incorporated by reference in the Prospectus. All of the outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and nonassessable and, to the best of such counsel's knowledge, have been issued in compliance with the registration and qualification requirements of federal and state securities laws. The form of certificate used to evidence the A-1 Common Stock is in due and proper form and complies with all applicable requirements of the charter and by-laws of the Company and the General Corporation Law of the State of Delaware. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (vii) No stockholder of the Company or any other person has any preemptive right, right of first refusal or other similar right to subscribe for or purchase securities of the Company arising (i) by operation of the charter or by-laws of the Company or the General Corporation Law of the State of Delaware or (ii) to the best knowledge of such counsel, otherwise, except for such rights as have been duly waived. (viii) The Underwriting Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. (ix) The Common Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to the Underwriting Agreement and, when issued and delivered by the Company pursuant to the Underwriting Agreement against payment of the consideration set forth therein, will be validly issued, fully paid and nonassessable. (x) Each of the Registration Statement and the Rule 462(b) Registration Statement, if any, has been declared effective by the Commission under the Securities Act. To the best knowledge of such counsel, no stop order suspending the effectiveness of either of the Registration Statement or the Rule 462(b) Registration Statement, if any, has been issued under the Securities Act and no proceedings for such purpose have been instituted or are pending or are contemplated or threatened by the Commission. Any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) under the Securities Act has been made in the manner and within the time period required by such Rule 424(b). (xi) The Registration Statement, including any Rule 462(b) Registration Statement, the Prospectus including any document incorporated by reference therein, and each amendment or supplement to the Registration Statement and the Prospectus including any document incorporated by reference therein, as of their respective effective or issue dates (other than the financial statements and supporting schedules included or incorporated by reference therein or in exhibits to or excluded from the Registration Statement, as to which no opinion need be rendered) comply as to form in all material respects with the applicable requirements of the Securities Act. (xii) The Common Shares have been approved for listing on the Nasdaq National Market. B-2 (xiii) The statements (i) in the Prospectus under the captions "Risk Factors-", "Description of Capital Stock", "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources", "Business--Proprietary Rights", "Certain Relationships and Related Transactions", "Shares Eligible for Future Sale", "Certain United States Income Tax Considerations" and "Underwriting" and (ii) in Item 14 and Item 15 of the Registration Statement, insofar as such statements constitute matters of law, summaries of legal matters, the Company's charter or by-law provisions, documents or legal proceedings, or legal conclusions, have been reviewed by such counsel and fairly present and summarize, in all material respects, the matters referred to therein. (xiv) To the best knowledge of such counsel, there are no legal or governmental actions, suits or proceedings pending or threatened which are required to be disclosed in the Registration Statement, other than those disclosed therein. (xv) To the best knowledge of such counsel, there are no Existing Instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed or incorporated by reference as exhibits thereto; and the descriptions thereof and references thereto are correct in all material respects. (xvi) No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental authority or agency, is required for the Company's execution, delivery and performance of the Underwriting Agreement and consummation of the transactions contemplated thereby and by the Prospectus, except as required under the Securities Act, applicable state securities or blue sky laws and from the NASD. (xvii) The execution and delivery of the Underwriting Agreement by the Company and the performance by the Company of its obligations thereunder (other than performance by the Company of its obligations under the indemnification section of the Underwriting Agreement, as to which no opinion need be rendered) (i) have been duly authorized by all necessary corporate action on the part of the Company; (ii) will not result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary; (iii) will not to the best knowledge of such counsel constitute a breach of, or Default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, any material Existing Instrument; or (iv) to the best knowledge of such counsel, will not result in any violation of any law, administrative regulation or administrative or court decree applicable to the Company or any subsidiary. (xviii) The Company is not, and after receipt of payment for the Common Shares will not be, an "investment company" within the meaning of Investment Company Act. (xix) Except as disclosed in the Prospectus under the caption "Shares Eligible for Future Sale", to the best knowledge of such counsel, there are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the B-3 Registration Statement or included in the offering contemplated by the Underwriting Agreement, except for such rights as have been duly waived. (xx) To the best knowledge of such counsel, neither the Company nor any subsidiary is in violation of its charter or by-laws or any law, administrative regulation or administrative or court decree applicable to the Company or any subsidiary or is in Default in the performance or observance of any obligation, agreement, covenant or condition contained in any material Existing Instrument, except in each such case for such violations or Defaults as would not, individually or in the aggregate, result in a Material Adverse Change. In addition, such counsel shall state that they have participated in conferences with officers and other representatives of the Company, representatives of the independent public or certified public accountants for the Company and with representatives of the Underwriters at which the contents of the Registration Statement and the Prospectus, and any supplements or amendments thereto, and related matters were discussed and, although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus (other than as specified above), and any supplements or amendments thereto, on the basis of the foregoing, nothing has come to their attention which would lead them to believe that either the Registration Statement or any amendments thereto, at the time the Registration Statement or such amendments became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as of its date or at the First Closing Date or the Second Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no belief as to the financial statements or schedules or other financial or statistical data derived therefrom, included or incorporated by reference in the Registration Statement or the Prospectus or any amendments or supplements thereto). In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws of any jurisdiction other than the General Corporation Law of the State of Delaware, the General Corporation Law of the State of California or the federal law of the United States, to the extent they deem proper and specified in such opinion, upon the opinion (which shall be dated the First Closing Date or the Second Closing Date, as the case may be, shall be satisfactory in form and substance to the Underwriters, shall expressly state that the Underwriters may rely on such opinion as if it were addressed to them and shall be furnished to the Representatives) of other counsel of good standing whom they believe to be reliable and who are satisfactory to counsel for the Underwriters; provided, however, that such counsel shall further state that they believe that they and the Underwriters are justified in relying upon such opinion of other counsel, and (B) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Company and public officials. B-4 EXHIBIT B [Date] NationsBanc Montgomery Securities LLC Donaldson, Lufkin & Jenrette Securities Corporation BancAmerica Robertson Stephens As Representatives of the Several Underwriters c/o NationsBanc Montgomery Securities LLC 600 Montgomery Street San Francisco, California 94111 RE: CitySearch, Inc. (the "Company") Ladies & Gentlemen: The undersigned is an owner of record or beneficially of certain shares of Common Stock of the Company ("Common Stock") or securities convertible into or exchangeable or exercisable for Common Stock. The Company proposes to carry out a public offering of Common Stock (the "Offering") for which you will act as the representatives of the underwriters. The undersigned recognizes that the Offering will be of benefit to the undersigned and will benefit the Company by, among other things, raising additional capital for its operations. The undersigned acknowledges that you and the other underwriters are relying on the representations and agreements of the undersigned contained in this letter in carrying out the Offering and in entering into underwriting arrangements with the Company with respect to the Offering. In consideration of the foregoing, the undersigned hereby agrees that the undersigned will not, without the prior written consent of NMS (which consent may be withheld in its sole discretion), directly or indirectly, sell, offer, contract or grant any option to sell (including without limitation any short sale), pledge, transfer, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock, or securities exchangeable or exercisable for or convertible into shares of Common Stock currently or hereafter owned either of record or beneficially (as defined in Rule 13d-3 under Securities Exchange Act of 1934, as amended) by the undersigned, or publicly announce the undersigned's intention to do any of the foregoing, for a period commencing on the date hereof and continuing through the close of trading on the date 180 days after the date of the Prospectus. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent and registrar against the transfer of shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock held by the undersigned except in compliance with the foregoing restrictions. With respect to the Offering only, the undersigned waives any registration rights relating to registration under the Securities Act of any Common Stock owned either of record or beneficially by the undersigned, including any rights to receive notice of the Offering. This agreement is irrevocable and will be binding on the undersigned and the respective successors, heirs, personal representatives, and assigns of the undersigned. _____________________________________ Printed Name of Holder By:__________________________________ Signature _____________________________________ Printed Name of Person Signing (and indicate capacity of person signing if signing as custodian, trustee, or on behalf of an entity) EX-3.1 3 RESTATED CERTIFICATE OF INC., CURRENTLY IN EFFECT Exhibit 3.1 EXHIBIT B --------- AMENDED AND RESTATED CERTIFICATE OF INCORPORATION of CITYSEARCH, INC. a Delaware Corporation CitySearch, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of Delaware (the "Corporation"), does hereby certify as follows: FIRST: The original Certificate of Incorporation of the Corporation was filed under the name of "PerfectMarket, Inc." with the Secretary of State of the State of Delaware (the "Secretary") on September 20, 1995, amended by the Certificate of Amendment of Certificate of Incorporation filed with the Secretary on November 27, 1995, by the Restated Certificate of Incorporation filed with the Secretary on May 15, 1996, by the Certificate of Amendment of the Certificate of Incorporation filed with the Secretary on June 25, 1996, by the Certificate of Amendment of the Certificate of Incorporation filed with the Secretary on July 25, 1996, by the Restated Certificate of Incorporation filed with the Secretary on December 12, 1996, by the Restated Certificate of Incorporation filed with the Secretary on December 23, 1996 and by the Restated Certificate of Incorporation filed with the Secretary on November 12, 1997. SECOND: This Amended and Restated Certificate of Incorporation has been duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware by the Board of Directors of the Corporation. THIRD: This Amended and Restated Certificate of Incorporation was approved by written consent of the stockholders pursuant to Section 228 of the General Corporation Law of the State of Delaware. FOURTH: The Restated Certificate of Incorporation of this Corporation is amended and restated in its entirety to read as follows: I. The name of the Corporation is CitySearch, Inc. II. The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. III. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. IV. The Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock" all of which shall have a par value of $0.01 per share. The total number of shares which the Corporation is authorized to issue is ninety million seven hundred and forty-one thousand and eighty-two (90,741,082) shares. Seventy-five million (75,000,000) shares shall be Common Stock and fifteen million seven hundred and forty-one thousand and eighty-two (15,741,082) shares shall be Preferred Stock. 1,791,173 shares of Preferred Stock shall be designated "Series A Preferred Stock" (hereinafter "Series A Preferred"), 450,000 shares of Preferred Stock shall be designated "Series B Preferred Stock" (hereinafter "Series B Preferred"), 3,261,024 shares of Preferred Stock shall be designated "Series C Preferred Stock" (hereinafter "Series C Preferred"), 4,430,313 shares of Preferred Stock shall be designated "Series D Preferred Stock" (hereinafter "Series D Preferred") and 5,808,572 shares of Preferred Stock shall be designated "Series E Preferred Stock" (hereinafter "Series E Preferred" and, together with the Series A Preferred, Series B Preferred, Series C Preferred, and Series D Preferred, the "Preferred Stock"). The rights, preferences, restrictions and other matters relating to the Preferred Stock are as follows: 1. Liquidation Preference. ---------------------- (a) The Preferred Stock shall, with respect to rights upon liquidation, dissolution or winding up, rank prior to the shares of Common Stock and of any other class of stock of the Corporation ranking junior to the Preferred Stock and in the event of any Transaction (as defined below), whether voluntary or involuntary, the holders of the Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, the distributions described herein before any distribution is made to holders of shares of Common Stock or any other junior stock. -2- (b) At any time, in the event of any of the following occurrences (each, a "Transaction"): (i) Any dissolution of the Corporation, liquidation or winding up of the Corporation; (ii) Any liquidation or winding up of the Corporation as a result of a bankruptcy, reorganization or similar proceeding; (iii) Any foreclosure by creditors of the Corporation on all or substantially all of the assets or equity interests in the Corporation; or (iv) An acquisition, merger or consolidation of the Corporation occurs in which more than 50% of the outstanding capital stock of the Corporation is being acquired for cash and the price per share of Common Stock (on a fully diluted basis) is below the Series E Conversion Price (as defined in Section 2 below) then in effect; the Corporation shall take appropriate steps in connection with such Transaction to ensure that the assets of the Corporation available for distribution shall be distributed at the closing of the Transaction in the order and priority as follows: (x) the holders of the Preferred Stock shall be entitled to receive the amount of $.90446 (the "Series A Preference Amount") for each share of Series A Preferred then held by them, the amount of $3.4665 (the "Series B Preference Amount") for each share of Series B Preferred then held by them, the amount of $3.4665 (the "Series C Preference Amount") for each share of Series C Preferred then held by them, the amount of $6.5251 (the "Series D Preference Amount") for each share of Series D Preferred then held by them and the amount of $7.00 (the "Series E Preference Amount", together with the Series A Preference Amount, the Series B Preference Amount, the Series C Preference Amount and the Series D Preference Amount, collectively, the "Preference Amounts" and, individually, a "Preference Amount") for each share of Series E Preferred then held by them. Each of the Preference Amounts shall be adjusted for any stock dividends, combinations or splits with respect to such shares, plus any declared and unpaid dividends on the Preferred Stock; and (y) all remaining assets available for distribution shall be distributed pro rata among the holders of the Common Stock based on the number of shares held by each. If upon the occurrence of a Transaction, the assets and funds available for distribution (the "Distribution Assets") are less than the sum of the Preference Amounts of all shares of Preferred Stock (the "Aggregate Preference Amount"), the distribution on account of each share of Preferred Stock pursuant to paragraph (x) above shall be an amount equal to (a) (i) the respective Preference -3- Amount of such share of Preferred Stock multiplied by (ii) the Distribution Assets divided by (b) the Aggregate Preference Amount. (c) With respect to any Transaction, if the consideration received by the Corporation is other than cash, its value will be deemed its fair market value. Any securities shall be valued as follows: (i) Securities not subject to investment letter or other similar restrictions on free marketability: (A) If traded on a securities exchange or through Nasdaq, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the thirty (30) trading day period ending three (3) days prior to the closing; (B) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty (30) trading day period ending three (3) days prior to the closing; and (C) If there is no active public market, the value shall be the fair market value thereof, as mutually determined by the Corporation and the holders of at least a majority of the voting power of all then outstanding shares of Preferred Stock with respect to any Transaction. (ii) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in (i)(A), (B) or (C) to reflect the approximate fair market value thereof, as mutually determined by the Corporation and the holders of at least a majority of the voting power of all then outstanding shares of such Preferred Stock. (d) In the event the requirements of this Section 1 are not complied with, this Corporation shall forthwith either: (i) cause such closing to be postponed until such time as the requirements of this Section 1 have been complied with; or (ii) cancel such Transaction to the extent permitted by law, in which event the rights, preferences and privileges of the holders of the Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in Section 1(e) hereof. -4- (e) The Corporation shall give each holder of record of Preferred Stock written notice of such impending Transaction not later than twenty (20) days prior to the stockholder's meeting called to approve such Transaction, or twenty (20) days prior to the closing of such Transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such Transaction. The first of such notices shall describe the material terms and conditions of the impending Transaction and the provisions of this Section 1, and the Corporation shall thereafter give such holders prompt notice of any material changes. The Transaction shall in no event take place sooner than twenty (20) days after the Corporation has given the first notice provided for herein or sooner than ten (10) days after the Corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of Preferred Stock that are entitled to such notice rights or similar notice rights and that represent at least a majority of the voting power of all then outstanding shares of such Preferred Stock. 2. Conversion. The holders of the Preferred Stock have conversion rights ---------- as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Preferred Stock shall be ---------------- convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of the Corporation or any transfer agent for the Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined: in the case of the Series A Preferred, by dividing $0.90446 by the Series A Conversion Price, determined as hereinafter provided, in effect at the time of the conversion; in the case of the Series B Preferred, by dividing $3.4665 by the Series B Conversion Price, determined as hereinafter provided, in effect at the time of the conversion; in the case of Series C Preferred, by dividing $3.4665 by the Series C Conversion Price, determined as hereinafter provided, in effect at the time of the conversion; in the case of the Series D Preferred, by dividing $6.5251 by the Series D Conversion Price, determined as hereinafter provided, in effect at the time of the conversion; and in the case of the Series E Preferred, by dividing $7.00 by the Series E Conversion Price, determined as hereinafter provided, in effect at the time of the conversion. The price at which shares of Common Stock shall be deliverable upon conversion of the Series A Preferred (the "Series A Conversion Price") shall initially be $0.90446 per share of Common Stock. The price at which shares of Common Stock shall be deliverable upon conversion of the Series B Preferred (the "Series B Conversion Price") shall initially be $3.4665 per share of Common Stock. The price at which shares of Common Stock shall be deliverable upon conversion of the Series C Preferred (the "Series C Conversion Price") shall initially be $3.4665 per share of Common Stock. The price at which shares of Common Stock shall be deliverable upon conversion of the Series D Preferred (the "Series D Conversion Price") shall initially be $6.5251 per share of Common Stock. The price at which shares of Common Stock shall be deliverable upon conversion of the Series E Preferred (the "Series E Conversion Price") shall initially be $7.00 per share of Common Stock. The term "Conversion Price," as used herein shall refer to the respective Conversion Price of each series of Preferred Stock. Each such Conversion Price shall be subject to adjustment as hereinafter provided. Upon conversion, all declared and unpaid dividends on the -5- Preferred Stock shall be paid, to the extent funds are legally available therefor, either in cash or in shares of Common Stock of the Corporation, at the election of the Corporation, wherein the shares of Common Stock shall be valued at the fair market value at the time of such conversion, as determined in good faith by the Board. (b) Automatic Conversion. Each share of Preferred Stock shall -------------------- automatically be converted into shares of Common Stock at the then effective Conversion Price upon: (i) the closing of a firm underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of shares of the Corporation's Common Stock with an aggregate net proceeds (after deduction of underwriter's discounts and commissions and offering expenses) to the Company of not less than $20,000,000, the price per share to the public of which was not less than $7.70 per share (a "Qualified IPO"); or (ii) the written election of holders of not less than a majority of the then outstanding Preferred Stock and a majority of each of the then outstanding Series C Preferred and Series E Preferred. In the event of the automatic conversion of the Preferred Stock upon a public offering as aforesaid, the person(s) entitled to receive the Common Stock issuable upon such conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (c) Mechanics of Conversion. No fractional shares of Common Stock shall ----------------------- be issued upon conversion of Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled (after aggregating all shares of Preferred Stock held by such holder such that the maximum number of whole shares of Common Stock is issued to such holder upon conversion), the Corporation shall pay cash equal to such fraction multiplied by the then fair market value of a share of Common Stock. Before any holder of Preferred Stock shall be entitled to convert the same into full shares of Common Stock and to receive certificates therefor, such holder shall surrender the certificate or certificates evidencing such Preferred Stock, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice to the Corporation at such office that such holder elects to convert the same; provided, however, that in the event of an automatic conversion pursuant to paragraph (b) hereof, the outstanding shares of Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent, and provided further that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless the certificates evidencing such shares of Preferred Stock are either delivered to the Corporation or its transfer agent as provided above, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. The Corporation shall, as soon as practicable after such delivery, or after such agreement and indemnification, issue and deliver at such office to such holder of Preferred Stock, a certificate or certificates for the number of shares of Common Stock to which the holder shall be entitled as aforesaid and a check payable to the holder in the amount of any cash amounts payable as the result -6- of a conversion into fractional shares of Common Stock. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, or, in the case of automatic conversion, on the date of closing of the offering or the date of written election to convert, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. (d) Adjustments of the Conversion Price. ----------------------------------- (i) If the number of shares of Common Stock outstanding at any time after the date upon which any shares of Series E Preferred were first issued (the "Series E Original Issue Date") is increased by split or subdivision of the outstanding shares of Common Stock or the receipt by holders of Common Stock of a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the number of shares of Common Stock issuable on conversion of each share of Preferred Stock shall be increased in proportion to such increase in outstanding shares by means of an adjustment to the applicable Conversion Price. (ii) If the number of shares of Common Stock outstanding at any time after the Series E Original Issue Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the number of shares of Common Stock issuable on conversion of each share of Preferred Stock shall be decreased in proportion to such decrease in outstanding shares by means of an adjustment to the applicable Conversion Price. (iii) If at any time or from time to time the Corporation distributes to all holders of the Corporation evidences of indebtedness or assets of the Corporation (other than cash dividends), the holders of the Preferred Stock shall thereafter be entitled to receive upon conversion of the Preferred Stock the amount of such evidences of indebtedness or assets of the Corporation as such holders of Preferred Stock would have been entitled to receive had they converted their shares of Preferred Stock into shares of Common Stock immediately prior to such distribution. (e) Adjustments for Certain Corporate Transactions. If the Common ---------------------------------------------- Stock issuable upon conversion of the Preferred Stock shall be changed into the same or a different number of shares of any other class or classes of stock of the Corporation or another corporation, whether by merger, consolidation, sale of all or substantially all of the assets of the Corporation, liquidation, capital reorganization, reclassification or otherwise (other than a dividend, subdivision, combination or consolidation of shares provided for above) (a "Reorganization"), the Conversion Price then in -7- effect shall, concurrently with the effectiveness of such Reorganization, be proportionately adjusted such that the Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock of the Corporation or other corporation, as the case may be, equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of such shares of Preferred Stock immediately before such Reorganization. Furthermore, in the event of an acquisition, merger or consolidation of the Corporation whereby the Corporation's stockholders of record immediately prior to such acquisition, merger or consolidation hold less than 50% of the voting power of the surviving entity immediately after such acquisition, merger or consolidation and (i) such acquisition, merger or consolidation shall be effected in such a way that the holders of the Corporation's Common Stock shall be entitled to receive stock, securities or assets other than cash and (ii) the surviving entity is not subject to the periodic reporting requirements of Sections 12(g) or 15(d) of the Securities Act of 1934, as amended, immediately after such acquisition, merger or consolidation, appropriate provisions shall be made with respect to the rights and interests of holders of the Series A Preferred, the Series B Preferred, the Series C Preferred, the Series D Preferred and the Series E Preferred to the end that the rights, preferences and privileges of the Series A Preferred, the Series B Preferred, the Series C Preferred, the Series D Preferred and the Series E Preferred as set forth in this Restated Certificate, as applicable (including without limitation provisions for adjustments of the Conversion Price), shall thereafter be incorporated into any shares of stock or securities thereafter deliverable upon the exercise of such conversion rights. (f) Adjustment of Series C Conversion Price. Upon any conversion of any --------------------------------------- shares of Series C Preferred to Common Stock in accordance with this Section 2, the Series C Conversion Price shall be adjusted to the extent necessary to an amount equal to the following: Series C Conversion Price = $45 million ----------------------------------------- Series C Measurement Shares plus Series C Option Shares For purposes of this Section 2(f), (i) the term "Series C Measurement Shares" shall equal 10,690,196 shares of Common Stock (as adjusted for stock splits, stock dividends or similar recapitalizations after the Series E Original Issue Date) and (ii) the term "Series C Option Shares" shall equal the 2,291,181 shares of Common Stock issuable upon exercise of stock options ("Original Issue Date Options") outstanding as of the date upon which any shares of Series C Preferred were first issued (the "Series C Original Issue Date") less such number of Option Shares that were subject to Original Issue Date Options that were canceled as a result of the termination of employment or consulting services on or prior to the date of conversion of the Series C Preferred (as adjusted for stock splits, stock dividends or similar recapitalizations after the Series E Original Issue Date). (g) Adjustment of Series D Conversion Price. Upon any conversion of any --------------------------------------- shares of Series D Preferred to Common Stock in accordance with this Section 2, the Series D Conversion Price shall be adjusted to the extent necessary to an amount equal to the following: -8- Series D Conversion Price = $110 million ------------------------------------------- Series D Measurement Shares plus Series D Option Shares For purposes of this Section 2(g), (i) the term "Series D Measurement Shares" shall equal 14,011,324 shares of Common Stock (as adjusted for stock splits, stock dividends or similar recapitalizations after the Series E Original Issue Date) and (ii) the term "Series D Option Shares" shall equal 2,846,776 shares of Common Stock issuable upon exercise of stock options ("Series D Original Issue Date Options") outstanding as of the date upon which any shares of Series D Preferred were first issued (the "Series D Original Issue Date") less such number of Series D Option Shares that were subject to Series D Original Issue Date Options that were canceled as a result of the termination of employment or consulting services on or prior to the date of conversion of the Series D Preferred (as adjusted for stock splits, stock dividends or similar recapitalizations after the Series E Original Issue Date). (h) Adjustment of Series E Conversion Price. Upon any conversion of any --------------------------------------- shares of Series E Preferred to Common Stock in accordance with this Section 2, the Series E Conversion Price shall be adjusted to the extent necessary to an amount equal to the following: Series E Conversion Price = $ 152,662,601 ------------------------------------------- Series E Measurement Shares plus Series E Option Shares For purposes of this Section 2(h), (i) the term "Series E Measurement Shares" shall equal 19,173,153 shares of Common Stock (as adjusted for stock splits, stock dividends or similar recapitalizations after the Series E Original Issue Date) and (ii) the term "Series E Option Shares" shall equal 2,635,790 shares of Common Stock issuable upon exercise of stock options ("Series E Original Issue Date Options") outstanding as of the Series E Original Issue Date less such number of Series E Option Shares that were subject to Series E Original Issue Date Options that were canceled as a result of the termination of employment or consulting services on or prior to the date of conversion of the Series E Preferred (as adjusted for stock splits, stock dividends or similar recapitalizations after the Series E Original Issue Date). (i) No Fractional Shares as to Adjustments. No fractional shares shall -------------------------------------- be issued upon the conversion of any share or shares of the Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded down to the nearest whole share. (j) No Impairment. The Corporation will not, by amendment of this ------------- Amended and Restated Certificate of Incorporation or through any Reorganization, issuance or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 2 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Preferred Stock against impairment. -9- (k) Certificate as to Adjustments. Upon the occurrence of each ----------------------------- adjustment of the Conversion Price pursuant to this Section 2, the Corporation at its expense shall promptly compute such adjustment in accordance with the terms hereof and furnish to each holder of Preferred Stock a certificate setting forth such adjustment and showing in detail the facts upon which such adjustment is based. The Corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of such holder's shares of Preferred Stock. 3. Mandatory Redemption. -------------------- (a) The Corporation shall redeem, from any source of funds legally available therefor, all then outstanding shares of Series C Preferred on the ten-year anniversary date (the "Series C Redemption Date") of the Series C Original Issue Date. The Corporation shall effect such redemption on the Series C Redemption Date by paying in exchange for the outstanding shares of Series C Preferred Stock cash in the amount equal to the liquidation value of such shares pursuant to Section 1 above (the "Series C Redemption Price"). (b) The Corporation shall redeem, from any source of funds legally available therefor, all then outstanding shares of Series D Preferred at any time on or after the seven-year anniversary date of the Series D Original Issue Date upon the written election of holders of not less than eighty percent (80%) of the then outstanding Series D Preferred. "Series D Redemption Date" shall mean forty-five (45) days from the date of the receipt by the Corporation of such written election. The Corporation shall effect such redemption on the Series D Redemption Date by paying in exchange for the outstanding shares of Series D Preferred, cash in the amount equal to the liquidation value of such shares pursuant to Section 1 above (the "Series D Redemption Price"). (c) The Corporation shall redeem, from any source of funds legally available therefor, all then outstanding shares of Series E Preferred at any time on or after the seven-year anniversary date of the Series D Original Issue Date upon the written election of holders of not less than eighty percent (80%) of the then outstanding Series E Preferred. "Series E Redemption Date" shall mean forty-five (45) days from the date of the receipt by the Corporation of such written election and the term "Redemption Date" shall mean a Series C Redemption Date, a Series D Redemption Date or a Series E Redemption Date. The Corporation shall effect such redemption on the Series E Redemption Date by paying in exchange for the outstanding shares of Series E Preferred, cash in the amount equal to the liquidation value of such shares pursuant to Section 1 above (the "Series E Redemption Price" and together with the Series C Redemption Price and Series D Redemption Price, a "Redemption Price"). (d) At least fifteen (15) but no more than thirty (30) days prior to any Redemption Date, written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Series C Preferred, Series D Preferred or Series E Preferred, as the case may be, at the address last shown on -10- the records of the Corporation for such holder, notifying such holder of the redemption to be effected, specifying the applicable Redemption Date, the applicable Redemption Price, the place at which payment may be obtained and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his or her certificate or certificates representing the Series C Preferred, the Series D Preferred or the Series E Preferred, as the case may be, (the "Redemption Notice"). Except as provided in Section 3(e) below, on or after such Redemption Date, each holder of Series C Preferred, the Series D Preferred or the Series E Preferred, as the case may be, shall surrender to the Corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the applicable Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. (e) From and after any Redemption Date, unless there shall have been a default in the payment of the applicable Redemption Price, all rights of the holders of shares of Series C Preferred, Series D Preferred or Series E Preferred, as the case may be, (except the right to receive the applicable Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the Corporation legally available for redemption of shares of Series C Preferred, Series D Preferred or Series E Preferred, as the case may be, on any Redemption Date are insufficient to redeem the total number of shares of Series C Preferred, Series D Preferred or Series E Preferred, as the case may be, those funds which are legally available will be used to redeem the maximum possible number of such shares ratably among the holders of Series C Preferred, Series D Preferred or Series E Preferred, as the case may be, based on their holdings of Series C Preferred, Series D Preferred or Series E Preferred, as the case may be. The shares of Series C Preferred, Series D Preferred or Series E Preferred, as the case may be, not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of the Corporation are legally available for the redemption of shares of Series C Preferred, Series D Preferred or Series E Preferred, as the case may be, such funds will immediately be used to redeem the balance of the shares to the extent of such additional funds until all shares of Series C Preferred, Series D Preferred or Series E Preferred, as the case may be, are redeemed. (f) At least ten days prior to any Redemption Date, the Corporation shall deposit the applicable Redemption Price of all shares of Series C Preferred, Series D Preferred or Series E Preferred, as the case may be, with a bank or trust corporation having aggregate capital and surplus in excess of $100,000,000 as a trust fund for the benefit of the respective holders of the Series C Preferred, Series D Preferred or Series E Preferred, as the case may be, with irrevocable instructions and authority to the bank or trust corporation to pay the applicable Redemption Price for such shares to their respective holders on or after such Redemption Date upon receipt of notification from the Corporation that such holder has surrendered his or her share certificate to the Corporation pursuant to Section 3(d) above. As of such Redemption Date, the deposit shall constitute full payment of the shares to their holders, and from and after such Redemption Date the shares of Series C Preferred, Series D Preferred or Series E Preferred, as the case may be, shall be redeemed and shall be deemed -11- to be no longer outstanding, and the holders thereof shall cease to be stockholders with respect to such shares and shall have no rights with respect thereto except the rights to receive from the bank or trust corporation payment of the applicable Redemption Price of the shares, without interest, upon surrender of their certificates therefor. Such instructions shall also provide that any moneys deposited by the Corporation pursuant to this Section 3(f) for the redemption of shares thereafter converted into shares of the Corporation's Common Stock pursuant to Section 2 hereof prior to such Redemption Date shall be returned to the Corporation forthwith upon such conversion. The balance of any moneys deposited by the Corporation pursuant to this Section 3(f) remaining unclaimed at the expiration of two years following such Redemption Date shall thereafter be returned to the Corporation upon its request expressed in a resolution of its Board of Directors. (g) Notwithstanding anything to the contrary in this Section 3, in the event the Corporation is precluded by applicable law from redeeming any of Series C Preferred, Series D Preferred or Series E Preferred, as the case may be, hereunder, the Corporation shall redeem such Series C Preferred, Series D Preferred or Series E Preferred, as the case may be, at the earliest date permitted under applicable law. (h) The provisions of this Section 3 shall terminate upon the closing of a Qualified IPO. 4. Voting Rights. ------------- (a) General. Except as otherwise provided herein or required by law, the ------- holder of each share of Common Stock issued and outstanding shall have one vote and the holder of each share of Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such share of Preferred Stock could be converted at the record date for determination of the stockholders entitled to vote on such matters, or, if no such record date is established, at the date such vote is taken or any written consent of stockholders is solicited, such votes to be counted together with all other shares of stock of the Corporation having a general voting power and not separately as a class. Holders of Common Stock and Preferred Stock shall be entitled to notice of any stockholders' meeting in accordance with the Bylaws of the Corporation. Fractional votes by the holders of Preferred Stock shall not, however, be permitted and any fractional voting rights shall (after aggregating all shares into which shares of Preferred Stock held by each holder could be converted) be rounded to the nearest whole number. (b) The holders of Series C Preferred voting together as a separate class shall have the right to elect one (1) member of the Board of Directors until the earlier of (i) a Qualified IPO or (ii) at such time as the outstanding Series C Preferred (including shares of Common Stock issuable upon conversion of the Series C Preferred) shall be less than five percent (5%) of the then outstanding Common Stock of the Company (including shares of Common Stock issuable upon conversion, exchange or exercise of securities convertible into or exercisable for or exchangeable for Common Stock). At such time as any other stockholder or stockholders, voting as a separate class, are entitled, by virtue of a right granted by the Company and not solely as a result of the number of shares held by such stockholder or stockholders, to elect two (2) or more directors, for purposes of -12- the preceding sentence, the holders of the Series C Preferred voting together as a separate class shall have the right to elect a number of directors equal to the number of directors such stockholder or stockholders are entitled to elect. (c) HSN, Inc. ("HSN") shall have the right to elect one (1) member of the Board of Directors until the earlier of (i) the ten-year anniversary date of the Series E Original Issue Date or (ii) the date HSN owns less than 50% of the capital stock of the Company (on an as converted to Common Stock basis and as adjusted for stock dividends, stock splits, stock combinations, recapitalizations and the like) that it owned as of the Series E Original Issue Date. At such time as any other stockholder or stockholders, voting as a separate class, are entitled, by virtue of a right granted by the Company and not solely as a result of the number of shares held by such stockholder or stockholders, to elect two (2) or more directors, for purposes of the preceding sentence, HSN shall have the right to elect a number of directors equal to the number of directors such stockholder or stockholders are entitled to elect. (d) Global Retail Partners, L.P. (together with its affiliates "GRP") shall have the right to elect one (1) member of the Board of Directors until the later of (i) the two-year anniversary of the date of the initial issuance of Series E Preferred to GRP (the "GRP Purchase Date") or (ii) the one-year anniversary of the closing of a Qualified IPO; provided GRP owns 100% of the capital stock of the Company (on an as converted to Common stock basis and as adjusted for stock dividends, stock splits, stock combinations, recapitalizations and the like) that it owned as of the GRP Purchase Date. (e) Protective Provisions. --------------------- (i) So long as any shares of Series C Preferred remain outstanding, the Corporation shall not, without the vote or written consent of not less than a majority of such outstanding shares of Series C Preferred voting together as a single class: (A) Increase or decrease the total number of authorized shares of Series C Preferred; (B) Alter or change by amendment to this Restated Certificate of Incorporation or otherwise the terms and provisions of the Series C Preferred or any other terms so as to affect adversely the rights, preferences or privileges of the Series C Preferred; or (C) Create or issue any new shares or any other securities convertible into equity securities of the Corporation or reclassify any existing shares into equity securities or any other securities convertible into equity securities of the Corporation having a preference senior to the Series C Preferred with respect to voting, dividends, redemption or upon liquidation. -13- (ii) So long as any shares of Series D Preferred remain outstanding, the Corporation shall not, without the vote or written consent of not less than a majority of such outstanding shares of Series D Preferred voting together as a single class: (A) Increase or decrease the total number of authorized shares of Series D Preferred; (B) Alter or change by amendment to this Restated Certificate of Incorporation or otherwise the terms and provisions of the Series D Preferred or any other terms so as to affect adversely the rights, preferences or privileges of the Series D Preferred; or (C) Create or issue any new shares or any other securities convertible into equity securities of the Corporation or reclassify any existing shares into equity securities or any other securities convertible into equity securities of the Corporation having a preference senior to the Series D Preferred with respect to voting, dividends, redemption or upon liquidation. (iii) So long as any shares of Series E Preferred remain outstanding, the Corporation shall not, without the vote or written consent of not less than a majority of such outstanding shares of Series E Preferred voting together as a single class: (A) Increase or decrease the total number of authorized shares of Series E Preferred; (B) Alter or change by amendment to this Restated Certificate of Incorporation or otherwise the terms and provisions of the Series E Preferred or any other terms so as to affect adversely the rights, preferences or privileges of the Series E Preferred; or (C) Create or issue any new shares or any other securities convertible into equity securities of the Corporation or reclassify any existing shares into equity securities or any other securities convertible into equity securities of the Corporation having a preference senior to the Series E Preferred with respect to voting, dividends, redemption or upon liquidation. 5. Status of Converted Stock. In case any shares of Preferred Stock shall ------------------------- be converted pursuant to Section 2 hereof, the shares so converted shall be canceled and shall not be issuable by the Corporation. From time to time, this Restated Certificate of Incorporation shall be appropriately revised to reflect the corresponding reduction in the Corporation's authorized capital stock. -14- V. The Board is expressly authorized to make, alter or repeal Bylaws of the Corporation, but the stockholders may make additional Bylaws and may alter or repeal any Bylaw whether adopted by them or otherwise. VI. Elections of directors need not be by written ballot except and to the extent provided in the Bylaws of the Corporation. VII. (a) To the fullest extent permitted by the Delaware General Corporation Law as the same exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. (b) The Corporation shall indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director, officer or employee of the Corporation or any predecessor of the Corporation or serves or served at any other enterprise as a director, officer or employee at the request of the Corporation or any predecessor to the Corporation. (c) Neither any amendment nor repeal of this Article VII, nor the adoption of any provision of the Corporation's Restated Certificate of Incorporation inconsistent with this Article VII, shall eliminate or reduce the effect of this Article VII in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article VII, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. FIFTH: That written notice of this Amended and Restated Certificate of Incorporation was duly given to the stockholders of this corporation who did not consent in writing to the foregoing resolutions. -15- IN WITNESS WHEREOF, CitySearch, Inc. has caused this Restated Certificate of Incorporation to be signed by its Chief Executive Officer and attested to by its Secretary this _____ day of May, 1998. ---------------------------------------- Charles Conn, III Chief Executive Officer ATTEST: Bradley O. Ramberg Secretary -16- EX-3.5 4 RESTATED BYLAWS EXHIBIT 3.5 BYLAWS OF CITYSEARCH, INC. (A DELAWARE CORPORATION) ARTICLE I CORPORATE OFFICES 1.1 Principal Office. The registered office of the corporation shall be fixed in the certificate of incorporation of the corporation. 1.2 Other Offices. The board of directors may at any time establish offices at such other places as the board of directors may from time to time designate. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 Place of Meetings. Meetings of stockholders shall be held at any place within or outside the State of Delaware designated by the board of directors. In the absence of any such designation, stockholders' meetings shall be held at the principal executive office of the corporation. 2.2 Annual Meeting. The annual meeting of stockholders shall be held each year on a date and at a time designated by the board of directors. In the absence of such designation, the annual meeting of stockholders shall be held on the third Wednesday of May in each fiscal year at such time as the Board shall determine. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected, and any other proper business may be transacted. 2.3 Special Meeting. A special meeting of the stockholders may be called at any time by the board of directors, by the chairman of the board or by the president. 2.4 Notice of Stockholders' Meetings. All notices of meetings of stockholders shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date, and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the stockholders (but any proper matter may be presented at the meeting for such action). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice the board intends to present for election. 2.5 Manner of Giving Notice; Affidavit of Notice. Written notice of any meeting of stockholders shall be given either personally or by first-class mail or by telegraphic or other written communication. Notices not personally delivered shall be sent postage prepaid and shall be addressed to the stockholder at the address of that stockholder appearing on the books of the corporation or given by the stockholder to the corporation for the purpose of notice. Notice shall be deemed to have been given at such time as it is delivered personally or deposited in the mail or sent by telegram or other means of written communication. An affidavit of the mailing or other means of giving any notice of any stockholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice. 2.6 Advance Notice of Stockholder Nominees and Stockholder Business. To be properly brought before an annual meeting or special meeting, nominations for the election of directors or other business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (b) otherwise properly brought before the meeting by or at the direction of the board of directors or (c) otherwise properly brought before the meeting by a stockholder. 2.7 Quorum. The holders of a majority of the shares entitled to vote, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of stockholders, except as otherwise provided by statute or by the certificate of incorporation. The stockholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. When a quorum is present at any meeting, the affirmative vote of holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the laws of the State of Delaware or of the certificate of incorporation or these bylaws, a different vote is required, in which case such express provision shall govern and control the decision of the question. If a quorum be initially present, the stockholders may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, if any action taken is approved by a majority of the stockholders initially constituting the quorum. 2.8 Adjourned Meeting; Notice. When any meeting of stockholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.9 Voting. The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners, and to voting trusts and other voting arrangements). Except as otherwise provided in the certificate of incorporation or bylaws, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 2.10 No Stockholder Action by Written Consent Without a Meeting. No action which may be taken at any annual or special meeting of stockholders may be taken without a meeting and without prior notice, in a consent in writing. 2.11 Record Date for Stockholder Notice; Voting. For purposes of determining the stockholders entitled to notice of any meeting or to vote thereat or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting and in such event only stockholders of record on the date so fixed are entitled to notice and to vote, notwithstanding any transfer of any shares on the books of the corporation after the record date. If the board of directors does not so fix a record date, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting unless the board of directors fixes a new record date for the adjourned meeting, but the board of directors shall fix a new record date if the meeting is adjourned for more than thirty (30) days from the date set for the original meeting. The record date for any other purpose shall be as provided in Section 8.1 of these bylaws. 2.12 Proxies. Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission, telefacsimile or otherwise) by the stockholder or the stockholder's attorney-in- fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the General Corporation Law of Delaware (relating to the irrevocability of proxies). 2.13 Organization. The president, or in the absence of the president, the chairman of the board, or in the absence of the chairman. Any executive officer of the corporation, shall call the meeting of the stockholders to order, and shall act as chairman of the meeting. In the absence of the president, the chairman of the board, and all of the executive officers, the stockholders shall appoint a chairman for such meeting. The chairman of any meeting of stockholders shall determine the order of business and the procedures at the meeting, including such matters as the regulation of the manner of voting and the conduct of business. The secretary of the corporation shall act as secretary of all meetings of the stockholders, but in the absence of the secretary at any meeting of the stockholders, the chairman of the meeting may appoint any person to act as secretary of the meeting. 2.14 List of Stockholders Entitled to Vote. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. ARTICLE III DIRECTORS 3.1 Powers. Subject to the provisions of the General Corporation Law of Delaware and to any limitations in the certificate of incorporation or these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 Number of Directors. The board of directors shall consist of eleven (11) members. The number of directors may be changed by an amendment to this bylaw, duly adopted by the board of directors or by the stockholders, or by a duly adopted amendment to the certificate of incorporation. 3.3 Election and Term of Office of Directors. Except as provided in Section 3.4 of these bylaws or the certificate of incorporation, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Each director, including a director elected or appointed to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. 3.4 Resignation and Vacancies. Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. Vacancies in the board of directors may be filled by a majority of the remaining directors, even if less than a quorum. or by a sole remaining director; provided, a vacancy created by the removal of a director by the vote of the stockholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the required quorum). Each director so elected shall hold office until the next annual meeting of the stockholders and until a successor has been elected and qualified. Unless otherwise provided in the certificate of incorporation or these bylaws: (1) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (2) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware (relating to meetings of stockholders) as far as applicable. 3.5 Removal of Directors. Unless otherwise restricted by statute, by the certificate of incorporation or by these bylaws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. 3.6 Place of Meetings; Meetings by Telephone. Regular meetings of the board of directors may be held at any place within or outside the State of Delaware that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held at any place within or outside the State of Delaware that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Any meeting of the board, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such directors shall be deemed to be present in person at the meeting. 3.7 Regular Meetings. Regular meetings of the board of directors may be held without notice if the times of such meetings are fixed by the board of directors. If any regular meeting day shall fall on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. 3.8 Special Meetings; Notice. Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.9 Quorum. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.11 of these bylaws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of the certificate of incorporation and applicable law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.10 Waiver of Notice. Notice of a meeting need not be given to any director (i) who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or (ii) who attends the meeting other than for the express purpose of objecting at the beginning of the meeting of the transaction of any business because the meeting is not lawfully called or convened. All such waivers, consents, and approvals shall be filed with the corporate records or made part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the board of directors. 3.11 Adjournment. A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. 3.12 Notice of Adjournment. Notice of the time and place of holding an adjourned meeting need not be given unless the meeting is adjourned for more than twenty-four (24) hours. If the meeting is adjourned for more than twenty- four (24) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.8 of these bylaws, to the directors who were not present at the time of the adjournment. 3.13 Board Action by Written Consent Without a Meeting. Any action required or permitted to be taken by the board of directors may be taken without a meeting, provided that all members of the board individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board. 3.14 Fees and Compensation of Directors. Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the board of directors. This Section 3.14 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. 3.15 Approval of Loans to Officers. The corporation may lend money or property to, or guarantee the obligations of, or otherwise assist any officer or other employee of the corporation or its parent or any subsidiary, whether or not a director of the corporation or its parent or any subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing contained in this section shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.16 Sole Director Provided by Certificate of Incorporation. In the event only one director is required by these bylaws or the certificate of incorporation, then any reference herein to notices, waivers, consents, meetings or other actions by a majority or quorum of the directors shall be deemed to refer to such notice, waiver. etc., by such sole director, who shall have all the rights and duties and shall be entitled to exercise all of the powers and shall assume all the responsibilities otherwise herein described as given to the board of directors. 3.17 Nomination of Directors; Stockholder Business at Annual Meetings. Subject to the rights of holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, nominations for the election of directors may be made by the board of directors or any nominating committee appointed by the board of directors or by any stockholder entitled to vote in the election of directors generally. However, a stockholder generally entitled to vote in the election of directors may nominate one or more persons for election as directors at a meeting only if written notice of such stockholder's intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid, to the secretary of the corporation not later than (i) with respect to an election to be held at an annual meeting of stockholders, 60 days in advance of such meeting and (ii) with respect to an election to be held at a special meeting of stockholders for the election of directors, the close of business on the seventh day following the date on which notice of such meeting is first given to stockholders. Each such notice shall set forth the following information: (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder, each nominee or any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the board of directors of the corporation; and (e) the consent of each nominee to serve as a director of the corporation if so elected. At the request of the board of directors any person nominated by the board of directors for election as a director shall furnish to the secretary of the corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth herein. A majority of the board of directors may reject any nomination by a stockholder not timely made or otherwise not in accordance with the terms of this Section 3.17. If a majority of the board of directors reasonably determines that the information provided in a stockholder's notice does not satisfy the informational requirements of this Section 3.17 in any material respect, the secretary of the corporation shall promptly notify such stockholder of the deficiency in writing. The stockholder shall have an opportunity to cure the deficiency by providing additional information to the secretary within such period of time, not to exceed ten (10) days from the date such deficiency notice is given to the stockholder, as a majority of the board of directors shall reasonably determine. If the deficiency is not cured within such period, or if a majority of the board of directors reasonably determines that the additional information provided by the stockholder, together with the information previously provided, does not satisfy the requirements of this Section 3.17 in any material respect, then a majority of the board of directors may reject such stockholder's nomination. The secretary of the corporation shall notify a stockholder in writing whether the stockholder's nomination has been made in accordance with the time and information requirements of this Section 3.17. At an annual meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (i) by or at the direction of the chairman of the meeting or (ii) by any stockholder of the corporation who complies with the notice procedures set forth in this Section 3.17. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than 60 days prior to the meeting; provided, however, that in the event that less than 70 days notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be received not later than the close of business on the tenth day following the earlier of the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting the following information: (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the corporation which are beneficially owned by the stockholder and (d) any material direct or indirect interest, financial or otherwise of the stockholder or its affiliates or associates in such business. The board of directors may reject any stockholder proposal not timely made in accordance with this Section 3.17. If the board of directors determines that the information provided in a stockholder's notice does not satisfy the informational requirements hereof, the secretary of the corporation shall promptly notify such stockholder of the deficiency in the notice. The stockholder shall then have an opportunity to cure the deficiency by providing additional information to the secretary within such period of time, not to exceed ten days from the date such deficiency notice is given to the stockholder, as the board of directors shall determine. If the deficiency is not cured within such period, or if the board of directors determines that the additional information provided by the stockholder, together with the information previously provided, does not satisfy the requirements of this Section 3.17, then the board of directors may reject such stockholder's proposal. The secretary of the corporation shall notify a stockholder in writing whether the stockholder's proposal has been made in accordance with the time and information requirements hereof. This provision shall not prevent the consideration and approval or disapproval at an annual meeting of reports of officers, directors and committees of the board of directors, but in connection therewith no new business shall be acted upon at any such meeting unless stated, filed and received as herein provided. Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with procedures set forth in this Section 3.17. ARTICLE IV COMMITTEES 4.1 Committees of Directors. The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of one (1) or more directors, to serve at the pleasure of the board. The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, but no such committee shall have the power and authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation), (ii) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware (relating to mergers and consolidations of domestic and foreign corporations), (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution or (v) amend the bylaws of the corporation; and, unless the board resolution establishing the committee, the bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware (relating to mergers of parent and subsidiary corporations). 4.2 Meetings and Action of Committees. Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws: Section 3.6 (place of meetings; meetings by telephone), Section 3.7 (regular meetings), Section 3.8 (special meetings; notice), Section 3.9 (quorum), Section 3.10 (waiver of notice), Section 3.11 (adjournment), Section 3.12 (notice of adjournment) and Section 3.13 (board action by written consent without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. 4.3 Committee Minutes. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. ARTICLE V OFFICERS 5.1 Officers. The corporate officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents (however denominated), one or more assistant secretaries, and such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. 5.2 Election of Officers. The corporate officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws, shall be chosen by the board, subject to the rights, if any, of an officer under any contract of employment, and shall hold their respective offices for such terms as the board of directors may from time to time determine. 5.3 Subordinate Officers. The board of directors may appoint, or may empower the president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine, and, in the case of an officer chosen by the president, by the president. 5.4 Removal and Resignation of Officers. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors at any regular or special meeting of the board or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors, and, in the case of an officer chosen by the president, by the president. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 Vacancies in Offices. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. 5.6 Chairman of the Board. The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him or her by the board of directors or as may be prescribed by these bylaws. If there is no president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws. 5.7 President. Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. The president shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors. The president shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. 5.8 Vice Presidents. In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the president or the chairman of the board. 5.9 Secretary. The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these bylaws. The secretary shall keep the seal of the corporation, if one be adopted in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. 5.10 Chief Financial Officer. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the board of directors. He or she shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his or her transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. 5.11 Authority and Duties of Officers. In addition to the foregoing powers, authority and duties, all officers of the corporation shalt respectively have such authority and powers and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS 6.1 Indemnification of Directors and Officers. The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware as the same now exists or may hereafter be amended, indemnify any person against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit, or proceeding in which such person was or is a party or is threatened to be made a party by reason of the fact that such person is or was a director or officer of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation shall mean any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. The corporation shall be required to indemnify a director or officer in connection with an action, suit, or proceeding (or part thereof) initiated by such director or officer only if the initiation of such action, suit, or proceeding (or part thereof) by the director or officer was authorized by the board of directors of the corporation. Any repeal or modification of the foregoing provisions of this Article shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. 6.2 Indemnification of Others. The corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware as the same now exists or may hereafter be amended, to indemnify any person (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit, or proceeding, in which such person was or is a party or is threatened to be made a party by reason of the fact that such person is or was an employee or agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) shall mean any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 Payment of Expenses in Advance. Corporation shall pay the expenses (including attorney's fees) incurred by a director or officer of the corporation entitled to indemnification hereunder in defending any action, suit or proceeding referred to in this Section 6.1 in advance of its final disposition; provided, however, that payment of expenses incurred by a director or officer of the corporation in advance of the final disposition of such action, suit or proceeding shall be made only upon receipt of an undertaking by the director or officer to repay all amounts advanced if it should ultimately be determined that the director or officer is not entitled to be indemnified under this Section 6.1 or otherwise. 6.4 Indemnity Not Exclusive. The rights conferred on any person by this Article shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the corporation's Certificate of Incorporation, these bylaws, agreement, vote of the stockholders or disinterested directors or otherwise. 6.5 Insurance Indemnification. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. ARTICLE VII RECORDS AND REPORTS 7.1 Maintenance and Inspection of Share Register. The corporation shall keep either at its principal executive office or at the office of its transfer agent or registrar (if either be appointed), as determined by resolution of the board of directors, a record of its stockholders listing the names and addresses of all stockholders and the number and class of shares held by each stockholder. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. 7.2 Inspection by Directors. Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders and its other books and records for a purpose reasonably related to his or her position as a director. 7.3 Annual Report to Stockholders. The board of directors shall present at each annual meeting of the stockholders a full and clear statement of the business and condition of the corporation. 7.4 Representation of Shares of Other Corporations. The chairman of the board, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority herein granted may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. 7.5 Certification and Inspection of Bylaws. The original or a copy of these bylaws, as amended or otherwise altered to date, certified by the secretary, shall be kept at the corporation's principal executive office and shall be open to inspection by the stockholders of the corporation, at all reasonable times during office hours. ARTICLE VIII GENERAL MATTERS 8.1 Record Date for Purposes Other Than Notice and Voting. For purposes of determining the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action. In that case, only stockholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the Code. If the board of directors does not so fix a record date, then the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution. 8.2 Checks; Drafts; Evidences of Indebtedness. From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.3 Corporate Contracts and Instruments: How Executed. The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.4 Certificates for Shares. The shares of the corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and, upon request, every holder of uncertificated shares, shall be entitled to have a certificate signed by, or in the name of the corporation by, the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the chief financial officer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. Certificates for shares shall be of such form and device as the board of directors may designate and shall state the name of the record holder of the shares represented thereby; its number; date of issuance; the number of shares for which it is issued; a summary statement or reference to the powers, designations, preferences or other special rights of such stock and the qualifications, limitations or restrictions of such preferences and/or rights, if any; a statement or summary of liens, if any, a conspicuous notice of restrictions upon transfer or registration of transfer, if any, a statement as to any applicable voting trust agreement; and, if the shares be assessable, or, if assessments are collectible by personal action, a plain statement of such facts. Upon surrender to the secretary or transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, or upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.5 Special Designation on Certificates. If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware (relating to transfers of stock, stock certificates and undercertificated stock), in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.6 Lost Certificates. Except as provided in this Section 8.6, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and canceled at the same time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the board may require; the board may require indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 8.7 Transfer Agents And Registrars. The board of directors may appoint one or more transfer agents or transfer clerks, and one or more registrars, each of which shall be an incorporated bank or trust company, either domestic or foreign, who shall be appointed at such times and places as the requirements of the corporation may necessitate and the board of directors may designate. 8.8 Construction; Definitions. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Code shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. ARTICLE IX AMENDMENTS The original or other bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws. Notwithstanding the foregoing, the affirmative vote for sixty-six and two thirds percent (66 2/3%) of the then outstanding voting securities of the corporation, voting together as a single class, shall be required to amend or repeal Section 2.3, 2.4, 2.6, 2.10 and 2.11 hereunder. EX-4.2 5 SIXTH AMENDED & RESTATED STOCKHOLDERS' AGR. Exhibit 4.2 SIXTH AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT This SIXTH AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT (the "Agreement") is made as of May 20, 1998, by and among CitySearch, Inc., a Delaware corporation (the "Company"); the purchasers of shares of Series C Preferred Stock of the Company (the "Series C Holders") pursuant to the Series C Preferred Stock Purchase Agreement, dated as of May 15, 1996 (the "Series C Agreement"); the purchasers of shares of Series D Preferred Stock of the Company (the "Series D Holders") pursuant to (i) the Series D Preferred Stock Purchase Agreement, dated as of December 13, 1996, as it may be amended from time to time, (ii) the Series D Preferred Stock Purchase Agreement, dated as of June 23, 1997, as it may be amended from time to time, (iii) the Series D Preferred Stock Purchase Agreement, dated July 18, 1997, as it may be amended from time to time (collectively, the "Series D Agreements"); and the purchasers of shares of Series E Preferred Stock of the Company (the "Series E Holders") pursuant to (i) the Series E Stock Purchase Agreement dated as of November 12, 1997 and (ii) the Series E Stock Purchase Agreement, dated May 20, 1998, as it may be amended from time to time (the "Second Series E Agreement" and collectively, the "Series E Agreements"); and for purposes of Section 5 only, NationsBanc Montgomery Securities, Inc. ("Montgomery"). R E C I T A L S --------------- A. The Company, the Series C Holders, the Series D Holders, the holders of the outstanding shares of Series E Preferred Stock (the "Existing Series E Holders") and Montgomery are parties to a Fifth Amended and Restated Stockholders' Agreement, dated as of November 11, 1997 (the "Original Agreement"), pursuant to which the Series C Holders, the Series D Holders and the Existing Series E Holders were granted certain rights, including but not limited to registration rights and rights of first refusal. B. The Company proposes to sell an additional 1,000,000 shares of Series E Preferred Stock pursuant to the Second Series E Agreement. C. The Company desires to provide a further inducement to the purchasers of the additional Series E Preferred Stock to purchase shares of its Series E Preferred Stock by providing the rights set forth herein. D. The Company has requested and (a) the Holders (as defined in the Original Agreement) holding at least a majority of the shares of the Common Stock issuable upon conversion of the Company's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock, (b) the Holders holding at least a majority of the Company's Series C Preferred Stock, (c) the Holders holding at least 66 2/3% of the Company's Series D Preferred Stock and (d) the Holders holding at least a majority of the outstanding shares of the Company's Series E Preferred Stock have agreed, pursuant to Section 11.6 of the Original Agreement, to amend and restate in its entirety the Original Agreement, in the manner set forth herein. THE PARTIES AGREE AS FOLLOWS: 1. Certain Definitions. As used in this Agreement, the following terms ------------------- shall have the following respective meanings: "Big Four Accounting Firm" shall mean one of the four largest public ------------------------ accounting firms in the United States with an international practice. "Commission" shall mean the Securities and Exchange Commission or any ---------- other federal agency at the time administering the Securities Act. "Common Stock" shall mean the Company's Common Stock, par value $0.01 ------------ per share. "Election Notice" has the meaning set forth in Section 7.1. --------------- "Exchange Act" shall mean the Securities Exchange Act of 1934, as ------------ amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "First Offer Price" has the meaning set forth in Section 8.2. ----------------- "Form S-3" shall mean Form S-3 issued by the Commission or any -------- substantially similar form then in effect. "GRP" shall mean Global Retail Partners, L.P. and its affiliates. --- "GRP Director" shall mean any director of the Company elected by GRP. ------------ "Holder" shall mean any holder of outstanding Registrable Securities ------ which have not been sold to the public, but only if such holder is a Stockholder or an assignee or transferee of registration rights as permitted by Sections 9 and 11.1 hereof. "HSN" shall mean HSN, Inc. or its successors. --- "HSN Director" shall mean any director of the Company elected by HSN. ------------ "Initiating Holders" has the meaning set forth in Section 5.1.1. ------------------ "Investment Basket" has the meaning set forth in Section 10. ----------------- "IPO Election Notice" has the meaning set forth in Section 7.2. ------------------- "Material Adverse Event" shall mean an occurrence having a consequence ---------------------- that either (a) is materially adverse as to the business, properties, prospects or financial condition of the Company or (b) is reasonably foreseeable, has a reasonable likelihood of occurring, and if it were to occur might materially adversely affect the business, properties, prospects or financial condition of the Company. "New Securities" has the meaning set forth in Section 7.1. -------------- "Offer Period" has the meaning set forth in Section 8.4. ------------ "Offered Shares" has the meaning set forth in Section 8.2. -------------- "Preferred Stock" shall mean the Series A Preferred, Series B --------------- Preferred, Series C Preferred, Series D Preferred and Series E Preferred. "Qualified IPO" shall mean an initial public offering of Common Stock ------------- of the Company generating aggregate net proceeds to the Company of at least $20,000,000 and having a per share public offering price of at least $7.70. The terms "Register", "Registered" and "Registration" refer to a -------- ---------- ------------ registration effected by preparing and filing a registration statement in compliance with the Securities Act ("Registration Statement"), and the declaration or ordering of the effectiveness of such Registration Statement. "Registrable Securities" means (i) the Common Stock issuable upon ---------------------- conversion of the Series C Preferred, the Series D Preferred and the Series E Preferred, (ii) with respect to Registrations under Section 5.2 only, the Common Stock issuable upon conversion of the Series A Preferred and Series B Preferred and (iii) any Common Stock of the Company issued or issuable in respect of any stock described in clauses (i) and (ii) above; excluding in all cases, however, any Registrable Securities sold by a Holder in a sale pursuant to a registration statement, a transaction pursuant to Rule 144 promulgated under the Securities Act or any other transaction in which registration rights are not transferred pursuant to Section 9 hereof. "Registration Expenses" shall mean all expenses incurred by the --------------------- Company in complying with Section 5.1 or 5.2 of this Agreement, including, without limitation, all federal and state registration, qualification and filing fees, printing expenses, fees and disbursements of counsel for the Company, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration and the reasonable fees and disbursements of one counsel for all Holders, reasonably acceptable to such Holders, in connection with Section 5.1 or 5.2 of this Agreement. "Reoffer Notice" has the meaning set forth in Section 8.4. -------------- "Reoffer Price" has the meaning set forth in Section 8.4. ------------- -3- "Securities Act" shall mean the Securities Act of 1933, as amended, or -------------- any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Seller's Notice" has the meaning set forth in Section 8.2. --------------- "Selling Expenses" shall mean all underwriting discounts and selling ---------------- commissions applicable to the sale of Registrable Securities pursuant to this Agreement. "Selling Stockholder" has the meaning set forth in Section 8.2. ------------------- "Series A Preferred" shall mean the Company's Series A Preferred ------------------ Stock, par value $0.01 per share, outstanding as of the date hereof. "Series B Preferred" shall mean the Company's Series B Preferred ------------------ Stock, par value $0.01 per share, outstanding as of the date hereof. "Series C Director" shall mean any director of the Company elected by ----------------- the holders of the Series C Preferred. "Series C Preferred" shall mean the Company's Series C Preferred ------------------ Stock, par value $0.01 per share, outstanding as of the date hereof. "Series D Preferred" shall mean the Company's Series D Preferred ------------------ Stock, par value $0.01 per share. "Series E Preferred" shall mean the Company's Series E Preferred ------------------ Stock, par value $0.01 per share. "Shares" shall mean the Preferred Stock and the Common Stock issuable ------ upon conversion of the Preferred Stock held by the Stockholders and additional shares of Common Stock and Preferred Stock, as the case may be, issued in respect of such shares upon any stock split, stock dividend or the like and, in any provision where the context requires a vote or counting of Shares, shares of Preferred Stock shall be counted based upon the number of shares of Common Stock into which such shares of Preferred Stock are then convertible. "Stockholders" shall mean the Series C Holders, the Series D Holders ------------ and the Series E Holders. "Transfer" shall mean an offer, sale, offer to sell, transfer, -------- assignment, pledge, encumbrance or other disposition. -4- "Underwriter's Representative" has the meaning set forth in Section ---------------------------- 5.1.5(c). 2. Restrictions Upon Transfer of Shares. ------------------------------------ 2.1 Restrictions on Transferability. The Shares shall not be ------------------------------- transferable except upon the conditions specified in this Agreement, which conditions are intended to ensure compliance with the provisions of the Securities Act. Each holder of Shares will cause any proposed transferee of such securities to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Agreement. 2.2 Restrictive Legend. Each certificate representing Shares shall ------------------ (unless otherwise permitted by the provisions of Section 3 below) be stamped or otherwise imprinted with a legend in the following form (in addition to any legend required under applicable state securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT. 3. Notice of Proposed Transfers. The holder of each certificate ---------------------------- representing Shares, by acceptance thereof, agrees to comply in all respects with the provisions of this Section 3. Prior to any proposed transfer of any Shares, unless there is in effect a registration statement under the Securities Act covering the proposed transfer, the holder thereof shall give written notice to the Company of such holder's intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer in sufficient detail and shall, if the Company so requests, be accompanied by either (i) a written opinion of legal counsel who shall be reasonably satisfactory to the Company addressed to the Company to the effect that the proposed transfer of the Shares may be effected without registration under the Securities Act or (ii) a "no action" letter from the Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon the holder of such Shares shall be entitled to transfer such Shares in accordance with the terms of the notice delivered by the holder to the Company; provided, however, that no opinion or no action letter need be obtained with respect to a transfer without consideration to (A) any affiliated entity of a holder of Shares, (B) a partner, active or retired, of a holder of Shares, (C) the estate of any such partner or a trust established for the benefit of the descendants or any relatives or spouse of such partner, (D) to a parent corporation or wholly-owned subsidiary of a holder of Shares or to a wholly- owned subsidiary of such parent, or (E) to the spouse of a holder of Shares; provided, in any -5- such case, that the transferee agrees in writing to be subject to the terms hereof. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. Each certificate evidencing the Shares transferred as above provided shall bear the appropriate restrictive legend set forth in Section 2 above, except that such certificate shall not bear such restrictive legend if in the opinion of counsel for the Company such legend is not required in order to establish compliance with any provisions of the Securities Act. 4. Information Rights. The Company hereby covenants and agrees as ------------------ follows: 4.1 Financial Statements and Reports to Stockholders. The Company ------------------------------------------------ shall deliver to the Stockholders (i) as soon as practicable after the end of each fiscal year of the Company, and in any event within 90 days thereafter, a consolidated balance sheet of the Company as of the end of such year and consolidated statements of income, stockholders' equity and cash flows for such year, which year-end financial reports shall be in reasonable detail, prepared in accordance with generally accepted accounting principles and fairly reflecting the fiscal affairs of the Company to the date thereof and audited by a Big Four Accounting Firm and a management letter discussing such financial results and (ii) as soon as practicable after the end of each fiscal quarter, and in any event within 30 days thereafter, unaudited financial statements of the Company prepared in accordance with generally accepted accounting principles. In addition, the Company shall deliver to the Series C Holders and the Series E Holders as soon as practicable after the end of each fiscal quarter of the Company, and in any event within 30 days thereafter, a management letter discussing the financial results and operations of the Company for the quarter and an officer's certificate of compliance with the provisions of this sentence. The Company shall provide to each Holder of Series C Preferred, Series D Preferred and Series E Preferred all closing documents of any round of debt or equity financing which requires the vote of the Series C Preferred, Series D Preferred or Series E Preferred, as the case may be, or which adversely affects the Series C Preferred, Series D Preferred or Series E Preferred, as the case may be. The Company shall also deliver, with reasonable promptness, copies of all filings with the Commission, and such other information and data that is in existence and has been compiled with respect to the Company as any Stockholder may from time to time reasonably request; provided, however, that the Company shall not be obligated pursuant to this Section 4.1 to provide any information which it reasonably considers to be a trade secret or confidential information. The Company shall provide the Series C Director, the HSN Director and the GRP Director with all information furnished to the Company's other directors for purposes of performing his or her duties as a director. 4.2 Termination of Covenants. As to any Series C Holder, the ------------------------ covenants of the Company set forth in Section 4.1 shall be terminated and be of no further force or effect upon the earlier of (a) the date on which the shares of Series C Preferred then outstanding (including the Common Stock issued upon conversion of the Series C Preferred), and the Series D Preferred (including the Common Stock issuable upon the conversion of such Series D Preferred) then held by such Series C Holder, is equal to less than 5% of the Company's then outstanding capital stock on a fully diluted basis and there is no Series C Director on the Board of Directors of the Company, (b) there are no shares of Series C Preferred outstanding (due to conversion, redemption or -6- otherwise), and (c) upon the closing of a Qualified IPO. Except as set forth below, as to any Series D Holder that does not hold Series C Preferred, the covenants of the Company set forth in Section 4.1 shall be terminated and be of no further force or effect upon the earlier of (a) the date on which the shares of Series D Preferred then outstanding (including the Common Stock issuable upon conversion of the Series D Preferred), is equal to or less than 5% of the Company's then outstanding capital stock on a fully diluted basis, (b) there are no shares of Series D Preferred outstanding (due to conversion, redemption or otherwise), and (c) upon the closing of a Qualified IPO. As to any Series E Holder, the covenants of the Company set forth in Section 4.1 shall be terminated and be of no further force or effect upon the earlier of (a) the date on which the shares of Series E Preferred then outstanding (including the Common Stock issuable upon conversion of the Series E Preferred), is equal to or less than 5% of the Company's then outstanding capital stock on a fully diluted basis and as to HSN, there is no HSN Director on the Board of Directors of the Company, (b) there are no shares of Series E Preferred outstanding (due to conversion, redemption or otherwise), and (c) upon the closing of a Qualified IPO. Except as set forth below, in addition, such covenants shall terminate as to any Stockholder at such time as such Stockholder no longer holds at least 5% of the shares of Series C Preferred (including Common Stock issued upon conversion), Series D Preferred (including Common Stock issuable upon conversion), or Series E Preferred (including Common Stock issuable upon conversion), as the case may be, originally purchased by such Stockholder under the Series C Agreement, the Series D Agreements or the Series E Agreements, as the case may be. Notwithstanding any of the foregoing provisions of this paragraph, as to any Series D Holder holding more than 15% of the Series D Preferred as of January 8, 1997, such covenants shall not terminate until the date such Stockholder holds less than 25% of the shares of Series D Preferred held by such Stockholder as of January 8, 1997. 5. Registration Rights. ------------------- 5.1 Demand Registration. ------------------- (a) Request for Registration on Form Other Than Form S-3. Subject ---------------------------------------------------- to the terms of this Agreement, in the event that the Company shall receive from the Holders (the "Initiating Holders") of Registrable Securities at any time after the earlier to occur of (a) the effective date of the Company's initial public offering of shares of Common Stock under a Registration Statement and (b) the five (5) year anniversary of the first date of issuance of the Series C Preferred, but in no case within 180 days of the effective date of a Registration in which Section 5.2.2 applied, a written request that the Company file a registration statement with respect to at least 10% of the sum of (i) outstanding Common Stock as of May 15, 1996 plus (ii) Preferred Stock (on an as converted to Common Stock basis) on a form of registration statement other than Form S-3, in which the reasonably anticipated aggregate offering price to the public would equal or exceed $10,000,000, the Company shall (i) promptly give written notice of the proposed Registration to all other Holders and shall (ii) as soon as practicable, use its best efforts to effect Registration of the Registrable Securities specified in such request, together with any Registrable Securities of any Holder joining in such request as are specified in a written request given within 20 days after written notice from the -7- Company. The Company shall not be obligated to effect more than three Registrations under this Section 5.1.1. (b) Request for Registration on Form S-3. Subject to the terms of this ------------------------------------ Agreement, in the event that the Company receives from Initiating Holders a written request that the Company effect any Registration on Form S-3 (or any successor form to Form S-3 regardless of its designation) at a time when the Company is eligible to register securities on Form S-3 (or any successor form to Form S-3 regardless of its designation), but in no case within 180 days of the effective date of a Registration, for an offering of Registrable Securities if the reasonably anticipated aggregate offering price to the public, would exceed $1,000,000, the Company will promptly give written notice of the proposed Registration to all the Holders and will as soon as practicable use its best efforts to effect Registration of the Registrable Securities specified in such request, together with all or such portion of the Registrable Securities of any Holder joining in such request as are specified in a written request delivered to the Company within 20 days after written notice from the Company of the proposed Registration. Registration under this Section 5.1.2 shall not be counted as a Registration under Section 5.1.1. (c) Right of Deferral of Registration. If the Company shall furnish --------------------------------- to all such Holders who joined in the request a certificate signed by the President of the Company stating that, in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company for any Registration to be effected as requested under Sections 5.1.1 or 5.1.2, the Company shall have the right to defer the filing of a Registration Statement with respect to such offering for a period of not more than 180 days (60 days in the case of a Registration on Form S-3) from delivery of the request of the Initiating Holders; provided, however, that the Company may not utilize this right more than once in any twelve month period. (d) Registration of Other Securities in Demand Registration. Any ------------------------------------------------------- Registration Statement filed pursuant to the request of the Initiating Holders under this Section 5.1 may, subject to the provisions of Sections 5.1.5(b) and (d), include securities of the Company other than Registrable Securities. (e) Underwriting in Demand Registration. ----------------------------------- (f) Notice of Underwriting. If the Initiating Holders intend to ---------------------- distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 5.1, and the Company shall include such information in the written notice referred to in Section 5.1.1 or 5.1.2. The right of any Holder to Registration pursuant to Section 5.1 shall be conditioned upon such Holder's agreement to participate in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting. (g) Inclusion of Other Holders in Demand Registration. If the ------------------------------------------------- Company, officers or directors of the Company holding Common Stock other than Registrable Securities or -8- holders of securities other than Registrable Securities, request inclusion in such Registration, the Initiating Holders, to the extent they deem advisable and consistent with the goals of such Registration, shall, on behalf of all Holders, offer to any or all of the Company, such officers or directors and such holders of securities other than Registrable Securities that such securities other than Registrable Securities be included in the underwriting and may condition such offer on the acceptance by such persons of the terms of this Section 5.1. (h) Selection of Underwriter in Demand Registration. The Company ----------------------------------------------- shall (together with all Holders proposing to distribute their securities through such underwriting) enter into an underwriting agreement with the representative ("Underwriter's Representative") of the underwriter or underwriters of national reputation selected for such underwriting by the Holders of a majority of the Registrable Securities being registered by the Initiating Holders and agreed to by the Company (which consent shall not be unreasonably withheld). (i) Marketing Limitation in Demand Registration. In the event the ------------------------------------------- Underwriter's Representative advises the Company or the Initiating Holders in writing that market factors (including, without limitation, the aggregate number of shares of Common Stock requested to be Registered, the general condition of the market, and the status of the persons proposing to sell securities pursuant to the Registration) require a limitation of the number of shares to be underwritten, then (i) first the securities other than Registrable Securities and (ii) next the securities requested to be registered by the Company, shall be excluded from such Registration to the extent required by such limitation. If a limitation of the number of shares is thereafter still required, the Initiating Holders shall so advise all Holders and the number of shares of Registrable Securities that may be included in the Registration and underwriting shall be allocated among all Holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities entitled to inclusion in such Registration held by such Holders at the time of filing the Registration Statement. No Registrable Securities or other securities excluded from the underwriting by reason of this Section 5.1.5(d) shall be included in such Registration Statement. To facilitate the allocation of shares in accordance with the above provisions, the Company or the Underwriter's Representative may round the number of shares allocated to any Holder to the nearest 100 shares. (j) Right of Withdrawal in Demand Registration. If any Holder of ------------------------------------------ Registrable Securities, or a holder of other securities entitled (upon request) to be included in such Registration, disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the underwriter and the Initiating Holders delivered at least seven days prior to the effective date of the Registration Statement. The securities so withdrawn shall also be withdrawn from the Registration Statement. (k) Blue Sky in Demand Registration. In the event of any Registration ------------------------------- pursuant to Section 5.1, the Company will exercise its best efforts to Register and qualify the securities covered by the Registration Statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably appropriate for the distribution of such securities; provided, however, that (i) the Company shall not be required to qualify to do business or to file a general -9- consent to service of process in any such states or jurisdictions, and (ii) notwithstanding anything in this Agreement to the contrary, in the event any jurisdiction in which the securities shall be qualified imposes a non-waivable requirement that expenses incurred in connection with the qualification of the securities be borne by selling stockholders, such expenses shall be payable pro rata by selling stockholders. 5.2 Piggyback Registration. ---------------------- (a) Notice of Piggyback Registration and Inclusion of ------------------------------------------------- Registrable Securities. Subject to the terms of this Agreement, in the event the - ---------------------- Company decides to Register any of its Common Stock or other securities solely for cash (either for its own account or the account of a security holder or holders exercising their respective demand registration rights) on a form that would be suitable for a registration involving solely Registrable Securities, the Company will: (i) promptly give each Holder written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable Blue Sky or other state securities laws) and (ii) include in such Registration (and any related qualification under Blue Sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request delivered to the Company by any Holder within fifteen (15) days after delivery of such written notice from the Company in accordance with Section 10.2. (b) Underwriting in Piggyback Registration. -------------------------------------- (c) Notice of Underwriting in Piggyback Registration. If the ------------------------------------------------ Registration of which the Company gives notice is for a Registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 5.2.1. In such event the right of any Holder to Registration shall be conditioned upon such underwriting and the inclusion of such Holder's Registrable Securities in such underwriting to the extent provided in this Section 5.2.2. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement with the Underwriter's Representative for such offering. The Holders shall have no right to participate in the selection of the underwriters for an offering pursuant to this Section 5.2. (d) Marketing Limitation in Piggyback Registration. In the event ---------------------------------------------- the Underwriter's Representative advises the Holders seeking registration of Registrable Securities pursuant to Section 5.2 in writing that market factors (including, without limitation, the aggregate number of shares of Common Stock requested to be Registered, the general condition of the market, and the status of the persons proposing to sell securities pursuant to the Registration) require a limitation of the number of shares to be underwritten, the Underwriter's Representative (subject to the allocation priority set forth in Section 5.2.2(c)) may exclude some or all Registrable Securities from such registration and underwriting, but in no event shall (i) the amount of securities of the selling Holders be reduced below 20% of the total amount of securities included in such offering, unless such offering is the initial public offering of the Company's securities in which case the -10- selling Holders may be excluded in full if no other stockholder's securities are included and (ii) notwithstanding clause (i) above, any shares being sold by a stockholder exercising a demand registration right similar to that granted in Section 5.1 be excluded from such offering. (e) Allocation of Shares in Piggyback Registration. In the event that ---------------------------------------------- the Underwriter's Representative limits the number of shares to be included in a Registration pursuant to Section 5.2.2(b), the number of shares to be included in such Registration shall be allocated (subject to Section 5.2.2(b)) in the following manner: The number of shares, if any, that may be included in the Registration and underwriting by selling stockholders shall first be allocated among all the requesting Holders pro rata according to the respective amounts of Registrable Securities entitled to be included in such offering by such requesting Holders and then among all other holders of securities other than Registrable Securities requesting and legally entitled to include shares in such Registration, in proportion, as nearly as practicable, to the respective amounts of securities (including Registrable Securities) which such Holders and such other holders would otherwise be entitled to include in such Registration. No Registrable Securities or other securities excluded from the underwriting by reason of this Section 5.2.2(c) shall be included in the Registration Statement. To facilitate the allocation of shares in accordance with the above provisions, the Company or the Underwriter's Representative may round the number of shares allocated to any Holder to the nearest 100 shares. The Company covenants and agrees that it will not permit the holders of the Company's Common Stock as of the date of this Agreement to exercise piggyback registration rights in a manner pari passu or senior to those of the Holders of Registrable Securities. - ---- ----- (f) Withdrawal in Piggyback Registration. If any Holder disapproves ------------------------------------ of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the underwriter delivered at least seven (7) days prior to the effective date of the Registration Statement. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such Registration. (g) Blue Sky in Piggyback Registration. In the event of any ---------------------------------- Registration of Registrable Securities pursuant to Section 5.2, the Company will exercise its best efforts to Register and qualify the securities covered by the Registration Statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably appropriate for the distribution of such securities; provided, however, that (i) the Company shall not be required to qualify to do business or to file a general consent to service of process in any such states or jurisdictions, and (ii) notwithstanding anything in this Agreement to the contrary, in the event any jurisdiction in which the securities shall be qualified imposes a non-waivable requirement that expenses incurred in connection with the qualification of the securities be borne by selling stockholders, such expenses shall be payable pro rata by selling stockholders. 5.3 Expenses of Registration. All Registration Expenses incurred in ------------------------ connection with three Registrations pursuant to Sections 5.1.1 and 5.1.2 and all Registrations pursuant to Section 5.2, shall be borne by the Company. All Registration Expenses incurred in connection with any other registration, qualification or compliance shall be apportioned among the Holders and other -11- holders of the securities so registered on the basis of the number of shares so registered. Notwithstanding the above, the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 5.1 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (which Holders shall bear such expenses), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to demand one (1) registration pursuant to Section 5.1; provided further, however, that if at the time of such withdrawal, the Holders have learned of a Material Adverse Event either (i) not known to the Holders at the time of their request or (ii) not made known to the Holders within 15 days after their request, then the Holders shall not be required to pay any of such expenses and shall retain their rights pursuant to Section 5.1. All Selling Expenses shall be borne by the holders of the securities registered pro rata on the basis of the number of shares registered. 5.4 Registration Procedures. The Company will keep each Holder whose ----------------------- Registrable Securities are included in any registration pursuant to this Agreement advised as to the initiation and completion of such Registration. At its expense, the Company will as expeditiously as reasonably possible: (a) Prepare and file with the Commission a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for a period of up to 120 days or until the distribution contemplated in the registration statement has been completed; provided, however, that such 120-day period shall be extended for a period of time equal to the period the Holders refrain from selling any securities included in such registration at the request of an underwriter of Common Stock (or other securities) of the Company. (b) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish such number of prospectuses (including preliminary prospectuses) in conformity with the requirements of the Securities Act and other documents as a Holder from time to time may reasonably request. (d) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. -12- (e) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange or on the Nasdaq Stock Market, as the case may be, on which similar securities issued by the Company are then listed. (f) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such Registration. (g) Furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Section 5, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a Registration pursuant to this Section 5, if such securities are being sold through underwriters, or, if such securities with respect to such securities becomes effective, an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and a letter, dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any. 5.5 Reports Under the Exchange Act. With a view to making available ------------------------------ to the Holders the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the Commission that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a Registration on Form S-3, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144, at all times after 90 days after the effective date of the first registration statement filed by the Company for the offering of its securities to the general public; (b) take such action, including the voluntary registration of its Common Stock under Section 12 of the Exchange Act, as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities, such action to be taken as soon as practicable after the end of the fiscal year in which the first registration statement filed by the Company for the offering of its securities to the general public is declared effective; (c) file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (d) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company), the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the -13- most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the Commission which permits the selling of any such securities without registration or pursuant to such form. 5.6 Information Furnished by Holder. It shall be a condition ------------------------------- precedent of the Company's obligations under this Agreement that each Holder of Registrable Securities included in any Registration furnish to the Company such information regarding such Holder and the distribution proposed by such Holder or Holders as the Company may reasonably request. 5.7 Indemnification. --------------- (a) Company's Indemnification of Holders. To the extent ------------------------------------ permitted by law, the Company will indemnify each Holder, each of its officers, directors and constituent partners and each person controlling such Holder, with respect to which Registration, qualification or compliance of Registrable Securities has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls any underwriter against all claims, losses, damages or liabilities (or actions in respect thereof) to the extent such claims, losses, damages or liabilities arise out of or are based upon any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus or supplement thereto or other document (including any related Registration Statement or any amendment thereto) incident to any such Registration, qualification or compliance, or are based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act, Exchange Act, any state securities law or any rules or regulations promulgated thereunder, applicable to the Company and relating to action or inaction required of the Company in connection with any such Registration, qualification or compliance; and the Company will pay to each such Holder, director, officer, partner, person, each such underwriter and each person who controls any such Holder or underwriter, as incurred, for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided, however, that the indemnity contained in this Section 5.7.1 shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if settlement is effected without the consent of the Company (which consent shall not unreasonably be withheld); and provided, further, that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based upon any untrue statement (or alleged untrue statement) or omission (or alleged omission) based upon written information furnished to the Company by such Holder, provided, that, if the Holder is a corporate holder, such information shall have been provided by an officer of such Holder, underwriter, or controlling person and stated to be for use in connection with the offering of securities of the Company. (b) Holder's Indemnification of Company. To the extent ----------------------------------- permitted by law, each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such Registration, qualification or compliance is being effected pursuant to this Agreement, indemnify the Company, each of its directors and officers, each underwriter, if any, of the -14- Company's securities covered by such a Registration Statement, each person who controls the Company or such underwriter within the meaning of the Securities Act, and each other such Holder, each of its officers, directors and constituent partners and each person controlling such other Holder, against all claims, damages and liabilities or actions in respect thereof arising out of or based upon any untrue statement of a material fact contained in any such Registration Statement, prospectus, offering circular or supplement or amendment thereto, or other document, or any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by such Holder of any rule or regulation promulgated under the Securities Act, Exchange Act, any state securities law or any rules or regulations promulgated thereunder, applicable to such Holder and relating to action or inaction required of such Holder in connection with any such Registration, qualification or compliance; and will pay to the Company, such Holders, such directors, officers, partners, persons, underwriters or control persons, as incurred, for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement or omission is made in such Registration Statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Holder and stated to be specifically for use in connection with the offering of securities of the Company, provided, however, (i) that the indemnity contained in this Section 5.7.2 shall not apply to any amounts paid in settlement of such claim, loss, damage, liability or action if settlement is effected without the consent of indemnifying Holders representing a majority-in-interest of the securities of the Company held by such Holders (which consent shall not be unreasonably withheld) and (ii) that each Holder's liability under this Section 5.7.2 shall not exceed such Holder's proceeds from the offering of securities made in connection with such Registration. (c) Indemnification Procedure. Promptly after receipt by an ------------------------- indemnified party under this Section 5.7 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 5.7, notify the indemnifying party in writing of the commencement thereof and generally summarize such action. The indemnifying party shall have the right to participate in and to assume the defense of such claim; provided, however, that the indemnifying party shall be entitled to select counsel for the defense (which fees and expenses will be paid by the indemnifying party) of such claim with the approval of any parties entitled to indemnification, which approval shall not be unreasonably withheld; provided further, however, that if either party reasonably determines that there may be a conflict between the position of the Company and the Holders in conducting the defense of such action, suit or proceeding by reason of recognized claims for indemnity under this Section 5.7, then counsel for such party (which fees and expenses will be paid by the indemnifying party) shall be entitled to conduct the defense to the extent reasonably determined by such counsel to be necessary to protect the interest of such party. The failure to notify an indemnifying party promptly of the commencement of any such action, if prejudicial to the ability of the indemnifying party to defend such action, shall relieve such indemnifying party, to the extent so prejudiced, of any liability to the indemnified party under this Section 5.7, but the omission so to notify the indemnifying party will not relieve such party of any liability that such party may have to any indemnified party otherwise -15- other than under this Section 5.7. No settlement of any such claim, loss, damage, liability or action shall be made by the indemnified party without the prior written consent of the indemnifying party. No indemnifying party, in the defense of any such claim or litigation, shall, except with the consent of each indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claims or litigation. (d) If the indemnification provided for in this Section 5.7 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (f) The obligations of the Company and Holders under this Section 5.7 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 5, and otherwise. 5.8 Limitations on Registration Rights Granted to Other Securities. -------------------------------------------------------------- From and after the date of this Agreement, except as set forth in Section 10.3, the Company shall not enter into any agreement with any holder or prospective holder of any securities of the Company providing for the granting to such holder of any Registration rights, except that, with the consent of the Holders of a majority of the aggregate of the Shares then outstanding, additional holders may be added as parties to this Agreement with regard to any or all securities of the Company held by them. Any such additional parties shall execute a counterpart of this Agreement, and upon execution by such additional parties and by the Company, shall be considered a Stockholder for all purposes of this Agreement. The additional parties and the additional Registrable Securities shall be identified in an amendment to Schedule A hereto. 5.9 Termination of Registration Rights. Notwithstanding the ---------------------------------- foregoing provisions of this Section 5, a Holder's rights under this Section 5 will terminate upon the first day when such -16- Holder has the right to sell all securities under Rule 144 under the Securities Act within the next three-month period and the number of shares of Common Stock held by such Holder is less than one percent of the then outstanding shares of Common Stock of the Company as shown on the Company's then most recent published report or statement. 6. Market Stand-off. In consideration for the Company agreeing to ---------------- its obligations under this Agreement, each Holder hereby agrees in connection with the first registration of the Company's securities not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Company securities (other than those included in the registration) without the prior written consent of the Company or underwriters managing the offering, as the case may be, for a period of no more than 180 days after the effective date of such registration; provided, however, that such Holder shall be relieved of its obligations under this Section 6 unless all executive officers, directors and stockholders of the Company each holding individually more than 2% of the capital stock of the Company enter into similar agreements for the same time period. Each Holder hereby agrees that, upon the request of the Company or the underwriters, it will confirm in writing the provisions of this Section 6. 7. Stockholders' Right of First Refusal. ------------------------------------ 7.1 Right of First Refusal for New Securities. (a) Subject to ----------------------------------------- the limitations set forth in Section 7.1(b) below, the Company hereby grants to each Stockholder the right of first refusal to purchase a pro rata portion of any New Securities (as defined in this Section 7) which the Company may, from time to time, propose to sell and issue. A Stockholder's pro rata share, for purposes of this Section 7 is the ratio that the number of Shares held by such Stockholder at the time of the issuance of the New Securities bears to the total number of Common Stock and Preferred Stock then outstanding (on a fully diluted basis and an as converted to Common Stock basis). (b) Notwithstanding any other provision of this Section 7, the Company hereby grants to HSN the right of first refusal to purchase such additional portion of any New Securities (the "HSN Securities") as will enable HSN to hold up to the then effective HSN Maximum Percentage (as defined below) of the capital stock of the Company outstanding immediately after the issuance or sale of the New Securities (on an fully diluted basis and an as converted to Common Stock basis). Notwithstanding the foregoing, the percentage of New Securities subject to HSN's right of first refusal shall not exceed 80% of the New Securities sought to be sold by the Company. In the event that HSN's election of its right of first refusal under this Section 7.1(b) results in the purchase by HSN of more than its pro rata share of the New Securities, each Stockholder other than HSN hereby agrees and acknowledges that such Stockholder's share of New Securities shall be decreased proportionally (based on the ratio of the number of Shares held by such Stockholder to the number of Shares held by all Stockholders other than HSN) by such excess amount. A reduction of any Stockholder's pro rata share pursuant to this Section 7.1(b) shall only be applicable to the issuance of New Securities with respect to which such reduction is made. For purposes of this Section 7, the "HSN Maximum Percentage" shall initially equal 14.9% and may not exceed 14.9% regardless of whether HSN is permitted to acquire more than 14.9% of the Company's stock pursuant -17- to Section 11.12 or otherwise. In the event that HSN fails to fully purchase its pro rata portion of any New Securities pursuant to Section 7.1, the then effective HSN Maximum Percentage shall be appropriately decreased by the percentage dilution suffered by HSN in the transaction in which it elected not to exercise its right under Section 7.1(a). As an example only and not in limitation of the above, if the number of Shares held by HSN represents 12% of the capital stock of the Company outstanding prior to an issuance of New Securities by the Company (on a fully diluted basis and an as converted to Common Stock basis) and the then effective HSN Maximum Percentage is 14.9%, and HSN's failure to exercise its rights under Section 7.1(a) decreases HSN's ownership of the capital stock of the Company immediately after the issuance to 10% (on a fully diluted basis and an as converted to Common Stock basis), the new HSN Maximum Percentage shall equal 14.9% minus 2%. (c) "New Securities" Defined. Except as set forth below, ----------------------- "New Securities" shall mean any shares of capital stock of the Company including Common Stock and Preferred Stock, whether now authorized or not, and rights, options or warrants to purchase said shares of Common Stock or Preferred Stock, or securities of any type whatsoever that are, or may become, convertible into equity securities of the Company. Notwithstanding the foregoing, "New Securities" does not include (i) up to 1,000,000 shares of Series E Preferred issued on or after the date hereof pursuant to the Second Series E Agreement, (ii) securities offered to the public in a Qualified IPO, (iii) shares of the Company's Common Stock or options convertible into such Common Stock issued to employees, officers and directors of, and consultants to the Company pursuant to any arrangements approved by the Board of Directors of the Company where the primary purpose is not to raise additional equity capital for the Company, (iv) stock issued upon conversion of any convertible securities or exercise of any options, warrants or other rights to acquire equity securities of the Company, provided that the rights of first refusal established by this Section 7 applied to the initial sale or grant by the Company of such convertible securities, options or other rights, (v) stock issued as direct consideration for the acquisition by the Company of another business entity or the merger of any business entity with or into the Company or subsidiary of the Company or a merger of a subsidiary of the Company with or into another entity; (vi) stock issued in connection with any stock split, stock dividend or recapitalization by the Company; or (vii) stock issued upon conversion of the Preferred Stock. (d) Notice of Intent to Issue New Securities. In the event ---------------------------------------- the Company proposes to undertake an issuance of New Securities, it shall give each Stockholder written notice of its intention, describing the type of New Securities, and the price and terms upon which the Company proposes to issue the same. Each Stockholder shall have 20 days from the date of receipt of any such notice to agree, by written notice to the Company (the "Election Notice"), to purchase up to its respective pro rata share and in the case of HSN, its additional share, of such New Securities for the price and upon the terms specified in the written notice delivered by the Company and stating therein the quantity of New Securities to be purchased. In the event that HSN elects to purchase any HSN Securities, the Company shall, as soon as practicable, provide written notice to each Stockholder that has delivered an Election Notice of the number of HSN Securities to be purchased by HSN and the decrease in such Stockholder's pro rata share of the New Securities. Any sale to the -18- Stockholders pursuant to exercise of their rights of first refusal hereunder shall be consummated as promptly as possible following the 20 day notice period referred to above in this Section 7.1(d). (e) Offers to Third Parties. To the extent the Stockholders ----------------------- fail to exercise in full the right of first refusal within said 20 day period, the Company shall have 60 days thereafter to sell the New Securities not elected to be purchased by the Stockholders, at the price and upon terms no more favorable to the purchasers of such securities than specified in the Company's notice. In the event the Company has not sold the New Securities within said 60 day period, the Company shall not thereafter issue or sell any New Securities, without first offering such securities in the manner provided above. 7.2 HSN Right of First Refusal for Qualified IPO. (a) The -------------------------------------------- Company hereby grants to HSN the right of first refusal to purchase such portion (the "HSN Portion") of the securities proposed to be issued in a Qualified IPO (the "Qualified IPO Shares") as will enable HSN to own or hold up to the then effective HSN Maximum Percentage of the capital stock of the Company outstanding immediately after the Qualified IPO (on a fully diluted basis and on as converted to Common Stock basis). Notwithstanding the foregoing, the percentage of the Qualified IPO Shares subject to HSN's right of first refusal shall not exceed 50% of the Qualified IPO Shares. (b) Notice of Intent. In the event the Company proposes to ---------------- undertake a Qualified IPO, it shall give HSN written notice of Board approval of such Qualified IPO. No less than 15 days after the initial public filing with the Commission of a registration statement and preliminary prospectus pursuant to the Securities Act with respect to a Qualified IPO, the Company shall notify HSN of the range of per share prices for the Common Stock (the "Company's Range Notice") which will be set forth on the cover page of the such registration statement. HSN shall have 10 days from the date of receipt of the Company's Range Notice to agree, by written notice to the Company (the "IPO Election Notice"), to purchase up to the HSN Portion of the Qualified IPO Shares at any price per share that is within the range specified in the Company's Range Notice. Such IPO Election Notice shall specify the number of Qualified IPO Shares HSN intends to purchase. If the actual price at which the Qualified IPO Shares are to be issued is within or below the range specified in the Company's Range Notice, then HSN shall be obligated to buy that number of Qualified IPO Shares which was specified in the IPO Election Notice. If the actual price at which the Qualified IPO Shares are to be issued is above the range specified in the Company's Range Notice, then HSN shall have the right, in its sole discretion, to purchase up to that number of Qualified IPO Shares specified in the IPO Election Notice by delivering a written notice to the Company as soon as practicable following the time at which the per share price to be paid in a Qualified IPO has been determined by the Company. Any sale to HSN pursuant to exercise of its right of first refusal pursuant to this Section 7.2 shall be consummated at the closing of the Qualified IPO. (c) Offers to Third Parties. To the extent HSN declines to ----------------------- exercise in full its right of first refusal within 10 days of the receipt of the Company's Range Notice, the Company shall have the right to sell the Qualified IPO Shares at the closing of the Qualified IPO. In the event -19- that such Qualified IPO is terminated for any reason, the Company shall not undertake another Qualified IPO without first granting HSN its rights of first refusal pursuant to this Section 7.2. 7.3 Transferability of Right of First Refusal. Except as provided in ----------------------------------------- Section 11.1, the right of first refusal granted pursuant to Section 7.1(a) is not assignable by a Stockholder. The rights of first refusal granted to HSN pursuant to Sections 7.1(b) and 7.2 are not assignable by HSN. Notwithstanding the foregoing, a Stockholder electing to purchase all or a portion of said Stockholder's pro rata share of any New Securities, or HSN electing to purchase all or a portion of its additional pro rata share of the New Securities or all or a portion of its portion of the Qualified IPO Shares may designate other purchasers to purchase such New Securities or Qualified IPO Shares provided such designees are general or limited partners or affiliates of such Stockholder or of HSN. 7.4 Termination of Provision. This Section 7 shall terminate and be ------------------------ of no further force or effect upon the earlier of (i) as to the Series C Holders, the date on which there are no shares of Series C Preferred outstanding (due to conversion, redemption or otherwise), as to Series D Holders, the date on which there are no shares of Series D Preferred outstanding (due to conversion, redemption or otherwise), as to Series E Holders, the date on which there are no shares of Series E Preferred outstanding (due to conversion, redemption or otherwise), as to HSN, the date on which it holds no shares of capital stock of the Company, or (ii) upon the closing of a Qualified IPO. 8. Right of First Offer. -------------------- 8.1 The Right. Each Stockholder hereby agrees that it will not --------- effect a transfer of any Series C Preferred, Series D Preferred or Series E Preferred, as the case may be, or Common Stock issued or issuable upon conversion of the Series C Preferred, Series D Preferred or Series E Preferred, as the case may be, of the Company owned or held by such Stockholder (except to an affiliate of such Stockholder, which affiliate agrees to be bound by the terms of this Agreement (a "Permitted Transferee")) representing fifteen percent (15%) or more of the outstanding Common Stock and Preferred Stock (on an as converted to Common Stock basis), unless the Stockholder shall have complied with the provisions of this Section 8. 8.2 Offering Notice. If a Stockholder (a "Selling Stockholder") --------------- proposes to effect a transfer of Series C Preferred, Series D Preferred or Series E Preferred, as the case may be, or Common Stock issued or issuable upon conversion of the Series C Preferred, Series D Preferred or Series E Preferred, as the case may be, of the Company owned or held by such Stockholder (other than to a Permitted Transferee) representing fifteen percent (15%) or more of the outstanding Common Stock and Preferred Stock (on an as converted to Common Stock basis) (the "Offered Shares") the Selling Stockholder shall first give written notice (a "Seller's Notice") to the Company stating the Selling Stockholder's desire to effect such transfer, and the cash price (in the case of a sale) (the "First Offer Price"), or a description of the proposed transfer (in the case of a transaction other than a sale), the name and address of the proposed transferee and other terms and conditions of such proposed transfer. -20- 8.3 Exercise of Right. Within thirty (30) days after receipt of ----------------- Seller's Notice, the Company shall give a notice to the Selling Stockholder stating whether it elects to purchase any Offered Shares. Any such purchase by the Company of Offered Shares shall be at the purchase price and in accordance with the terms and conditions set forth in the Seller's Notice. 8.4 Effect of Non-Exercise. If any or all of the Offered Shares ---------------------- are not purchased by the Company prior to the expiration of the period provided in Section 8.3 hereof, the Selling Stockholder may make a transfer as set forth in the Seller's Notice of the balance of the Offered Shares not timely purchased by the Company, but, in the case of a sale, only at a cash purchase price of at least 95% of the First Offer Price, and, in the case of a transaction other than a cash sale, only in compliance with the terms therein stated. If the Selling Stockholder shall fail to complete such a transfer of the Offered Shares within 90 days following the expiration of the time provided in Section 8.3 hereof (the "Offer Period"), the Selling Stockholder shall not thereafter propose to transfer any of its shares of Common Stock or Preferred Stock without first offering such securities in the manner provided above in this Section 8. Furthermore, if within such Offer Period the Selling Stockholder shall desire to transfer the Offered Shares in a sale at a cash price less than 95% of the First Offer Price, the Selling Stockholder shall give written notice (a "Reoffer Notice") to the Company stating the Selling Stockholder's desire to effect such transfer at the lower price (the "Reoffer Price"). Within the Offer Period, the Selling Stockholder shall be entitled to submit only two Reoffer Notices to the Company. Within 30 days after receipt of the Reoffer Notice, the Company shall give a notice to the Selling Stockholder stating whether it elects to purchase any Offered Shares at the Reoffer Price, and if the Company does not purchase any or all of the Offered Shares at the Reoffer Price, the Selling Stockholder may effect such transfer of the Offered Shares at the Reoffer Price for a 60-day period following the expiration of such 30-day period. If the Company does not exercise its option to purchase the Offered Shares upon the terms set forth in a Seller's Notice or a Reoffer Notice, and the Selling Stockholder shall not have transferred the Offered Shares before the expiration of the applicable period, then the Stockholder shall not give a Seller's Notice with respect to a transaction which would require compliance with this Section 8 for a period of 60 days. 8.5 Rights Upon Prohibited Transfers. In the event the Selling -------------------------------- Stockholder should transfer any securities of the Company in contravention of the right of first offer under this Section 8 or under Section 9(a) of the Company under this Agreement, the Company may proceed to protect and enforce its rights by suit in equity or by action at law, whether for the specific performance of any term contained in this Agreement or for an injunction against the breach of any such term or in furtherance of the exercise of any power granted in this Agreement, or to enforce any other legal or equitable right of the Company or to take one or more of such actions. 8.6 Termination of Provision. This Section 8 shall terminate ------------------------ and be of no further force or effect upon the earlier of (i) as to Series C Holders, the date on which there are no shares of Series C Preferred outstanding (due to conversion, redemption or otherwise), as to Series D Holders, the date on which there are no shares of Series D Preferred, outstanding (due to conversion, redemption or otherwise) and as to Series E Holders, the date on which there are no shares of -21- Series E Preferred, outstanding (due to conversion, redemption or otherwise), or (ii) upon the Closing of a Qualified IPO. 9. Certain Limitations on Sales ---------------------------- (a) Notwithstanding any other provision of this Agreement, for a period of five (5) years from the date of the Series C Agreement, the date of the applicable Series D Agreement or the date of the applicable Series E Agreement, as the case may be, the Stockholders shall not effect any transfer of Series C Preferred, Series D Preferred or Series E Preferred, as the case may be, or Common Stock into which such Series C Preferred, Series D Preferred or Series E Preferred, as the case may be, may be converted, to competitors of the Company as identified by the Company and set forth in Exhibit B hereto. Exhibit B shall set forth three such competitors, and the list of three competitors may be updated by the Company no more than once every three months during the respective five year period. Any additions to Exhibit B must be made in good faith by the Company, and the Company may not amend Exhibit B to include a proposed transferee of Offered Shares after a Seller's Notice has been delivered specifying such proposed transferee. (b) Subject to the Company's right of first offer set forth in Section 8 and the prohibition set forth in Section 9(a), the Stockholders may effect transfers of shares of Series C Preferred, Series D Preferred or Series E Preferred, as the case may be, or Common Stock into which such Series C Preferred, Series D Preferred or Series E Preferred, as the case may be, may be converted; provided however, that if the Stockholders transfer a cumulative aggregate of 45% or more of the outstanding shares of Series C Preferred or Common Stock into which such Series C Preferred may be converted to any person(s) or entity(ies) that is in the communications industry, the rights of the holders of Series C Preferred to elect a Series C Director as set forth in the Certificate shall terminate, and the Company will take all appropriate action to amend its Certificate of Incorporation, as then in effect, to eliminate the right to elect the Series C Director, and in such event, the holders of Series C Preferred agree to vote in favor of such amendment to the Certificate of Incorporation. (c) This Section 9 shall terminate and be of no further force or effect upon the earlier of (i) as to Series C Holders, the date on which there are no shares of Series C Preferred outstanding (due to conversion, redemption or otherwise), as to Series D Holders, the date on which there are no shares of Series D Preferred outstanding (due to conversion, redemption or otherwise) and as to Series E Holders, the date on which there are no shares of Series E outstanding (due to conversion, redemption or otherwise), or (ii) upon the Closing of a Qualified IPO. (d) Each certificate representing Series C Preferred, Series D Preferred and Series E Preferred shall be stamped or otherwise imprinted with a legend substantially in the following form (in addition to any legend required pursuant to Section 2.2. hereof): THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AS SET FORTH IN A STOCKHOLDERS' AGREEMENT, AS AMENDED AND RESTATED FROM -22- TIME TO TIME, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF THE ISSUER. NO REGISTRATION OR TRANSFER OF SUCH SECURITIES WILL BE MADE ON THE BOOKS OF THE ISSUER UNLESS AND UNTIL SUCH RESTRICTIONS SHALL HAVE BEEN COMPLIED WITH. 10. Protective Provisions. The Company shall not perform the following, --------------------- without the prior written consent or affirmative vote of each of (i) the holders of record of at least a majority of the outstanding shares of Series C Preferred, (ii) HSN and (iii) with respect to (g) below only, GRP: (a) a merger or consolidation of the Company with QVC, Inc. or Comcast, Inc. or any of their respective successors and assigns; (b) the acquisition by the Company of another business entity, joint venture or partnership or the establishment of non-wholly owned subsidiaries, any of which involve the contribution of the greater of $5,000,000 or 10% of the post-money valuation of the Company based on its then most recently completed equity financing (the "Investment Basket"); provided, however, such restriction shall not apply to the merger, consolidation, share exchange, or other reorganization or business combination (a "Reorganization") involving a change of control of the Company (including without limitation, a Reorganization in which the stockholders of the Company immediately prior to such Reorganization own fifty percent (50%) or less of the voting capital stock of the resulting entity); (c) the incurrence of indebtedness in excess of the Investment Basket; (d) any expansions into new businesses other than the consumer information business or electronic commerce; (e) any asset sales in excess of the Investment Basket; (f) any liens on or encumbrances of assets in excess of the Investment Basket, except liens or encumbrances securing senior indebtedness of the Company to a commercial bank or a syndicate of commercial banks; (g) any issuances or sales of New Securities in excess of the Investment Basket; provided, that at least one other director of the Company who was also a director as of the date of the original issuance of Series C Preferred (or replacement thereof) other than the Series C Director vetoes such proposed issuance or sale; (h) any issuances or sales of New Securities to QVC, Inc. or any of its successors and assigns; -23- (i) any issuances or sales of New Securities to Comcast, Inc. or any of its successors or assigns other than issuances and sales of New Securities purchased by Comcast, Inc. pursuant to its right set forth in Section 7.1(a); (j) any payments of dividends, repurchases or redemptions of securities (except pursuant to stock options or restricted stock purchase agreements with employees or consultants of the Company as approved by the Board of Directors or as set forth in the Company's Amended and Restated Certificate of Incorporation) or debt (except to the extent such debt has been approved by a majority of the Board of Directors is due in accordance with its terms); (k) any transactions with any affiliates of the Company; (l) a change in the bylaws of the Company (except that the Company shall be permitted to increase the number of directors authorized thereunder without either the consent of the Series C Preferred or the consent of HSN); (m) a change in the Company's independent public accountants; or (n) any registrations of securities under the Securities Act, except for a Qualified IPO and except pursuant to Section 5.1 hereof; provided, however, in the event the Series C Holders, HSN or GRP, as the case may be, do not consent to the proposed transaction, their written rejection must be received by the Company within 15 days of the date the Series C Holders, HSN or GRP receive notification of the proposed transaction. If such rejection is not received by the Company within such 15-day period, the Company may effect the proposed transaction within a 90-day period thereafter without further complying with this Section 10. Notwithstanding any of the foregoing, in no event shall the Series C Preferred, HSN or GRP have any consent or voting right pursuant to this Section 10 with respect to any Reorganization other than as set forth in Section 10(a) or Section 10(b) (subject to the limits set forth therein) above or as provided by applicable law. The preceding sentence shall not limit in any way, the voting right of any HSN Director, any Series C Director or any director elected by GRP pursuant to the Company's charter. The Company acknowledges that (i) its annual budget, and (ii) any adoption or amendment of key employment contracts or benefit plans, including, but not limited to, stock option plans, shall be subject to approval of the Company's Board of Directors, consistent with the Company's then existing charter and by- laws. With respect to the Series C Preferred, the provisions of this Section 10 shall terminate and be of no further force or effect upon the earlier of (i) the date on which there are no shares of Series C Preferred outstanding (due to conversion, redemption or otherwise), and (ii) upon the -24- closing of a Qualified IPO. With respect to HSN, the provisions of this Section 10 shall terminate and be of no further force or effect upon the earlier of (i) the date on which HSN holds less than 50% of the capital stock of the Company (on an as converted to Common Stock basis and as adjusted for stock dividends, stock splits, stock combinations, recapitalizations and the like) that it held as of the date of this Agreement, and (ii) upon the closing of a Qualified IPO. HSN's rights under this Section 10 may not be assigned. With respect to GRP, the provisions of this Section 10 shall terminate and be of no further force or effect upon the earlier of (i) the date on which GRP holds less than 100% of the capital stock of the Company (on an as converted to Common Stock basis and as adjusted for stock dividends, stock splits, stock combinations, recapitalizations and the like) that it held as of the date of the initial issuance of shares of Series E Preferred to GRP, and (ii) upon the closing of a Qualified IPO. GRP's rights under this Section 10 may not be assigned. 11. Miscellaneous. ------------- 11.1 Transfer of Rights. Subject to the provisions of Sections 7.3, ------------------ 9 and 10, the rights of the Stockholders in this Agreement may not be assigned by any Stockholder except to a transferee or assignee of any Shares not sold to the public acquiring at least the lesser of (a) 100,000 Shares and (b) the total number of Shares acquired by such stockholder on or as of the date such stockholder becomes a party to this Agreement (equitably adjusted for any stock splits, subdivisions, stock dividends, changes, combinations or the like); provided, however, that the Company must receive written notice prior to the time of said transfer, stating the name and address of said transferee or assignee and identifying the securities with respect to which such rights are being assigned. Notwithstanding the limitation set forth in the foregoing sentence respecting the minimum number of shares which must be transferred, (i) any Stockholder which is a partnership may transfer such holder's rights to such holder's constituent partners, (ii) any Stockholder which is a natural person may transfer such rights to any immediate family member or to any trust created for the benefit of a Stockholder or his or her immediate family members, in each case without restriction as to the number or percentage of shares acquired by any such constituent partner, and (iii) any Stockholder may transfer any of such holder's rights to an affiliated entity, subject in each case to such transferee's agreeing to be bound by the rights and restrictions of this Agreement. 11.2 Notices, etc. All notices and other communications required or ------------- permitted hereunder shall be in writing, shall be effective upon receipt and may be delivered in person, by telecopy, overnight courier, express delivery service or U.S. mail, in which event it may be mailed by first-class, certified or registered, postage prepaid, addressed (i) to the Company, 790 E. Colorado Blvd., Suite 200, Pasadena, CA 91101, Attn: Chief Executive Officer and (ii) to the Stockholders at the address set forth on the Schedule of Stockholders attached hereto as Exhibit A, or to such other address as a party may have specified in writing. 11.3 Additional Holders. The parties acknowledge that each of the ------------------ holders of the Series A Preferred and Series B Preferred will become parties to this Agreement for purposes of Section 5.2 after the date hereof at such time that the Company obtains an executed signature page to this Agreement from such holder. -25- 11.4 Successors and Assigns. Except as otherwise expressly provided ---------------------- herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 11.5 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND ------------- CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO CONTRACTS ENTERED INTO AND WHOLLY TO BE PERFORMED WITHIN THE STATE OF DELAWARE BY DELAWARE RESIDENTS. 11.6 Waivers and Amendments. The rights and obligations of the ---------------------- parties under this Agreement may be amended, waived or discharged (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely) only by a written instrument effecting such amendment, waiver or discharge signed by the Company and by (i) Holders holding at least a majority of the Shares, (ii) Holders holding at least a majority of the Series C Preferred, (iii) Holders holding at least 66 2/3% of the Series D Preferred and (iv) Holders holding at least a majority of the Series E Preferred. Notwithstanding the foregoing, any provision relating only to HSN may be amended, waived or discharged (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely) by a written instrument effecting such amendment, waiver or discharge signed only by the Company and by HSN. 11.7 Titles and Subtitles. The titles of the paragraphs and -------------------- subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 11.8 Severability of this Agreement. If any provision of this ------------------------------ Agreement shall be judicially determined to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 11.9 Delays or Omissions. It is agreed that no delay or omission to ------------------- exercise any right, power or remedy accruing to any party upon any breach or default of any other party under this Agreement shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character of any breach or default under this Agreement, or any waiver of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in writing and that all remedies, either under this Agreement, by law or otherwise, shall be cumulative and not alternative. 11.10 Entire Agreement. This Agreement constitutes the full and ---------------- entire understanding and agreement between the parties with regard to the subjects hereof. -26- 11.11 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 11.12 HSN Ownership. (a) The Company agrees that it shall not (i) ------------- adopt a rights agreement (or other device similar to a rights agreement) with an ownership threshold that would limit HSN's ability to own or purchase securities of the Company or (ii) amend its bylaws, certificate of incorporation or fail to take an action under Section 203 of the Delaware General Corporation Law (or the analogous statute in another jurisdiction applicable to the Company) which would limit HSN's ability to own or purchase securities of the Company. Nothing in this Section 11.12 shall be read to prohibit the adoption by the Company of a rights agreement (or other device similar to a rights agreement) so long as HSN is specifically exempted from the applicability of such rights agreement or similar device. (b) Prior to a Qualified IPO, without the prior written consent of the Company, HSN will not, and will not permit any of its subsidiaries or affiliates to, directly or indirectly, purchase or otherwise acquire, or agree to acquire, or obtain, directly or indirectly, beneficial ownership of any shares of the Company's capital stock entitled to vote generally for the election of directors of the Company, whether currently outstanding or hereafter issued (collectively, "Voting Stock") or beneficial ownership of any (i) non- ------------ voting securities of the Company which are convertible into Voting Stock, whether currently outstanding or hereafter issued, and/or (ii) options, warrants and other rights to acquire Voting Stock whether currently outstanding or hereafter granted (collectively, "Rights to Acquire Voting Stock"), if the ------------------------------ effect of such acquisition would be to increase the number of shares of Voting Stock then owned by HSN and its subsidiaries and affiliates to an amount equal to more than 14.9% of all Voting Stock, assuming for the purposes of determining each such percentage the exercise and/or conversion of all Rights to Acquire Voting Stock, whether owned by HSN or otherwise. (c) For purposes of determining the percentage of the capital stock of the Company held by HSN in connection with the first sentence of Section 7.1(b), Section 7.2(a) and Section 11.12(b) only, HSN shall be deemed to beneficially own or hold any shares of capital stock of the Company initially held by it but later transferred. Under no circumstance shall this Section 11.12(c) apply to any other provisions of this Agreement, including without limitation, Section 4.2, Section 7.4 and Section 10. -27- IN WITNESS WHEREOF, the parties hereto have executed this Stockholders' Agreement as of the day and year first above written. The Company: CITYSEARCH, INC., a Delaware corporation By: ---------------------------------------- Name: Charles Conn, III Title: Chief Executive Officer The Stockholders: Name Signature Title, if Entity [SIXTH AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT] IN WITNESS WHEREOF, the parties have caused this Stockholders' Agreement to be duly executed and delivered by their proper and duly authorized officer as of the day and year first written above. GOLDMAN, SACHS & CO. VERWALTUNGS GmbH* By: ----------------------------------------- Joseph H. Gleberman, Managing Director and ----------------------------------------- Carla H. Skodinski, Registered Agent *2 Signatories required to bind this entity GS CAPITAL PARTNERS II, L.P. By: GS Advisors, L.P. Its General Partner By: GS Advisors, Inc. Its General Partner By: ----------------------------------------- Joseph H. Gleberman, Vice President GS CAPITAL PARTNERS II OFFSHORE, L.P. By: GS Advisors II (Cayman), L.P. Its General Partner By: GS Advisors II, Inc. Its General Partner By: ----------------------------------------- Joseph H. Gleberman, Vice President STONE STREET FUND 1996, L.P. By: Stone Street Empire Corp., General Partner By: ----------------------------------------- Carla H. Skodinski, Vice President BRIDGE STREET FUND 1996, L.P. By: Stone Street Empire Corp. Managing General Partner By: ----------------------------------------- Carla H. Skodinski, Vice President [SIXTH AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT] IN WITNESS WHEREOF, the parties have caused this Stockholders' Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first written above. ORCHID & CO., nominee for T. Rowe Price Threshold Fund III, L.P. By: T. Rowe Price Threshold Fund Associates, Inc. By: --------------------------------------------- Name: Title: [SIXTH AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT] IN WITNESS WHEREOF, the parties have caused this Stockholders' Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first written above. GLOBAL RETAIL PARTNERS, L.P. By: GLOBAL RETAIL PARTNERS, INC. General Partner By: ----------------------------------------- Name: Title: DLJ DIVERSIFIED PARTNERS, L.P. By: DLJ DIVERSIFIED PARTNERS, INC. General Partner By: ----------------------------------------- Name: Title: DLJ DIVERSIFIED PARTNERS-A, L.P. By: DLJ DIVERSIFIED PARTNERS, INC. General Partner By: ----------------------------------------- Name: Title: [SIXTH AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT] -31- GRP PARTNERS, L.P. By: GLOBAL RETAIL PARTNERS, INC. General Partner By: ----------------------------------------- Name: Title: GLOBAL RETAIL PARTNERS FUNDING, INC. By: ----------------------------------------- Name: Title: DLJ FIRST ESC L.L.C. By: DLJ LBO PLANS MANAGEMENT CORPORATION Manager By: ----------------------------------------- Name: Title: [SIXTH AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT] -32- EXHIBIT B List of Three Competitors ------------------------- Microsoft Corp. One Microsoft Way Redmond, WA 98052 (206) 882-8080 Zip2 444 Castro Street Suite 101 Mountain View, CA 94041 (415) 429-4400 America Online Inc. 8619 Westwood Centre Drive Vienna, Virginia 22182 (703) 448-8700 EXHIBIT D --------- CITYSEARCH, INC. Sixth Amended and Restated Stockholders' Agreement May 20, 1998 EX-10.1 6 FORM OF INDEMNIFICATION AGREEMENT Exhibit 10.1 CITYSEARCH, INC. INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is entered into as of the ___ day of March, 1998 by and between CitySearch, Inc., a Delaware corporation (the "Company") and ("Indemnitee"). RECITALS -------- A. The Company and Indemnitee recognize the continued difficulty in obtaining liability insurance for its directors, officers, employees, agents and fiduciaries, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance. B. The Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, agents and fiduciaries to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited. C. Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and other directors, officers, employees, agents and fiduciaries of the Company may not be willing to continue to serve in such capacities without additional protection. D. The Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve the Company and, in part, in order to induce Indemnitee to continue to provide services to the Company, wishes to provide for the indemnification and advancing of expenses to Indemnitee to the maximum extent permitted by law. E. In view of the considerations set forth above, the Company desires that Indemnitee be indemnified by the Company as set forth herein. NOW, THEREFORE, the Company and Indemnitee hereby agree as follows: 1. Indemnification. --------------- (a) Indemnification of Expenses. The Company shall indemnify --------------------------- Indemnitee to the fullest extent permitted by Delaware law if Indemnitee was or is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any threatened, pending or completed action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation that Indemnitee in good faith believes might lead to the institution of any such action, suit, proceeding or alternative dispute resolution mechanism, whether civil, criminal, administrative, investigative or other (hereinafter a "Claim") by reason of (or arising in part out of) any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or any subsidiary of the Company, or is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action or inaction on the part of Indemnitee while serving in such capacity (hereinafter an "Indemnifiable Event") against any and all expenses (including attorneys' fees and all other costs, expenses and obligations incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in, any such action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation), judgments, fines, penalties and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) of such Claim and any federal, state, local or foreign taxes imposed on Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement (collectively, hereinafter "Expenses"), including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses. Such payment of Expenses shall be made by the Company as soon as practicable but in any event no later than five days after written demand by Indemnitee therefor is presented to the Company. (b) Reviewing Party. Notwithstanding the foregoing, (i) the --------------- obligations of the Company under Section 1(a) shall be subject to the condition that the Reviewing Party (as described in Section 10(e) hereof) shall not have determined (in a written opinion, in any case in which the Independent Legal Counsel referred to in Section 1(c) hereof is involved) that Indemnitee would not be permitted to be indemnified under applicable law, and (ii) the obligation of the Company to make an advance payment of Expenses to Indemnitee pursuant to Section 2(a) (an "Expense Advance") shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitees' obligation to reimburse the Company for any Expense Advance shall be unsecured and no interest shall be charged thereon. If there has not been a Change in Control (as defined in Section 10(c) hereof), the Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change in Control (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), the Reviewing Party shall be the Independent Legal Counsel referred to in Section 1(c) hereof. Indemnitee shall have the right, within 60 days of a determination by the Reviewing Party that Indemnitee substantively would not be permitted to be -2- indemnified in whole or in part under applicable law, or within 30 days or Indemnitee's request for payment if there has been no determination by the Reviewing Party, to commence litigation in any court of competent jurisdiction, or seek an award in arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association, which award shall be deemed final, unappealable and binding, to determine whether Indemnitee should be indemnified under applicable law, or to challenge any such determination by the Reviewing Party or any aspect thereof, including the legal or factual bases therefor. Any such court or arbitrator, as the case ma be, shall thereupon have the exclusive authority to make such determination unless and until such court or arbitrator dismisses or otherwise terminates such action without having made a determination. The Company hereby consents to service of process and to appear in any such proceeding. In any such action before the court or arbitrator, Indemnitee shall be presumed to be entitled to indemnification and the Company shall have the burden of proving that indemnification is not required under this Agreement. All fees and expenses of any arbitrator pursuant to this provision and all reasonable fees and expenses of counsel retained by Indemnitee in connection with any court or arbitration finding an obligation greater than that assumed by the Company prior to commencement of such court action or arbitration shall be paid by the Company. Any determination by the Reviewing Party otherwise shall be conclusive and binding on the Company and Indemnitee. (c) Change in Control. The Company agrees that if there is a Change ----------------- in Control of the Company (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control) then, with respect to all matters thereafter arising concerning the rights of Indemnitees to payments of Expenses and Expense Advances under this Agreement or any other agreement or under the Company's Certificate of Incorporation or Bylaws as now or hereafter in effect, Independent Legal Counsel (as defined in Section 10(d) hereof) shall be selected by Indemnitee. Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be permitted to be indemnified under applicable law and the Company agrees to abide by such opinion. The Company agrees to pay the reasonable fees of the Independent Legal Counsel referred to above and to fully indemnify such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. (d) Mandatory Payment of Expenses. Notwithstanding any other ----------------------------- provision of this Agreement other than Section 9 hereof, to the extent that Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any action, suit, proceeding, inquiry or investigation referred to in Section (1)(a) hereof or in the defense of any claim, issue or matter therein, Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in connection therewith. 2. Expenses; Indemnification Procedure. ----------------------------------- -3- (a) Advancement of Expenses. The Company shall advance all Expenses ----------------------- incurred by Indemnitee. The advances to be made hereunder shall be paid by the Company to Indemnitee as soon as practicable but in any event no later than five days after written demand by Indemnitee therefor to the Company. (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a -------------------------------- condition precedent to Indemnitees' right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any Claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitees' power. (c) No Presumptions; Burden of Proof. For purposes of this Agreement, -------------------------------- the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its --------------- equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. In addition, neither the failure of the Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by the Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that Indemnitee should be indemnified under applicable law, shall be a defense to Indemnitee's claim or create a presumption that Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. (d) Notice to Insurers. If, at the time of the receipt by the Company ------------------ of a notice of a Claim pursuant to Section 2(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such action, suit, proceeding, inquiry or investigation in accordance with the terms of such policies. (e) Selection of Counsel. In the event the Company shall be obligated -------------------- hereunder to pay the Expenses of any Claim, the Company shall be entitled to assume the defense of such Claim with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the -4- Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same Claim; provided that, (i) Indemnitee shall have the right to employ Indemnitees' counsel in any such Claim at Indemnitee expense and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there is a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such Claim, then the fees and expenses of Indemnitee counsel shall be at the expense of the Company. The Company shall have the right to conduct such defense as it sees fit in its sole discretion, including the right to settle any claim against Indemnitee without the consent of the Indemnitee provided the Company holds the Indemnitee harmless in connection with any such settlement. 3. Additional Indemnification Rights; Nonexclusivity. ------------------------------------------------- (a) Scope. The Company hereby agrees to indemnify Indemnitee to the ----- fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Restated Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify a member of its Board of Directors or an officer, employee, agent or fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its Board of Directors or an officer, employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder except as set forth in Section 8(a) hereof. (b) Amendment to Indemnification Rights. The Company shall not adopt ----------------------------------- any amendment to its Restated Certificate of Incorporation, as amended (the "Certificate") or By-Laws the effect of which would be to deny, diminish or encumber Indemnitee's rights to indemnity pursuant to the Restated Certificate of Incorporation, By-Laws, the Delaware General Corporation Law or any other applicable law as applied to any act or failure to act occurring in whole or in part prior to the date (the "Effective Date") upon which the amendment was approved by the Company's Board of Directors or stockholders, as the case may be. In the event that the Company shall adopt any amendment to its Restated Certificate of Incorporation or By-Laws the effect of which is to change Indemnitee's rights to indemnity under such instruments, such amendment shall apply only to acts or failures to act occurring entirely after the Effective Date thereof. The Company shall give written notice to Indemnitee of any proposal which respect to any such amendment no later than the date such amendment is first presented to the Board of Directors (or any committee thereof) for consideration, and shall provide a copy of any such amendment to Indemnitee promptly after its adoption. -5- (c) Nonexclusivity. The indemnification provided by this Agreement -------------- shall be in addition to any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise. The indemnification provided under this Agreement shall continue as to Indemnitee for any action Indemnitee took or did not take while serving in an indemnified capacity even though Indemnitee may have ceased to serve in such capacity. 4. No Duplication of Payments. The Company shall not be liable under -------------------------- this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, Certificate of Incorporation, Bylaw or otherwise) of the amounts otherwise indemnifiable hereunder. 5. Partial Indemnification. If Indemnitee is entitled under any ----------------------- provision of this Agreement to indemnification by the Company for some or a portion of Expenses incurred in connection with any Claim, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses to which Indemnitee are entitled. 6. Mutual Acknowledgment. Both the Company and Indemnitee --------------------- acknowledge that in certain instances, Federal law or applicable public policy may prohibit the Company from indemnifying its directors, officers, employees, agents or fiduciaries under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 7. Liability Insurance. ------------------- (a) Except as provided in (b) below, the Company hereby agrees to use its best efforts to obtain and maintain directors and officers liability insurance for Indemnitee so long as Indemnitee shall continue to serve as a director, officer or key employee of the Company, and, thereafter, so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that Indemnitee was a director, officer or key employee of the Company. (b) The Company shall have no obligation hereunder to obtain or maintain directors and officers liability insurance if, in the reasonable business judgment of the Board of Directors of the Company, such insurance is not reasonably available, the premium costs for such insurance are disproportionate to the amount of coverage provided, or the coverage provided by such insurance is limited, by exclusions or otherwise, so as to provide an insufficient benefit. (c) To the extent the Company maintains liability insurance applicable to directors, officers, employees, agents or fiduciaries, Indemnitee shall be covered by such policies in such a -6- manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee is not an officer or director but is a key employee, agent or fiduciary. (d) The Company shall give prompt written notice to Indemnitee of any amendment or other change or modification, or any proposed amendment change or modification, to any policy of directors and officers liability insurance maintained by the Company and covering Indemnitee. 8. Exceptions. Any other provision herein to the contrary ---------- notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Excluded Action or Omissions. To indemnify Indemnitee for ---------------------------- Indemnitee's acts, omissions or transactions from which Indemnitee or the Indemnitee may not be relieved of liability under applicable law; (b) Claims Initiated by Indemnitee. To indemnify or advance expenses ------------------------------ to Indemnitee with respect to Claims initiated or brought voluntarily by Indemnitee and not by way of defense, except (i) with respect to actions or proceedings brought to establish or enforce a right to indemnification under this Agreement or any other agreement or insurance policy or under the Company's Certificate of Incorporation or Bylaws now or hereafter in effect relating to Claims for Indemnifiable Events, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such Claim, or (iii) as otherwise required under Section 145 of the Delaware General Corporation Law, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be; (c) Lack of Good Faith. To indemnify Indemnitee for any expenses ------------------ incurred by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous; or (d) Claims Under Section 16(b). To indemnify Indemnitee for expenses -------------------------- and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 9. Period of Limitations. No legal action shall be brought and no --------------------- cause of action shall be asserted by or in the right of the Company against Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period; -7- provided, however, that if any shorter period of limitations is otherwise - -------- ------- applicable to any such cause of action, such shorter period shall govern. 10. Construction of Certain Phrases. ------------------------------- (a) For purposes of this Agreement, references to the "Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was a director, officer, employee, agent or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (b) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee, agent or fiduciary of the Company which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an employee benefit plan, its participants or its beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. (c) For purposes of this Agreement a "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, (A) who is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding Voting Securities, increases his beneficial ownership of such securities by 5% or more over the percentage so owned by such person, or (B) becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 20% of the total voting power represented by the Company's then outstanding Voting Securities, (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to -8- constitute a majority thereof, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of transactions) all or substantially all of the Company's assets. (d) For purposes of this Agreement, "Independent Legal Counsel" shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 1(c) hereof, who shall not have otherwise performed services for the Company or Indemnitee within the last three years (other than with respect to matters concerning the rights of Indemnitee under this Agreement, or of other indemnitees under similar indemnity agreements). (e) For purposes of this Agreement, a "Reviewing Party" shall mean any appropriate person or body consisting of a member or members of the Company's Board of Directors or any other person or body appointed by the Board of Directors who is not a party to the particular Claim for which Indemnitee are seeking indemnification, or Independent Legal Counsel. (f) For purposes of this Agreement, "Voting Securities" shall mean any securities of the Company that vote generally in the election of directors. 11. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall constitute an original. 12. Binding Effect; Successors and Assigns. This Agreement shall be -------------------------------------- binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company, spouses, heirs, and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect with respect to Claims relating to Indemnifiable Events regardless of whether Indemnitee continues to serve as a director, officer, employee, agent or fiduciary of the Company or of any other enterprise at the Company's request. 13. Attorneys' Fees. In the event that any action is instituted by --------------- Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret -9- any of the terms hereof or thereof, Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee with respect to such action, regardless of whether Indemnitee is ultimately successful in such action, and shall be entitled to the advancement of Expenses with respect to such action, unless, as a part of such action, a court of competent jurisdiction over such action determines that each of the material assertions made by Indemnitee as a basis for such action was not made in good faith or was frivolous. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee in defense of such action (including costs and expenses incurred with respect to Indemnitee counterclaims and cross-claims made in such action), and shall be entitled to the advancement of Expenses with respect to such action, unless, as a part of such action, a court having jurisdiction over such action determines that each of Indemnitee material defenses to such action was made in bad faith or was frivolous. 14. Notice. All notices and other communications required or ------ permitted hereunder shall be in writing, shall be effective when given, and shall in any event be deemed to be given (a) five (5) days after deposit with the U.S. Postal Service or other applicable postal service, if delivered by first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day after the business day of deposit with Federal Express or similar overnight courier, freight prepaid, or (d) one day after the business day of delivery by facsimile transmission, if delivered by facsimile transmission, with copy by first class mail, postage prepaid, and shall be addressed if to Indemnitee, at the Indemnitee address as set forth beneath Indemnitee signatures to this Agreement and if to the Company at the address of its principal corporate offices (attention: Secretary) or at such other address as such party may designate by ten days' advance written notice to the other party hereto. 15. Consent to Jurisdiction. The Company and Indemnitee each hereby ----------------------- irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in the Court of Chancery of the State of Delaware in and for New Castle County, which shall be the exclusive and only proper forum for adjudicating such a claim. 16. Severability. The provisions of this Agreement shall be ------------ severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitations, each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 17. Choice of Law. This Agreement shall be governed by and its ------------- provisions construed and enforced in accordance with the laws of the State of Delaware, as applied to contracts between -10- Delaware residents, entered into and to be performed entirely within the State of Delaware, without regard to the conflict of laws principles thereof. 18. Subrogation. In the event of payment under this Agreement, the ----------- Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 19. Amendment and Termination. No amendment, modification, ------------------------- termination or cancellation of this Agreement shall be effective unless it is in writing signed by both the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 20. Integration and Entire Agreement. This Agreement sets forth the -------------------------------- entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto. 21. No Construction as Employment Agreement. Nothing contained in --------------------------------------- this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. CitySearch, Inc. By:___________________________ Title:________________________ Address:______________________ ______________________ AGREED TO AND ACCEPTED BY: Name:___________________________ Address:________________________ ________________________ -11- EX-10.7 7 EMPLOYMENT AGREEMENT WITH CHARLES CONN EXHIBIT 10.7 PERFECTMARKET, INC. EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into between PERFECTMARKET, INC., ("PMI"), a Delaware corporation, and Charles Conn ("Employee"). PMI and Employee agree, in consideration for each others' promises as described in this Agreement, as follows: 1. Position and Duties. PMI agrees to hire Employee, initially in the ------------------- position of CEO and President, and Employee accepts such employment. Employee agrees to perform any and all services as are required by PMI, and agrees to perform such services at the time and in the manner so designated by PMI. Employee agrees to devote Employee's full time and energy toward the performance of the duties and responsibilities assigned to Employee, which may be changed at any time and from time and time. Employee further agrees to at all times abide by the policies, procedures and directions of PMI. 2. Compensation. In exchange for Employee consenting to this Agreement, ------------ PMI agrees to employ Employee pursuant to the terms hereof, and to compensate Employee for such employment. Employee's compensation, and benefits if any, shall be as agreed by PMI and Employee. PMI may adjust said salary from time to time in its sole discretion, in view of changes in Employees's job duties and responsibilities. Employees's job performance, financial considerations of PMI, and other similar business factors. 3. Insurance. Employee agrees to provide PMI with a certificate of --------- automobile liability insurance covering any vehicle that Employee intends or actually uses during the course of his employment with PMI in the performance of his duties and responsibilities. Such insurance coverage must meet the minimum coverage required by state law. 4. Safety Procedures. Employee agrees to abide by all procedures, ----------------- practices, guidelines and directions of PMI relating to safety. Failure to comply with such procedures, practices, guidelines and directions may result in termination. 5. Termination of Employment. Employee understands and agrees that ------------------------- Employee is employed "at will." This means that either Employer or PMI may terminate Employee's employment with PMI at any time, for any reason, with or without cause or notice. No express or implied agreement contrary to this at-will employment provision exists between Employee and PMI. In the event that Employee is terminated, Employee will receive salary continuation pay of full-salary for the first three months after termination, and half-salary for the second three months after termination, until Employee is employed by a recognized company, but in no case more than six months of salary continuation. 6. Inventions, Trade Secrets and Proprietary Information. Employee agrees ----------------------------------------------------- to execute and abide by PMI's Employee Inventions & Confidentiality Agreement. Any breach of that Agreement shall be a material breach of this Agreement. The obligations undertaken by Employee in the Inventions & Confidentiality Agreement shall survive termination of this Agreement. 7. Entire Agreement. This Agreement constitutes the sole and entire ---------------- agreement between the parties concerning Employee's employment, and supersedes any and all other agreements between them, whether oral or written, implied or express. There are no understandings or agreements between the parties which are not expressly set forth in this Agreement. Any modification to this Agreement will be effective only if in writing and if fully executed by Employee and the President of PMI. 8. SEVERABILITY. If any provision of this Agreement is held void or ------------ unenforceable for any reason, that provision shall be severed from the Agreement and all remaining Provisions shall be valid and fully enforceable. 9. Governing Law. This Agreement shall be construed, applied, ------------- interpreted and enforced in accordance with the laws of the State of California. EMPLOYEE HEREBY ACKNOWLEDGES THAT: (1) EMPLOYEE HAS READ THIS ENTIRE EMPLOYMENT, CONFIDENTIALITY & INVENTIONS AGREEMENT; (2) EMPLOYEE UNDERSTANDS THIS ENTIRE AGREEMENT AND HAS HAD AN OPPORTUNITY TO ASK QUESTIONS ABOUT IT BEFORE SIGNING IT; AND (3) EMPLOYEE UNDERSTANDS THAT THIS AGREEMENT IS THE SOLE AGREEMENT PERTAINING TO THE CONDITIONS, NATURE, TENURE AND/OR DURATION OF THE PARTIES' EMPLOYMENT RELATIONSHIP. Employee: Charles Conn - ------------------------------ Please Print Name /s/ Charles Conn III 5/09/96 - ------------------------------ ------------ Employee's Signature Date PERFECTMARKET. INC. By: /s/ Charles Conn III 5/09/96 --------------------------- ------------ Charles Conn, President Date EX-10.21 8 AMENDED & RESTATED VOTING AGREEMENT Exhibit 10.21 EXHIBIT F --------- AMENDED AND RESTATED VOTING AGREEMENT ------------------------------------- THIS AMENDED AND RESTATED VOTING AGREEMENT is made as of the 12th day of November, 1997, by and among CitySearch, Inc., a Delaware corporation (the "Company"), the holders of the Series B Preferred Stock of the Company (the "Series B Holders"); the purchasers of shares of Series C Preferred Stock of the Company (the "Series C Holders") pursuant to the Series C Preferred Stock Purchase Agreement, dated as of May 15, 1996; the purchasers of shares of Series D Preferred Stock of the Company (the "Series D Holders") pursuant to (i) the Series D Preferred Stock Purchase Agreement, dated as of December 13, 1996, as amended from time to time, (ii) the Series D Preferred Stock Purchase Agreement, dated as of June 23, 1997, as amended from time to time, and (iii) the Series D Preferred Stock Purchase Agreement, dated July 18, 1997, as amended from time to time; the purchasers of shares of Series E Preferred Stock of the Company (the "Series E Holders') pursuant to the Series E Stock Purchase Agreement, as amended from time to time, dated as of November 12, 1997 (the "Series E Agreement"); NationsBanc Montgomery Securities, Inc. and certain holders of the Company's Series A Preferred Stock and Common Stock listed on Schedule A attached hereto (the "Common Stock Holders," and together with the Series B Holders, the Series C Holders, the Series D Holders and the Series E Holders, the "Stockholders"). WHEREAS, the Company and the Series B Holders, the Series C Holders, the Series D Holders and the Common Stock Holders are parties to a Voting Agreement, dated May 15, 1996 (the "Original Agreement"). WHEREAS, the Company has requested and the holders of a majority-in- interest of the Series C Preferred Stock and the holders of a majority-in- interest of the Shares (as defined in the Original Agreement) have agreed, pursuant to Section 11 of the Original Agreement, to amend and restate in its entirety the Original Agreement, in the manner set forth herein. All terms not otherwise defined herein shall have the meaning ascribed to such terms in the Series E Agreement and the Fifth Amended and Restated Stockholders' Agreement dated November 12, 1997. NOW THEREFORE, THE PARTIES AGREE AS FOLLOWS: 1. Agreement to Vote. During the term of this Agreement, the ----------------- Stockholders agree to vote all of the shares of the Company's voting securities now or thereafter owned by them, whether beneficially or otherwise (the "Shares"), at any regular or special meeting of stockholders of the Company, or, in lieu of any such meeting, to have their written consent, in the election or removal of certain directors of the Company as provided in this Agreement. 2. Election of Directors. From and after the closing date of a --------------------- Qualified IPO, and the conversion of all outstanding shares of Series C Preferred Stock (the "Series C Preferred") into Common Stock of the Company in connection therewith, the Stockholders shall vote all shares of the Company's capital stock held by them to elect the number of designees (the "Series C Directors") selected by the holders of a majority of the outstanding shares of Series C Preferred immediately prior to such closing (the "Series C Holders") as provided below. The number of Series C Directors shall equal one (1) member of the Board. At such time as any other stockholder or stockholders, voting as a separate class, are entitled, by virtue of a right granted by the Company to elect two (2) or more directors, the number of Series C Directors shall be increased to equal the number of directors such stockholder or stockholders are entitled to elect. 3. Replacement of Director. In the event of any termination or ----------------------- resignation of any Series C Director, the Stockholders agree to vote their Shares as required to cause such vacancy to be filled by a designee of the Series C Holders in accordance with the provisions of Section 2 hereof. 4. Successors in Interest of the Parties. ------------------------------------- (a) The provisions of the Agreement shall be binding upon the successors in interest of the Stockholders to any of the Shares. The Company shall not permit the transfer of any Shares on its books or issue a new certificate representing any Shares unless and until the person to whom such securities is to be transferred shall have executed a written agreement pursuant to which such person becomes a party to this Voting Agreement and agrees to be bound by all the provisions hereof as if such person was a Voting Party hereunder. (b) Each certificate representing any Shares issued after the date of this Agreement shall be endorsed by the Company with a legend reading substantially as follows: THE SHARES EVIDENCED HEREBY ARE SUBJECT TO A VOTING AGREEMENT DATED AS AMENDED AND RESTATED FROM TIME TO TIME (A COPY OF WHICH MAY BE OBTAINED UPON WRITTEN REQUEST FROM THE ISSUER), AND BY ACCEPTING ANY INTEREST IN SUCH SHARES THE PERSON ACCEPTING SUCH INTEREST SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF SAID VOTING AGREEMENT. 5. Covenants of the Company. The Company agrees to use its best ------------------------ efforts to ensure that the rights given to holders of Series C Preferred hereunder are effective and that such holders enjoy the benefits thereof. Such actions include, without limitation, the use of the Company's best efforts to cause the nomination and election of the Series C Directors as provided in Section 2. The Company will not, by any voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all of the provisions of this Agreement and in the taking of all such actions as may be necessary, appropriate or reasonably requested by the holders of a majority of the outstanding voting securities held by the Series C Holders assuming exercise and conversion of -2- all outstanding securities in order to protect the rights of the parties hereunder against impairment. The Company further covenants and agrees that it shall require all persons or entities to whom it issues any voting securities after the date of this Agreement and prior to a Qualified IPO to become parties to this Voting Agreement as a condition to the issuance of such securities. 6. Grant of Proxy. Should the provisions of this Voting Agreement be -------------- construed to constitute the granting of proxies, such proxies shall be deemed coupled with an interest and, to the extent permitted by law, shall be irrevocable for the term of this Voting Agreement. 7. Specific Enforcement. It is agreed and understood that monetary -------------------- damages would not adequately compensate an injured Series C Holder for the breach of this Voting Agreement by any Stockholder, that his Voting Agreement shall be specifically enforceable, and that any breach or threatened breach of this Voting Agreement shall be the proper subject of a temporary or permanent injunction or restraining order. Further, each Stockholder hereto waives any claim or defense that there is an adequate remedy at law for such breach or threatened breach. 8. Manner of Voting. The voting of Shares pursuant to this Voting ---------------- Agreement may be effected in person, by proxy, by written consent, or in any other manner permitted by applicable law. 9. Termination. ----------- (a) This Agreement shall terminate and be of no further force or effect upon the earlier of (i) the date the Series C Holders shall hold less than seven and one-half percent (7.5%) of the then outstanding Common Stock of the Company (on an as-converted to Common Stock basis) or (ii) the date, if it occurs prior to a Qualified IPO, that the right of the holders of Series C Preferred to elect a specified number of directors to the Board pursuant to the provisions set forth in the Company's Restated Certificate of Incorporation is terminated. (b) Upon termination of this Agreement, the Directors shall be elected in accordance with the Bylaws and the Restated Certificate of Incorporation of the Company. 10. Third Party Beneficiaries. The holders of Series C Preferred ------------------------- shall be considered third party beneficiaries under this Agreement. 11. Amendments and Waivers. Any term hereof may be amended and in ---------------------- observance of any term hereof may be waived (either generally or in a particular provision and either retroactively or prospectively) only with the written consent of the Company, the holders of a majority-in-interest of the Series C Holders and the holders of a majority-in-interest of the Shares. Any amendment or waiver so effected shall be binding upon the parties hereof. 12. Stock Splits, Stock Dividends, etc. In the event of any stock ---------------------------------- split, stock dividend, recapitalization, reorganization, or the like, any securities issued with respect to the Shares -3- shall become Shares for purposes of the Agreement and shall be endorsed with the legend set forth in Section 4(b) hereof. 13. Severability. Whenever possible, each provision of this Agreement ------------ shall be interpreted in such manner as to be effective and valid under applicable law, but with any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 14. Governing Law. This Agreement shall be governed by and construed ------------- under the laws of the State of Delaware as applied to contracts among Delaware residents entered into and to be performed entirely within Delaware. 15. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 16. Successors and Assigns. Except as otherwise expressly provided in ---------------------- this Agreement, the provisions, hereof shall inure to the benefit of, and be binding upon, the successors and assigns of the parties hereto. 17. Notices. All notices required or permitted hereunder shall be in ------- writing and shall be deemed effectively given upon personal deliver to the party to be notified or five (5) days after deposit in the Untied States mail, by registered or certified mail, postage prepaid and properly addressed to the party to be notified as set forth on the signature page hereof or at such other address as such party may designate by ten (10) days' advance written notice to the other parties hereto. 18. Additional Parties. The parties hereto acknowledge and agree that ------------------ it is contemplated that persons and entities who are issued voting securities of the Company subsequent to the date of this Agreement shall be made parties to this Agreement. Upon execution of this Agreement, such persons and entities shall be considered "Stockholders" for all purposes of this Agreement. -4- IN WITNESS WHEREOF, the parties hereto have executed this Voting Agreement as of the day and year first above written. The Company: CitySearch, Inc., a Delaware corporation By: ---------------------------------- Title: ------------------------------- The Stockholders: ------------------------------------- Name ------------------------------------- Signature ------------------------------------- Title, if Entity The Series C Preferred Stock Holders: ------------------------------------- Name ------------------------------------- Signature ------------------------------------- Title, if Entity -5- IN WITNESS WHEREOF, the parties hereto have executed this Voting Agreement as of the day and year first above written. GOLDMAN, SACHS & CO. VERWALTUNGS GmbH* By: ------------------------------------------- Joseph H. Gleberman, Managing Director and ------------------------------------------- Carla H. Skodinski, Registered Agent *2 Signatories required to bind this entity GS CAPITAL PARTNERS II, L.P. By: GS Advisors, L.P. Its General Partner By: GS Advisors, Inc. Its General Partner By: ------------------------------------------- Joseph H. Gleberman, Vice President GS CAPITAL PARTNERS II OFFSHORE, L.P. By: GS Advisors II (Cayman), L.P. Its General Partner By: GS Advisors II, Inc. Its General Partner By: ------------------------------------------- Joseph H. Gleberman, Vice President STONE STREET FUND 1996, L.P. By: Stone Street Empire Corp., General Partner By: ------------------------------------------- Carla H. Skodinski, Vice President BRIDGE STREET FUND 1996, L.P. By: Stone Street Empire Corp. Managing General Partner By: ------------------------------------------- Carla H. Skodinski, Vice President -6- IN WITNESS WHEREOF, the parties hereto have executed this Voting Agreement as of the day and year first above written. SERVICEMASTER VENTURE FUND L.L.C. By: The Service Master Company Limited Partnership, managing member By: ServiceMaster Management Corporation, general partner By: ------------------------------------------- Kenneth Hooten, Vice President -7- IN WITNESS WHEREOF, the parties hereto have executed this Voting Agreement as of the day and year first above written. ORCHID & CO., nominee for T. Rowe Price Threshold Fund III, L.P. By: T. Rowe Price Threshold Fund Associates, Inc. By: ------------------------------------------- Name: Title: -8- IN WITNESS WHEREOF, the parties hereto have executed this Voting Agreement as of the day and year first above written. GLOBAL RETAIL PARTNERS, L.P. By: GLOBAL RETAIL PARTNERS, INC. General Partner By: ------------------------------------------- Name: Title: DLJ DIVERSIFIED PARTNERS, L.P. By: DLJ DIVERSIFIED PARTNERS, INC. General Partner By: ------------------------------------------- Name: Title: DLJ DIVERSIFIED PARTNERS-A, L.P. By: DLJ DIVERSIFIED PARTNERS, INC. General Partner By: ------------------------------------------- Name: Title: -9- GRP PARTNERS, L.P. By: GLOBAL RETAIL PARTNERS, INC. General Partner By: ------------------------------------------- Name: Title: GLOBAL RETAIL PARTNERS FUNDING, INC. By: ------------------------------------------- Name: Title: DLJ FIRST ESC L.L.C. By: DLJ LBO PLANS MANAGEMENT CORPORATION Manager By: ------------------------------------------- Name: Title: -10- EX-21.1 9 SUBSIDIARIES OF CITYSEARCH EXHIBIT 21.1 SUBSIDIARIES OF CITYSEARCH, INC. Metro Beat, Inc. (New York) CitySearch Canada Inc. (Ontario, Canada) EX-23.1 10 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITOR We consent to the reference to our firm under the captions "Experts" and "Selected Financial Data" and to the use of our report dated March 11, 1998 (except Note 10, as to which the date is May 26, 1998), in the Registration Statement Form S-1 and related Prospectus (the Registration Statement) of CitySearch, Inc. dated June 22, 1998. Our audit also included the financial statement schedule of CitySearch, Inc. listed in Item 16(b). The schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the schedule based on our audit. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Ernst & Young LLP Woodland Hills, CA June 19, 1998 EX-27.1 11 FINANCIAL DATA SCHEDULE
5 1,000 U.S DOLLARS YEAR 3-MOS DEC-31-1997 MAR-31-1998 JAN-01-1997 JAN-01-1998 DEC-31-1997 MAR-31-1998 1 1 25,227 16,455 0 0 318 941 25 44 0 0 25,639 17,537 8,185 9,029 2,169 2,842 31,655 23,724 6,264 5,879 0 0 70,882 70,882 2,610 2,610 455 870 (245) (567) 31,655 23,724 6,184 3,091 6,184 3,091 10,846 3,450 36,741 8,150 0 0 115 23 271 106 (36,518) (7,977) 8 0 (36,526) (7,977) 0 0 0 0 0 0 (36,526) (7,977) (1.96) (.33) (1.96) (.33)
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