-----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, GaDWqF236bsWmkjPxsr/zfVJ6GeJdzI+rxCJJwQgaWail1W4dPvb16br+efi6RMP I/ZAr4k2N0dZV9ycHQaeTA== 0001012870-99-000963.txt : 19990402 0001012870-99-000963.hdr.sgml : 19990402 ACCESSION NUMBER: 0001012870-99-000963 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TICKETMASTER ONLINE CITYSEARCH INC CENTRAL INDEX KEY: 0001006637 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 954546874 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25041 FILM NUMBER: 99583065 BUSINESS ADDRESS: STREET 1: 790 E COLORADO BLVD STREET 2: STE 200 CITY: PASADENA STATE: CA ZIP: 91101 BUSINESS PHONE: 6264050050 MAIL ADDRESS: STREET 1: 790 E COLORADO BLVD STREET 2: SUITE 200 CITY: PASADENA STATE: CA ZIP: 91101 FORMER COMPANY: FORMER CONFORMED NAME: CITYSEARCH INC DATE OF NAME CHANGE: 19980617 10-K 1 FORM 10-K =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File No. 0-________ TICKETMASTER ONLINE-CITYSEARCH, INC. (Exact name of Registrant as specified in its charter) ------------------------- Delaware 95-4546874 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 790 E. Colorado Boulevard, Suite 200 Pasadena, California 91101 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (626) 405-0050 ------------------------- Securities registered pursuant to Section 12 (b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Class B Common Stock, par value $.01 per share Nasdaq Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES [X] NO [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of Class B Common Stock on December 31, 1998, as reported by Nasdaq, was approximately $1,093,303,000. Shares of voting stock held by each officer and director and by each person who owns 5% or more of the outstanding voting stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the registrant's Common Stock on December 31, 1998 was 63,291,653 shares of Class A Common Stock and 8,167,000 shares of Class B Common Stock. DOCUMENTS INCORPORATED BY REFERENCE None. ================================================================================ PART I The discussion in this report 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein and those set forth under "Risk Factors" in the Registration Statement on Form S-1 filed by the Company on December 2, 1998. Unless the context otherwise requires, (i) "Ticketmaster Online" means, prior to the Merger (as defined below), Ticketmaster Multimedia Holdings, Inc. and, after the Merger, the Ticketmaster Online business of the Company, (ii) "CitySearch" means, prior to the Merger, CitySearch, Inc. and its subsidiaries and, after the Merger, the CitySearch business of the Company, (iii) "Ticketmaster Group" means Ticketmaster Group, Inc., a wholly-owned subsidiary of USA Networks, Inc., and its subsidiaries and managed affiliates (other than Ticketmaster Online and the Company), (iv) "Ticketmaster Corp." means Ticketmaster Corporation, a wholly-owned subsidiary of Ticketmaster Group, and its subsidiaries and managed affiliates (other than Ticketmaster Online and the Company) collectively or individually, and (v) "USAi" means USA Networks, Inc. and its subsidiaries and managed affiliates (other than Ticketmaster Online and the Company). All information in this report reflects the merger of Ticketmaster Online with a wholly-owned subsidiary of CitySearch, which became effective on September 28, 1998, with Ticketmaster Online continuing as the surviving corporation and as a wholly-owned subsidiary of CitySearch (the "Merger"). ITEM 1. BUSINESS General The Company has combined CitySearch and Ticketmaster Online to create a leading provider of local city guides, local advertising and live event ticketing on the Internet. CitySearch was incorporated in September 1995 and launched its first local city guide in May 1996. Ticketmaster Online was formed in 1993 to administer the online business of Ticketmaster Corp. and began selling live event tickets and related merchandise online in November 1996. Prior to the Merger, Ticketmaster Online was operated as a wholly-owned subsidiary of Ticketmaster Corp. The Company is integrating its local CitySearch city guides with its Ticketmaster Online live events ticketing and merchandising distribution capabilities to offer online ticketing, merchandise, electronic coupons and other transactions to a broader audience of consumers. The CitySearch city guides provide 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. Ticketmaster Online offers consumers up-to-date information on live entertainment events and a convenient means of purchasing tickets and related merchandise on the Web for live events in 43 states and in Canada and the United Kingdom. Consumers can access the Ticketmaster Online service at www.ticketmaster.com and from CitySearch owned and operated city guides at www.citysearch.com through numerous direct links from banners and event profiles. Subject to certain limitations, Ticketmaster Online is the exclusive agent for Ticketmaster Corp., a leading provider of live event automated ticketing services in the United States, for the online sale of tickets to live events presented by Ticketmaster Corp.'s clients. The Company intends to accelerate the expansion of different versions of the CitySearch city guides into new local territories in part by working closely with Ticketmaster Corp.'s local offices. The Company includes selected CitySearch editorial content on the Ticketmaster Online Web site, thereby providing additional information to assist purchasing decisions. The Company believes that by expanding its branded network of local city guides and increasing the sales of tickets sold online, the Company's Web sites will increasingly attract local, regional and national advertisers and local consumers seeking to transact on the Company's Websites. The Company has two classes of authorized Common Stock (as defined below) outstanding, Class A Common Stock (the "Class A Common Stock") and Class B Common Stock (the "Class B Common Stock"). On December 2, 1998, the Company filed a Registration Statement on Form S-1 for 8,050,000 shares of -2- Class B Common Stock. As of December 31, 1998, there were 63,291,653 shares of Class A Common Stock outstanding and 8,167,000 shares of Class B Common Stock outstanding. The rights of the holders of Class A Common Stock and Class B Common Stock are substantially identical, except with respect to voting, conversion and transfer. Except as otherwise required by applicable law, each share of Class A Common Stock entitles its holder to 15 votes and each share of Class B Common Stock entitles its holder to one vote on all matters submitted to a vote or for the consent of stockholders. Except as otherwise required by applicable law, the Class A Common Stock and the Class B Common Stock shall vote together as a single class on all matters submitted to a vote or for the consent of stockholders. The Company has also authorized Class C Common Stock (the "Class C Common Stock" and, together with the Class A Common Stock and the Class B Common Stock, the "Common Stock"), which is nonvoting and of which no shares are issued and outstanding. The Company is currently a direct, non-wholly-owned subsidiary of Ticketmaster Corporation, an Illinois corporation ("Ticketmaster Corp."), which is an indirect, wholly-owned subsidiary of USA Networks, Inc., a Delaware corporation ("USAi"). USAi beneficially owns 42,480,143 shares of Class A Common Stock, or approximately 59.4%, of the Company's outstanding Common Stock, representing approximately 66.4% of the total voting power of the outstanding Common Stock. 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) 405-0050. Ticketmaster Online-CitySearch Merger On September 28, 1998, pursuant to an Amended and Restated Agreement and Plan of Reorganization, dated August 12, 1998 (the "Merger Agreement"), by and among CitySearch, USAi, Ticketmaster Group, Ticketmaster Corp., Ticketmaster Online, and Tiberius, Inc., a wholly-owned subsidiary of CitySearch ("Merger Sub"), Merger Sub was merged with and into Ticketmaster Online, with Ticketmaster Online continuing as the surviving corporation and as a wholly- owned subsidiary of the Company. Immediately prior to the Merger, all of the outstanding shares of CitySearch Convertible Preferred Stock were converted into shares of CitySearch Common Stock and all outstanding options or warrants to purchase shares of CitySearch Preferred Stock were converted into options or warrants to purchase shares of CitySearch Common Stock. Recent Developments Pending Business Combination with Lycos, Inc. and USAi's Home Shopping Network, Ticketmaster and Internet Shopping Network/First Auction Businesses On February 9, 1999, USAi, Lycos, Inc. ("Lycos") and the Company announced that they had entered into definitive agreements (the "Agreements") relating to the combination of the Company, Lycos and USAi's Home Shopping Network ("Home Shopping"), Ticketmaster and Internet Shopping Network/First Auction businesses (the "Contributed Businesses") in a new company to be named USA/Lycos Interactive Networks, Inc. ("USA/Lycos"). The transactions will be effected by mergers of Lycos and the Company with subsidiaries of USA/Lycos and the contribution by USAi to USA/Lycos of the Contributed Businesses, in exchange for the consideration summarized below (the "Transactions"). Pursuant to the Agreements, upon consummation of the Transactions: i) each share of Lycos Common Stock will be converted into the right to receive (a) 1 share of USA/Lycos Common Stock and (b) 0.2963 of a share of USA/Lycos Series A Convertible Redeemable Preferred Stock (the "Series A Preferred Stock"); -3- (ii) each share of the Company's Class B Common Stock (the publicly traded Company stock) will be converted into the right to receive (x) 0.4464 of a share of USA/Lycos Common Stock and (y) 0.0584 of a share of Series A Preferred Stock; (iii) each share of the Company's Class A Common Stock will be converted into the right to receive 0.4464 of a share of USA/Lycos Class B Common Stock; and (iv) USAi will receive 88,353,398 shares of USA/Lycos Class B Common Stock and 1,938,853 shares of Series A Preferred Stock in exchange for the Contributed Businesses. Both the USA/Lycos Common Stock and the Series A Preferred Stock will be publicly traded. The USA/Lycos Class B Common Stock will not be publicly traded. Except as otherwise provided by Delaware law, the USA/Lycos Common Stock will have one vote per share, and the USA/Lycos Class B Common Stock will have 15 votes per share on all matters submitted to a vote of USA/Lycos' stockholders, including the election of directors of USA/Lycos. Upon closing of the Transactions, based on the expected initial ownership of USA/Lycos on an adjusted fully diluted basis, former Lycos shareholders will own 30% of the USA/Lycos equity, former Company shareholders (other than USAi) will own 8.5% of the USA/Lycos equity and USAi will own 61.5% of the USA/Lycos equity (including 10.9% relating to USAi's controlling interest in the Company). Upon the closing, USAi will beneficially own shares of USA/Lycos stock representing approximately 96% of the combined voting power of USA/Lycos, assuming all holders of the Company's Class A Common Stock, other than USAi, convert their shares into shares of the Company's Class B Common Stock prior to the closing. The terms of the Series A Preferred Stock provide for the issuance in certain circumstances of additional shares of USA/Lycos Common Stock to the holders thereof following the 39-month anniversary of the closing of the Transactions. Each share of Series A Preferred Stock will be, following such anniversary, automatically converted into the right to receive a number of shares of USA/Lycos Common Stock based on the "Final Market Price" of the USA/Lycos Common Stock, which is equal to the sum of (i) .5 times the average of the 90-day, volume-weighted average closing price (the "Market Price") of the USA/Lycos Common Stock ending on (x) the 90th day following the closing, (y) the 15-month anniversary of the closing and (z) the 27-month anniversary of the closing, and (ii) .5 times the Market Price for the 90-day period ending on the 39-month anniversary of the closing (the sum of (i) and (ii), the "Final Market Price"). If the Final Market Price is equal to or greater than $257.88 (which would imply a market capitalization, based on USA/Lycos's expected initial capitalization at closing, of $45 billion), each share of Series A Preferred Stock will be converted into 1 share of USA/Lycos Common Stock, if the Final Market Price is equal to or less than $143.27 (which would imply a market capitalization, based on USA/Lycos' expected initial capitalization at closing, of $25 billion), each Series A Preferred Stock share will be convertible into no shares of USA/Lycos Common Stock and the shares of Series A Preferred Stock will be redeemed by USA/Lycos for $.01 per share. At Final Market Prices between $143.27 and $257.88, the shares to be issued will vary, on an interpolated basis. The Series A Preferred Stock will contain customary anti-dilution adjustments for the Final Market Price and the conversion ratio. The terms of the Series A Preferred Stock are set forth in Exhibit B to the Agreement and Plan of Reorganization, filed as an exhibit hereto. The parties have also entered into option agreements, filed as exhibits hereto, which under certain circumstances provide USAi and the Company with the right to acquire, in the aggregate, up to 19.9% of the outstanding Lycos Common Stock. The Transactions are subject to Lycos shareholder approval as well as receipt of required regulatory approvals and other customary conditions. Upon closing of the Transactions, Barry Diller, Chairman and Chief Executive Officer of USAi, will be Chairman of the Board of USA/Lycos; Robert J. Davis, the President and Chief Executive Officer of -4- Lycos, will be the President and Chief Executive Officer of USA/Lycos; and Edward M. Philip, Chief Operating Officer and Chief Financial Officer of Lycos, will be the Chief Financial Officer of USA/Lycos. In addition to Mr. Diller, Messrs. Davis and Philip will be directors of USA/Lycos. Lycos will be entitled to appoint one additional director to serve for a one-year term, and USAi will appoint the remaining directors of USA/Lycos. The Agreements summarized above are filed as exhibits hereto, and the foregoing summary descriptions of such agreements are qualified in their entirety by reference to such exhibits, which are incorporated herein by reference. Pending Acquisition of CityAuction, Inc. On January 8, 1999, the Company and CityAuction, Inc. ("CityAuction") entered into an Agreement and Plan of Reorganization (the "CityAuction Agreement"). Pursuant to the CityAuction Agreement, a newly-formed, wholly-owned subsidiary of the Company will merge into CityAuction (the "CityAuction Merger"), resulting in CityAuction's becoming a wholly-owned subsidiary of the Company. Upon the closing of the CityAuction Merger, each outstanding share of Common Stock of CityAuction will be converted into 0.279971340 shares of Class B Common Stock of the Company. The maximum consideration to be paid to CityAuction shareholders by the Company pursuant to the CityAuction Merger will be equal to (i) 800,000 shares of Class B Common Stock of the Company (plus any additional shares of Class B Common Stock exchanged in the CityAuction Merger at the Exchange Ratio (as defined in the CityAuction Agreement) for shares of capital stock of CityAuction issued upon exercise of a warrant issued by CityAuction), plus (ii) an additional 200,000 shares of Class B Common Stock of the Company to be reserved for issuance upon exercise of options to purchase Class B Common Stock of the Company to be granted to the employees of CityAuction. The CityAuction Agreement is filed as an exhibit hereto, and the foregoing summary description of the CityAuction Agreement is qualified in its entirety by reference to the exhibit, which is incorporated herein by reference. CitySearch Business CitySearch Service for Consumers The Company produces and delivers comprehensive local city guides on 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 partners. The CitySearch service is topically organized by categories, such as arts and entertainment, restaurants and bars, community, shops and services, sports and outdoors, hotels and tourism, local news and professional services. Within most of the city guides, consumers can search neighborhood 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. In CitySearch owned and operated markets, consumers can also access the Ticketmaster Online Web site through CitySearch city guides to purchase live event tickets and related merchandise online. In certain markets, consumers can also access audio streams, including recent news and other information, from local radio partners. 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. The CitySearch service has been launched in markets across the United States and in selected international markets. The Company plans to continue to expand the service both in owned and operated -5- markets and by partnering with major media companies in other 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 Selected Partners - ---------------------------------- ---------------------- --------------------------------------------------- Owned and operated: Raleigh-Durham-Chapel Hill May 1996 WUNC (public radio station) Capstar Broadcasting Corporation (4 radio stations) WCHL AM San Francisco Bay Area October 1996 KGO (ABC) CBS Radio (2 radio stations) Austin March 1997 KTBC (Fox) UPN 13 Salt Lake City/Utah April 1997 KUTV (CBS) Citadel Communications Corporation (6 radio stations) Nashville May 1997 WZTV (Fox) UPN 30 Dick Broadcasting (2 radio stations) Portland June 1997 KATU (ABC) KKCW FM (Jacor Communications Inc.) New York(1) September 1997 New York Daily News Time Out New York (weekly arts and entertainment publication) New York Convention & Visitors Bureau Denver January 1999 Atlanta February 1999 Partner-led: Melbourne July 1997 The Melbourne Age Big Colour Pages (independent yellow pages of Australia) Sydney September 1997 The Sydney Morning Herald Big Colour Pages Toronto September 1997 Toronto Star Tele-Direct (the yellow pages subsidiary of Bell Canada) Washington, D.C. January 1998 Washingtonpost.Newsweek Interactive Los Angeles(2) April 1998 Los Angeles Times Dallas July 1998 The Dallas Morning News Baltimore August 1998 The Baltimore Sun Stockholm September 1998 Schibsted ASA/Scandinavia Online Copenhagen November 1998 Schibsted ASA/Scandinavia Online San Diego February 1999 The San Diego Union-Tribune Canberra March 1999 John Fairfax, Ltd. Big Colour Pages Oslo 1999* Schibsted ASA/Scandinavia Online
- ----------------------------- * Estimated launch date (1) The Company acquired Metrobeat, Inc. ("Metrobeat") 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. -6- CitySearch Service for Business Customers The Company creates and hosts CitySearch Web sites for local and regional businesses and organizations for a monthly fee. The Company 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 $1,000 per month. Most business customers have entered into a one-year agreement that automatically converts into a month-to-month contract upon expiration of the initial term. By aggregating a customer's Web site with those of numerous other businesses in a comprehensive local city guide, the Company provides categorical, geographic and editorial context to a customer's Web presence to generate usage by consumers, as well as significant Internet traffic. Based on studies conducted for it by a marketing research firm, 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 CitySearch Web presence, including design, photography, layout, posting of updated information, hosting and maintenance. Businesses are able to provide a targeted audience with current information about their products and services including photographs, prices, location, schedules of live entertainment, sales and other relevant information. Unlike traditional media such as yellow pages advertising, the Company offers CitySearch business customers a certain number of free updates each month. The 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 CitySearch services, are typically priced from $190 to $1,000 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 its prices compare favorably to other Web advertising 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 believes that its 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, Internet Business Advisors ("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 the Company's central production site in Pasadena, California 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 sites designed to 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 an 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 its competitors. The Company intends to offer expanded e-commerce functionality and other innovative features allowing businesses to better serve consumers, including ticketing, reservations, sales events notifications, -7- 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 local city guides. CitySearch 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 of CitySearch local city guides, (ii) generate licensing revenue in CitySearch partner-led markets, (iii) facilitate branding, (iv) gain access to additional content and (v) drive traffic on the Company's network of sites. Management intends to continue to negotiate further partnerships and alliances. Newspaper and Telephony Partnerships. The Company has entered into strategic partnerships with major newspapers and media companies such as The Baltimore Sun, The Dallas Morning News, the Los Angeles Times, The San Diego Union-Tribune, Washingtonpost.Newsweek Interactive, Big Colour Pages (independent yellow pages of Australia), The Melbourne Age, Schibsted ASA/Scandinavia Online (Copenhagen, Oslo and Stockholm), The Sydney Morning Herald, Tele-Direct (the yellow pages subsidiary of Bell Canada, Inc.) and the Toronto Star. In these partner-led markets, the partner provides the capital and management, while the Company contributes technology, a business model, consulting services, business systems and processes and network participation. The Company typically receives up-front license fees, ongoing license fees for delivery of upgrades and support, and royalties based on revenues that the 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. These 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. The Company has also reached content sharing and linking agreements with various companies, including the New York Daily News Online Edition and Time Out New York. Under these agreements, the Company's city guide sites and content partners create co-branded areas and host certain content supplied by the content partners. In August 1998, the Company restructured its relationship with Toronto Star Newspapers Limited in order to admit a new partner with significant brand, sales and financial resources. Under the terms of the partnership agreement, Toronto Star Newspapers Limited and Tele-Direct Inc. each hold a 45% interest in the partnership and together operate the toronto.com Web service. The Company holds a 10% interest in the partnership and licenses its technology and business systems to the partnership for use in the defined territory. In July 1998, the Company entered into agreement with Classified Ventures, a leading provider of online advertising products and services to the newspaper industry. Classified Ventures is funded by Central Newspapers, Inc., Gannett Co., Inc., Knight Ridder, Inc., The McClatchy Company, The New York Times Company, The Times Mirror Company, Tribune Company and The Washington Post Company, and has a network of over 140 affiliated newspapers in 44 states, including 34 of the nation's top 50 markets. The Company licensed elements of its technology and business systems to Classified Ventures and provides services in automotive and real estate classified advertising categories. The agreement may be terminated effective 2001 by Classified Ventures. Certain CitySearch owned and operated city guides may also participate as Classified Ventures affiliates in their respective markets. Television and Radio Media Alliances. The Company has entered into co- promotion agreements with local television and radio stations in most of its CitySearch owned and operated markets. These relationships typically offer content sharing and co-promotion to both parties. The Company works with each partner to develop a multimedia Web site within the CitySearch site, while the partner offers promotion and a -8- recognized brand within the market. The Company 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, the Company has partnered in Salt Lake City/Utah with the CBS television station (KUTV) as well as radio stations owned by Citadel Communications Corporation and, in Raleigh-Durham-Chapel Hill, with the national public radio station (WUNC) and radio stations owned by Capstar Broadcasting 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 is a party to an agreement with American Express which included an equity investment in the Company. The agreement provides for distribution of co-branded marketing materials to American Express Travel Related Services Company, Inc. ("American Express") merchant customers in the Company's local markets that will offer merchant customers online Web site presences through the Company's local city guides. The parties intend to create areas within the CitySearch sites to aggregate promotions and discounts offered to consumers by American Express merchant customers as well as develop additional e-commerce products. In addition, American Express is obligated to purchase sponsorships and banner advertising on the CitySearch sites. The agreement expires in 2002, subject to certain provisions allowing for early termination in the event of a change of control of the Company. The Company intends to continue to aggressively pursue such marketing agreements in order to attract additional business customers and increase usage of the CitySearch service by consumers. Content Distribution Alliances. The Company has entered into agreements with a number of companies to distribute its content and drive traffic to the Company's Web sites. For example, the Company has entered into agreements or arrangements with Earthlink Network, Inc., Planet Direct Corporation and Internet Travel Network to distribute content across relevant sites. Marketing and Sales The Company emphasizes marketing activities in its owned and operated markets aimed at increasing awareness of its CitySearch local city guides for both consumers and business customers. The Company's roll-out teams are led by experienced managers who prepare for launch by negotiating promotional arrangements with local media, training a direct sales force and selling initial sites. The Company conducts advertising and public relations campaigns through low-cost "guerilla" marketing efforts and the Company'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 and Preview Travel, as well as through traditional radio, print and outdoor media. 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 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 provides its partners with a roll-out team to launch the service and ongoing support, including assistance with recruiting, sales strategy and back office operations. 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 December 31, 1998, the Company employed approximately 135 IBAs in its seven owned and operated markets selling directly to local businesses as well as field customers service representatives in these markets to maintain regular contact with business customers and facilitate up-selling of Web site functionality. Each IBA completes an 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 participate in ongoing training sessions in sales techniques and new products. -9- Operations The Company has created a systematic approach to market roll-out of its CitySearch local city guides that is designed to enable it to launch its service in owned and operated markets 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. The Company'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. Customer service operations are 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 changes to the business customer's site in real time. Technology The Company has developed and implemented a number of technologies to support its local city guide service and business operations, including (i) an online city guide application, (ii) a set of content creation and management tools and (iii) a suite of integrated enterprise management systems. CitySearch Online Application. The CitySearch online application provides a 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, geographic 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, which the Company has deployed in all of its markets, CitySearch is employing a multi- tiered architecture, separating a standard relational database from business rules and presentation logic. CS 2.5 is designed to permit city guide publishers 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 believes that both it and its partners will be able to respond more quickly to changes in the marketplace and evolving user preferences. In addition, the object-oriented architecture is designed to provide 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. -10- The Company 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. Ticketmaster Online Business Ticketmaster Online Service Ticketmaster Online is a leading online ticketing service that enables consumers to purchase tickets for live music, sports, theater and family entertainment events presented by Ticketmaster Corp.'s clients and related merchandise over the Web. Consumers can access the Ticketmaster Online service at www.ticketmaster.com and from CitySearch owned and operated city guides at www.citysearch.com through numerous direct links from banners and event profiles. In addition to these services, the Ticketmaster Online Web site provides local information and original content regarding live events for Ticketmaster Corp. clients throughout the United States, Canada and the United Kingdom. Throughout the Ticketmaster Online Web site and at the conclusion of a confirmed ticket purchase, the consumer is prompted to purchase merchandise that is related to a particular event, such as videos, tour merchandise and sports memorabilia. The Company intends to expand the types and range of merchandise that can be ordered by consumers through the Ticketmaster Online Web site. The Company also intends to organize membership programs that will provide Ticketmaster Online members with certain benefits centered around entertainment, leisure and travel activities. Membership is expected to include participation in other activities not generally available to the public. Since the commencement of online ticket sales in November 1996, Ticketmaster Online has experienced significant growth in tickets sold through its Web site. Gross transaction dollars for ticket sales increased from approximately $854,000 in the quarter ended December 31, 1996 to $41.7 million in the quarter ended December 31, 1998. Similarly, tickets sold on the Ticketmaster Online Web site in the quarter ended December 31, 1996 represented less than 1% of total tickets sold by Ticketmaster Corp., while tickets sold online in the quarter ended December 31, 1998 represented 6%. Ticketmaster Corp. Clients Ticketmaster Corp. is a leading provider of automated ticketing services in the United States with over 3,750 domestic clients, including many of the country's foremost entertainment facilities, promoters and sports franchises. Ticketmaster Corp. established its market position by providing these clients with comprehensive ticket inventory control and management, a broad distribution network and dedicated marketing and support services. Ticket orders are received and fulfilled through operator-staffed call centers, independent sales outlets remote to the facility box office, and Ticketmaster Online's website. Revenue is generated principally from convenience charges received by Ticketmaster Corp. for tickets sold on its clients' behalf. Ticketmaster Corp. generally serves as an exclusive agent for its clients and typically has no financial risk for unsold tickets. Ticketmaster Corp. has a comprehensive domestic distribution system that includes approximately 2,700 remote sales outlets, covering many of the major metropolitan areas in the United States, and 17 domestic call centers with approximately 2,000 operator positions. Ticketmaster Corp. also operates in Great Britain, Canada, Ireland, Mexico and Australia and, in 1998, has expanded into France, Chile and Argentina. The number of tickets sold through Ticketmaster Corp. has increased from approximately 29 million tickets in 1990 to approximately 70 million tickets in 1998. The Company believes that the Ticketmaster system for live event ticketing transactions and its distribution capabilities enhance Ticketmaster Corp.'s ability to attract new clients and maintain its existing client base. The Ticketmaster system, which includes both hardware and software, is typically installed in a client's box office and provides a single centralized inventory control management system capable of tracking total ticket inventory for all events, whether sales are made on a season, subscription, group or individual ticket basis. The versatility of the Ticketmaster system allows it to be customized to satisfy a full range of client requirements. -11- Ticketmaster Corp. generally enters into written agreements with its clients under which it agrees to provide the Ticketmaster system and to serve as the client's exclusive ticket sales agent for all sales of individual tickets sold outside of the facility's box office for a specified period, typically five to seven years. Under its facilities agreements,Ticketmaster Corp. generally is granted the right to sell tickets for all live events presented at a facility, and installs the Ticketmaster system in the facility's box office. Agreements with promoters generally grant Ticketmaster Corp. the right to sell tickets for all live events presented by that promoter at any facility, unless the facility is covered by an exclusive agreement with another automated ticketing service company. As part of its client agreements, Ticketmaster Corp. is generally granted the right to collect from ticket purchasers a per ticket convenience charge on all tickets sold other than at the box office and an additional per order handling charge on all tickets sold by Ticketmaster Corp. other than at remote sales outlets to partially offset the cost of fulfillment. The amount of the convenience charge is typically determined during the contract negotiation process, and varies based upon numerous factors, including the services to be rendered to the client, the amount and cost of equipment to be installed at the client's box office and the amount of advertising and/or promotional allowances to be provided, as well as the type of event and whether the ticket is purchased at a remote sales outlet, by telephone, through the Ticketmaster Online Web site or otherwise. Any deviations from those amounts for any event are negotiated and agreed upon by Ticketmaster Corp. and the client prior to the commencement of ticket sales. During Ticketmaster Corp.'s fiscal 1998, the convenience charges generally ranged from $1.50 to $7.00 per ticket. Convenience charges, when added to per order handling charges, averaged approximately $4.50 per ticket in fiscal 1998. Ticketmaster Corp.'s client agreements also generally establish the amounts and frequency of any increases in the convenience charge and handling charge during the term of the agreement. The agreements with some of Ticketmaster Corp.'s clients may provide for a client to participate in the convenience charges paid by ticket purchasers for tickets bought through Ticketmaster Corp. for that client's events. The amount of such participation, if any, is determined by negotiation with that client. Some agreements also may provide for Ticketmaster Corp. to make participation advances to the client, generally recoupable by Ticketmaster Corp. out of the client's future right to participation. In limited cases, Ticketmaster Corp. makes an upfront, non-recoupable payment to a client for the right to sell tickets for that client. Clients are routinely required by contract to include the Ticketmaster name in print, radio and television advertisements for entertainment events sponsored by such clients. The Ticketmaster name and logo are also prominently displayed on printed tickets and ticket envelopes. Ticketmaster Corp. generally does not buy tickets from its clients for resale to the public and has no financial risk for unsold tickets. In the United Kingdom, Ticketmaster Corp. may from time to time buy tickets from its clients for resale to the public in an amount typically not exceeding (Pounds) 600,000 in the aggregate. Ticket prices are not determined by Ticketmaster Corp. Ticketmaster Corp.'s clients also generally determine the scheduling of when tickets go on sale to the public and what tickets will be available for sale through Ticketmaster Corp. Facilities and promoters, for example, often handle group and season ticket sales in-house. Ticketmaster Corp. only sells a portion of its clients' tickets, the amount of which varies from client to client and varies as to any single client from year to year. The Company believes that the primary benefits derived by Ticketmaster Corp.'s clients by use of the Ticketmaster System include (i) centralized control of total ticket inventory as well as accounting information and market research data, (ii) centralized accountability for ticket proceeds, (iii) manageable and predictable -12- transaction costs, (iv) broader and expedited distribution of tickets, (v) wide dissemination of information about upcoming events through Ticketmaster Corp.'s call centers, Ticketmaster Online and other media platforms, (vi) the ability to easily add additional performances if warranted by demand and (vii) marketing and promotional support. If an event is canceled, Ticketmaster Corp.'s current policy is to refund the per ticket convenience charges (but not the handling charge). Refunds of the ticket price for a canceled event are funded by the client. To the extent that funds then being held by Ticketmaster Corp. on behalf of the client are insufficient to cover all refunds, the client is obligated to provide Ticketmaster Corp. with additional funds within 24 to 72 hours after a request by Ticketmaster Corp. Ticketmaster License Agreement Under the Ticketmaster License Agreement, subject to certain limitations, Ticketmaster Corp. has granted (a) Ticketmaster Online an exclusive, perpetual, irrevocable, worldwide license to use the Ticketmaster trademark and (b) certain Ticketmaster Corp. databases to sell live event tickets online for Ticketmaster Corp.'s clients. In addition, Ticketmaster Corp. authorized Ticketmaster Online to be Ticketmaster Corp.'s exclusive, perpetual, worldwide agent for such online ticket sales. The Ticketmaster License Agreement further provides that Ticketmaster Corp. may use and permit others to use the Ticketmaster trademark in connection with the online promotion of ticket sales. Ticketmaster Corp. retains the rights to sell tickets by non-online means and to use the Ticketmaster trademark in connection with such sales. The Ticketmaster License Agreement defines such non-online means to include (1) by telephone; (2) by other voice-to-voice means or voice-to-voice recognition unit systems; (3) by non-interactive broadcast, cable and satellite television; and (4) by kiosks and retail ticket outlets. Client venues retain the rights to sell tickets at their box offices or as otherwise provided in client venue agreements with Ticketmaster Corp. Ticketmaster Corp. is the contracting party with client venues, promoters and sports franchises, providing ticket inventory management, consumer information and related data for all ticketing transactions. Ticketmaster Corp. provides this information to Ticketmaster Online for processing of online live event ticket sales and provides all transaction processing and fulfillment services for online live event ticket sales. Ticketmaster Online is required under the Ticketmaster License Agreement to comply with the terms of Ticketmaster Corp.'s client agreements. Ticketmaster Online's rights, contained in the Ticketmaster License Agreement, are subject to the client agreements. The Ticketmaster License Agreement also generally restricts Ticketmaster Online from cooperating with, offering online links to, or entering into any agreements with venues, ticket sellers or sales agents for online sale of tickets. Under the Ticketmaster License Agreement, Ticketmaster Online pays Ticketmaster Corp. a royalty which is a percentage of the net profit it derives from online ticket sales. Ticketmaster Online also reimburses Ticketmaster Corp. for Ticketmaster Corp.'s direct expenses related to online ticket sales. Under the Ticketmaster License Agreement, Ticketmaster Online has also been granted the non-exclusive right to promote and sell online certain merchandise available through Ticketmaster Corp. Ticketmaster Corp. serves as Ticketmaster Online's exclusive fulfillment provider for the online sales of this merchandise. As long as Ticketmaster Corp.'s fees, terms and quality of service are no less favorable than those available to Ticketmaster Online from third parties, Ticketmaster Corp. or its affiliates will serve as Ticketmaster Online's exclusive fulfillment provider for the online sales of all other merchandise available through Ticketmaster Corp. Ticketmaster Corp. may also solicit sponsorship and advertising for Ticketmaster Online's Web sites in a bundle with other sponsorship and advertising opportunities offered by Ticketmaster Corp. The summary descriptions of the Ticketmaster License Agreement contained in this report are qualified in their entirety by reference to the copy thereof filed as an exhibit to the Registration Statement on Form S- 1 filed by the Company on December 2, 1998. -13- Ticketmaster Online Strategic Alliances Ticketmaster Online participates in certain strategic partnerships with leading media, marketing and technology partners. The Company believes that these alliances will assist in the development of compelling content, increase consumer traffic to the Ticketmaster Online Web site, continue to build the Ticketmaster Online brand name and expand the Company's promotional opportunities. Media Partnerships. Ticketmaster Online creates and acquires entertaining, informative and timely local content (e.g., live event information, venue information, articles on live entertainment topics, chat sessions, entertainment reviews and Webcasts), for use on its Web sites. In this regard, Ticketmaster Online has entered into agreements with media companies such as JAM TV and RealTime Sports. These arrangements generally provide for the development of a co-branded Web presence and links from the co-branded area to event listings and ticketing and merchandising pages on the Ticketmaster Online Web site. Ticketmaster Online shares in the advertising and merchandising revenues generated under the applicable agreement. Advertising, Sponsorship and Marketing Partnerships. Ticketmaster Online has entered into advertising, sponsorship and marketing alliances with Internet content and service providers and other partners. In addition, Ticketmaster Corp. has entered into similar agreements pursuant to which Ticketmaster Online performs services and is allocated a percentage of revenues. Ticketmaster Online's other advertisers and marketing partners include Palm Computing Company, United Parcel Service of America, Inc., International Business Machines Corporation and Sprint Communications Company, Ltd. Client advertisements and marketing opportunities are typically integrated into Ticketmaster Online's Web site through banners and links that encourage viewers to click through for additional information. The Company intends to continue to pursue such advertising, sponsorship and marketing opportunities. Technology Partnerships. Ticketmaster Online also participates in certain arrangements with technology partners to provide enhanced features and functionality on its Web site. For example, the Company's "my Ticketmaster" Web site, which Ticketmaster Online jointly developed with Intel Corporation and launched in the first quarter of 1999, is a personalized Web application designed to enable users to choose categories of event information they receive based on personal preferences and habits. This personalized and localized site has been designed to include such features as seating charts (some of which are designed to provide three-dimensional perspectives) and driving directions to venues. Marketing and Sales The Company believes that it will benefit from Ticketmaster Corp.'s continued promotion of its brand name through Ticketmaster Corp.'s services and advertising sales force. The Company intends to continue to leverage the Ticketmaster brand name, Ticketmaster Corp.'s extensive distribution capabilities and core ticketing services in an effort to offer live event venues, sports franchises, promoters, advertisers, sponsors and other partners a wider variety of advertising, promotional and marketing platforms for their products and services. Through the Company's relationship with Ticketmaster Corp., advertisers have access to a full array of advertising alternatives, ranging from online advertising vehicles such as Web sites, banners and sponsorships to traditional advertising on ticket stock and envelopes, during telephone sales (e.g., "music on hold" and sales scripts) and through direct mail campaigns. As of December 31, 1998, the Company had eleven employees dedicated to advertising and promotion of Ticketmaster Online's services. Operations Ticketmaster Online's ticketing system interfaces on a real-time basis with the host ticketing systems developed by Ticketmaster Corp. This process is designed to ensure that, except in limited circumstances, the inventory of tickets available online is identical to that which is available through Ticketmaster's other distribution methods (e.g., telephone call centers and independent retail outlets) and to enable consumers to -14- order tickets on a "best available seat" basis. Measures are taken that are designed to prevent system failure in Ticketmaster Corp.'s computer center. Each system has a live back-up standing ready in the event of a primary system failure. The rooms housing the computer-related equipment are protected by computer-safe fire protection systems. To guard against power outages, uninterruptable power supplies are utilized. High capacity back-up generators eliminate the dependency on public electric sources. In addition, all data is continually recorded on back-up tape. Ticketmaster Online utilizes Secure Sockets Layer encryption technology designed to allow users to securely transmit their personal information to the Ticketmaster Online Web site. The decrypted data is then passed through two levels of firewalls, using an internally developed communications protocol to the Ticketmaster Corp. host systems where credit cards are processed and customer accounts are created. The host systems communicate directly with bank processing centers for instantaneous online credit card authorization and electronic deposit of credit card receipts. Essentially, all order processing, credit card billing, order fulfillment and consumer service functions for online ticketing orders are handled by Ticketmaster Corp. in the same manner as orders which are placed by telephone. Technology Ticketmaster Online has an extensive database of live event information, with event information updated 12 times every hour and more than 200 times daily. This data base contains information on more than 30,000 events and over 3,000 clients and is designed to support an easy-to-use and reliable dynamic event calendar and ticket-buying interface to the Ticketmaster System. The Ticketmaster Online system is deployed as a multi-tiered system of servers that separate database functions, Web page serving functions, transaction processing functions and ticketing system interfacing functions. The system is built using a combination of commercial and proprietary software and hardware and is integrated into the Ticketmaster System. All Ticketmaster Online ticket sales occur on one of 20 geographically dispersed host systems. Credit card authorization and deposit, inventory control for events, customer account management and ticket printing and distribution are all handled on the Ticketmaster System. Internet users interact with various Web servers to find an event using various criteria including event location, event type, or performer name. Once an event is located, users interact with forms-based HTML pages to guide them through the ticket-buying process. The Web servers communicate via a proprietary gateway to the host ticketing systems where the transaction actually takes place. Since the online ticketing system interfaces in real-time with the host ticketing systems, except in limited circumstances, the seats are identical to those available for sale through Ticketmaster Corp.'s other distribution systems such as call centers, outlets or box offices. Competition The markets for local interactive content and services are highly competitive. Currently, CitySearch's primary competitors include Digital City, Inc., a company wholly-owned by America Online, Inc. and Tribune Company, and Microsoft Corporation (Sidewalk). CitySearch also competes against search engine and other site aggregation companies which primarily serve to aggregate links to sites providing local content such as Excite, Inc. (City.Net), Lycos, Inc. (Lycos City Guide) and Yahoo! (Yahoo! Local). In addition, CitySearch competes against offerings from media companies, including Cox Interactive Media, Inc., Knight Ridder, Inc. and Zip2 Corporation, 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 MediaOne Group, Inc. (DiveIn). There are also numerous niche competitors which focus on a specific category or geography and compete with specific content offerings provided by the Company. 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. The Company faces different competitors in most of its CitySearch markets. For example, competitors in the San Francisco Bay -15- Area primarily include Microsoft Corporation (Sidewalk), America Online, Inc. (Digital City) and Yahoo! (SF Bay). Competitors in Raleigh-Durham-Chapel Hill primarily include the Web site operated by The Raleigh News & Observer, WRAL-TV, trianglerestaurants.com, Digital Center (raleighonline.com), Yahoo! Local and Internet Presentations, Inc. (citydirect.com). 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 markets for the business of selling live events tickets and related merchandise is highly competitive and diverse. Ticketmaster Corp.'s and Ticketmaster Online's competitors include event facilities and promoters that handle their own ticket sales and distribution through online and other distribution channels, live event automated ticketing companies with Web sites which may or may not currently offer online transactional capabilities and certain Web-based live event ticketing companies which only conduct business online. Where facilities and promoters decide to utilize the services of a ticketing company, Ticketmaster Corp. and Ticketmaster Online compete with international, national and regional ticketing services, including TicketWeb, Telecharge (Shubert Ticketing Services), NEXT Ticketing, Advantix, ETM Entertainment Network, Dillard's, Prologue, Capital Tickets, Lasergate (Lasergate Systems, Inc.) and Tickets.com. Several of Ticketmaster Corp.'s and Ticketmaster Online's competitors have operations in multiple locations throughout the United States and compete with Ticketmaster Corp. and Ticketmaster Online on a national level, while others compete with Ticketmaster Corp. and Ticketmaster Online principally in one specific geographic region. Ticketmaster Corp. is a leading provider of live event automated ticketing services in the United States, with over 3,000 clients, and has a widely recognized brand name in the live event ticketing business. The Company believes that its right to act as Ticketmaster Corp.'s exclusive agent for online live event ticket sales with the exclusive, worldwide right to use the Ticketmaster trademark for such online sales will enable it to compete effectively with other online ticketing services. However, in certain specific geographic regions, including certain of the local markets in which CitySearch provides or intends to provide its local city guide service, one or more of Ticketmaster Corp.'s and Ticketmaster Online's competitors may serve as the primary ticketing service in the region. The Company believes that Ticketmaster Online will experience significant difficulty in establishing a significant online presence in such regions and, as a result, any local city guide for such a region may be unable to provide significant ticketing capabilities. In addition, there can be no assurance that one or more of these regional automated ticketing companies will not expand into other regions or nationally, which could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, certain of Ticketmaster Online's competitors may have financial and other resources greater than those of the Company and may introduce new Internet products and services in these markets in the future. There can be no assurance that Ticketmaster Online's competitors will not develop services superior to those of Ticketmaster Online or achieve greater acceptance than Ticketmaster Online's offerings. In addition, pursuant to the Ticketmaster License Agreement, Ticketmaster Online is restricted from entering into agreements with facilities, promoters or other ticket sellers for the online sale of live event tickets. As a result, Ticketmaster Online is dependent on the ability of Ticketmaster Corp. to acquire and maintain live event ticketing rights, including online ticketing rights, with facilities and promoters and to negotiate commercially favorable terms for such rights. Furthermore, substantially all of the tickets sold through Ticketmaster Online's Web site are also sold by Ticketmaster Corp. by telephone and through independent retail outlets. Such sales by Ticketmaster Corp. could have a material adverse effect on Ticketmaster Online's online sales, and as a result, on the Company's business, financial condition and results of operations. The Company believes that the principal competitive factors include depth, quality and comprehensiveness of content, ease of use, distribution, search capability and brand recognition. Many of the Company's competitors, whether with respect to its CitySearch service or its Ticketmaster Online service, have greater financial and marketing resources than the Company and may have significant competitive -16- advantages through other lines of business and existing business relationships. 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, servicing 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, proprietary software 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 employees, customers, partners and others to protect its proprietary rights. The Company does not hold any patents. 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 or sought by the Company 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 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 brands 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 its copyrights, trademarks, trade dress and similar proprietary rights. In addition, there can be no assurance that other parties will not assert infringement claims, including patent infringement claims, against the Company. The Company licenses the registered trademark "CitySearch" from a third party, and there can be no assurance that the Company will be able to continue to license the trademark on terms acceptable to the Company. The initial term of the license expires in 2001, subject to renewal at the Company's option. The Company licenses the trademark "Ticketmaster" and related trademarks from Ticketmaster Corp. pursuant to the Ticketmaster License Agreement. The Company is dependent upon Ticketmaster Corp. to maintain and assert its rights to the trademarks licensed from Ticketmaster Corp. and defend infringement claims, if any, relating to the Company's use of such marks. The Company may be subject to legal proceedings and claims of alleged infringement of the trademarks and other intellectual property rights of third parties by the Company and its licensees or licensors. 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 December 31, 1998, the Company employed 608 persons with respect to the CitySearch business, including 301 persons in functions related to cost of revenue (including 265 persons in design, content collection, editorial and photography, 27 persons in customer service and nine persons in professional services), 189 persons in sales and marketing, 56 persons in research and development and 62 persons in general and administrative areas. As of December 31, 1998, the Company employed 26 persons with respect to the Ticketmaster Online business, including eleven in advertising and promotion, seven in operations and technical support, five in graphic design and editorial and content development and three in general and administrative services. None of the Company's employees is represented by a labor union, and the Company considers its employee relations to be good. -17- ITEM 2. PROPERTIES The Company's headquarters are located in Pasadena, California, where the Company currently leases approximately 30,700 square feet under a lease expiring in 2002. The Company also leases approximately 4,500 square feet in Austin, 900 square feet in Denver, 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, 2001, 2003, 2000, 2004, 2002, 2001 and 1999, respectively. Ticketmaster Online leases its principal offices in Los Angeles, California, as well as office space in additional cities throughout the United States, the United Kingdom and Canada, in each case on a month-to-month basis from Ticketmaster Corp. on terms the Company believes are at least as favorable as those it could obtain from a third party in an arm's-length transaction. Ticketmaster Online currently occupies an aggregate of approximately 1,000 square feet of space. The Company believes that its facilities are adequate in those cities in which the Company currently does business. ITEM 3. 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. USAi is a defendant (along with several of USAi's directors) in lawsuits brought in connection with the Transactions. See "Business Recent Developments Pending Business Combination with Lycos, Inc. and USAi's Home Shopping Network, Ticketmaster and Internet Shopping Network/First Auction Businesses." Seven of the lawsuits are brought on behalf of shareholders of the Company and allege that the non-USAi shareholders of the Company will receive consideration in the Transactions that is "grossly inadequate" and unfair and that defendants, including USAi, breached alleged fiduciary duties to the shareholders of the Company in negotiating and approving the Transactions. These complaints seek an injunction against completion of the Transactions, rescission in the event it is completed, and damages in an unspecified amount. The remaining six lawsuits are brought on behalf of shareholders of Lycos alleging that USAi aided and abetted alleged breaches of fiduciary duty by Lycos' directors, in that the consideration Lycos shareholders will receive in the Transactions is alleged to be grossly inadequate and unfair. These complaints seek an injunction against completion of the Transactions, rescission in the event it is completed, and damages in an unspecified amount. All these actions are pending in the Court of Chancery of the State of Delaware. The time for defendants to answer has not yet elapsed, and no discovery has as yet been scheduled. USAi believes that the allegations against USAi and its directors do not have merit. During 1994, Ticketmaster Corp. was named as a defendant in 16 federal class action lawsuits filed in United States District Courts purportedly on behalf of consumers who were alleged to have purchased tickets to various events through Ticketmaster Corp. These lawsuits alleged that Ticketmaster Corp.'s activities violated antitrust laws. On December 7, 1994, the Judicial Panel on Multidistrict Litigation transferred all of the lawsuits to the United States District Court for the Eastern District of Missouri for coordinated and consolidated pretrial proceedings. After an amended and consolidated complaint was filed by the plaintiffs, Ticketmaster Corp. filed a motion to dismiss and, on May 31, 1996, the District Court granted that motion ruling that the plaintiffs had failed to state a claim upon which relief could be granted. On April 10, 1998, the United States Court of Appeals for the Eighth Circuit issued an opinion affirming the district court's ruling that the plaintiffs lack standing to pursue their claims for damages under the antitrust laws and held that the plaintiffs' status as indirect purchasers of Ticketmaster Corp.'s services did not bar them from seeking equitable relief against Ticketmaster Corp. Discovery on the plaintiffs' remanded claim for equitable relief is ongoing in the District Court and a trial date of July 17, 2000 has been set. On July 9, 1998, the plaintiffs filed a petition for writ of certiorari to the United States Supreme Court seeking review of the decision dismissing their damage claims. Plaintiff's petition for writ of certiorari in the United States Supreme Court was denied on January 19, 1999. Ticketmaster Corp. has stated that the Court's affirmance of the decision prohibiting plaintiffs from obtaining monetary damages against Ticketmaster Corp. eliminates the substantial portion of plaintiffs' claims. With respect to injunctive relief, the Antitrust Division of the United States Department of Justice had previously investigated Ticketmaster Corp. for in excess of 15 months and closed its investigation with no suggestion of any form of injunctive relief or modification of the manner in which Ticketmaster Corp. does business. In March 1995, MovieFone, Inc. ("MovieFone") and The Teleticketing Company, L.P. filed a complaint against Ticketmaster Corp. in the United States District Court for the Southern District of New York. Plaintiffs allege that they are in the business of providing movie information and teleticketing services, and that they are parties to a contract with Pacer Cats Corporation, a wholly owned subsidiary of Wembley plc ("Pacer Cats"), to provide teleticketing services to movie theaters. Plaintiffs also allege that, together with Pacer Cats, they had planned to begin selling tickets to live entertainment events, and that Ticketmaster Corp., by its conduct, frustrated and prevented plaintiffs' ability to do so. Plaintiffs further allege that Ticketmaster Corp. has interfered with and caused Pacer Cats to breach its contract with plaintiffs. The complaint asserts that Ticketmaster Corp.'s actions violate Section 7 of the Clayton Act and Sections 1 and 2 of the Sherman Act, and that Ticketmaster Corp. tortiously interfered with contractual and prospective business relationships and seeks monetary and injunctive relief based on such allegations. Ticketmaster Corp. filed a motion to dismiss. The court heard oral argument on September 26, 1995. In March 1997, prior to the rendering of any decision by the Court on Ticketmaster Corp.'s motion to dismiss, Ticketmaster Corp. received an amended complaint in which the plaintiffs assert essentially the same claims as in the prior complaint but have added a RICO claim and tort claims. Ticketmaster Corp. filed a motion to dismiss the amended complaint in April 1997, which is still pending. Some of the claims in this litigation are similar to claims that were the subject of an arbitration award in which MovieFone was a claimant and Pacer Cats a respondent. Among other things, the award included damages from Pacer Cats to MovieFone of approximately $22.75 million before interest and an injunction against some entities, which may include affiliates of Ticketmaster Corp., restricting or prohibiting their activity with respect to aspects of the movie teleticketing business for a specified period of time. Neither USAi, Ticketmaster Corp., nor any entity owned or controlled by Ticketmaster Corp., were parties to the arbitration. In May 1998, MovieFone filed a petition in New York state court to hold an entity affiliated with Ticketmaster Corp. in contempt of the injunction provision of the arbitration award on the grounds that such entity is a successor or assignee of, or otherwise acted in concert with, Pacer Cats. In November 1998, the court ruled that the Ticketmaster Corp. affiliate is bound by the arbitrators' findings that it is the successor to Pacer Cats and, as such, liable for breaches committed by Pacer Cats and subject to the terms of the arbitration award's injunction. The court further found that the Ticketmaster Corp. affiliate had violated the injunction and awarded MovieFone approximately $1.38 million for losses it incurred as a result of such violations. The Ticketmaster Corp. affiliate has filed a notice of appeal of the court's decision, including to seek reversal of the ruling regarding successor liability. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On December 1, 1998, stockholders representing a majority of the total outstanding voting power of all outstanding shares of capital stock of the Company as of that date approved (1) the amendment and restatement of the Company's Certificate of Incorporation, in connection with the Company's initial public offering of Class B Common Stock, to authorize 2,000,000 shares of "blank check" preferred stock upon the closing of the offering; the addition of certain provisions regarding corporate opportunities; and the deletion of certain provisions that were operative only prior to the offering; (2) the adoption of the Company's 1998 Employee Stock Purchase Plan, reserving 1,000,000 shares of Class B Common Stock for issuance thereunder, which amount shall increase each year by 200,000 shares or a lesser amount as determined by the Board of Directors; and (3) the adoption of the Company's 1998 Stock Option Plan, reserving 4,000,000 shares of Class B Common Stock for issuance thereunder. -18- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Market for Registrant's Common Stock The Company's Class B Common Stock is traded on the Nasdaq National Market under the symbol "TMCS." The following table sets forth the range of the high and low sale prices by quarter as reported on the Nasdaq National Market since December 3, 1998, the date the Class B Common Stock commenced trading. - ----------------------------------------------------------------------------- Quarter High Low - ----------------------------------------------------------------------------- 1998: Fourth Quarter (from December 3, 1998) $80.50 $32.69 - ----------------------------------------------------------------------------- As of December 31, 1998, the number of stockholders of record of the Company's Class B Common Stock was 41. The Company currently intends to retain any earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. On December 8, 1998, the Company completed its initial public offering (the "IPO") of 8,050,000 shares (including the exercise of the underwriters' over- allotment option consisting of 1,050,000 shares) of its Class B Common Stock, $.01 par value per share, at a public offering price of $14.00 per share pursuant to a registration statement on Form S-1 (file no. 333-64855) filed with the Securities and Exchange Commission. All of the shares registered were sold. NationsBanc Montgomery Securities LLC, Allen & Company Incorporated, BancBoston Robertson Stephens Inc., Bear Stearns & Co., Inc., and Donaldson Lufkin & Jenrette Securities Corporation were the managing underwriters of the IPO. Aggregate gross proceeds to the Company from the IPO (prior to deduction of underwriting discounts and commissions and expenses of the offering) were $112,700,000. There were no selling stockholders in the IPO. The Company paid underwriting discounts and commissions of $7,327,000 and other expenses of approximately $1,319,000 in connection with the IPO. The total expenses paid by the Company in the IPO were $8,646,000 and the net proceeds to the Company in the IPO were $104,054,000. From December 2, 1998, the effective date of the Registration Statement, to December 31, 1998 (the Company's fiscal year end), approximately $51,151,000 of net proceeds were used for the repayment of a convertible note (the "Convertible Note") issued to USAi upon execution of the Merger Agreement in exchange for a $50 million loan from USAi to provide working capital to the Company, and accrued interest thereon. The remainder of the net proceeds was used for general working capital purposes. None of such payments consisted of direct or indirect payments to directors, officers, 10% stockholders or affiliates of the Company. On December 31, 1998, there were 114 shareholders of record of the Company's Class A Common Stock. There is no public market for the Class A Common Stock, but each share of Class A Common Stock will be automatically converted into one share of Class B Common Stock of the Company upon any transfer of such share, subject to certain exceptions. In addition, each share of Class A Common Stock may be converted at any time into one share of Class B Common Stock at the option of the holder thereof. -19- Recent Sales of Unregistered Securities During the 1998 fiscal year, the Company issued and sold the following unregistered securities: (1) From January 1, 1998 to December 31, 1998, the Company granted options to purchase 2,288,528 shares of the Company Class A Common Stock pursuant to its 1996 Stock Plan and 650,000 shares of the Company Class B Common Stock pursuant to its 1998 Stock Plan, respectively, at exercise prices ranging from $3.00 to $8.67 and $8.67 to $32.69, per share, respectively. (2) From January 1, 1998 to December 31, 1998, the Company issued and sold an aggregate of 1,338,998 shares of Class A Common Stock to its employees, directors and consultants upon exercise of stock options granted pursuant to its 1996 Stock Plan at exercise prices ranging from $.10 to $8.00 per share for an aggregate consideration of approximately $869,590. (3) In May 1998, CitySearch issued and sold an aggregate of 1,000,000 shares of its Series E Preferred Stock (or 987,500 shares of Class A Common Stock pursuant to the conversion of all of the outstanding shares of Series A, Series B, Series C, Series D and Series E convertible preferred stock of City Search, which became effective immediately prior to the consummation of the Merger (the "Conversion") and the reclassification of all outstanding shares of CitySearch Common Stock into Class A Common Stock, which became effective on September 28, 1998 (the "Reclassification")) for an aggregate cash consideration of approximately $7.0 million. The shares were issued to USAi and American Express. (4) In June 1998, CitySearch issued an aggregate of 63,644 shares of Series B Preferred Stock (or 63,644 shares of Class A Common Stock pursuant to the Reclassification) at $7.00 per share as additional consideration for the acquisition of Metrobeat. The shares were issued to the following shareholders of Metrobeat: Mark Davies and Joshua White. (5) In September 1998, CitySearch issued an aggregate of 37,238,000 shares of CitySearch Common Stock (or 37,238,000 shares of Class A Common Stock pursuant to the Reclassification) as consideration for the acquisition of Ticketmaster Multimedia Holdings, Inc. The shares were issued to Ticketmaster Corp. (6) In September 1998, pursuant to the Reclassification, each issued and outstanding share of CitySearch Common Stock, or 62,486,478 shares, was reclassified into one share of Class A Common Stock of the Company for no consideration. (7) In December 1998, the Company issued an aggregate of 7,955 shares of Class A Common Stock at $14.00 per share as additional consideration for the Metrobeat acquisition. The shares were issued to the following shareholders of Metrobeat: Mark Davies and Joshua White. The sales of the securities described in Items (1) and (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 of 1933, as amended (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 (3) through (5) and (7) 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 received adequate information about CitySearch or had access, through employment or other relationships, to such information. The sale of securities in Item (6) was deemed to be exempt from registration under the Securities Act in reliance on Section 3(a)(9) of the Securities -20- Act as an exchange by the issuer with its existing security holders where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. ITEM 6. SELECTED FINANCIAL DATA The selected financial data below as of December 31, 1998 and the eleven months ended December 31, 1998 are derived from the audited financial statements of Ticketmaster Online CitySearch, Inc. The selected financial data presented below at January 31, 1998 and 1997 and for each of the two years in the period ended January 31, 1998, are derived from audited Financial Statements of Ticketmaster Online as the predecessor entity. The balance sheet data as of January 31, 1996 are derived from unaudited financial statements of Ticketmaster Online that are not included herein. The selected Ticketmaster Online CitySearch financial data set forth below are qualified in their entirety by, and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements of Ticketmaster Online CitySearch and Notes thereto included elsewhere in this report.
Eleven Months Ended Year Ended January 31, December 31, ------------------------------ 1998(1) 1998 1997(2) 1996(2) ------------- ------- ------- ------- (In Thousands, Except Per Share Data) Statement of Operations Data: Revenues: Ticketing operations........................................ $ 15,743 $ 5,972 $ 199 $ -- Sponsorship and advertising................................. 6,754 3,933 997 14 City guide and related...................................... 5,376 -- -- -- -------- ------- ------- ------- Total revenues............................................ 27,873 9,905 1,196 14 Costs and expenses: Ticketing operations........................................ 9,842 3,522 635 -- City guide and related...................................... 4,021 -- -- -- Sales and marketing......................................... 6,834 490 290 -- Research and development.................................... 1,728 -- -- -- General and administrative.................................. 3,495 1,719 1,260 548 Amortization of goodwill.................................... 16,275 -- -- -- -------- ------- ------- ------- Total costs and expenses.................................. 42,195 5,731 2,185 548 -------- ------- ------- ------- Income (loss) from operations.................................. (14,322) 4,174 (989) (534) Interest income, net........................................... 54 -- -- -- -------- ------- ------- ------- Income (loss) before income taxes.............................. (14,268) 4,174 (989) (534) Income tax provision (benefit)................................. 2,951 1,827 (374) (204) -------- ------- ------- ------- Net income (loss).............................................. $(17,219) $ 2,347 $ (615) $ (330) ======== ======= ======= ======= Basic and diluted net income (loss) per equivalent share (3)....................................... $ (0.38) $ 0.06 $ (0.02) $ (0.01) ======== ======= ======= ======= Number of shares used to compute basic and diluted net income (loss) per equivalent share (3)..................... 45,201 37,238 37,238 37,238 ======== ======= ======= =======
January 31, December 31, ---------------------- 1998 (4) 1998 1997 1996 ------------ ------ ------ ------ (In Thousands) Balance Sheet Data: Cash and cash equivalents............................................. $106,910 $ -- $ 3 $ -- Working capital (deficit) (4)......................................... 99,571 (100) 218 223 Total assets (5)...................................................... 416,725 688 554 354 Stockholders' equity (deficit)........................................ 403,588 289 489 354
- --------------------------- (1) Includes the operating results of CitySearch from September 29, 1998 to December 31, 1998 as a result of the Merger. The eleven month period reflects the Company's change in year end to December 31 from January 31. Comparable amounts for the prior period are not presented because as a result of the Merger and continuing growth of the Company such presentation would not be considered meaningful. (2) Ticketmaster Online did not incur costs or expenses until June 1995 and commenced selling live event tickets and merchandise online in November 1996. -21- (3) Basic and diluted net income (loss) per equivalent share is based on the number of shares of CitySearch Common Stock exchanged in the Merger for all January 31 ended periods presented, and for the eleven months ended December 31, 1998 includes the outstanding Class A and Class B Common Stock for period subsequent to the Merger in the calculation of average shares. (4) The balance sheet data at December 31, 1998 represents the consolidated assets and liabilities of Ticketmaster Online and CitySearch as a result of the Merger. (5) Total assets at December 31, 1998 reflect $299.6 million of goodwill, net of accumulated amortization of $16.3 million resulting from the Merger and USAi's acquisition of all of the outstanding equity of Ticketmaster Group in June 1998 (the "Ticketmaster Transaction") and USAi's acquisition of 1,997,502 shares of Class A Common Stock of CitySearch from holders of such Class A Common Stock for $17.2 million (the "Tender Offer") pursuant to the terms of the Merger Agreement on November 3, 1998. -22- ITEM 7. 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 audited Consolidated Financial Statements of the Company and the related Notes thereto included elsewhere in this report. 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 below and elsewhere in this report. Overview The Company has combined CitySearch and Ticketmaster Online to create a leading provider of local city guides, local advertising and live event ticketing on the Internet. The Company is integrating its local CitySearch city guides with its Ticketmaster Online live events ticketing and merchandise distribution capabilities to offer online ticketing, merchandise, electronic coupons and other transactions to a broader audience of consumers. CitySearch was founded in September 1995 and Ticketmaster Online launched its online ticketing services in November 1996 as a wholly-owned subsidiary of Ticketmaster Corp. On September 28, 1998, pursuant to the Merger, a wholly-owned subsidiary of CitySearch merged into Ticketmaster Online, with Ticketmaster Online continuing as the surviving corporation and as a wholly-owned subsidiary of CitySearch. The Merger was accounted for using the "reverse purchase" method of accounting pursuant to which Ticketmaster Online was treated as the acquiring entity for accounting purposes. The Company derives revenues from three sources: online ticketing, sales of sponsorships and advertising and City guide services. The Company views its business as being in one segment. Integration of the ticketing and City guide business models is ongoing. Ticketing operations revenues are primarily comprised of convenience charges that are charged on a per ticket purchased basis and shipping and handling fees which are collected on a per order basis. The sale of tickets for an event often begins several months prior to the scheduled date of the event. Ticket operations revenue is recognized when the ticket is sold. If credit card chargeback or refund activity is likely to occur with respect to an event, for example, due to the cancellation of such event, an allowance is established for potential convenience charge refunds. Merchandise sale revenues are recognized when the products are sold. Under the Ticketmaster License Agreement, subject to certain limitations, Ticketmaster Corp. has granted (a) the Company an exclusive, perpetual, irrevocable, worldwide license to use the Ticketmaster trademark and (b) certain Ticketmaster Corp. databases to sell live event tickets online for Ticketmaster Corp.'s clients. In addition, Ticketmaster Corp. has authorized the Company to be Ticketmaster Corp.'s exclusive, perpetual, worldwide agent for such online ticket sales. The Ticketmaster License Agreement further provides that Ticketmaster Corp. may use and permit others to use the Ticketmaster trademark in connection with the online promotion of ticket sales. Ticketmaster Corp. retains the rights to sell tickets by non-online means and to use the Ticketmaster trademark in connection with such sales. The Ticketmaster License Agreement defines such non-online means to include (1) by telephone; (2) by other voice-to-voice means or voice-to-voice recognition unit systems; (3) by non-interactive broadcast, cable and satellite television; and (4) by kiosks and retail ticket outlets. Client venues retain the rights to sell tickets at their box offices or as otherwise provided in client venue agreements with Ticketmaster Corp. Ticketmaster Corp. is the contracting party with client venues, promoters and sports franchises, providing ticket inventory management, consumer information and related data for all ticketing transactions. Ticketmaster Corp. provides this information to the Company for processing of online ticket sales and -23- provides all transaction processing and fulfillment services for online live event ticket sales. The Company is required under the Ticketmaster License Agreement to comply with the terms of Ticketmaster Corp.'s client agreements. The Company's rights, contained in the Ticketmaster License Agreement, are subject to the client agreements. The Ticketmaster License Agreement also generally restricts the Company from cooperating with, offering online links to, or entering into any agreements with venues, ticket sellers or sales agents for online sale of tickets. Under the Ticketmaster License Agreement, the Company pays Ticketmaster Corp. a royalty which is a percentage of the net profit it derives from online ticket sales. The Company also reimburses Ticketmaster Corp. for Ticketmaster Corp.'s direct expenses related to online ticket sales. Under the Ticketmaster License Agreement, the Company has also been granted the non-exclusive right to promote and sell online certain merchandise available through Ticketmaster Corp. Ticketmaster Corp. serves as the Company's exclusive fulfillment provider for the online sales of this merchandise. As long as Ticketmaster Corp.'s fees, terms and quality of service are no less favorable than those available to the Company from third parties, Ticketmaster Corp. or its affiliates will serve as the Company's exclusive fulfillment provider for the online sales of all other merchandise available through Ticketmaster Corp. Pursuant to its client agreements, Ticketmaster Corp. is generally granted the right to collect from ticket purchasers a per ticket convenience charge on all tickets sold other than at the box office and an additional per order handling charge on all tickets sold by Ticketmaster Corp. at other than remote sales outlets to partially offset the cost of fulfillment. The amount of the convenience charge is typically determined during the contract negotiation process, and varies based upon numerous factors, including the services to be rendered to the client, the amount and cost of equipment to be installed at the client's box office and the amount of advertising and/or promotional allowances to be provided, as well as the type of event and whether the ticket is purchased at a remote sales outlet, by telephone, through the Company's Web sites or otherwise. Sponsorship and advertising revenues are derived from local and national advertisers and are primarily recognized ratably over the term of the promotion. Ticketmaster Corp. may also solicit sponsorship and advertising for the Company's Web sites in a bundle with other sponsorship and advertising opportunities offered by Ticketmaster Corp. The Company 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 the Company to assist in developing, designing and launching a city guide. These partners license the Company's business and technology systems and provide royalty payments to the Company for revenues derived from operations. In partner-led markets, the Company's partners hire and train the local city guide staff and purchase all necessary third-party hardware and software. The Company's current owned and operated sites are Atlanta, Austin, Denver, 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 Baltimore, Dallas, Los Angeles, San Diego, Washington D.C., Canberra, Copenhagen, Melbourne, Stockholm, Sydney and Toronto. In its owned and operated city guide markets, the Company derives its revenues primarily from subscription fees resulting from the creation, hosting and maintenance of local business Web sites. Business customers typically enter into one-year agreements that automatically convert to month-to-month contracts upon expiration. The Company recognizes revenue from sales of local business Web sites on a monthly basis over the term of each contract as services are rendered. The average monthly revenue from new businesses signed up in its owned and operated markets in December 1996 was approximately $50 per customer and in December 1998 was approximately $219 per customer. To a lesser extent, the Company derives city guide -24- revenue from barter agreements with television, radio and media alliances. With barter agreements, the Company receives television and radio broadcast advertising in exchange for Web site design, hosting and maintenance. Barter revenue and expense are 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. In partner-led markets, the Company derives licensing and royalty revenues from the licensing of the Company's technology and business systems, consulting services and from providing back office and hosting services. 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 is recognized over the term of the license agreement or the period over which the relevant services are delivered for use of the Company's business and technology systems. Royalty revenue is recognized as earned and is typically a percentage of partner-led market revenues from Web site subscriptions, banners, advertisements, sponsorships, and other ancillary offerings. Additionally, the Company derives revenue from providing back office services, including business Web site design, hosting, customer service and billing, to certain of its partners. See Note 1 of Notes to Consolidated Financial Statements of the Company. Operating Losses The Company incurred a net loss of $17.2 million for the eleven months ended December 31, 1998, earned net income of $2.3 million for the year ended January 31, 1998 and incurred net losses of $615,000 the year ended January 31, 1997. At December 31, 1998, the Company had a retained deficit of $16.0 million. Goodwill The Merger and the Tender Offer resulted in $160.6 million of goodwill that will be amortized over five years and intangibles related to the Non-Competition Agreements of $500,000, which is being amortized over 2.5 years. The Company recorded an allocation of goodwill of $154.8 million, which is being amortized over ten years, resulting from the acquisition of Ticketmaster Group by USAi. Results of Operations Ticketing Operations Revenues. Ticketing operations revenues were $15.7 million, $6.0 million and $199,000 for the eleven months ended December 31, 1998 and for the fiscal years ended January 31, 1998 and 1997, respectively. The increase for the eleven months ended December 31, 1998 over the year ended January 31, 1998 (the difference of one month's operations is not considered to materially affect the comparison of the two periods) is primarily attributable to a significant increase in the number of tickets sold (from 1,062,000 to 2,860,000 tickets), and a 7.7% increase in average convenience charge revenue per ticket (from $5.06 to $5.45). Sponsorship and advertising revenues. Sponsorship and advertising revenues were $6.8 million, $3.9 million and $1.0 million for the eleven months ended December 31, 1998 and fiscal years ended January 31, 1998 and 1997, respectively. The increases are primarily attributable to an increase in sponsorship and promotion activity with strategic marketing partners. In the eleven months ended December 31, 1998, $3.0 million is attributable to one promotional agreement. City Guide and Related Revenue. City guide and related revenues were $5.4 million for the eleven months ended December 31, 1998 representing the CitySearch city guide and related revenue for the three months subsequent to the Merger. Ticketing Operations Expenses. Ticketing operations expenses consist primarily of expenses associated with ticket fulfillment, Web site design and layout, service and network infrastructure maintenance -25- and data communications. Ticketing operating expenses were $9.8 million, $3.5 million and $635,000 for the eleven months ended December 31, 1998 and for the fiscal years ended January 31, 1998 and 1997, respectively. Ticketing operations expenses are primarily variable in nature and have increased during the periods presented in conjunction with the increase in ticketing operations revenue and will continue to increase in future periods to the extent ticketing operations revenues increase during such periods. In addition, the Company expects that ticketing operations expenses will increase as a percentage of ticketing revenues as a result of expenses associated with the Ticketmaster License Agreement. City Guide and Related Expenses. City guide and related expenses consist 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 costs of consulting services in partner-led markets. City guide and related expenses are expended as incurred. City guide and related expense was $4.0 million for the eleven months ended December 31, 1998 representing the CitySearch city guide and related expenses for the three months subsequent to the Merger. City guide and related expenses are primarily variable in nature and will continue to increase in future periods to the extent City guide and related revenues increase during such periods. Sales and Marketing Expenses. Sales and marketing expenses consist primarily of costs related to the compensation of sales and marketing personnel, advertising and travel. Sales and marketing expenses were $6.8 million, $490,000 and $290,000 for the eleven months ended December 31, 1998 and the fiscal years ended January 31, 1998 and 1997, respectively. The increase for the eleven months ended December 31, 1998 as compared to the fiscal year ended January 31, 1998 is due primarily to the sales and marketing costs of CitySearch for the three months subsequent to the Merger amounting to $5.8 million and increased salary related costs and operating support costs associated with the growth in sales and marketing activities. The Company expects that sales and marketing expenses will increase in absolute dollars. Research and Development Expenses. Research and development expenses include the costs to develop, test and upgrade the Company's 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 for the eleven months ended December 31, 1998 which represents the research and development cost of CitySearch for the three months subsequent to the Merger. The Company believes that timely deployment of new and enhanced products and technology is critical to attaining its strategic objectives and to remaining competitive. Accordingly, the Company intends to continue recruiting and hiring experienced research and development personnel and making 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. General and administrative expenses were $3.5 million, $1.7 million and $1.3 million for the eleven months ended December 31, 1998 and fiscal years ended January 31, 1998 and 1997, respectively. The substantial increase for the eleven months ended December 31, 1998 was due primarily to general and administrative expenses for CitySearch for the three months subsequent to the Merger amounting to $1.7 million. The Company expects that the general and administrative expenses will increase in absolute dollars. Interest Income, Net. Net interest income consists primarily of interest earned on the Company's cash and cash equivalents, less interest expense on capital lease obligations. The Company had net interest income of $54,000 for the eleven months ended December 31, 1998. Included in net interest income is interest expense of $710,000 on the Convertible Note. The Company invests its cash balances in short-term investment grade, interest-bearing securities. -26- Income Taxes. The provision (benefit) for income taxes was $2.9 million, $1.8 million and $(374,000) for the eleven months ended December 31, 1998 and fiscal years ended January 31, 1998 and 1997, respectively. The provision for income taxes for the eleven months ended December 31, 1998 primarily consists of the provision recorded by Ticketmaster Online prior to the Merger. The Company's effective tax rate differs from the statutory federal income tax rate, primarily as a result of state income taxes and operating losses not benefitted. Tax benefits were recorded for the year ended January 31, 1997 as there was no valuation allowance recognized against the deferred tax asset on a stand-alone basis for that year. The Company expects that any taxable income for 1998 and 1999 will be offset by the expected future net operating losses of CitySearch, resulting in a nominal tax provision on a combined basis subsequent to the Merger. However, net operating loss carryforwards of CitySearch will not be available to further offset taxable income of the Company. Liquidity and Capital Resources Prior to the Merger, the Company's primary sources of liquidity were cash from operations and funding from Ticketmaster Corp. Consistent with the cash management policies of Ticketmaster Corp., the Company did not maintain any cash balances prior to the date of the Merger (September 28, 1998). Net cash used in operating activities was $438,000 for the eleven months ended December 31, 1998 and net cash provided from operating activities was $2.9 million for the fiscal year ended January 31, 1998, while net cash used in operating activities was $556,000 for the year ended January 31, 1997. Net cash used in investing activities was $1.1 million for the eleven months ended December 31, 1998, and was $250,000 and $189,000 for the fiscal years ended January 31, 1998 and January 31, 1997, respectively. Net cash used in investing activities in these periods consisted primarily of capital expenditures for computers, software, equipment and leasehold improvements. Net cash provided in financing activities was $50.6 million for the eleven months ended December 31, 1998, attributable to the Company's initial public offering and repayment of the Convertible Note. Net cash used in financing activities was $2.7 million for the fiscal year ended January 31, 1998, attributable to repayments to Ticketmaster Corp. for prior financing provided to the Company and distributions to Ticketmaster Corp. Net cash provided by financing activities was $748,000 for the fiscal year ended January 31, 1997, attributable to intercompany funding from Ticketmaster Corp. At December 31, 1998, the Company's cash and cash equivalents were $106.9 million. Existing cash and cash equivalents 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. Year 2000 The widespread use of computer programs that rely on two-digit dates to perform computation and decision-making functions may cause computer systems, including systems and software used by the Company and its Web services, to malfunction prior to or in the Year 2000 and lead to significant business delays and disruptions in the Company's business and operations in the United States and internationally. The Company has developed a plan to minimize the impact of this Year 2000 problem. Pursuant to such plan, the Company has established a Year 2000 Committee consisting of senior managers from relevant functional areas. The Year 2000 Committee has reviewed all areas of the Company's business and operations that may be affected and has assigned responsibility for each area to individuals knowledgeable about their respective areas. The Year 2000 Committee has made these individuals responsible for the initial assessment of risk and initial estimate of hardware cost, software cost and time required to achieve compliance. The Company concluded its initial assessment in the fourth quarter of 1998 and is commencing implementation of remediation necessary to achieve compliance. Remediation will continue in 1999. The Company estimates that the dollar cost of Year 2000 compliance is approximately $200,000. However, the Company has not yet completed its comprehensive assessment of remediation costs and actual costs could materially differ. Several systems provided by third parties are required for the operation of the Company's services, any of which may contain software code that is not Year 2000 compliant. These systems include server software used to operate the Company's network servers, software controlling routers, switches and other components of the Company's data network, disk management software used to control the Company's data disk arrays, firewall, security, monitoring and back- up software used by the Company, as well as desktop PC applications software. In most cases, the Company employs widely available software applications and other products from leading third party vendors, and expects that such vendors will provide any required upgrades or modifications in a timely fashion. However, any failure of third party suppliers to provide Year 2000 compliant versions of the products used by the Company could result in a temporary disruption of the Company's services or otherwise disrupt the Company's operations. In addition, the Company's partners may operate their city guide sites in proximity to other applications that may not be Year 2000 compliant. While the Company intends to assign an individual to coordinate each partner's compliance efforts to ensure uninterrupted operations, the Company has limited ability to influence decisions by its partners. Non-compliant systems that adjoin partners' city guide applications could result in interruption or disruption of the city guide service, which in turn could reduce royalties or other amounts due to the Company. There can be no assurance that the Company, its third party suppliers or its partners will be Year 2000 compliant at the end of the millennium. Failure to achieve compliance could result in complete failure or inaccessibility of the Company's or its partners' services, and could adversely affect the Company's business, financial condition and results of operations. Year 2000 compliance problems could also undermine the general infrastructure necessary to support the Company's operations. For instance, the Company depends on third party Internet service providers for connectivity to the Internet. Any interruption of service from the Company's Internet service providers could result in a temporary interruption of the Company's services. Moreover, the effects of Year 2000 compliance deficiencies on the integrity and stability of the Internet are difficult to predict. A significant disruption in the ability of businesses and consumers to reliably access the Internet or portions of it would have an adverse effect on demand for the Company's services and adversely impact the Company's business, financial condition and results of operations. -27- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market rate risk for changes in interest rates relates primarily to the Company's investment portfolio. The Company has not used derivative financial instruments in its investment portfolio. The Company invests its excess cash in debt instruments of the U.S. Government and its agencies, and in high-quality corporate issuers and, by policy, limits the amount of credit exposure to any one issuer. The Company protects and preserves its invested funds by limiting default, market and reinvestment risk. Investments in both fixed rate and floating rate interest earning instruments carries a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, the Company's future investment income may fall short of expectations due to changes in interest rates or the Company may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. -28- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's consolidated financial statements, with notes thereto and the report of Ernst & Young LLP, the Company's independent auditors, are set forth as indicated in Item 14. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. -29- PART III ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT The following table sets forth certain information regarding the executive officers and directors of the Company:
Name Age Position - ------------------------------------------ ------- -------------------------------------------------------------- Alan Citron............................... 40 Chairman of the Board Charles Conn.............................. 37 Chief Executive Officer and Director Thomas Layton............................. 36 President and Treasurer David Hagan............................... 38 Chief Operating Officer Robert Perkins............................ 44 Executive Vice President, Ticketing and Electronic Commerce Douglas McPherson......................... 37 Chief Legal Officer and Vice President, Business Development Bradley Ramberg........................... 35 Chief Financial Officer, Vice President, Finance and Administration and Secretary Barry Baker............................... 46 Director Terry Barnes.............................. 47 Director Eugene L. Cobuzzi......................... 42 Director Stuart W. DePina.......................... 38 Director Barry Diller.............................. 57 Director Joseph Gleberman.......................... 41 Director William Gross............................. 40 Director Victor A. Kaufman......................... 55 Director Robert Kavner(1).......................... 55 Director William D. Savoy(1)(2).................... 34 Director Alan Spoon................................ 47 Director Thomas Unterman(2)........................ 54 Director
- ------------------ (1) Member of the Compensation Committee (2) Member of the Audit Committee Mr. Citron has served as Chairman of the Board of the Company since September 1998 and the President of USA Interactive, a division of USAi, since July 1998. From June 1997 until July 1998, Mr. Citron served as the President and Chief Operating Officer of Ticketmaster Online. From January 1995 until June 1997, Mr. Citron served as Senior Vice President--New Media of Ticketmaster Corp. From January 1991 until January 1995, Mr. Citron was employed by the Los Angeles Times, a division of The Times Mirror Company, as a reporter and business writer and, commencing in 1992, as an assistant business editor in charge of entertainment. Mr. Conn has served as a director of the Company since March 1999, as Chief Executive Officer since September 1998 and as Chief Executive Officer of CitySearch since he co-founded CitySearch in September 1995. Mr. Conn also served as President of CitySearch from September 1995 to October 1996 and served as a director from September 1995 until September 1998. 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. 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 an M.B.A. from Harvard Business School, where he was a Baker Scholar. Mr. Layton has served as President and Treasurer of the Company since September 1998. Prior to such time, he served as President of CitySearch since October 1996 and as Chief Operating Officer and Treasurer since November 1995. He served as a director of CitySearch from May 1996 to September 1998. 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, -30- where he was promoted from Chief Financial Officer to President and Chief Operating Officer. From January 1989 to October 1992, Mr. Layton was Vice President and General Manager of the Western Region for Leasecomm, Inc., a 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 an M.B.A. from Stanford University. Mr. Hagan has served as Chief Operating Officer since January 1999. From April 1994 until December 1998, he served in a variety of senior management positions with Sprint Canada, a telecommunications company, most recently as Executive Vice President, Marketing, Sales and Service. While at Sprint Canada, Mr. Hagan also served as President, Consumer Services Group and as Vice President, Residential Services. Mr. Perkins has served as Executive Vice President, Ticketing and Electronic Commerce of the Company since September 1998. From 1982 until September 1998, he served in a variety of senior management positions with Ticketmaster Corp., most recently as Vice President of Ticketmaster Online. Prior to joining Ticketmaster Corp., Mr. Perkins worked in Venue Management and Sports Marketing, having directed ticketing for the 1987 Pan Am Games in Indianapolis, Indiana and serving as Venue Manager for the Olympic Ice Center at the 1980 Winter Olympics in Lake Placid, New York. Mr. McPherson has served as Chief Legal Officer and Vice President, Business Development since September 1998. From July 1996 until September 1998, he served as Chief Legal Officer and Vice President, Business Development of CitySearch. From November 1992 to July 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 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, an 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, Vice President, Finance and Administration and Secretary of the Company since September 1998. From April 1996 when he joined CitySearch until September 1998, he served as Chief Financial Officer and Vice President, Finance and Administration of CitySearch and also served as Secretary of CitySearch 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 an M.B.A. from Harvard Business School. Mr. Baker has served as a director of the Company since March 1999. Mr. Baker has been President and Chief Operating Officer of USAi and USANi LLC since February 1999. Mr. Baker was Executive Vice President of Sinclair Broadcast Group, Inc. and served as Chief Executive Officer designate and as a director of Sinclair Communications, Inc. from June 1996 through February 1999. From 1989 through May 1996, he was also Chief Executive Officer of River City Broadcasting, L.P., which was aquired by Sinclair Broadcasting. Mr. Barnes has served as a director of the Company since September 1998 and as the President and Chief Executive Officer of Ticketmaster Corp. since June 1998. From September 1995 until June 1998, Mr. Barnes was the President and Chief Operating Officer of TM Ticketing Co. From January 1991 until September 1995, Mr. Barnes was Vice President and General Manager of numerous subsidiaries of Ticketmaster Corp. in the Midwest. Mr. Cobuzzi has served as a director of the Company since September 1998 and as the Chief Operating Officer of Ticketmaster Corp. since June 1998. From February 1997 until June 1998, Mr. Cobuzzi was the Senior Vice President of Operations for Ticketmaster Corp. From September 1995 until February 1997, Mr. Cobuzzi served as an Executive Vice President of TM Ticketing Co. From January 1991 until September 1995, Mr. Cobuzzi served as an officer of numerous subsidiaries of Ticketmaster Corp. in the Northeast. Mr. Cobuzzi, a CPA, began his career at Ticketmaster Corp. as Controller in August 1985. Mr. DePina has served as a director of the Company since September 1998 and as the Chief Financial Officer of Ticketmaster Corp. since June 1998. From November 1995 until June 1998, Mr. DePina was the Vice President--Finance and Treasurer of Ticketmaster Group. From August 1984 to November 1995, Mr. -31- DePina was employed by the public accounting firm of KPMG Peat Marwick LLP serving in various capacities including, most recently, as a partner. Mr. Diller has served as a director of the Company since September 1998 and served as a director of CitySearch from December 1997 until September 1998. Mr. Diller has been a director and Chairman of the Board and Chief Executive Officer of USAi 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 Chairman 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. He also serves on the Board of the Museum of Television and Radio and is a member of the Board of Councilors for the University of Southern California's School of Cinema-Television. Mr. Diller also serves on the Board of Directors of AIDS Project Los Angeles, the Executive Board for the Medical Sciences of the University of California, Los Angeles and the Board of the Children's Advocacy Center of Manhattan. Mr. Gleberman has served as a director of CitySearch since May 1996 and of the Company since September 1998. He is a Managing Director in the Principal Investment Area of Goldman, Sachs & Co., an investment banking firm, a position which he has held since November 1996. He joined Goldman, Sachs & Co. in 1982 and has served as a partner from November 1990 to November 1996. Mr. Gleberman also 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 and of the Company since September 1998. Since March 1996, Mr. Gross has been Chairman of the Board, Chief Executive Officer and President of bill gross' idealab!, a corporation which generates ideas for and creates new companies. In 1991, he founded Knowledge Adventure Inc., a corporation which developed educational software for children, and served as its Chairman from June 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. Kaufman has served as a director of the Company since September 1998. Mr. Kaufman has also served as a director of USAi since December 1996. Mr. Kaufman has served in the Office of the Chairman of USAi since January 1997 and as its Chief Financial Officer since November 1997. Prior to that time, he served as Chairman and Chief Executive Officer of Savoy Pictures Entertainment, Inc. ("Savoy") from March 1992 through December 1996 and as a director of Savoy from February 1992 through December 1996. Mr. Kaufman was the founding Chairman and Chief Executive Officer of Tri-Star Pictures, Inc. ("Tri-Star") from 1983 until December 1987, at which time he became President and Chief Executive Officer of Tri-Star's successor company, Columbia Pictures Entertainment, Inc. ("Columbia"). He resigned from these positions at the end of 1989 following the acquisition of Columbia by Sony USA, Inc. Mr. Kaufman joined Columbia in 1974 and served in a variety of senior positions at Columbia and its affiliates prior to the founding of Tri-Star. Mr. Kavner has served as a director of CitySearch since December 1995, including as Chairman of the Board from March 1996 to September 1998 and as a director of the Company since September 1998. Since December 1998, Mr. Kavner has served as General Partner of bill gross' idealab!, and as a consultant to On Command Corporation, a provider of hotel in-room entertainment and movies. From September 1996 to December 1998, Mr. Kavner served as the Chief Executive Officer, President and a director of On Command Corporation and was a consultant in the area of Internet services and content, interactive entertainment and telecommunications from September 1995 to August 1996. From June 1994 to September 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 with AT&T, Inc. He also serves as a director of Fleet Financial Group and Earthlink Networks, Inc. -32- Mr. Savoy has served as a director of the Company since September 1998. Since 1990, Mr. Savoy has served as Vice President of Vulcan Ventures, Incorporated, a venture capital fund. From 1987 until November 1990, Mr. Savoy was employed by Layered, Inc., and became its President in 1988. Currently, Mr. Savoy serves as President of Vulcan Northwest, Inc. Mr. Savoy also serves on the Advisory Board of Dream Works SKG. Mr. Savoy serves as a director of Cnet, Inc., Harbinger Corporation, Metricom, Inc., Telescan, Inc., United States Satellite Broadcasting, Inc. and, since July 1997, has served as a director of USAi. Mr. Spoon has served as a director of CitySearch since December 1997 and as a director of the Company since September 1998. 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. He is also a director of American Management Systems, Inc. and Human Genome Sciences, Inc. Mr. Unterman has served as a director of CitySearch since June 1997 and as a director of the Company since September 1998. Since March 1998, he has served as Executive Vice President and Chief Financial Officer and from August 1995 to March 1998, he served as 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 Vice President and General Counsel of The Times Mirror Company. Section 16(a) Beneficial Ownership Reporting Compliance Based solely on the Company's review of copies of reports on Forms 3, 4 and 5 (and amendments thereto) furnished to it or written representations from reporting persons, the Company believes that, during the 1998 fiscal year, all filing requirements pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended, applicable to its officers, directors and beneficial owners of more than ten percent of its securities were complied with, except that Goldman Sachs Group LP and American Express Travel Related Services Company, Inc. failed to timely file a Form 3 during that period. -33- ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain summary information concerning the compensation awarded to, earned by or paid for services rendered during the year ended December 31, 1998 by the Company's Chief Executive Officer and the two executive officers who earned in excess of $100,000 in compensation during such year (the "Named Executive Officers"). Summary Compensation Table
Long-Term Compensation ---------------------- Awards ---------------------- Ticketmaster Annual Online-CitySearch Compensation Securities -------------------------------- Other Annual Underlying Options Name and Principal Position Salary Bonus Compensation (#) (1) - --------------------------------------------------------- -------- ------- ------------ ---------------------- Charles Conn Chief Executive Officer................................. $119,750 $50,000 $ -- 350,000 Thomas Layton President and Treasurer................................. 116,667 50,000 -- 350,000 Robert Perkins Executive Vice President................................ 164,167 40,000 -- 25,000
(1) Options to purchase 200,000, 200,000 and 25,000 shares of Class A Common Stock of the Company were granted to each of Messrs. Conn, Layton and Perkins, respectively, pursuant to the Company's 1996 Stock Plan. In addition, options to purchase 150,000 shares of Class B Common Stock of the Company were granted to each of Messrs. Conn and Layton pursuant to the Company's 1998 Stock Plan. Option Grants in 1998 The following table sets forth certain information regarding option grants to each of the Named Executive Officers during the year ended December 31, 1998.
Percent of Potential Realizable Value at Number of Total Assumed Annual Rates of Stock Securities Options Price Option Appreciation For Underlying Granted to Exercise Term (5) Options Employees Price Per Expiration ------------------------------ Name Granted (#) in 1998 (3) Share (4) Date 5% 10% - -------------------------------- ----------- ------------ ---------- ----------- ------------ -------------- 200,000(1) 8.7% $ 7.00 6/17/08 $16,843,620 $27,649,916 Charles Conn.................... 150,000(2) 23.1% $32.69 12/17/08 8,779,215 16,883,937 200,000(1) 8.7% $ 7.00 6/17/08 16,843,620 27,649,916 Thomas Layton................... 150,000(2) 23.1% $32.69 12/17/08 8,779,215 16,883,937 Robert Perkins.................. 25,000(1) 1.1% $ 8.67 11/24/08 2,105,452 3,456,239
- ------------------------ (1) All options were granted under the 1996 Stock Plan and are exercisable for Class A Common Stock of the Company. As of December 31, 1998, 325,000 shares, 275,000 shares, and 1,041 shares subject to the options granted to Messrs. Conn, Layton and Perkins were vested, respectively. (2) All options were granted under the 1998 Stock Plan and are exercisable for Class B Common Stock of the Company. No shares were vested as of December 31, 1998 for Messrs. Conn and Layton. -34- (3) Based on options to purchase 2,288,528 and 650,000 shares granted under the 1996 Stock Plan and the 1998 Stock Plan, respectively, to the Company's employees, including Messrs. Conn and Layton, during the year ended December 31, 1998 (excluding options to purchase 419,231 and 0 shares of the Company's Class A Common Stock and Class B Common Stock, respectively, that were granted to employees and subsequently canceled during the fiscal year ended December 31, 1998). (4) The exercise price per share of each option was equal to the fair market value of the underlying the Company's Common Stock on the date of grant as determined by the Company's Board of Directors. (5) Potential gains are calculated based on the $56.00 closing price per share of Class B Common Stock on December 31, 1998 net of the respective 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 Commission and do not represent the Company's estimate or projection of the future Class B Common Stock price. Actual gains, if any, on stock option exercises are dependent on the future market price of shares of Class B Common Stock, the future financial performance of the Company and overall market conditions. 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, 1998 and the number of shares covered by both exercisable and unexercisable stock options held by each of the Named Executive Officers at December 31, 1998.
Number of Securities Underlying Unexercised Value of Unexercised In-The- Options at Year-End (#) Money Options at Year-End (3) Acquired On Value ----------------------------- ----------------------------- Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ------------------------- ------------- --------- ----------- ------------- ----------- ------------- Charles Conn............. -- -- 325,000(1) 0 $16,550,000 $ 0 0 150,000(2) 0 $3,496,500 Thomas Layton............ 250,000 $725,000 275,000(1) 0 $13,850,000 $ 0 0 150,000(2) 0 $3,496,500 Robert Perkins........... -- -- 1,041(1) 23,959 $ 49,271 $1,133,979
- ----------------------------- (1) Options shown were granted under the 1996 Stock Plan and are exercisable for Class A Common Stock. (2) Options shown were granted under the 1998 Stock Plan and are exercisable for Class B Common Stock. (3) Based on the December 31, 1998 closing price of $56.00 per share, less the exercise price. Board Composition The Board of Directors of the Company is currently comprised of 14 directors, one of whom is an officer of the Company. Pursuant to the Restated Certificate of Incorporation of the Company, the number of directors of the Company will be fixed from time to time by resolution of the Board of Directors. All members of the Board of Directors are elected annually by the stockholders of the Company. Seven of the Company's current directors are directors, officers or employees of USAi or Ticketmaster Group . The Board of Directors has a Compensation Committee, comprised of Messrs. Kavner and Savoy, with Mr. Citron serving as an observer to such Committee. The Compensation Committee makes recommendations to the Board of Directors concerning salaries and incentive compensation for officers and employees of the Company, including equity compensation for senior executives of the Company. In addition, the Board of Directors has an Audit Committee, comprised of Messrs. Savoy and Unterman with Mr. DePina serving as an observer, that reviews and monitors corporate financial reporting and audits of the Company, as well as any other accounting related matters. -35- Director Compensation The members of the Board of Directors are not currently compensated for their services to the Company other than for reimbursement of their expenses incurred in connection with such services. In March and April 1996, Mr. Kavner received options to purchase 50,000 shares, 10,000 shares and 81,681 shares of the Company's Class A Common Stock under the 1996 Stock Plan at an exercise price of $0.10 per share, $0.10 per share and $0.25 per share, respectively. Directors may receive discretionary stock option grants pursuant to the provisions of the 1998 Stock Plan. Compensation Committee Interlocks and Insider Participation The Board of Directors has a Compensation Committee, comprised of Messrs. Kavner and Unterman, with Mr. Citron serving as an observer to such Committee. Neither 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 the Compensation Committee and the board of directors or compensation committee of any other company, nor has such an interlocking relationship existed in the past. Between December 13, 1996 and October 22, 1997, CitySearch issued and sold an aggregate of 4,430,313 shares of Series D Preferred Stock (or 4,297,824 shares of Class A Common Stock pursuant to the Conversion and Reclassification) at a per share price of $6.5251. 766,272 shares (or 743,360 shares of Class A Common Stock pursuant to the Conversion and the Reclassification) were sold to The Times Mirror Company for an aggregate purchase price of approximately $5.0 million. In June 1997, CitySearch 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 CitySearch'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 addition, in September 1997, Ticketmaster Online entered into an agreement with The Los Angeles Times, Inc. providing for Ticketmaster Online to create and maintain a co-branded Web site with ticketing capabilities and information on local live events. Under the agreement, Ticketmaster Online is required to pay The Los Angeles Times, Inc. 50% of net merchandising revenue from the co-branded Web site. Mr. Unterman, a director of the Company, is Executive Vice President and Chief Financial Officer of The Times Mirror Company. Employment Agreements On May 9, 1996 and July 2, 1997, CitySearch entered into at-will employment agreements with each of Messrs. Conn and Layton, respectively. Pursuant to such employment agreements, in the event that Messrs. Conn's or Layton's, as the case may be, employment is terminated, he 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. On November 25, 1998, the Company entered into an employment agreement with Mr. Perkins. The term of the agreement is January 1, 1999 to December 31, 2000, unless earlier terminated in accordance with the agreement. Pursuant to the agreement, in the event the Company terminates Mr. Perkins for cause, he will be entitled to receive severance payments equal to his full base salary for the remainder of the term of the agreement. -36- In addition, pursuant to stock option agreements between the Company and each of Messrs. Conn and Layton, the vesting of such stock options was accelerated and such stock options fully vested upon completion of the Merger. Moreover, in connection with the Merger, each of Messrs. Conn and Layton entered into the Non-Competition Agreements. See "Certain Relationships and Related Transactions--Acceleration of Stock Options" and "--Non-Competition Agreements." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL STOCKHOLDERS The following tables set forth certain beneficial ownership information with respect to the Company and USAi, the majority owner of the Company. Company Class B Common Stock The following table sets forth, as of December 31, 1998, certain information regarding the beneficial ownership of the Company's Class B Common Stock by (i) each person or entity who is known by the Company to own beneficially 5% or more of the Company's outstanding Class B 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.
Number of Shares Percentage of Shares Voting Name and Address of Beneficial Owner (1) Beneficially Owned (2) Beneficially Owned (2) Power (3) - --------------------------------------------- ----------------------- ---------------------- ------------- USA Networks, Inc............................ 42,480,143 83.9% 65.8% 152 West 57th Street, 42nd Floor New York, NY 10019 Barry Diller(4).............................. 42,480,143 83.9 65.8 William Gross(5)............................. 2,828,261 25.7 4.4 Alan Citron.................................. 2,500 * * Terry Barnes................................. 2,500 * * Eugene L. Cobuzzi(6)......................... 2,500 * * Stuart W. DePina(7).......................... 2,500 * * Joseph Gleberman(8).......................... 2,387,981 22.6 3.7 Victor A. Kaufman............................ 2,000 * * Alan Spoon(9)................................ 748,692 8.4 1.2 Thomas Unterman(10).......................... 750,413 8.4 1.2 Robert Kavner(11)............................ 237,568 2.8 * William D. Savoy............................. 10,000 * * Charles Conn(12)............................. 1,536,249 15.8 2.4 Thomas Layton(13)............................ 971,249 10.6 1.5 All executive officers and directors as a group (19 persons)(14)....................... 52,094,086 86.4 80.6
- ------------------ * Less than 1% of the total voting power of the Company's outstanding Class A Common Stock and Class B Common Stock. (1) The address of Mr. Diller and Mr. Kaufman is: c/o USA Networks, Inc., 152 West 57th Street, 42nd Floor, New York, NY 10019. The address of each of the other named individuals is: c/o Ticketmaster Online-CitySearch, Inc., 790 E. Colorado Boulevard, Suite 200, Pasadena, CA 91101. (2) Pursuant to the Company's Restated Certificate of Incorporation, shares of Class A Common Stock are convertible at any time into an equal number of shares of Class B Common Stock. The percentage of shares beneficially owned assumes the conversion of all shares of Class A Common Stock beneficially owned by such listed person, but does not assume the conversion of Class A Common Stock owned by any other person. 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, the persons named in the table -37- above have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. Amounts shown in the above table and the following notes include shares issuable upon exercise of stock options to purchase shares of Class A Common Stock which are exercisable within 60 days of December 31, 1998. (3) Percent of total voting power is based on one vote for each share of Class B Common Stock and 15 votes for each share of Class A Common Stock, calculated assuming no conversion of the Class A Common Stock by any holder. (4) Includes 42,480,143 shares of Class A Common Stock which are beneficially owned by USAi. Mr. Diller disclaims beneficial ownership of such shares.(5) Includes 472,562 shares of Class A Common Stock held by bill gross' idealab!. Mr. Gross disclaims beneficial ownership of the shares held by bill gross' idealab!. (6) Includes 2,500 shares of Class B Common Stock held in custodial accounts for the benefit of Mr. Cobuzzi's minor children for which Mr. Cobuzzi serves as custodian. (7) Includes 2,500 shares of Class B Common Stock which are held by the DePina Family Trust dated April 8, 1998. (8) Includes 2,387,981 shares of Clas A Common Stock which are held by entities affiliated with The Goldman Sachs Group L.P. (the "GS Group"). Mr. Gleberman is a managing director of Goldman, Sachs & Co., the general partner of which is GS Group. Mr. Gleberman disclaims beneficial ownership of the shares owned by the GS Group, except to the extent of his pecuniary interest therein. (9) Includes 748,692 shares of Class A Common Stock which are held by Washingtonpost.Newsweek Interactive Company. Mr. Spoon disclaims beneficial ownership of such shares. (10) Includes 743,360 shares of Class A Common Stock which are held by The Times Mirror Company. Mr. Unterman disclaims beneficial ownership of such shares. Also includes 7,053 shares of Class A Common Stock which are held by The Thomas and Janet Unterman Living Trust dated 12/30/94. (11) Includes 115,282 shares of Class A Common Stock and options to purchase 122,286 shares of Class A Common Stock exercisable by Mr. Kavner within 60 days of December 31, 1998. (12) Includes 1,205,000 shares of Class A Common Stock, and options to purchase 325,000 shares of Class A Common Stock and 6,249 shares of Class B Common Stock exercisable by Mr. Conn within 60 days of December 31, 1998. (13) Includes 690,000 shares of Class A Common Stock, and options to purchase 275,000 shares of Class A Common Stock and 6,249 shares of Class B Common Stock exercisable by Mr. Layton within 60 days of December 31, 1998. (14) See notes (2) through (13). Company Class A Common Stock The following table sets forth, as of December 31, 1998, certain information relating to the beneficial ownership of the Company's Class A Common Stock by (i) each person or entity who is known by the Company to beneficially own 5% or more of the Company's outstanding Class A 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. -38-
Beneficially Percentage of Name and Address of Beneficial Owner (1) Owned (2) Class (2) - ----------------------------------------------------------------- ------------ -------------- USA Networks, Inc................................................ 42,480,143 67.1% 152 West 57th Street, 42nd Floor New York, NY 10019 Barry Diller(3).................................................. 42,480,143 67.1 William Gross(4)................................................. 2,828,261 4.5 Alan Citron...................................................... -- -- Terry Barnes..................................................... -- -- Eugene L. Cobuzzi................................................ -- -- Stuart W. DePina................................................. -- -- Joseph Gleberman(5).............................................. 2,387,981 3.8 Victor A. Kaufman................................................ -- -- Alan Spoon(6).................................................... 748,692 1.2 Thomas Unterman(7)............................................... 750,413 1.2 Robert Kavner(8)................................................. 237,568 * William D. Savoy................................................. -- -- Charles Conn(9).................................................. 1,530,000 2.4 Thomas Layton(10)................................................ 965,000 1.5 All executive officers and directors as a group (19 persons)(11).............................................. 52,059,588 81.3
- ----------------------- * Less than 1% of the Company's outstanding Class A Common Stock. (1) The address of Mr. Diller and Mr. Kaufman is: c/o USA Networks, Inc., 152 West 57th Street, 42nd Floor, New York, NY 10019. The address of each of the other named individuals is: c/o Ticketmaster Online-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, the persons named in the table above have sole voting and investment power with respect to all shares of Class A Common Stock shown as beneficially owned by them. Percentage of class is based on 63,291,653 shares of Class A Common Stock outstanding as of December 31, 1998. Amounts shown in the above table and the following notes include shares issuable upon exercise of stock options to purchase shares of Class A Common Stock which are exercisable within 60 days of December 31, 1998. Shares of Class A Common Stock may be converted at any time into an equal number of shares of Class B Common Stock. (3) Includes 42,480,143 shares of Class A Common Stock beneficially owned by USAi, as to which Mr. Diller disclaims beneficial ownership. (4) Includes 472,562 shares of Class A Common Stock held by bill gross' idealab!. Mr. Gross disclaims beneficial ownership of the shares held by bill gross' idealab!. (5) Includes 2,387,981 shares of Class A Common Stock held by entities affiliated with the GS Group. Mr. Gleberman is a managing director of Goldman, Sachs & Co., the general partner of which is GS Group. Mr. Gleberman disclaims beneficial ownership of the shares owned by the GS Group, except to the extent of his pecuniary interest therein. (6) Includes 748,692 shares of Class A Common Stock held by Washingtonpost.Newsweek Interactive Company, as to which Mr. Spoon disclaims beneficial ownership. (7) Includes 743,360 shares of Class A Common Stock held by The Times Mirror Company, as to which Mr. Unterman disclaims beneficial ownership, and 7,053 shares of Class A Common Stock held by The Thomas and Janet Unterman Living Trust dated 12/30/94. (8) Includes 122,286 shares issuable upon exercise of stock options to purchase shares of Class A Common Stock which are exercisable by Mr. Kavner within 60 days of December 31, 1998. (9) Includes 325,000 shares issuable upon exercise of stock options to purchase shares of Class A Common Stock which are exercisable by Mr. Conn within 60 days of December 31, 1998. -39- (10) Includes 275,000 shares issuable upon exercise of stock options to purchase shares of Class A Common Stock which are exercisable by Mr. Layton within 60 days of December 31, 1998. (11) See notes (2) through (10). USAI Common Stock The following table sets forth, as of December 31, 1998, information relating to the beneficial ownership of the USAi Common Stock by (i) each director of the Company; (ii) the Named Executive Officers of the Company; and (iii) all executive officers and directors of the Company as a group.
Percentage of Total Name and Address of Beneficial Owner (1) Number of Shares Percent of Class (2) Voting Power (3) - --------------------------------------------- ---------------- -------------------- ------------------- Barry Diller(4).............................. 60,071,714 34.7% 75.3% William Gross................................ -- -- -- Alan Citron(5)............................... 33,781 * ** Terry Barnes(5).............................. 50,000 * ** Eugene L. Cobuzzi(5)......................... 64,452 * ** Stuart W. DePina(5).......................... 39,770 * ** Joseph Gleberman............................. -- -- -- Victor A. Kaufman(6)......................... 495,000 * ** Alan Spoon................................... -- -- -- Thomas Unterman.............................. -- -- -- Robert Kavner................................ -- -- -- William D. Savoy(7).......................... 76,745 * ** Charles Conn................................. -- -- -- Thomas Layton................................ -- -- -- All executive officers and directors as a group (19 persons)(8)........................ 60,880,503 35.1% 75.4%
- ---------------------- * Less than 1% of the outstanding USAi Common Stock. ** Less than 1% of the total voting power of the USAi Common Stock and the Class B common stock of USAi, par value $.01 per share ("USAi Class B Common Stock"). (1) The address of Mr. Diller and Mr. Kaufman is: c/o USAi Networks, Inc., 152 West 57th Street, 42nd Floor, New York, NY 10019. The address of each of the other named individuals is: c/o Ticketmaster Online-CitySearch, Inc., 790 E. Colorado Boulevard, Suite 200, Pasadena, CA 91101. (2) The percentage of beneficial ownership listed assumes the conversion of any shares of USAi Class B Common Stock owned by such listed person, but does not assume the conversion of USAi Class B Common Stock owned by any other person. Beneficial ownership has been determined in accordance with the rules of the Commission. Shares of USAi Class B Common Stock are convertible at any time into an equal number of shares of USAi Common Stock. (3) The percentage of votes for all classes is based on one vote for each share of USAi Common Stock and ten votes for each share of USAi Class B Common Stock (assuming no conversion of USAi Class B Common Stock). (4) Liberty, a wholly-owned subsidiary of TCI, Universal, Seagram, USAi and Mr. Diller are parties to a stockholders agreement (the "Stockholders Agreement") pursuant to which Liberty and Mr. Diller have formed BDTV INC., BDTV II INC., BDTV III INC. and BDTV IV INC. (together the "BDTV Entities") which entities, as of December 31, 1998, held 4,000,000, 15,618,222, 4,005,182 and 800,000 shares of USAi Class B Common Stock, respectively. Includes 6,715,000 shares of USAi Class B Common Stock, and 8,490,654 shares of USAi Common Stock as to which Mr. Diller has general voting power and which are otherwise beneficially owned by Seagram. Includes 378,322 shares of USAi Class B Common Stock, and 4,820,587 shares of USAi Common Stock as to which Mr. Diller has general voting power and which are otherwise beneficially owned by Liberty. Mr. Diller also owns through intermediate entities 1,029,954 shares of USAi Common Stock and vested options to purchase 14,153,771 shares of USAi Common Stock. Pursuant to the Stockholders Agreement, Mr. Diller -40- generally has the right to vote all of the shares of USAi stock held by the BDTV Entities, Seagram and Liberty. These figures do not include any unissued shares of USAi Common Stock or USAi Class B Common Stock issuable upon exchange of the shares of Home Shopping Network, Inc. ("Home Shopping") held by Liberty HSN, Inc. ("Liberty HSN") and the shares of USANi LLC ("LLC Shares") beneficially owned by Liberty or Seagram. (5) Consists solely of vested options to purchase shares of USAi Common Stock. (6) Consists of 160,000 shares of USAi Common Stock and vested options to purchase 335,000 shares of USAi Common Stock. (7) Consists of 29,000 shares of USAi Common Stock and vested options to purchase 47,745 shares of USAi Common Stock. (8) Includes Barry Baker, who became a director of the Company in March 1999. As of December 31, 1998, Mr. Baker owned 4,000 shares of USAi Common Stock. USAI Class B Common Stock The following table sets forth, as of December 31, 1998, information relating to the beneficial ownership of USAi Class B Common Stock for the individuals described in the table regarding ownership of USAi Common Stock.
Number of Shares Beneficially Name and Address of Beneficial Owner Owned (1) Percentage of Class - ------------------------------------------------------------------------ -------------------- ------------------- Barry Diller(2)......................................................... 31,516,726 100% c/o USA Networks, Inc. 152 West 57th Street 42nd Floor New York, NY 10019
- ------------------------- (1) All or any portion of shares of USAi Class B Common Stock may be converted at any time into an equal number of shares of USAi Common Stock. (2) These figures do not include any unissued shares of USAi Common Stock or USAi Class B Common Stock issuable upon conversion of Liberty HSN's Home Shopping shares and LLC Shares beneficially owned by Liberty or Seagram. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Private Placements of Securities On September 22, 1995, CitySearch issued an aggregate of 6,622,857 shares of CitySearch Common Stock to Mr. Gross, a co-founder of CitySearch and director of the Company, for services provided to CitySearch and aggregate proceeds of $5,000. On December 9, 1995, CitySearch repurchased 2,000,000 shares of such CitySearch Common Stock from Mr. Gross for an aggregate price of $1,510. On October 11, 1995 CitySearch sold an aggregate of 4,233,500 shares of CitySearch Common Stock to Messrs. Conn, Layton, Jeffrey Brewer and certain other key employees (together with shares of CitySearch Common Stock issued to Mr. Gross, the "Founders' Stock") for aggregate proceeds of $84,670. Pursuant to the Reclassification, the Founders' Stock has been reclassified as Class A Common Stock of the Company. Between May 15, 1996 and July 31, 1996, CitySearch issued and sold an aggregate of 3,261,024 shares of Series C Preferred Stock (or 3,170,356 shares of Class A Common Stock pursuant to the Conversion and the Reclassification) at a per share price of $3.4665. Entities affiliated with Goldman, Sachs & Co. purchased 2,596,278 shares of these shares (or 2,465,686 shares of Class A Common Stock pursuant to the Conversion and the Reclassification) 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. -41- Between December 13, 1996 and October 22, 1997, CitySearch issued and sold an aggregate of 4,430,313 shares of Series D Preferred Stock (or 4,297,824 shares of Class A Common Stock pursuant to the Conversion and the Reclassification) at a per share price of $6.5251. These sales included the following: 766,272 shares (or 743,360 shares of Class A Common Stock pursuant to the Conversion and the Reclassification) were sold to The Times Mirror Company for an aggregate purchase price of approximately $5.0 million; 475,085 shares (or 460,873 shares of Class A Common Stock pursuant to the Conversion and the Reclassification) were sold to entities affiliated with Goldman, Sachs & Co. for an aggregate purchase price of approximately $3.1 million; and 459,763 shares (or 446,015 shares of Class A Common Stock pursuant to the Conversion and the Reclassification) were sold to Washingtonpost.Newsweek Interactive Company for an aggregate purchase price of approximately $3.0 million. Mr. Unterman, a director of the Company, is an Executive Vice President and Chief Financial Officer of The Times Mirror Company. Mr. Gleberman, a director of the Company, is Managing Director in the Principal Investment Area of Goldman, Sachs & Co. Mr. Spoon, a director of the Company, is President, Chief Operating Officer and a director of The Washington Post Company. Between November 11, 1997 and November 26, 1997, CitySearch issued and sold an aggregate of 4,714,286 shares of Series E Preferred Stock (or 4,655,347 shares of Class A Common Stock pursuant to the Conversion and the Reclassification) at a per share price of $7.00. USAi purchased 2,857,143 such shares (2,821,428 shares of Class A Common Stock pursuant to the Conversion and the Reclassification) for an aggregate purchase price of approximately $20.0 million. Mr. Diller, a director of the Company, is Chairman and Chief Executive Officer of USAi. In addition, 306,509 shares (or 302,677 shares of Class A Common Stock pursuant to the Conversion and the Reclassification) were sold to Washingtonpost.Newsweek Interactive Company for an aggregate purchase price of approximately $2.1 million. On May 26, 1998, CitySearch issued and sold an aggregate of 1,000,000 shares of Series E Preferred Stock (or 987,500 shares of Class A Common Stock pursuant to the Conversion and the Reclassification) at a per share price of $7.00. USAi purchased 428,571 of these shares (or 423,213 shares of Class A Common Stock pursuant to the Conversion and the Reclassification) for an aggregate purchase price of approximately $3.0 million. Transactions with Affiliates USAi, Ticketmaster Corp. and Related Entities In May 1997, CitySearch entered into a cross-promotional agreement with Ticketmaster Online. Pursuant to the agreement, Ticketmaster Online agreed to provide banner advertising promoting CitySearch's owned and operated city sites on the Ticketmaster Online Web site, to provide access to Ticketmaster Online ticket and information Web pages and to provide "music-on-hold" and/or direct mail opportunities from Ticketmaster Corp. CitySearch agreed to provide promotion of the Ticketmaster name and logo in selected advertising and marketing materials, to co-produce with Ticketmaster Online broadcast advertising, to provide banner advertising promoting Ticketmaster Online on the CitySearch Web sites and to promote Ticketmaster Corp. events and publications. This agreement terminates on October 31, 1998. CitySearch, USAi, Ticketmaster Online and various affiliates are parties to the Merger Agreement. In addition, pursuant to the Merger Agreement, the Tender Offer was completed on November 3, 1998. Concurrently with the execution of the Merger Agreement, USAi loaned $50 million in cash to CitySearch in exchange for the Convertible Note. See "Business--Ticketmaster Online-CitySearch Merger." In August 1998, Ticketmaster Online, Ticketmaster Corp. and USAi entered into the Ticketmaster License Agreement. See "Business--Ticketmaster Online Business Ticketmaster License Agreement." The Company expects that, both within and outside the ordinary course of business, the Company and its affiliates (other -42- than USAi and its controlled affiliates), on the one hand, and USAi and its affiliates (other than the Company and its controlled affiliates), on the other hand, will engage in various transactions, including pursuant to the Ticketmaster License Agreement. The Company expects that such transactions will result in terms to the Company that are at least as favorable as those that could be obtained from a third party, where applicable. In February 1999, the Company entered into an agreement providing for the combination of the Company, Lycos, Inc. and USAi's Home Shopping Network, Ticketmaster and Internet Shopping Network/First Auction businesses. See "Business--Recent Developments--Pending Business Combination With Lycos, Inc. and USAi's Home Shopping Network, Ticketmaster and Internet Shopping Network/First Auction Businesses." Other Affiliates In June 1997, CitySearch 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 CitySearch'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. Mr. Unterman, a director of the Company, is Executive Vice President and Chief Financial Officer of The Times Mirror Company. In September 1997, Ticketmaster Online entered into an agreement with The Los Angeles Times, Inc. providing for Ticketmaster Online to create and maintain a co-branded Web site with ticketing capabilities and information on local live events. Under the agreement, Ticketmaster Online is required to pay to The Los Angeles Times, Inc. 50% of net merchandising revenue from the co-branded Web site. In November 1997, CitySearch entered into a license and services agreement with Washingtonpost.Newsweek Interactive 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. Mr. Spoon, a director of the Company, is the President and a director of The Washington Post Company, the parent of Washington-post.Newsweek Interactive Company. Acceleration of Stock Options Messrs. Conn and Layton are parties to stock option agreements under the 1996 Stock Plan pursuant to which Mr. Conn was granted options to purchase 125,000 shares and 200,000 shares of CitySearch Class A Common Stock at exercise prices of $2.00 per share and $7.00 per share, respectively, and Mr. Layton was granted options to purchase 75,000 shares and 200,000 shares of the Company's Class A Common Stock at exercise prices of $2.00 per share and $7.00 per share, respectively. Each of these stock option agreements provides that in the event of a substantial merger or a board approved acquisition of CitySearch, all outstanding, unvested stock options will vest upon completion of such event. Upon consummation of the Merger, 277,085 shares subject to unvested options held by Mr. Conn and 239,584 shares subject to unvested options held by Mr. Layton immediately vested. Additionally, Mr. Conn is a party to a stock option agreement under the 1998 Stock Plan, pursuant to which he was granted options to purchase 150,000 shares of the Company's Class B Common Stock at an exercise price of $32.69 per share. This stock option agreement provides that in the event of a substantial merger or a board approved acquisition of the Company, all outstanding, unvested stock options will vest upon completion of such event. Non-Competition Agreements In connection with the execution of the Merger Agreement, Messrs. Conn and Layton each entered into the Non-Competition Agreements with CitySearch, Ticketmaster Corp. and Ticketmaster Online. -43- The Non-Competition Agreements provide that each of Messrs. Conn and Layton will not, for a period of 30 months from the date of the Non-Competition Agreement, directly engage in or assist any activity that is the same or materially competes with the local city guide business on the Web or the business of the sale of tickets to live events through any distributed channels. Messrs. Conn and Layton each received $250,000 from Ticketmaster Group in connection with the execution of his Non-Competition Agreement. In addition, neither Messrs. Conn nor Layton may solicit senior employees or customers, advertisers or clients of CitySearch or Ticketmaster Online or any of their respective subsidiaries for a period of one year following the date of the termination of his employment with CitySearch for any reason. The Company has also entered into employment agreements with each of Messrs. Conn and Layton, which provide for certain severance payments upon termination of employment. See "Executive Compensation--Employment Agreements." -44- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: 1. Financial Statements. The following Consolidated Financial Statements of Ticketmaster Online-CitySearch, Inc. and Report of Independent Auditors are being filed as required by Item 8: Report of Independent Auditors. Consolidated Balance Sheets at December 31, 1998 and January 31, 1998. Consolidated Statements of Operations for the Eleven Months Ended December 31, 1998 and the Years Ended January 31, 1998 and January 31, 1997. Consolidated Statements of Stockholders' Equity for the Eleven Months Ended December 31, 1998 and the Years Ended January 31, 1998 and January 31, 1997. Consolidated Statements of Cash Flows for the Eleven Months Ended December 31, 1998 and the Years Ended January 31, 1998 and January 31, 1997. Notes to Consolidated Financial Statements. -45- 2. Financial Statement Schedules. The following consolidated financial statement schedules of CitySearch, Inc. and Ticketmaster Online are filed as part of this Report and should be read in conjunction with the Financial Statements: Schedule Page -------- ---- II - Valuation and Qualifying Accounts.................. S-1 Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or notes thereto. 3. Exhibits:
Notes: ------ 2.1 Agreement and Plan of Reorganization, among CitySearch, Inc., MB Acquisition (A)* Corporation, MetroBeat, Inc., Mark Davies and Joshua White, dated May 31, 1996. 2.2 Amended and Restated Agreement and Plan of Reorganization, among CitySearch, (A) Inc., Tiberius, Inc., USA Networks, Inc., Ticketmaster Group, Inc., Ticketmaster Corporation and Ticketmaster Multimedia Holdings, Inc., dated August 12, 1998. 2.3 Agreement and Plan of Reorganization, dated as of January 8, 1999, by and + among Ticketmaster Online-CitySearch, Inc., Nero Acquisition Corporation, CityAuction, Inc., Andrew Rebele and Monica Lee, as amended. 2.4 Agreement and Plan of Reorganization, dated as of February 8, 1999, by and (E) among USA Networks, Inc., Ticketmaster Online-CitySearch, Inc., Lycos, Inc., USA Interactive, Inc., Lemma, Inc. and Tycho, Inc. (the "Merger Agreement"), including Form of Certificate of Designations, Preferences and Rights of Series A Convertible Redeemable Preferred Stock of USA/Lycos Interactive Networks, Inc. (Exhibit B to the Merger Agreement) 2.5 Contribution Agreement, dated as of February 8, 1999, by and among USA (E) Networks, Inc., USANi LLC and USA Interactive Inc. 2.6 Stock Option Agreement, dated February 8, 1999, between Lycos, Inc. and USA (E) Networks, Inc. (Exhibit A-1 to the Merger Agreement) 2.7 Stock Option Agreement, dated February 8, 1999, between Lycos, Inc. and (E) Ticketmaster Online-CitySearch, Inc. (Exhibit A-2 to the Merger Agreement) 3.1 Amended and Restated Certificate of Incorporation, as currently in effect. (A) 3.2 Form of Amended and Restated Certificate of Incorporation, to be effective (C) immediately prior to the consummation of the offering. 3.3 Amended and Restated Bylaws. (C) 4.1 Specimen Class B Common Stock Certificate. (C) 10.1 Form of Indemnification Agreement for directors and officers. (A) 10.2 1996 Stock Option Plan and form of agreement thereunder. (C) 10.3 1998 Stock Option Plan and form of agreement thereunder. (C) 10.4 1998 Employee Stock Purchase Plan. (D) 10.5 License Agreement between CitySearch, Inc. and Perly, Inc., dated March 9, (A)* 1996.
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Notes: ------ 10.6 Marketing Agreement between CitySearch, Inc, and American Express Travel (A)* Related Services Company, Inc., dated May 26, 1998. 10.7 Employment Agreement between CitySearch, Inc. and Charles Conn, dated May 9, (A) 1996. 10.8 Unanimous Shareholder Agreement between Tele-Direct (Services), Inc., (A)* Metroland Printing, Publishing & Distributing Ltd., CitySearch Canada, Inc. and 1310818 Ontario, Inc., dated August 31, 1998. 10.9 Limited Partnership Agreement between Metroland Printing, Publishing & (A)* Distributing Ltd., 1310818 Ontario Inc., CitySearch Canada, Inc., TeleDirect (Services), Inc., Tele-Direct (Publications), Inc., CitySearch, Inc. and Torstar Corporation, dated August 31, 1998. 10.10 Amended and Restated License and Services Agreement between CitySearch, Inc. (A)* and CitySearch Canada, Inc., dated August 31, 1998. 10.11 Sublicense and Services Agreement between CitySearch Canada, Inc., and (A)* toronto.com, dated August 31, 1998. 10.12 Non-competition Agreement between Toronto Star Newspapers Ltd., TeleDirect (A)* (Services), Inc., CitySearch Canada, Inc. and Metroland Printing, Publishing & Distributing Ltd., dated August 31, 1998. 10.13 Lease Agreement by and between CitySearch, Inc. and West End Land Development (A) Co., L.P., dated November 7, 1996. 10.14 Standard Form of Lease, Aeriel Center Executive Park, between Pizzagalli (A) Investment Company and CitySearch, Inc., dated May 8, 1996. 10.15 Standard Office Lease between CitySearch, Inc. and Sage Realty Corporation, (A) dated May 6, 1997. 10.16 Standard Office Lease between CitySearch, Inc. and H. Naito Corporation, dated (A) March 6, 1997. 10.17 Standard Office Lease between CitySearch, Inc. and Brazos Austin Centre, Ltd., (A) dated August 15, 1996 10.18 Standard Office Lease between CitySearch, Inc. and Judge Building Group, dated (A) September 10, 1996. 10.19 Standard Office Lease between CitySearch, Inc. and Sobel Building Development, (A) dated May 31, 1996. 10.20 Standard Office Lease between CitySearch, Inc. and BPG Pasadena, L.L.C. (later (A) assigned to Spieker Properties), dated September 30, 1996. 10.21 Lease Agreement between CitySearch, Inc. and Securities Properties Investors (A) II, L.P. dated May 13, 1998. 10.22 Employment Agreement between CitySearch, Inc. and Thomas Layton, dated July 2, (A) 1997. 10.23 License and Services Agreement between CitySearch, Inc. and Classified (A)* Ventures, L.L.C. 10.24 Convertible Promissory Note issued to CitySearch, Inc., by USA Networks, Inc., (A) dated August 12, 1998. 10.25 Non-Competition Agreement between CitySearch, Inc., Ticketmaster Corporation, (A) Ticketmaster, Multimedia Holdings, Inc., and Charles Conn, dated August 12, 1998. 10.26 Non-Competition Agreement between CitySearch, Inc., Ticketmaster Corporation, (A) Ticketmaster, Multimedia Holdings, Inc., and Thomas Layton, dated August 12, 1998. 10.27 Letter Agreement Between N2K Inc. and Ticketmaster Ticketing Co., Inc., dated (B)* April 23, 1998, as amended by a Letter Agreement by and between the parties, dated June 16, 1998.
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Notes: ------ 10.28 Development and Services Agreement between Ticketmaster Corporation, (A) Ticketmaster Multimedia Holdings, Inc. and Starwave Corporation, dated June 28, 1996. 10.29 License and Services Agreement between Ticketmaster Corporation, Ticketmaster (A)* Multimedia Holdings, Inc., and USA Networks, Inc., dated August 12, 1998. 10.30 Employment Agreement between Ticketmaster Online CitySearch, Inc. and Robert + Perkins dated November 25, 1998. 10.31 Employment Agreement between Ticketmaster Online CitySearch, Inc. and David + Hagan dated November 27, 1998 21.1 Subsidiaries of the Registrant. (A) 23.1 Consent of Independent Auditors. + 24.1 Power Of Attorney (see page 49). + 27.1 Financial Data Schedule. +
______________________________ + Filed herewith. * Confidential treatment has been granted with respect to portions of this exhibit. (A) Incorporated by reference to exhibits filed in response to Item 16, "Exhibits," of the Company's Registration Statement on Form S-1 (File No. 333-64855) filed with the Commission on September 30, 1998. (B) Incorporated by reference to exhibits filed in response to Item 16, "Exhibits," of the Company's Registration Statement on Form S-1 (File No. 333-64855) filed with the Commission on October 19, 1998. (C) Incorporated by reference to exhibits filed in response to Item 16, "Exhibits," of the Company's Registration Statement on Form S-1 (File No. 333-64855) filed with the Commission on November 6, 1998. (D) Incorporated by reference to exhibits filed in response to Item 16, "Exhibits," of the Company's Registration Statement on Form S-1 (File No. 333-64855) filed with the Commission on November 20, 1998. (E) Incorporated by reference to exhibits filed in response to Item 7, "Exhibits," of the Report on Form 8-K filed by USA Networks, Inc. (File No. 000-20570) with the Commission on February 26, 1999. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the quarter ended December 31, 1998. -48- SIGNATURES Pursuant to the requirements of the Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunder duly authorized. TICKETMASTER ONLINE-CITYSEARCH, INC. By: /s/ Charles Conn ----------------------------------- Charles Conn Chief Executive Officer Dated: March 31, 1999 POWER OF ATTORNEY Know All Men By These Presents, that each person whose signature appears below constitutes an appoints Charles Conn and Bradley Ramberg, jointly and severally, his or her attorney-in-fact, each with the power of substitution for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K 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 or her substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1934, this Report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Charles Conn - -------------------------------------- Chief Executive Officer (Principal March 31, 1999 Charles Conn Executive Officer) and a Director /s/ Bradley Ramberg - -------------------------------------- Chief Financial Officer and March 31, 1999 Bradley Ramberg Vice President, Finance and Administration and Secretary (Principal Financial and Accounting Officer) - -------------------------------------- Director March __, 1999 Barry Baker /s/ Terry Barnes ______________________________________ Director March 31, 1999 Terry Barnes ______________________________________ Director March __, 1999 Alan Citron
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Signature Title Date --------- ----- ---- /s/ Eugene L. Cobuzzi ______________________________________ Director March 31, 1999 Eugene L. Cobuzzi /s/ Stuart W. Depina ______________________________________ Director March 31, 1999 Stuart W. Depina ______________________________________ Director March ____, 1999 Barry Diller /s/ Joseph Gleberman ______________________________________ Director March 31, 1999 Joseph Gleberman /s/ William Gross ______________________________________ Director March 31, 1999 William Gross ______________________________________ Director March ____, 1999 Victor A. Kaufman /s/ Robert Kavner ______________________________________ Director March 31, 1999 Robert Kavner ______________________________________ Director March ____, 1999 William D. Savoy /s/ Alan Spoon ______________________________________ Director March 31, 1999 Alan Spoon ______________________________________ Director March ____, 1999 Thomas Unterman
-50- REPORT OF INDEPENDENT AUDITORS Board of Directors Ticketmaster Online-CitySearch, Inc. We have audited the accompanying consolidated balance sheets of Ticketmaster Online (the Predecessor) and Ticketmaster Online-CitySearch, Inc. (the Company) as of January 31, 1998 and December 31, 1998, respectively, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years in the period ended January 31, 1998 and the eleven month period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and the schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule 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 Ticketmaster Online-CitySearch, Inc., as the Predecessor and successor companies at January 31, 1998 and December 31, 1998, and the consolidated results of their operations and their cash flows for each of the two years in the period ended January 31, 1998 and the eleven month period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Woodland Hills, California January 29, 1999 F-1 TICKETMASTER ONLINE-CITYSEARCH, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
Predecessor ---------------- December 31, January 31, 1998 1998 -------------- -------------- ASSETS Current assets: Cash and cash equivalents.................................................. $106,910 $ -- Accounts receivable (net of allowance for doubtful accounts of $58 and $0 respectively)..................................... 1,249 167 Related party receivable................................................... 813 -- Due from licensees......................................................... 1,440 -- Prepaid expenses........................................................... 777 124 -------- ------- Total current assets.................................................... 111,189 291 Computers, software, equipment and leasehold improvements, net............... 5,893 397 Goodwill and other intangibles, net.......................................... 299,643 -- -------- ------- Total assets............................................................ $416,725 $ 688 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................................................... $ 2,734 $ 158 Accrued expenses........................................................... 4,551 144 Deferred revenue........................................................... 3,002 89 Current portion of capital lease obligations............................... 1,331 -- -------- ------- Total current liabilities............................................... 11,618 391 Other long-term liabilities.................................................. 437 8 Capital lease obligations, net of current portion............................ 1,082 -- Stockholders' equity: Preferred stock, $0.01 par value; Authorized shares--2,000,000 at December 31, 1998 Issued and outstanding--none............................................. -- -- Common stock, no par value; Authorized shares--1,000 at January 31, 1998 and none at December 31, 1998 Issued and outstanding--none............................................. -- -- Class A Common Stock, $0.01 par value; Authorized shares--100,000,000 at December 31, 1998 Issued and outstanding--63,291,653 at December 31, 1998.................. 633 -- Class B Common Stock--$0.01 par value; Authorized shares--250,000,000 at December 31, 1998 Issued and outstanding--8,167,000 at December 31, 1998................... 82 -- Class C Common Stock--$0.01 par value; Authorized shares--2,883,506 at December 31, 1998 Issued and outstanding--none............................................. -- -- Due to (from) Ticketmaster Corp............................................ -- (1,113) Additional paid-in capital................................................. 418,918 -- Retained earnings (deficit)................................................ (16,045) 1,402 -------- ------- Total stockholders' equity.............................................. 403,588 289 -------- ------- Total liabilities and stockholders' equity.............................. $416,725 $ 688 ======== =======
See accompanying notes. F-2 TICKETMASTER ONLINE-CITYSEARCH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Eleven Predecessor Months ----------------------------- Ended Year Ended January 31, December 31, ---------------------------- 1998 1998 1997 ------------- ------------ ------------- Revenues: Ticketing operations.................................................. $ 15,743 $ 5,972 $ 199 Sponsorship and advertising........................................... 6,754 3,933 997 City guide and related................................................ 5,376 -- -- -------- ------- ------- Total revenues..................................................... 27,873 9,905 1,196 Operating costs and expenses: Ticketing operations.................................................. 9,842 3,522 635 City guide and related................................................ 4,021 -- -- Sales and marketing................................................... 6,834 490 290 Research and development.............................................. 1,728 -- -- General and administrative............................................ 3,495 1,719 1,260 Amortization of goodwill.............................................. 16,275 -- -- -------- ------- ------- Total costs and expenses........................................... 42,195 5,731 2,185 -------- ------- ------- Income (loss) from operations........................................... (14,322) 4,174 (989) Interest income......................................................... 867 -- -- Interest expense........................................................ (813) -- -- -------- ------- ------- 54 -- -- -------- ------- ------- Income (loss) before income taxes....................................... (14,268) 4,174 (989) Income tax provision (benefit).......................................... 2,951 1,827 (374) -------- ------- ------- Net income (loss)....................................................... $(17,219) $ 2,347 $ (615) ======== ======= ======= Basic and diluted net income (loss) per share........................... $(0.38) $0.06 $(0.02) ======== ======= ======= Shares used to compute basic and diluted net income (loss) per share.... 45,201 37,238 37,238 ======== ======= =======
See accompanying notes. F-3 TICKETMASTER ONLINE-CITYSEARCH, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
Class A Class B Common Stock Common Stock Common Stock Due to Additional Retained -------------- ---------------- -------------- (from) Paid-in Earnings Shares Amount Shares Amount Shares Amount Ticketmaster Capital (Deficit) Total ------ ------ ------- ------- ------ ------ ------------- ---------- ---------- ---------- Balance at February 1, 1996... 1 $ -- -- $ -- -- $ -- $ 684 $ -- $ (330) $ 354 Accounts receivable transferred to Ticketmaster Corp......................... -- -- -- -- -- -- (1,088) -- -- (1,088) Operating charges transferred from Ticketmaster Corp., net of federal income tax allocation................... -- -- -- -- -- -- 1,838 -- -- 1,838 Net loss...................... -- -- -- -- -- -- -- -- (615) (615) ----- ------ ------ ---- ----- ------ ------- -------- -------- -------- Balance at January 1, 1997.... 1 -- -- -- -- -- 1,434 -- (945) 489 Accounts receivable transferred to Ticketmaster Corp......................... -- -- -- -- -- -- (9,953) -- -- (9,953) Operating charges transferred from Ticketmaster Corp., net of federal income tax allocation................... -- -- -- -- -- -- 7,406 -- -- 7,406 Net income.................... -- -- -- -- -- -- -- -- 2,347 2,347 ----- ------ ------ ---- ----- ------ ------- -------- -------- -------- Balance at January 31, 1998... 1 $ -- -- $ -- -- $ -- $(1,113) $ -- $ 1,402 $ 289 ===== ====== ====== ==== ===== ====== ======= ======== ======== ======== Allocation of initial capitalization as a result of the Ticketmaster Acquisition by USAi......... -- $ -- -- $ -- -- $ -- $ -- $ 22,834 $ 1,174 $ 24,008 Allocation of basis of Tax-free Merger of Ticketmaster by USAi........ -- -- -- -- -- -- -- 126,170 -- 126,170 Stock exchanged in connection with CitySearch Merger (37,238) and USAi's initial investment in CitySearch at cost........................ -- -- 40,483 405 -- -- -- 145,923 -- 146,328 Contribution of tendered CitySearch Common Stock from USAi to Ticketmaster........ -- -- -- -- -- -- -- 17,318 -- 17,318 Contribution of CitySearch Common Stock from USAi to Ticketmaster................. -- -- 22,003 220 -- -- -- 1,100 -- 1,320 Exercise of stock options and warrants..................... -- -- 923 9 -- -- -- 1,600 -- 1,609 Initial public offering of Class B Common Stock......... -- -- -- -- 8,050 81 -- 103,973 -- 104,054 Class A shares converted to Class B...................... -- -- (117) (1) 117 1 -- -- -- -- Net loss...................... -- -- -- -- -- -- -- -- (17,219) (17,219) ----- ------ ------ ---- ----- ------ ------- -------- -------- -------- Balance at December 31, 1998 -- $ -- 63,292 $633 8,167 $ 82 $ -- $418,918 $(16,045) $403,588 ===== ====== ====== ==== ===== ====== ======= ======== ======== ========
See accompanying notes. F-4 TICKETMASTER ONLINE-CITYSEARCH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Predecessor Eleven Months ------------------------------ Ended Year Ended January 31, December 31, ------------------------------ 1998 1998 1997 ------------- ------------- ------------- Operating activities Net income (loss)........................................................ $(17,219) $ 2,347 $(615) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.......................................... 17,411 268 51 Changes in operating assets and liabilities: Accounts receivable................................................. (818) (41) (108) Related parties receivable.......................................... (184) -- -- Due from licensees.................................................. 27 -- -- Prepaid expenses.................................................... (475) 30 51 Accounts payable.................................................... 36 158 -- Accrued expenses.................................................... (196) 87 65 Deferred revenue.................................................... 969 89 -- Deferred rent....................................................... 11 -- -- -------- ------- ----- Net cash provided by (used in) operating activities...................... (438) 2,938 (556) Investing activities Capital expenditures..................................................... (1,034) (250) (189) Deferred purchase price of subsidiary.................................... (112) -- -- -------- ------- ----- Net cash used in investing activities.................................... (1,146) (250) (189) Financing activities Net proceeds from (distributions to) Ticketmaster Corp................... (5,549) (2,691) 748 Net proceeds from exercise of options and warrants....................... 1,609 -- -- Net proceeds from initial public offering................................ 104,989 -- -- Payments on capital leases............................................... (324) -- -- Payment on convertible promissory note................................... (50,000) -- -- Other, net............................................................... (108) -- -- -------- ------- ----- Net cash provided by (used in) financing activities...................... 50,617 (2,691) 748 Net cash acquired in CitySearch Merger................................... 57,877 -- -- -------- ------- ----- Net increase (decrease) in cash and cash equivalents..................... 106,910 (3) 3 Cash and cash equivalents at beginning of period......................... -- 3 -- -------- ------- ----- Cash and cash equivalents at end of period............................... $106,910 $ -- $ 3 ======== ======= ===== Supplemental statement of cash flow information Noncash investing and financing information: Acquisition of CitySearch, Inc. Fair value of assets acquired (including cash and cash equivalents of $57,877 and goodwill)................................ $226,339 Less: Fair value of liabilities assumed................................... 61,373 Issuance of Class A Common Stock.................................... 147,648 Contribution of tendered CitySearch Common Stock from USAi to Ticketmaster......................................... 17,318 -------- Cash paid......................................................... $ 0 ========
See accompanying notes. F-5 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 1. Organization and Business Basis of Presentation and Merger Prior to the Merger (as defined below), Ticketmaster Multimedia Holdings, Inc. (the predecessor company) (Ticketmaster Online) was a wholly owned subsidiary of Ticketmaster Corporation (Ticketmaster Corp.). Ticketmaster Corp. is a wholly owned subsidiary of Ticketmaster Group, Inc. (Ticketmaster Group), which is a wholly owned subsidiary of USA Networks, Inc. (USAi). In July 1997, USAi acquired a controlling interest in Ticketmaster Group through the issuance of shares of USAi common stock (Ticketmaster Acquisition by USAi). In June 1998, USAi completed its acquisition of Ticketmaster Group in a tax-free merger (Tax-free Merger and collectively with the Ticketmaster acquisition is the Ticketmaster Transaction), pursuant to which each outstanding share of Ticketmaster Group common stock not owned by USAi was exchanged for 1.126 shares of USAi common stock. A portion of the Ticketmaster Group acquisition cost has been allocated to the assets acquired and liabilities assumed of Ticketmaster Online based on the fair value of the respective portion of Ticketmaster Online acquired in the Ticketmaster Transaction. On September 28, 1998, pursuant to an Amended and Restated Agreement and Plan of Reorganization dated as of August 12, 1998 (the Merger Agreement), by and among CitySearch, Inc. (CitySearch), USAi, Ticketmaster Group, Ticketmaster Online and Tiberius, Inc. (Tiberius), a wholly-owned subsidiary of CitySearch, Tiberius was merged with and into Ticketmaster Online, with Ticketmaster Online continuing as the surviving corporation and as a wholly-owned subsidiary of CitySearch (the Merger). In connection with the Merger Agreement, all issued and outstanding shares of Ticketmaster Online's Common Stock held by Ticketmaster Corp. were converted into an aggregate of 37,238,000 shares of CitySearch Common Stock and such shares were subsequently reclassified as Class A Common Stock of the Company. The Merger was accounted for using the "reverse purchase" method of accounting, pursuant to which Ticketmaster Online was treated as the acquiring entity for accounting purposes, and the assets acquired and liabilities assumed of CitySearch were recorded at their respective fair values. The accompanying financial statements prior to the Merger reflect the financial position, results of operations and cash flows of Ticketmaster Online. The accompanying financial statements, subsequent to the Merger, include the assets and liabilities of CitySearch and the results of operations of CitySearch from September 29, 1998 through December 31, 1998. In connection with the Merger the name of the combined company was changed from CitySearch, Inc. to Ticketmaster Online- CitySearch, Inc. (the Company). References throughout these financial statements to Ticketmaster Online and CitySearch relate to the individual businesses of Ticketmaster Online and CitySearch, respectively. The Merger costs and the determination of the excess of Merger costs over net assets acquired are set forth below (in thousands): Initial investment at cost............................................................................... $ 23,000 Value of portion of CitySearch acquired in the Merger.................................................... 120,864 Tender offer............................................................................................. 17,318 Estimated transaction costs (including non-competition agreements)....................................... 2,464 -------- Total Merger costs.................................................................................... 163,646 Net identifiable assets acquired......................................................................... (2,517) -------- Excess of Merger cost over net assets acquired........................................................... $161,129 ========
The initial investment at cost represents the previous purchases of shares of Series E Preferred Stock by USAi, which were converted into 3,244,641 shares of Class A Common Stock in connection with the Merger, which, prior to the Merger, represented approximately 11.8% of the CitySearch outstanding equity. F-6 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 1. Organization and Business (continued) Merger (continued) The value of the non-monetary exchange between Ticketmaster Online and CitySearch was determined by Ticketmaster Online based on the fair value of the 50.7% of CitySearch acquired in the transaction. The fair value of CitySearch before the Merger was $238.4 million based on an assumed fair value of $8.67 per share of CitySearch's Common Stock outstanding at September 28, 1998, including outstanding stock options under the treasury method. The fair value of CitySearch attributable to outstanding shares of Common Stock at September 28, 1998 was $218.9 million and the fair value of CitySearch attributable to outstanding stock options at September 28, 1998, under the treasury stock method, was $19.5 million. On October 2, 1998 USAi commenced a tender offer (the Tender Offer) to purchase up to 20% of each CitySearch stockholder's Common Stock at a per share purchase price of $8.67 in cash, up to an aggregate of 2,924,339 shares. The Tender Offer expired on November 3, 1998 and 1,997,502 shares were tendered for purchase for a total of $17,318,000. In connection with the Merger Agreement, Ticketmaster Online also entered into a License and Services Agreement (the License Agreement) with Ticketmaster Corp. and USAi to remain perpetually in effect unless terminated as allowed under the License Agreement. For a license fee, Ticketmaster Corp. granted Ticketmaster Online, among other things, the exclusive worldwide right to use the trademarks of Ticketmaster Corp. in connection with the sale of tickets and merchandise via electronic interactive services. Pro Forma Financial Data (Unaudited) The following unaudited pro forma information presents a summary of results of the Company assuming the Merger, Ticketmaster Transaction and the Tender Offer had occurred as of January 1, 1997, with pro forma adjustments to give effect to amortization of goodwill, certain other adjustments to conform to the terms of the License Agreement, and the related income tax effects. The pro forma information also gives effect to the Company's change in year end from January 31, to December 31. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effective on January 1, 1997.
Year Ended December 31, 1998 1997 ------------- ------------- (in thousands, except per share data) Revenues................................................................... $ 40,157 $ 15,479 Net loss................................................................... $(72,598) $(80,357) Net loss per share......................................................... $ (1.16) $ (1.44)
F-7 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 1. Organization and Business (continued) Business Prior to the Merger, Ticketmaster Online was a wholly-owned subsidiary of Ticketmaster Corp. which is a leading provider of automated ticketing services in the United States, with clients including many of the country's most well- known entertainment facilities, promoters and professional sports franchises. Ticketmaster Online was formed in December 1993 to administer the online business of Ticketmaster Corp. There were no costs and expenses incurred by Ticketmaster Online until June 1995. Ticketmaster Online commenced online ticket sales in November 1996 providing a ticketing outlet via the World Wide Web (Web) which gives users access to live event tickets and event information. Ticketmaster Online's operations are the online distribution mechanism for Ticketmaster Corp., which utilizes Ticketmaster Corp.'s business relationships and brand name. CitySearch was organized on September 20, 1995. CitySearch produces and delivers comprehensive local city guides on the Web, providing up-to-date information regarding arts and entertainment events, community events, community activities, recreation, business, shopping, professional services and news/sports/weather to consumers in metropolitan areas. CitySearch 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. CitySearch has two primary means of providing its local city guides. In its "owned and operated" markets CitySearch systematically produces the majority of its own content, hires and deploys a direct sales force to sell custom-built business Web sites as well as related services to local and regional businesses, and launches a presence in the market. In its partner-led markets, CitySearch contracts with a local media company to provide assistance in developing, designing and launching a city guide. Under these contracts, the partners license CitySearch's business and technology systems and pay a license fee and make royalty payments to CitySearch based on certain revenues generated by the media partners from the operation of their sites and pay CitySearch for additional consultation and design services not provided for under the license fee. Customers include hotels, 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, and San Francisco, CA. Through partnership and licensing agreements, the Company has an internet presence in Baltimore, MD, Dallas, TX, Los Angeles, CA, Washington D.C., Melbourne and Sydney, Australia, Toronto, Canada, Copenhagen, Denmark, and Stockholm, Sweden. 2. Summary of Significant Accounting Policies Ticketmaster Online Basis of Presentation Prior to the merger, the accompanying consolidated financial statements present the financial position, operating results and cash flows of the predecessor company, Ticketmaster Online, a wholly owned subsidiary of Ticketmaster Corp. The financial statements include revenues related to the convenience and handling charges in connection with tickets sold via the Internet and advertising sales on Ticketmaster Online's web site. Costs of ticketing revenues have been allocated from Ticketmaster Corp. to Ticketmaster Online on a per ticket sold basis. The financial statements include operating expenses which have been allocated to Ticketmaster Online by Ticketmaster Corp. on a specific identification basis. Further, Ticketmaster Online shares certain employees and other resources with Ticketmaster Corp. Allocations from Ticketmaster Corp. for indirect expenses for such shared resources have been made primarily on a proportional cost allocation method based on tickets sold and related revenues. Management F-8 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 2. Summary of Significant Accounting Policies (continued) Ticketmaster Online Basis of Presentation (continued) believes these allocations are reasonable and that such expenses would not differ materially had Ticketmaster Online operated on a stand-alone basis for all periods presented. The financial statements of Ticketmaster Online prior to the merger do not necessarily reflect the results of operations or financial position that would have existed had Ticketmaster Online been an independent company. Segments Based on the Company's integration and management strategies, the Company operates in one business segment. Change in Year-End The statements of operations and cash flows for the eleven months ended December 31, 1998 reflect a change in Ticketmaster Online's year-end as a result of the purchase of Ticketmaster Group by USAi. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany amounts have been eliminated. 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. Revenue Recognition Revenue from advertising and sponsorship agreements is recognized when the service is provided or over the term of the promotion. Revenue from the sale of tickets is recognized when tickets are sold. City guide and related revenues include revenue from the sale of subscriptions for custom-built business Web sites (designed and developed by CitySearch) in its owned and operated markets, the performance of consultation and design services, and licensing and royalty revenues from the sale of licenses for the use of CitySearch's business and technology systems in its partner-led markets. License and royalty revenue is less than ten percent of consolidated revenue. The Company recognizes subscription revenues over the period the services are provided. Royalty revenues are recognized when earned based on the revenues generated by the license or based on the minimum royalty provisions in the contract. Revenues from consultation and design services are recognized as the services are provided. Revenues from the sale of licenses for use of the Company's business and technology systems to its partner-led markets are generally recognized over the term of the license agreement or the period over which the relevant services are delivered. The Company's license agreements have terms ranging from three to nine years. F-9 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 2. Summary of Significant Accounting Policies (continued) Revenue Recognition (continued) Deferred revenue primarily consists of prepayments of subscription services and licensing agreements, advertising and sponsorship revenue, and revenue from Web site support agreements with joint venture partners of Ticketmaster Corp. Web site support is recognized straight line over the life of the agreement. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company places its cash deposits with high-credit quality financial institutions. Accounts Receivable Concentration of credit risk with respect to trade receivables is limited based on the size and diversity of Ticketmaster Online's clients and the large number and geographic dispersion of CitySearch customers. The Company generally does not require collateral; however, credit losses have generally been within management's expectations and have not been significant. 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. 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. Goodwill and Other Intangibles Goodwill of $154.8 million represents amounts allocated to Ticketmaster Online from the purchase of Ticketmaster Group by USAi and is being amortized by the straight-line method over ten years. As a result of the Merger and the Tender Offer, the Company recorded goodwill of $160.6 million, which is being amortized using the straight-line method over five years, and intangibles relating to non-competition agreements of $500,000, which is being amortized using the straight-line method over 2.5 years. Accumulated amortization at December 31, 1998 was $16.3 million. F-10 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 2. Summary of Significant Accounting Policies (continued) Due to (from) Ticketmaster Corp. Due to (from) Ticketmaster Corp. includes amounts payable to Ticketmaster Corp. primarily for operations and working capital requirements, offset by amounts receivable for cash collected by Ticketmaster Corp. The balances were primarily the result of Ticketmaster Online's participation in Ticketmaster Corp.'s central cash management system, wherein all of Ticketmaster Online's cash receipts were collected by Ticketmaster Corp. and all cash disbursements were funded by Ticketmaster Corp. Other transactions include Ticketmaster Online's pro rata share of the current portion of Ticketmaster Corp.'s consolidated income tax liability and other administrative expenses incurred by Ticketmaster Corp. on behalf of Ticketmaster Online prior to the Merger. Such amounts payable do not have specific repayment terms and do not bear interest. At January 31, 1998 and 1997, such intercompany balances have been included as a component of stockholders' equity as it was not the original intention of Ticketmaster Online or Ticketmaster Corp. to settle such balances in cash. Most of the due to (from) Ticketmaster Corp. amount was reclassified as additional paid-in capital in connection with the Merger. An analysis of transactions in the due to (from) Ticketmaster Corp. account for each of the two years ended January 31, 1998 and the eleven months ended December 31, 1998 follows:
January 31, December 31, -------------------------- 1998 1998 1997 ------------ ------------ ------------ (in thousands) Balance at beginning of year.......................................... $ (1,113) $ 1,434 $ 684 Ticketing revenues transferred to Ticketmaster Corp. prior to the merger................................................. (11,551) (9,953) (1,088) Operating charges transferred from Ticketmaster Corp. prior to the merger................................................. 6,263 5,579 2,212 Share of Ticketmaster Corp.'s current federal income tax provision (benefit) prior to the merger............................. -- 1,827 (374) Balance transferred to additional paid-in capital in connection with the Merger....................................... 6,013 -- -- Amounts transferred to related party receivable 388 -- -- -------- ------- ------- Balance at end of year................................................ $ -- $(1,113) $ 1,434 ======== ======= ======= Average balance during the year....................................... $ (557) $ 161 $ 1,059 ======== ======= =======
Income Taxes Prior to the Merger, Ticketmaster Online's results have been included in Ticketmaster Corp.'s consolidated federal and state income tax returns. The income tax provision was calculated and deferred tax assets and liabilities were recorded as if Ticketmaster Online had operated as an independent company. Prior to the Merger Ticketmaster Corp. paid all taxes for Ticketmaster Online and, as such, income taxes payable and deferred tax assets have been included in due to (from) Ticketmaster Corp. Subsequent to the Merger, the Company will file its Federal and State income tax returns on a stand-alone basis. F-11 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 2. Summary of Significant Accounting Policies (continued) Income Taxes (continued) Deferred tax assets and liabilities are recognized with respect to the tax consequences attributable to the differences between the financial statement carrying values and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. Further, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Basic and Diluted Earnings (Loss) per Share Basic earnings (loss) per share are determined by dividing the net earnings or (loss) by the weighted average shares of Common Stock outstanding during the period. Diluted earnings or (loss) per share are determined by dividing the net earnings or (loss) by the weighted average shares of Common Stock outstanding plus the dilutive effects of stock options, warrants, and other convertible securities. Basic and diluted earnings (loss) per share are the same for the eleven month period ended December 31, 1998 because the effects of outstanding stock options are antidilutive. Basic and diluted earnings (loss) per share are the same for the years ended January 31, 1998 and 1997 because there were no dilutive securities outstanding during those periods. The number of shares used in computing basic and diluted earnings (loss) per share for the eleven month period ended December 31, 1998 includes the number of shares of CitySearch Common Stock exchanged in the Merger plus shares of Class A Common Stock of City Search outstanding and the number of shares of Class B Common Stock issued from the date of the Merger through December 31, 1998 calculated on a weighted average basis. The number of shares used in computing basic and diluted earnings (loss) per share for the years ended January 31, 1998 and 1997 represents the number of shares of CitySearch Common Stock exchanged in the Merger. Financial Instruments The estimated fair values of cash, accounts receivable, accounts payable, and accrued expenses approximate their carrying value because of the short term maturity of these instruments or the stated interest rates are indicative of market interest rates. Advertising Costs Advertising costs are expensed as incurred. For the eleven month period ended December 31, 1998, advertising costs amounted to $1,540,000. There were no advertising costs for the years ended January 31, 1998 and 1997. During 1998 CitySearch maintained several barter arrangements whereby the Company has assisted in the design of a Web site in exchange for broadcast advertising. The fair value of services provided and the services received in the barter arrangement is not readily determinable and therefore is not used to measure the value of the broadcast advertising received. The Company valued these barter transactions at $349,000 for the period from the date of the Merger through December 31, 1998, based on the estimated cost of the specific services provided by the Company. Such amounts are included in City guide and related revenue as well as recognized in sales and marketing expense in the accompanying consolidated statements of operations. Reciprocal noncash barter advertising on the Internet is not valued in the consolidated financial statements because of the immateriality of the associated costs and the indeterminable fair value. F-12 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 2. Summary of Significant Accounting Policies (continued) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of The Company periodically reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows (on an undiscounted basis) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Stock-based Compensation Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation" (SFAS 123), suggests that stock awards granted subsequent to January 1, 1995, be recognized as compensation 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 7). 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. There was no compensation expense applicable under APB 25. Reclassifications Certain reclassifications have been made to the prior years' balances to conform to the current year presentation. 3. Computers, Software, Equipment and Leasehold Improvements Computers, software, equipment and leasehold improvements consisted of the following:
December 31, January 31, 1998 1998 ------------ ------------ (in thousands) Computers and software.......................................................... $ 6,860 $ 532 Furniture and fixtures.......................................................... 141 20 Leasehold improvements.......................................................... 215 33 ------- ----- 7,216 585 Less accumulated depreciation and amortization.................................. (1,323) (188) ------- ----- $ 5,893 $ 397 ======= =====
Depreciation and amortization expense was $1,136,000, $124,000 and $49,000 for the eleven month period ended December 31, 1998 and the years ended January 31, 1998 and 1997, respectively. F-13 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 4. Income Taxes The provision (benefit) for income taxes consisted of the following:
Predecessor --------------- Eleven Months Year Ended Ended January 31, December 31, --------------------------- 1998 1998 1997 ------------ ------------ ------------- (in thousands) Current: Federal............................................................ $2,624 $1,445 $(340) Foreign............................................................ 82 -- -- State.............................................................. 754 395 (46) ------ ------ ----- 3,460 1,840 (386) ------ ------ ----- Deferred: Federal............................................................ (478) (13) 12 State.............................................................. (31) -- -- ------ ------ ----- (509) (13) 12 ------ ------ ----- Total income tax provision (benefit).................................. $2,951 $1,827 $(374) ====== ====== =====
The following is a reconciliation of the statutory federal income tax rate to the Company's effective income tax rate:
Eleven Months Ended Years ended January 31, December 31, -------------------------- 1998 1998 1997 ------------ ------------ ------------ Statutory federal income tax expense (benefit)........................ (35)% 34% (34)% Tax provision for earnings included in Ticketmaster Corp. consolidated return................................................. 20 -- -- Non-deductible goodwill amortization.................................. 37 -- -- State income tax expense (benefit).................................... -- 9 (6) Other................................................................. (1) 1 2 ---- ---- ---- 21% 44% (38)% ==== ==== ====
F-14 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 4. Income Taxes (continued) Significant components of the Company's deferred tax assets and liabilities as of December 31, 1998 are as follows (in thousands): Deferred tax liabilities Depreciation.................................................................... $ 400 Software development............................................................ 824 -------- Total deferred tax liabilities................................................... 1,224 Deferred tax assets Net operating loss carryforwards................................................ 31,482 Research and development carryforwards.......................................... 468 Vacation accruals............................................................... 250 Deferred revenue................................................................ 600 Other........................................................................... 124 -------- Total deferred tax assets........................................................ 32,924 Valuation allowance.............................................................. (31,700) -------- $ -- ========
Deferred taxes at January 31, 1998 were not significant. The valuation allowance increased by $1.7 million during the eleven month period. The valuation allowance recorded in connection with the CitySearch Merger was approximately $30 million. If the related deferred tax assets become realizable in the future, the reversal of the valuation allowance will be recorded as a reduction of goodwill. The Company had net operating loss carryforwards for federal and state income tax purposes at December 31, 1998 of approximately $78,704,000 which had been generated by CitySearch. The federal carryforwards expire principally in the period from 2010 to 2018, and the state carryforwards expire principally in 2003. Utilization of the net operating loss carryforwards is subject to limitations as a result of ownership changes as defined in the Internal Revenue Code. Furthermore, the net operating loss carryforwards, to the extent not otherwise limited, can only be used to offset the future taxable income of CitySearch. F-15 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 5. Defined Contribution Plans Ticketmaster Online participates in the Ticketmaster Corp. 401(k) defined contribution plan (the 401(k) Plan), covering substantially all Ticketmaster Online employees, which contains an employer matching feature of 25% up to a maximum of 6% of the employee's compensation. Ticketmaster Online's contribution for the 401(k) Plan year ended December 31, 1997 was $12,000. In July 1997, CitySearch 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. As a result of the merger, Ticketmaster Online employees will be incorporated into their balance from the 401(k) plan into the CitySearch plan. 6. Related Party Transactions Ticketmaster Online was part of a consolidated group and, as such, had significant transactions with related entities. In connection with the Merger, the Company entered into a license agreement with Ticketmaster Corp. (the License Agreement) under which the Company is required to pay Ticketmaster Corp. a royalty based on a percentage of the net profit the Company derives from online ticket sales. Ticketing operations cost includes $1,519,000 of royalty fees incurred under the License Agreement for the eleven months ended December 31, 1998. Included in related party receivable is $346,000 representing unpaid ticketing revenue, net of amounts due to Ticketmaster Corp. for direct expenses and royalty fees under the License Agreement. Concurrently with the execution of the Merger Agreement, the Company received a $50 million loan from USAi in exchange for a convertible promissory note (Convertible Note). The Convertible Note, in the principal amount of $50 million, bore interest at a rate per annum of 7.00%. On December 10, 1998, the Company repaid the Convertible Note and paid total interest of $1,151,000 covering the period August 13 to December 31, 1998. Interest expense on the Convertible Note was $710,000 during the eleven month period ended December 31, 1998. On June 28, 1996, Ticketmaster Online entered into an agreement expiring on December 31, 2003, with an affiliate of its then majority shareholder, whereby in exchange for services rendered in connection with the development of Ticketmaster Online's Web site, Ticketmaster Online will pay royalties equaling 5% of net profit (as defined) from ticket convenience charges and 10% of net profit (as defined) from merchandise sold through its Web site (net of defined deductions). The agreement calls for an annual minimum royalty payment of $100,000 per year. Royalty expense incurred for the eleven month period ended December 31, 1998 and the years ended January 31, 1998 and 1997 amounted to $477,000, $138,000 and $50,000, respectively. Revenues from affiliated companies for the eleven month period ended December 31, 1998 and for the fiscal years January 31, 1998 and 1997, amounted to $491,000, $583,000 and $21,000, respectively, primarily for Web site development and support and license fee revenue. Included in related party receivables at December 31, 1998 was $467,000 receivable from these affiliated companies. F-16 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 7. Stockholders' Equity and Stock Options Stockholders' equity reflects the exchange of 1,000 shares of Common Stock of Ticketmaster Online for 37,238,000 shares of CitySearch Common Stock (subsequently reclassified as Class A Common Stock of the Company) and the recording of the predecessor basis and outstanding shares of CitySearch Common Stock (subsequently reclassified as Class A Common Stock of the Company) in connection with the Merger. Holders of each share of Class A Common Stock have 15 votes. Each share of Class A Common Stock will automatically convert into one share of Class B Common Stock upon a "transfer," as defined, of such share except for transfers to certain parties. Holders of Class B Common Stock have rights in the Company's Restated Certificate of Incorporation similar to holders of Class A Common Stock except each share of Class B Common Stock carries one vote. Holders of Class C Common Stock have no voting rights. In December 1998, the Company completed its initial public offering of 8,050,000 shares of Class B Common Stock resulting in the receipt of net proceeds of $104,054,000. Preferred Stock The Company is 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. 1996 Stock Option Plan The CitySearch 1996 Stock Option Plan (1996 Stock Plan) authorized members of management to grant non-statutory stock options or incentive stock options to employees and consultants of the Company and its subsidiaries. As of December 31, 1998 the maximum number of shares of Common Stock to be issued under the Plan was 5,500,000 shares. Options granted under the 1996 Stock Plan are exercisable at various dates over their ten-year life and vest principally 25% after the first year and ratably over the remaining vesting period which is generally another three years. At December 31, 1998 there were options to purchase 3,247,587 shares of the Company's Class A Common Stock outstanding at a weighted average exercise price of $4.79 per share. Options to purchase 114,432 shares of Class A Common Stock were available for future grants at December 31, 1998. 1998 Stock Option Plan The Company has adopted the 1998 Stock Plan and reserved 4,000,000 shares of Class B Common Stock of the Company for issuance thereunder. The 1998 Stock Plan provides for the grant of incentive stock options to employees (including officers and employee directors) and for the grant of nonstatutory stock options and stock purchase rights ("SPRs") to employees, directors and consultants. Unless terminated sooner, the 1998 Stock Plan will terminate automatically in September 2008. At December 31, 1998, there were options to purchase 650,000 shares of the Company's Class B Common Stock outstanding at a weighted average exercise price of $19.76 per share. Options to purchase 3,350,000 shares of Class B Common Stock were available for future grants at December 31, 1998. F-17 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 7. Stockholders' Equity and Stock Options (continued) 1998 Employee Stock Purchase Plan The Company has adopted the Purchase Plan and reserved an aggregate of 1,000,000 shares of Class B Common Stock thereunder. The number of shares reserved will be increased automatically each year on the first day of the of the Company's fiscal year beginning in 2000 by an amount equal to (i) 200,000 shares of Class B Common Stock or (ii) 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 under the Purchase Plan will run for six months, other than the initial offering period, which commenced in December 1998 and will end on August 14, 1999. Thereafter, new six-month offering periods will commence each February 15 and August 15. Stock Option Table The following table summarizes certain information related to options for Common Stock:
Weighted Average Number of Exercise Shares Price Per Share Price ---------------- -------------------------- ------------ (in thousands) Options assumed in Merger................................ 3,905 $0.10 to $ 8.67 $ 3.66 Granted during the period September 29 and December 31, 1998............................... 938 8.67 to 32.69 16.35 Forfeited............................................ (124) 0.50 to 8.67 4.23 Exercised............................................ (821) 0.10 to 0.75 9.19 ----- --------------- ------ Outstanding at December 31, 1998......................... 3,898 $0.10 to $32.69 $ 7.28 =====
Additional information with respect to outstanding options as of December 31, 1998 is as follows:
Options Outstanding Options Exercisable ----------------------------------------------------- ----------------------------------- Weighted- Weighted- Average Weighted- Average Remaining Average Range of Number of Exercise Contractual Number of Exercise Exercise Prices Shares Price Life Shares Price - ------------------------ ----------------- ---------------- ---------------- ----------------- ---------------- (in thousands) (in thousands) $0.10 to $2.00 1,111 $ 1.19 8.14 705 $1.14 3.00 to 7.00 1,656 6.15 9.40 692 6.59 8.00 to 32.69 1,131 14.93 9.86 40 8.15 ------------- ----- ----- 0.10 to 32.69 3,898 1,437 ===== =====
F-18 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 7. Stockholders' Equity and Stock Options (continued) Stock Option Table (continued) Pro forma information regarding the effect on operations is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. Pro forma information includes options granted subsequent to the Merger using the Black- Scholes method at the date of grant based on the following assumptions:
1998 ---------------- Expected life (years) 1 year Risk-free interest rate...................................................... 5.14% Dividend yield............................................................... -- Volatility................................................................... 75%
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:
Eleven Months Ended December 31, 1998 ------------------ (in thousands) Net loss, as reported............................................................ $(17,219) Pro forma net loss............................................................... (17,479) Basic and diluted historical loss per share...................................... $ (0.38) Pro forma basic and diluted loss per share....................................... (0.39)
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts as the options include only three months of grants from the date of the Merger. Additional awards in future years are anticipated. The weighted-average fair value of options granted during the eleven month period ended December 31, 1998 was $8.65, for options granted with an exercise price equal to the deemed fair market value, at the date of grant, of the underlying Common Stock. 8. Commitments Leases The Company has noncancelable capital lease obligations for computers and equipment and 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. F-19 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 8. Commitments (continued) Leases (continued) The following is a schedule of future minimum lease payments at December 31, 1998:
Operating Capital Leases Leases ---------- ---------- (in thousands) Year ended December 31: 1999 $1,219 $1,599 2000 1,189 967 2001 1,095 207 2002 342 23 2003 252 -- Thereafter...................................................................... 112 -- ------ ------ $4,209 2,796 ====== Less amount representing interest.................................................. (383) ------ Net present value of net minimum lease payments (including approximately $1,331 payable currently)........................................................ $2,413 ======
During the eleven month period ended December 31, 1998 and the years ended January 31, 1998 and 1997, rent expense allocated from Ticketmaster Corp. and related to other leased facilities amounted to $593,000 and $149,000 and $42,000, respectively. The total costs and accumulated amortization of equipment under capital leases amounted to $2,769,000 and $360,000 respectively, as of December 31, 1998. 9. Subsequent Events Acquisition of CityAuction, Inc. On January 8, 1999, the Company agreed to acquire CityAuction, Inc., a person- to-person online auction community. Under the terms of the agreement, the Company will issue approximately 800,000 shares of Class B Common Stock in exchange for all the outstanding capital stock of CityAuction, Inc. The agreement is subject to certain customary closing conditions, including the approval of both companies' stockholders. 10. Subsequent Events Unaudited Merger with Lycos On February 8, 1999, USAi, Lycos, Inc. (Lycos) and the Company entered into agreements to combine USAi's electronic commerce and internet capital assets with the businesses of Lycos and the Company to form a new company to be named USA/Lycos Interactive Networks, Inc. (USA/Lycos). Under the transaction agreements, the Company and Lycos will each merge with subsidiaries of USA/Lycos followed immediately by the contribution by USAi to USA/Lycos of the Home Shopping Network, Ticketmaster Corporation (excluding TM Realty) and Internet Shopping Network/First Auction. Upon completion of the transaction, based on the expected initial ownership of USA/Lycos on an adjusted fully diluted basis, F-20 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 10. Subsequent Events Unaudited (continued) Merger with Lycos (continued) USAi will own 61.5%, former Lycos shareholders will own 30% and the Company's former shareholders other than USAi will own 8.5% of the USA/Lycos Common equity. Assuming all holders of Company Class A Common Stock convert their shares into shares of Company Class B Common Stock prior to the closing, USAi will own approximately 96% of the USA/Lycos combined voting power. In addition to USA/Lycos common shares, each party (except for holders of Company Class A Common Stock) will receive shares of convertible preferred stock of USA/Lycos. The preferred stock will be convertible into additional common stock of USA/Lycos at the 39-month anniversary of the closing of the transaction if the weighted average of the total fair market value of USA/Lycos exceeds $25 billion. If the weighted average of the total fair market value of USA/Lycos is equal to $45 billion or more, the preferred stock would convert into the maximum number of shares of USA/Lycos common stock, following which the Lycos stockholders would own 35%, the Company stockholders would own 8.7% and USAi would own 56.3% of the USA/Lycos equity, based on the expected initial capitalization of USA/Lycos. The parties have also entered into option agreements, which under certain circumstances provide USAi and the Company with the right to acquire, in the aggregate, up to 19.9% of the outstanding Lycos common stock. The transaction is subject to various approvals, including a vote of the Lycos shareholders, and is expected to close in the summer of 1999. F-21 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Balance Balance at Transferred Charged to Charged to Balance at Beginning at the Costs and Other End of of Period Merger Expenses Accounts Deductions Period ---------- ----------- ---------- ---------- ---------- ---------- Eleven months ended December 31, 1998 $ -- $ 68,400 $125,200 $85,900 $221,700(a) $57,800
- -------------------- (a) Represents amounts written off against the allowance for doubtful accounts, net of recoveries and reversals. S-1 INDEX TO EXHIBITS
Notes: ------ 2.1 Agreement and Plan of Reorganization, among CitySearch, Inc., MB Acquisition (A)* Corporation, MetroBeat, Inc., Mark Davies and Joshua White, dated May 31, 1996. 2.2 Amended and Restated Agreement and Plan of Reorganization, among CitySearch, (A) Inc., Tiberius, Inc., USA Networks, Inc., Ticketmaster Group, Inc., Ticketmaster Corporation and Ticketmaster Multimedia Holdings, Inc., dated August 12, 1998. 2.3 Agreement and Plan of Reorganization, dated as of January 8, 1999, by and + among Ticketmaster Online-CitySearch, Inc., Nero Acquisition Corporation, CityAuction, Inc., Andrew Rebele and Monica Lee, as amended. 2.4 Agreement and Plan of Reorganization, dated as of February 8, 1999, by and (E) among USA Networks, Inc., Ticketmaster Online-CitySearch, Inc., Lycos, Inc., USA Interactive Inc., Lemma, Inc. and Tycho, Inc. (the "Merger Agreement"), including Form of Certificate of Designations, Preferences and Rights of Series A Convertible Redeemable Preferred Stock of USA/Lycos Interactive Networks, Inc. (Exhibit B to the Merger Agreement) 2.5 Contribution Agreement, dated as of February 8, 1999, by and among USA (E) Networks, Inc., USANi LLC and USA Interactive Inc. 2.6 Stock Option Agreement, dated February 8, 1999, between Lycos, Inc. and USA (E) Networks, Inc. (Exhibit A-1 to the Merger Agreement) 2.7 Stock Option Agreement, dated February 8, 1999, between Lycos, Inc. and (E) Ticketmaster Online-CitySearch, Inc. (Exhibit A-2 to the Merger Agreement) 3.1 Amended and Restated Certificate of Incorporation, as currently in effect. (A) 3.2 Form of Amended and Restated Certificate of Incorporation, to be effective (C) immediately prior to the consummation of the offering. 3.3 Amended and Restated Bylaws. (C) 4.1 Specimen Class B Common Stock Certificate. (C) 10.1 Form of Indemnification Agreement for directors and officers. (A) 10.2 1996 Stock Option Plan and form of agreement thereunder. (C) 10.3 1998 Stock Option Plan and form of agreement thereunder. (C) 10.4 1998 Employee Stock Purchase Plan. (D) 10.5 License Agreement between CitySearch, Inc. and Perly, Inc., dated March 9, (A)* 1996. 10.6 Marketing Agreement between CitySearch, Inc, and American Express Travel (A)* Related Services Company, Inc., dated May 26, 1998. 10.7 Employment Agreement between CitySearch, Inc. and Charles Conn, dated May 9, (A) 1996. 10.8 Unanimous Shareholder Agreement between Tele-Direct (Services), Inc., (A)* Metroland Printing, Publishing & Distributing Ltd., CitySearch Canada, Inc. and 1310818 Ontario, Inc., dated August 31, 1998. 10.9 Limited Partnership Agreement between Metroland Printing, Publishing & (A)* Distributing Ltd., 1310818 Ontario Inc., CitySearch Canada, Inc., TeleDirect (Services), Inc., Tele-Direct (Publications), Inc., CitySearch, Inc. and Torstar Corporation, dated August 31, 1998.
Notes: ------ 10.10 Amended and Restated License and Services Agreement between CitySearch, Inc. (A)* and CitySearch Canada, Inc., dated August 31, 1998. 10.11 Sublicense and Services Agreement between CitySearch Canada, Inc., and (A)* toronto.com, dated August 31, 1998. 10.12 Non-competition Agreement between Toronto Star Newspapers Ltd., TeleDirect (A)* (Services), Inc., CitySearch Canada, Inc. and Metroland Printing, Publishing & Distributing Ltd., dated August 31, 1998. 10.13 Lease Agreement by and between CitySearch, Inc. and West End Land Development (A) Co., L.P., dated November 7, 1996. 10.14 Standard Form of Lease, Aeriel Center Executive Park, between Pizzagalli (A) Investment Company and CitySearch, Inc., dated May 8, 1996. 10.15 Standard Office Lease between CitySearch, Inc. and Sage Realty Corporation, (A) dated May 6, 1997. 10.16 Standard Office Lease between CitySearch, Inc. and H. Naito Corporation, dated (A) March 6, 1997. 10.17 Standard Office Lease between CitySearch, Inc. and Brazos Austin Centre, Ltd., (A) dated August 15, 1996 10.18 Standard Office Lease between CitySearch, Inc. and Judge Building Group, dated (A) September 10, 1996. 10.19 Standard Office Lease between CitySearch, Inc. and Sobel Building Development, (A) dated May 31, 1996. 10.20 Standard Office Lease between CitySearch, Inc. and BPG Pasadena, L.L.C. (later (A) assigned to Spieker Properties), dated September 30, 1996. 10.21 Lease Agreement between CitySearch, Inc. and Securities Properties Investors (A) II, L.P. dated May 13, 1998. 10.22 Employment Agreement between CitySearch, Inc. and Thomas Layton, dated July 2, (A) 1997. 10.23 License and Services Agreement between CitySearch, Inc. and Classified (A)* Ventures, L.L.C. 10.24 Convertible Promissory Note issued to CitySearch, Inc., by USA Networks, Inc., (A) dated August 12, 1998. 10.25 Non-Competition Agreement between CitySearch, Inc., Ticketmaster Corporation, (A) Ticketmaster, Multimedia Holdings, Inc., and Charles Conn, dated August 12, 1998. 10.26 Non-Competition Agreement between CitySearch, Inc., Ticketmaster Corporation, (A) Ticketmaster, Multimedia Holdings, Inc., and Thomas Layton, dated August 12, 1998. 10.27 Letter Agreement Between N2K Inc. and Ticketmaster Ticketing Co., Inc., dated (B)* April 23, 1998, as amended by a Letter Agreement by and between the parties, dated June 16, 1998. 10.28 Development and Services Agreement between Ticketmaster Corporation, (A) Ticketmaster Multimedia Holdings, Inc. and Starwave Corporation, dated June 28, 1996. 10.29 License and Services Agreement between Ticketmaster Corporation, Ticketmaster (A)* Multimedia Holdings, Inc., and USA Networks, Inc., dated August 12, 1998. 10.30 Employment Agreement between Ticketmaster Online CitySearch, Inc. and Robert + Perkins dated November 25, 1998.
Notes: ------ 10.31 Employment agreement between Ticketmaster-Online CitySearch, Inc. and David + Hagan dated November 27, 1998. 21.1 Subsidiaries of the Registrant. (A) 23.1 Consent of Independent Auditors. + 24.1 Power Of Attorney (see page 49). + 27.1 Financial Data Schedule. +
______________________________ + Filed herewith. * Confidential treatment has been granted with respect to portions of this exhibit. (A) Incorporated by reference to exhibits filed in response to Item 16, "Exhibits," of the Company's Registration Statement on Form S-1 (File No. 333-64855) filed with the Commission on September 30, 1998. (B) Incorporated by reference to exhibits filed in response to Item 16, "Exhibits," of the Company's Registration Statement on Form S-1 (File No. 333-64855) filed with the Commission on October 19, 1998. (C) Incorporated by reference to exhibits filed in response to Item 16, "Exhibits," of the Company's Registration Statement on Form S-1 (File No. 333-64855) filed with the Commission on November 6, 1998. (D) Incorporated by reference to exhibits filed in response to Item 16, "Exhibits," of the Company's Registration Statement on Form S-1 (File No. 333-64855) filed with the Commission on November 20, 1998. (E) Incorporated by reference to exhibits filed in response to Item 7, "Exhibits," of the Report on Form 8-K filed by USA Networks, Inc. (File No. 000-20570) with the Commission on February 26, 1999. EX-2.3 2 AGREEMENT AND PLAN OF REORGANIZATION EXHIBIT 2.3 ================================================================================ AGREEMENT AND PLAN OF REORGANIZATION DATED AS OF JANUARY 8, 1999 ================================================================================ i TABLE OF CONTENTS
Page SECTION 1 THE MERGER 1 1.1 Merger; Effective Time................................................. 1 1.2 Closing................................................................ 1 1.3 Effects of the Merger.................................................. 2 1.4 Articles of Incorporation; Bylaws; Directors; Officers................. 2 1.5 Tax-Free Reorganization................................................ 2 SECTION 2 EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES..................... 2 2.1 Effect on Capital Stock................................................ 2 2.2 Exchange of Certificates............................................... 6 SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................... 8 3.1 Organization, Standing and Corporate Power............................. 8 3.2 Company Capital Structure.............................................. 8 3.3 Subsidiaries........................................................... 9 3.4 Authority/Noncontravention............................................. 9 3.5 Financial Statements; No Undisclosed Liabilities....................... 11 3.6 Absence of Certain Changes or Events................................... 11 3.7 Litigation............................................................. 12 3.8 Contracts.............................................................. 12 3.9 Compliance With Laws................................................... 12 3.10 Absence of Changes in Benefit Plans; Employment Agreements; Labor Relations.............................................................. 12 3.11 ERISA Compliance....................................................... 14 3.12 Taxes 14 3.13 No Excess Parachute Payments........................................... 15 3.14 Title to Properties.................................................... 15 3.15 Intellectual Property.................................................. 16 3.16 Year 2000 Compliance................................................... 17 3.17 Voting Requirements.................................................... 17 3.18 Payments............................................................... 17 3.19 Transactions with Related Parties...................................... 18 3.20 Restrictions on Business Activities.................................... 18 3.21 Accounts Receivable; Inventory......................................... 18 3.22 Minute Books........................................................... 19 3.23 Environmental Matters.................................................. 19 3.24 Insurance.............................................................. 20
i 3.25 Warranties; Indemnities................................................ 20 3.26 Representations Complete............................................... 20 SECTION 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB....................... 20 4.1 Organization, Standing and Corporate Power............................. 21 4.2 Authority/Noncontravention............................................. 21 4.3 SEC Documents; Parent Financial Statements............................. 22 4.4 Parent Common Stock.................................................... 22 SECTION 5 COVENANTS.............................................................. 22 5.1 Conduct of Business of the Company..................................... 22 5.2 No Solicitation........................................................ 24 5.3 Shareholder Approval................................................... 25 5.4 Access to Information.................................................. 25 5.5 Confidentiality........................................................ 26 5.6 Expenses............................................................... 26 5.7 Public Disclosure...................................................... 26 5.8 Consents............................................................... 26 5.9 FIRPTA Compliance...................................................... 26 5.10 Reasonable Efforts..................................................... 27 5.11 Notification of Certain Matters........................................ 27 5.12 Blue Sky Laws.......................................................... 27 5.13 Noncompetition and Employment Agreements............................... 27 5.14 Investment Representation Agreements................................... 27 5.15 Appointment............................................................ 28 5.16 Stock Options.......................................................... 28 SECTION 6 CONDITIONS TO THE MERGER............................................... 28 6.1 Conditions to Obligations of Each Party to Effect the Merger........... 28 6.2 Additional Conditions to the Obligations of Parent and Sub............. 29 6.3 Additional Conditions to Obligations of Company........................ 30 SECTION 7 INDEMNIFICATION........................................................ 31 7.1 General Indemnification................................................ 31 7.2 Limitation and Expiration.............................................. 32 7.3 Indemnification Procedures............................................. 32 7.4 Shareholders' Representative........................................... 36 7.5 Survival of Representations, Warranties and Covenants.................. 37
ii SECTION 8 TERMINATION, AMENDMENT AND WAIVER...................................... 37 8.1 Termination............................................................ 37 8.2 Effect of Termination.................................................. 38 8.3 Amendment.............................................................. 38 8.4 Extension; Waiver...................................................... 38 8.5 Notice of Termination.................................................. 38 SECTION 9 MISCELLANEOUS.......................................................... 38 9.1 Notices................................................................ 38 9.2 Interpretation......................................................... 40 9.3 Counterparts........................................................... 41 9.4 Entire Agreement; Assignment........................................... 41 9.5 Severability........................................................... 41 9.6 Other Remedies......................................................... 41 9.7 Governing Law.......................................................... 41 9.8 Further Assurances..................................................... 41 9.9 Absence of Third Party Beneficiary Rights.............................. 42 9.10 Mutual Drafting........................................................ 42 9.11 Further Representations................................................ 42
iii INDEX OF EXHIBITS Exhibit A Agreement of Merger Exhibit B Allocation of Employee Stock Options Exhibit C Form of Noncompetition Agreement Exhibit D Form of Investment Representation Agreement Exhibit E Form of Legal Opinion of Counsel to the Company Exhibit F Form of Registration Rights Agreement iv AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (the "AGREEMENT") is made and entered into as of January 8, 1999 among Ticketmaster Online - CitySearch, Inc., a Delaware corporation ("PARENT"), Nero Acquisition Corporation, a California corporation and a wholly-owned subsidiary of Parent ("Sub"), CityAuction, Inc., a California corporation (the "COMPANY"), and Andrew Rebele and Monica Lee, individuals and principal shareholders of the Company (the "PRINCIPAL SHAREHOLDERS"). RECITAL The Boards of Directors of each of the Company, Parent and Sub believe it is in the best interests of each company and their respective shareholders that the Company and Sub combine into a single company through the merger of Sub with and into the Company (the "MERGER") pursuant to the terms of this Agreement and, in furtherance thereof, have approved the Merger. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the parties agree as follows: SECTION 1 THE MERGER 1.1 MERGER; EFFECTIVE TIME. Subject to the terms and conditions of this ---------------------- Agreement and the Agreement of Merger attached as Exhibit A (the "MERGER --------- AGREEMENT"), Sub will be merged into the Company (the "MERGER") in accordance with the California Corporation Code (the "CALIFORNIA CODE"). The Merger Agreement provides, among other things, the mode of effecting the Merger and the manner and basis of converting each issued and outstanding share of capital stock of the Company into shares of Class B common stock, $.01 par value, of Parent ("PARENT COMMON STOCK"). Subject to the provisions of this Agreement and the Merger Agreement, the Merger Agreement, together with required officers' certificates, shall be filed in accordance with the California Code on the Closing Date (as defined in Section 1.2). The Merger shall become effective upon confirmation of such filing of the Merger Agreement and such officers' certificates (the date of confirmation of such filing is referred to as the "EFFECTIVE DATE" and the time of confirmation of such filing is referred to as the "EFFECTIVE TIME"). 1.2 CLOSING. The closing of the Merger (the "CLOSING") will take place ------- as soon as practicable on the first business day after satisfaction or waiver of the latest to occur of the conditions set forth in Section 6 (the "CLOSING DATE"), at the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304-1050, unless a different date or place is agreed to in writing by the parties hereto. 1.3 EFFECTS OF THE MERGER. At the Effective Time, the separate existence --------------------- of Sub shall cease and Sub shall be merged with and into the Company, and the effects of the Merger shall be as provided in this Agreement, the Merger Agreement and the applicable provisions of the California Code. The Company after the Merger is sometimes referred to as the "SURVIVING CORPORATION." Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, powers and franchises of the Company and Sub shall vest in the Surviving Corporation, and all debts, liabilities, obligations and duties of the Company and Sub shall become the debts, liabilities, obligations and duties of the Surviving Corporation. 1.4 ARTICLES OF INCORPORATION; BYLAWS; DIRECTORS; OFFICERS. At the ------------------------------------------------------ Effective Time, (i) the Articles of Incorporation of the Company shall be the Articles of Incorporation of the Surviving Corporation; (ii) the Bylaws of the Company as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation until altered, amended or repealed; (iii) the directors of Sub shall be the initial directors of the Surviving Corporation and will hold office from the Effective Time until their respective successors are duly elected or appointed and qualified in the manner provided in the Articles of Incorporation and Bylaws of the Surviving Corporation, as the same may be amended from time to time or otherwise as provided by law; and (iv) the officers of the Company shall be the initial officers of the Surviving Corporation. 1.5 TAX-FREE REORGANIZATION. The Merger is intended to be a ----------------------- reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "CODE"). The parties have consulted with their own tax advisors regarding the Merger. SECTION 2 EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES 2.1 EFFECT ON CAPITAL STOCK. As of the Effective Time, by virtue of the ----------------------- Merger and without any action on the part of the holder of any shares of capital stock of the Company: (a) Capital Stock of Sub. Each issued and outstanding share of -------------------- capital stock of Sub shall continue to be issued and outstanding and shall be converted into one share of validly issued, fully paid and non-assessable Common Stock of the Surviving Corporation. Each stock certificate of Sub evidencing ownership of any such shares shall continue to evidence ownership of such shares of capital stock of the Surviving Corporation. -2- (b) Cancellation of Certain Shares of Capital Stock of the Company. -------------------------------------------------------------- All shares of capital stock of the Company that are owned directly or indirectly by the Company shall be canceled and no stock of Parent or other consideration shall be delivered in exchange therefor. (c) Conversion of Capital Stock of the Company. Subject to Sections ------------------------------------------ 2.1(d), (e), (f), (g) and (h) below, each issued and outstanding share of common stock of the Company, .01 par value ("COMPANY COMMON STOCK") (other than shares to be canceled pursuant to Section 2.1(b)), that are issued and outstanding immediately prior to the Effective Time shall automatically be canceled and extinguished and converted, without any action on the part of the holder thereof, into the right to receive 0.28195 shares of Parent Common Stock. All such shares of Company Common Stock, when so converted, shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such shares shall cease to have any rights with respect thereto, except the right to receive the shares of Parent Common Stock to be issued or paid in consideration therefor upon the surrender of such certificate in accordance with Section 2.2 of this Agreement. The ratio pursuant to which each share of Company Common Stock will be exchanged for shares of Parent Common Stock, determined in accordance with the foregoing provisions, is referred to as the "EXCHANGE RATIO." (d) Adjustment of Exchange Ratio. If, between the date of this ---------------------------- Agreement and the Effective Time, the outstanding shares of Parent Common Stock (or, subject to Section 5.1 below, Company Common Stock) shall have been changed into a different number of shares or a different class by reason of any reclassification, split-up, stock dividend, stock combination, then the Exchange Ratio shall be correspondingly adjusted. (e) Dissenters' Rights. Any shares of Company Common Stock held by a ------------------ holder who has properly exercised dissenters' rights for such shares in accordance with the California Code and who, as of the Effective Time, has not effectively withdrawn or lost such dissenters' rights ("DISSENTING SHARES") shall not be converted into Parent Common Stock but shall be converted into the right to receive such consideration as may be determined to be due with respect to such Dissenting Shares pursuant to the California Code. The Company shall give Parent prompt notice of any demand received by the Company to require the Company to purchase shares of Company Common Stock, and Parent shall have the right to participate in all negotiations and proceedings with respect to such demand. The Company agrees that, except with the prior written consent of Parent, or as required under the California Code, it will not voluntarily make any payment with respect to, or settle or offer to settle, any such purchase demand. Each holder of Dissenting Shares (a "DISSENTING SHAREHOLDER") who, pursuant to the provisions of the California Code, becomes entitled to payment of the value of shares of Company Common Stock shall receive payment therefor (but only after the value therefor shall have been agreed upon or finally determined pursuant to such provisions). In the event of legal obligation, after the Effective Time, to deliver shares of Parent Common Stock to any holder of shares of Company Common Stock who shall have failed to make an effective purchase demand or shall have lost its status as a -3- Dissenting Shareholder, Parent shall issue and deliver, upon surrender by such Dissenting Shareholder of such holder's certificate or certificates representing shares of capital stock of the Company, the shares of Parent Common Stock to which such Dissenting Shareholder is then entitled under this Section 2.1 and the Merger Agreement. (f) Fractional Shares. No fractional shares of Parent Common Stock ----------------- shall be issued, but in lieu thereof each holder of shares of Company Common Stock who would otherwise be entitled to receive a fraction of a share of Parent Common Stock shall receive from Parent an amount of cash equal to the per share market value of Parent Common Stock (based on the last sales price of Parent Common Stock as reported on the Nasdaq National Market on the Effective Date) multiplied by the fraction of a share of Parent Common Stock to which such holder would otherwise be entitled. The fractional share interests of each shareholder of the Company shall be aggregated, so that no Company shareholder shall receive cash in an amount greater than the value of one full share of Parent Common Stock. (g) Maximum Merger Consideration. The maximum consideration to be ---------------------------- paid by Parent (including Parent Common Stock to be reserved for issuance upon exercise of the Company's options assumed by Parent pursuant to Section 5.16) pursuant to the Merger shall be equal to (i) 800,000 shares of Parent Common Stock (plus any additional shares of Parent Common Stock exchanged in the Merger at the Exchange Ratio for shares of capital stock of the Company issued upon exercise of the Warrant (as defined in section 3.2)) plus (ii) an additional 200,000 shares of Parent Common Stock to be reserved for issuance upon exercise of options to purchase Parent Common Stock to be granted to the employees of CityAuction as set forth in Section 2.1 (i)(b) below. No adjustment shall be made in the aggregate consideration to be paid in the Merger as a result of any cash proceeds received by the Company from the date of this Agreement to the Closing Date pursuant to the exercise of currently outstanding options to acquire Company Common Stock. (h) Pledged Shares. -------------- (i) As collateral security for the payment of any indemnification obligations of the shareholders of the Company (the "SHAREHOLDERS") pursuant to Section 7 of this Agreement, at the Closing the Company shall, and by execution hereof does hereby, transfer, pledge and assign to Parent, for the benefit of Parent, a security interest in the following assets: (A) 75,000 shares of Parent Common Stock issuable by Parent in the Merger pursuant to Section 2.1 (the "PLEDGED SHARES"), as well as the certificates and instruments representing or evidencing the Pledged Shares, and all non-cash dividends and other property at any time received or otherwise distributed in respect of or in exchange or substitution for any or all of the Pledged Shares; and in the event the Company or any Shareholder receives any such property, the Company and such Shareholder shall immediately deliver such property to Parent as part of the Pledged Shares; and -4- (B) all rights, titles, interests, privileges and preferences appertaining or incident to the foregoing property, except as provided for in Section 1.2(h)(iii). The Pledged Shares shall be withheld from the shareholders in relation to the prorated percentage of shares of Company Common Stock issuable to such shareholders in the Merger as set forth in Section 2.1 (c). (ii) Each certificate evidencing the Pledged Shares issued in the names of the Shareholders in the Merger, shall, at the Closing, be delivered to Parent, together with an undated stock power duly signed in blank by each such Shareholder, such certificate bearing no restrictive or cautionary legend other than those imprinted by the Transfer Agent at Parent's request. (iii) The Shareholders shall be entitled to exercise any voting powers incident to the Pledged Shares until such time, if ever, that they are demanded to be transferred to Parent to satisfy the indemnification obligations of the Shareholders pursuant to Section 7 hereof. (i) Stock Options. ------------- (i) At the Effective Time, all Company Stock Options (as defined in Section 3.2) then outstanding shall be assumed by Parent in accordance with Section 5.16 below. (ii) At the Effective Time, Parent shall grant to the CityAuction employees stock options under the Parent's 1998 Stock Option Plan exercisable for an aggregate of 200,000 shares of Parent Common Stock (the "EMPLOYEE STOCK OPTIONS"). The exercise price for such option shall be equal to $53.25 per share. The allocation of such options to employees shall be as set forth on Exhibit B. The Employee Stock Options shall be subject to the following --------- vesting provisions: (A) Employee Stock Options to purchase an aggregate of 100,000 shares shall vest over a four year period as follows: 1/48 per month; provided, however, that no shares shall be exercisable until the first anniversary of the optionee's employment with the Company. (B) Employee Stock Options to purchase an aggregate of 100,000 shares shall also vest over a four year period in accordance with the vesting provisions set forth in subsection (i) above. Such stock options shall be subject to acceleration in accordance with the following terms: (1) In the event that aggregate revenues (i.e. winning bids multiplied by units won whether or not such sales actually occur) in auctions completed on the Company's web site (the "CITYAUCTION REVENUE") during the one year period ending on the first anniversary of this Agreement exceeds $12.0 million (the "YEAR 1 AUCTION TARGET AMOUNT"), -5- then a total of 37,500 options shall be vested as of the first anniversary date (which total shall include the options which shall otherwise have vested during such year) and 37,500 options shall vest ratably on a monthly basis for the twelve months following the first anniversary date (which total shall include the options which shall otherwise have vested during such year); (2) In the event that CityAuction Revenue during the one year period ending on the first anniversary of this Agreement is between 70% and 99.9% (the "YEAR 1 ACTUAL PERCENTAGE") of the Year 1 Auction Target Amount, then the total number of options which shall be vested as of such first anniversary date shall equal 25,000 options plus the Year 1 Actual Percentage multiplied by 12,500 options (which total shall include the options which otherwise shall have vested during such year) and 25,000 options plus the Year 1 Actual Percentage multiplied by 12,500 which shall vest ratably on a monthly basis for the twelve months following such date (which total shall include the options which shall otherwise have vested during such year); (3) In the event that CityAuction Revenue during the one year period ending on the second anniversary of this Agreement exceeds $30.0 million (the "YEAR 2 AUCTION TARGET AMOUNT"), then all remaining unvested options shall vest as of such second anniversary date; and (4) In the event that CityAuction Revenue during the one year period ending on the second anniversary of the Agreement is between 70% and 99.9% (the "YEAR 2 ANNUAL PERCENTAGE") of the Year 2 Auction Target Amount, then the number of remaining unvested options multiplied by the Year 2 Annual Percentage shall vest as of the second anniversary date, and the remainder shall vest ratably over the next two years. In the event that there is a material and fundamental change in the business condition and structure of the Parent (either through an extraordinary merger, acquisition or similar event involving the Parent which the parties agree is beyond the scope of what is reasonably contemplated presently as part of the Parent's growth strategy) prior to the second anniversary of this Agreement, the parties agree that they shall discuss in good faith whether the performance criteria set forth in this Section 2.1 (i)(ii)(B) for the acceleration of the stock options referenced thereunder should be modified in recognition of such fundamental change in Parent. (j) Rebele Shares. Fifty percent (50%) shares of Parent Common ------------- Stock received in the Merger pursuant to Section 2.1(c) by Andrew Rebele shall be subject to vesting over a two year period following the Closing on a pro rata monthly basis. 2.2 EXCHANGE OF CERTIFICATES. ------------------------ (a) Exchange Agent. Prior to the Effective Time, Parent shall -------------- designate a bank or trust company, reasonably acceptable to the Company, to act as exchange agent (the "EXCHANGE AGENT") in the Merger. -6- (b) Parent to Provide Common Stock. Promptly after the Effective ------------------------------ Time, Parent shall deliver to the Exchange Agent in accordance with this Section 2 and the Merger Agreement, the shares of Parent Common Stock issuable pursuant to Section 2.1 and the Merger Agreement in exchange for outstanding shares of capital stock of the Company, and cash in an amount sufficient for payment in lieu of fractional shares pursuant to Section 2.1(f). (c) Exchange Procedures. As soon as practicable after the Effective ------------------- Time, the Surviving Corporation shall cause to be mailed to each holder of record of a certificate or certificates which immediately prior to the Effective Time represented outstanding shares of Company Common Stock (the "Certificates") whose shares are being converted into Parent Common Stock pursuant to Section 2.1 and the Merger Agreement, (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for Parent Common Stock. Upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by Parent, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor the number of shares of Parent Common Stock to which the holder of Company Common Stock is entitled pursuant to Section 2.1. The Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of Company Common Stock which is not registered on the transfer records of the Company, the appropriate number of shares of Parent Common Stock may be delivered to a transferee if the Certificate representing such capital stock of the Company is presented to the Exchange Agent and accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Section 2.2, each Certificate shall be deemed at any time after the Effective Time to represent the right to receive upon such surrender the number of shares of Parent Common Stock as provided by this Section 2 and the provisions of the California Code. (d) No Further Ownership Rights in Capital Stock of the Company. All ----------------------------------------------------------- Parent Common Stock delivered upon the surrender for exchange of shares of Company Common Stock in accordance with the terms hereof shall be deemed to have been delivered in full satisfaction of all rights pertaining to such shares of Company Common Stock, and following the Effective Time, the Certificates shall have no further rights to, or ownership in, shares of capital stock of the Company. There shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Company Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Section 2. (e) Lost, Stolen or Destroyed Certificates. In the event any -------------------------------------- certificates evidencing shares of Company Common Stock shall have been lost, stolen or destroyed, the -7- Exchange Agent shall make payment in exchange for such lost, stolen or destroyed certificates, upon the making of an affidavit of that fact by the holder thereof, such shares of Parent Common Stock and cash for fractional shares, if any, as may be required pursuant to Section 2.1(f); provided, however, that Parent may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Parent or the Exchange Agent with respect to the certificates alleged to have been lost, stolen or destroyed. (f) No Liability. Notwithstanding anything to the contrary in this ------------ Section 2.2, none of the Exchange Agent, the Surviving Corporation or any party hereto shall be liable to a holder of shares of Company Common Stock for any amount paid to a public official pursuant to any applicable abandoned property, escheat or similar law. (g) Dissenting Shares. The provisions of this Section 2.2 shall ----------------- also apply to Dissenting Shares that lose their status as such, except that the obligations of Parent under this Section 2.2 shall commence on the date of loss of such status. SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL SHAREHOLDER Except as disclosed in writing in a disclosure letter referring specifically to the representations and warranties in this Agreement that specifically identifies the section and subsection to which such disclosure relates and that is delivered to Parent by the Company and the Principal Shareholders and certified by a duly authorized officer of the Company and the Principal Shareholder prior to the date of this Agreement (the "COMPANY SCHEDULES"), each of the Company and the Principal Shareholders represents and warrants to Parent and Sub as set forth below. 3.1 ORGANIZATION, STANDING AND CORPORATE POWER. The Company is a ------------------------------------------ corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has all requisite corporate power and authority to carry on its business as now being conducted. The Company is duly qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership, leasing or operation of its properties makes such qualification or licensing necessary. The Company has delivered to the Parent complete and correct copies of its Articles of Incorporation and Bylaws. 3.2 COMPANY CAPITAL STRUCTURE. ------------------------- (a) The authorized capital stock of the Company consists (i) of 10,000,000 shares of Common Stock, of which 2,400,000 shares are issued and outstanding and (ii) 1,015,000 shares -8- of Preferred Stock, of which 415,000 shares, designated Series A Preferred Stock, are outstanding. All of such outstanding shares have been duly authorized, validly issued, fully paid and non-assessable and have been issued in compliance with all applicable federal and state securities laws. The outstanding shares of capital stock of the Company are not subject to preemptive rights created by statute, the Articles of Incorporation or Bylaws of the Company, or any agreement to which the Company is a party or by which it may be bound. There are no voting agreements or voting trusts with respect to any of the outstanding shares of capital stock of the Company. The outstanding shares of capital stock of the Company are held by the persons and in the amounts set forth in Section 3.2 of the Company Schedules. (b) The Company has reserved 300,000 shares of Company Common Stock for issuance to employees and consultants pursuant to the Company's 1998 Stock Option Plan (the "COMPANY'S STOCK OPTION PLAN"), of which stock options to purchase 22,394 shares of Company Common Stock have been granted to date (the "COMPANY STOCK OPTIONS") and 277,606 shares remain available for future grant under the plan. Section 3.2 (b) of the Company Schedules sets forth for each outstanding Company Stock Options the name of the holder of such option, the number of shares of Company Common Stock subject to such option, the exercise price of such option and the vesting schedule for such option, including the extent vested to date. The Company has reserved 600,000 shares of Series A Preferred Stock issuable upon exercise of a warrant issued to Snap! LLC (the "WARRANT"). Except for the Company Stock Options described in Section 3.2 (b) of the Company Schedules and the Warrant, there are no options, warrants, calls, rights, commitments or agreements of any character, written or oral, to which the Company is a party or by which it is bound obligating the Company to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of the capital stock of the Company or obligating the Company to grant, extend, accelerate the vesting of, change the price of, otherwise amend or enter into any such option, warrant, call, right, commitment or agreement. The Company's Stock Options and the Warrant have been issued in compliance with all applicable federal and state securities laws. The holders of Company Stock Options and the Warrant have been or will be given, or shall have properly waived, any required notice prior to the Merger. As a result of the Merger, Parent will be the record and beneficial owner of all outstanding capital stock of the Company and, except for stock options granted pursuant to the Company's Stock Option Plan and the Warrant, rights to acquire capital stock of the Company. 3.3 SUBSIDIARIES. The Company does not have and has never had any ------------ subsidiaries or affiliated companies and does not otherwise own and has never otherwise owned any shares of capital stock or any interest in, or control, directly or indirectly, any other corporation, partnership, association, joint venture or other business entity. 3.4 AUTHORITY/NONCONTRAVENTION. The Company has the requisite corporate -------------------------- power and authority to execute and deliver this Agreement and, subject to the approval and adoption of this Agreement and approval of the Merger by the Company's shareholders, to consummate the transactions contemplated by this Agreement. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions -9- contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions contemplated hereby, subject, in each case, to the approval and adoption of this Agreement and approval of the Merger by the Company's shareholders. This Agreement has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. The execution and delivery of this Agreement do not, and subject to the approval and adoption of this Agreement and approval of the Merger by the Company's shareholders as required in connection with this Agreement and the transactions contemplated by this Agreement, the consummation of the transactions contemplated by this Agreement and compliance with the provisions of this Agreement will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a material benefit or require any consent, approval or authorization under, or result in the creation of any pledges, claims, liens, charges, encumbrances and security interests of any kind or nature whatsoever (collectively, "LIENS") in or upon any of the properties or assets of the Company under, any provision of (a) the Articles of Incorporation or Bylaws of the Company, (b) any loan or credit agreement, bond, debenture, note, mortgage, indenture, lease or other material contract, commitment, agreement, arrangement, obligation, undertaking, instrument, permit, concession, franchise or license applicable to the Company or its properties or assets (including, without limitation, any of the contracts of the Company set forth in the Company Schedules) or (c) subject to the governmental filings and other matters referred to in the following sentence, any statute, law, ordinance, rule or regulation or judgment, order or decree, in each case, applicable to the Company or its properties or assets, other than, in the case of clauses (b) and (c), any such conflicts, violations, defaults, rights, or Liens or other occurrences that individually or in the aggregate would not have a Material Adverse Effect on the Company. No consent, approval, order or authorization of, or registration, declaration or filing with, any Federal, state or local, domestic or foreign, government or any court, administrative agency or commission or other governmental authority or agency, domestic or foreign (a "GOVERNMENTAL ENTITY"), is required by or with respect to the Company in connection with the execution and delivery of this Agreement by the Company or the consummation by the Company of the Merger or the other transactions contemplated by this Agreement, except for (a) the receipt of a valid exemption from the registration requirements of the Securities Act of 1933, as amended (the "SECURITIES ACT"), (b) the filing of the Agreement of Merger with the California Secretary of State and appropriate documents with the relevant authorities of other states in which the Company is qualified to do business and (c) such other consents, approvals, orders, authorizations, registrations, declarations and filings the failure of which to be obtained or made individually or in the aggregate would not have a Material Adverse Effect on the Company or impair the ability of the Company to perform its obligations under this Agreement. -10- 3.5 FINANCIAL STATEMENTS; NO UNDISCLOSED LIABILITIES. ------------------------------------------------ (a) The unaudited balance sheet (the "COMPANY BALANCE SHEET") of the Company as of December 31, 1998 (the "BALANCE SHEET DATE") and the related profit and loss statement for the year then ended (the "COMPANY FINANCIAL STATEMENTS") are in accordance with the books and records of the Company and are complete and correct in all material respects, have each been prepared in accordance with GAAP in conformity with the practices consistently applied by the Company throughout the periods involved and present fairly the financial position, results of operations and cash flows of the Company as of the dates and for the periods specified. True and complete copies of the Company Financial Statements have previously been supplied to the Parent. (b) As of the Balance Sheet Date, the Company did not have any indebtedness, obligations or liabilities of any kind (whether accrued, absolute, contingent or otherwise, and whether due or to become due or asserted or unasserted), which were not fully reflected in, reserved against or otherwise described in the Company Balance Sheet that would be required to be disclosed on a balance sheet prepared as of the Balance Sheet Date in conformity with GAAP applied on a basis consistent with the Company Financial Statements. Since the Balance Sheet Date, the Company has not incurred any indebtedness, obligations or liabilities of any kind (whether accrued, absolute, contingent or otherwise, and whether due or to become due or asserted or unasserted) that would be required to be disclosed on a balance sheet prepared as of the date hereof in conformity with GAAP applied on a basis consistent with the Company Financial Statements, other than those incurred in the ordinary course of business consistent with past practice, none of which would have a Material Adverse Effect on the Company. 3.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in Section ------------------------------------ 3.6 of the Company Schedules, since the Balance Sheet Date and until the date hereof, the Company has conducted its businesses only in the ordinary course consistent with past practice, and there has not been (a) any Material Adverse Effect with respect to the Company, (b) any declaration, setting aside or payment of any dividend on, or other distribution (whether in cash, stock or property) with respect to any of the Company's capital stock, (c) any split, combination, reclassification or repurchase of any of the Company's capital stock or any issuance or the authorization of any issuance of any other securities in respect of, in lieu of or in substitution for shares of the Company's capital stock, (d) (i) any granting by the Company to any officer of the Company of any increase in compensation, except in the ordinary course of business consistent with past practice or as required under employment agreements in effect as of the date hereof, (ii) any granting by the Company to any officer of the Company of any increase in severance or termination pay, except as was required under any employment, severance or termination agreement in effect as of the date hereof, or (iii) any entry by the Company into (A) any currently effective employment, severance, termination or indemnification agreement, or consulting agreement (other than in the ordinary course of business consistent with past practice), with any current or former officer, director, employee or consultant or (B) any agreement with any current or former officer, director, employee or consultant the benefits of which are contingent, or the -11- terms of which are materially altered, upon the occurrence of a transaction involving the Company of the nature contemplated by this Agreement, (e) any damage, destruction or loss, whether or not covered by insurance, that individually or in the aggregate would have a Material Adverse Effect on the Company, (f) any change in accounting methods, principles or practices by the Company, except insofar as may have been required by a change in GAAP or (g) any tax election that individually or in the aggregate would have a Material Adverse Effect on the Company. 3.7 LITIGATION. There is no suit, claim, action, proceeding or, to the ---------- knowledge of the Company, investigation, pending or, to the knowledge of the Company, threatened, against or affecting the Company, nor is there any judgment, order, decree or injunction of any Governmental Entity or arbitrator outstanding against, or, to the knowledge of the Company, investigation by any Governmental Entity involving, the Company. 3.8 CONTRACTS. Except as set forth in Section 3.8 of the Company --------- Schedules, as of the date hereof, the Company is not a party to, nor are any of their properties or assets bound by, any currently binding (i) contracts, licenses or agreements, with respect to any intellectual property with a value or cost in excess of $50,000, (ii) any employment or consulting agreement or contract (or commitment to enter into any such agreement or contract) with an employee or individual consultant or salesperson or consulting or sales agreement or contract (or commitment to enter into any such agreement or contract) with a firm or other organization in excess of $50,000 annually, (iii) any agreement or plan, including, without limitation, any stock option plan, stock appreciation rights plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement, (iv) any fidelity or surety bond or completion bond, (v) any lease of personal property having a value individually in excess of $50,000, (vi) any agreement of indemnification, agreement providing for reimbursement of payments or providing a right of rescission, hold harmless or guaranty, or any obligation or liability with respect to infringement of the intellectual property rights of another person, in excess of, or entered into in connection with a transaction in excess of, $50,000, (vii) any agreement, contract or commitment containing any covenant limiting the freedom of such party, any of its subsidiaries or the Surviving Corporation to engage in any line of business or to compete with any person, (viii) any agreement, contract or commitment relating to capital expenditures and involving future payments by such party or any of its subsidiaries in excess of $50,000 in one or in a series of transactions, (ix) any agreement, contract or commitment relating to the disposition or acquisition of assets or any interest in any business enterprise outside the ordinary course of business, (x) any mortgages, indentures, loans or credit agreements, security agreements or other agreements or instruments relating to the borrowing of money or extension of credit, (xi) any purchase order or contract for the purchase of materials involving in excess of $50,000, (xii) any construction contracts, (xiii) contracts that relate to corporate governance, the voting or transfer of any equity securities of such party, the registration of any securities of such party under the Securities Act or that grants any redemption or preemptive rights or (xiv) any other agreement, contract or commitment that involves $50,000 or more or is not cancelable without penalty within thirty (30) days (collectively, -12- the "CONTRACTS"). The Company has delivered or otherwise made available to Parent true, correct and complete copies of the Contracts listed in Section 3.8 of the Company Schedules, together with all amendments, modifications and supplements thereto and all side letters to which the Company is a party affecting the obligations of any party thereunder. The Company is not in violation of or in default (with or without notice or lapse of time, or both) under any lease, permit, concession, franchise, license or any other Contract, commitment, agreement, arrangement, obligation or understanding to which it is a party or by which it or any of its properties or assets is bound. As of the Closing, after giving effect to the Merger and the transactions contemplated hereby, the Surviving Corporation, shall be entitled to all of the benefits under the agreements (as the same may be amended) set forth on Section 3.8 of the Company Schedules to which the Company is entitled on the date hereof, except as may be adversely affected by agreements (as the same may be amended) to which Parent is a party on the date hereof. 3.9 COMPLIANCE WITH LAWS. The Company is in compliance with all -------------------- statutes, laws, ordinances, rules, regulations, judgments, orders and decrees of any Governmental Entity applicable to its business or operations, except for instances of possible noncompliance that individually or in the aggregate would not have a Material Adverse Effect on the Company, impair in any material respect the ability of the Company to perform its obligations under this Agreement or prevent or materially delay the consummation of any of the transactions contemplated by this Agreement. The Company has in effect all Federal, state and local, domestic and foreign, governmental consents, approvals, orders, authorizations, certificates, filings, notices, permits, franchises, licenses and rights (collectively "PERMITS") necessary for it to own, lease or operate its properties and assets and to carry on its business as now conducted and there has occurred no violation of, or default under, any such Permit, except for the lack of Permits and for violations of, or defaults under, Permits which lack, violation or default individually or in the aggregate would not have a Material Adverse Effect on the Company. 3.10 ABSENCE OF CHANGES IN BENEFIT PLANS; EMPLOYMENT AGREEMENTS; LABOR ----------------------------------------------------------------- RELATIONS. Since the Balance Sheet Date and until the date hereof, there has - --------- not been any termination, adoption, amendment or agreement to amend in any material respect by the Company any bonus, pension, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock appreciation, restricted stock, stock option, phantom stock, performance, retirement, vacation, severance, disability, death benefit, hospitalization, medical or other material plan, arrangement or understanding providing benefits to any current or former officer, director or employee of such party or any of its subsidiaries (collectively, "BENEFIT PLANS"). Except as set forth in Section 3.10 of the Company Schedules, as of the date hereof there exist no currently binding employment, severance or termination agreements or consulting agreements between the Company and any current or former officer of the Company. There are no collective bargaining or other labor union agreements to which the Company is a party or by which it is bound. The Company has not encountered any labor union organizing activity, nor had any actual or threatened employee strikes, work stoppages, slowdowns or lockouts. -13- 3.11 ERISA COMPLIANCE. ---------------- (a) Section 3.11(a) of the Company Schedules contains a list of all "employee pension benefit plans" (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) (sometimes referred to herein as "PENSION PLANS"), "employee welfare benefit plans" (as defined in Section 3(l) of ERISA) and all other Benefit Plans maintained or contributed to by the Company or any person or entity that, together with the Company, is treated as a single employer under Section 414(b), (c), (m) or (o) of the Code (a "COMMONLY CONTROLLED ENTITY") for the benefit of any current or former officers, directors or employees of the Company. The Company has made available to Parent true, complete and correct copies of (i) each Benefit Plan (or, in the case of any unwritten Benefit Plans, descriptions thereof), (ii) the most recent annual report on Form 5500 required to be filed with the Internal Revenue Service (the "IRS") with respect to each Benefit Plan (if any such report was required), (iii) the most recent summary plan description for each Benefit Plan for which such summary plan description is required and (iv) each trust agreement and group annuity contract relating to any Benefit Plan. Each Benefit Plan has been administered in accordance with its terms, except where the failure to so administer would not, individually or in the aggregate, have a Material Adverse Effect on the Company. The Company and all the Benefit Plans are all in compliance with applicable provisions of ERISA and the Code, except for instances of possible noncompliance that would not, individually or in the aggregate, have a Material Adverse Effect on the Company. (b) Each of the Pension Plans has been the subject of a determination letter (or its equivalent) from the IRS to the effect that such Pension Plan is qualified and exempt from United States Federal income taxes under Sections 401(a) and 501(a), respectively, of the Code, and no such determination letter (or its equivalent) has been revoked nor has any event occurred since the date of its most recent determination letter (or its equivalent) or application therefor that would adversely affect its qualification or materially increase its costs. (c) Neither the Company nor any Commonly Controlled Entity of the Company has maintained, contributed to or been obligated to contribute to any Benefit Plan that is subject to Title IV of ERISA. (d) No officer or employee of the Company will be entitled to any additional compensation or benefits or any acceleration of the time of payment or vesting of any compensation or benefits under any Benefit Plan as a result of the transactions contemplated by this Agreement or any benefits under any Benefits Plan the value of which will be calculated on the basis of any of the transactions contemplated by this Agreement. 3.12 TAXES. The Company has filed all material tax returns and reports ----- required to be filed by it and all such returns and reports were true and correct in all material respects. All taxes that accrue or are payable by the Company in respect of taxable periods that end on or before the Closing Date and for any taxable period that begins before the Closing Date and ends thereafter to the extent such taxes are attributable to the portion of such period ending on the Closing Date, as -14- determined under the closing of the books method of allocation, have been (or will have been, on or before the Closing Date) timely paid or an adequate reserve has been established on the Company Balance Sheet. The most recent financial statements, dated December 31, 1998, (a true, correct complete copy of which has been delivered to the Parent by the Company) reflect an adequate reserve for all taxes payable by the Company for all taxable periods and portions thereof through the date of such financial statements and no liabilities for taxes have been incurred since the date of such financial statements except in the ordinary course of business. No deficiencies for any taxes have been proposed, asserted or assessed against the Company, and no requests for waivers of the time to assess any such taxes are pending. As used in this Agreement, "TAXES" shall include all Federal, state, local and foreign income, property, sales, excise and other taxes, tariffs or governmental charges of any nature whatsoever, together with an interest and penalties, whether as primary obligor or as a result of being a "transferor" (within the meaning of section 6901 of the Code and any corresponding state and local law) of another person or a member of an affiliated, consolidated or combined group. 3.13 NO EXCESS PARACHUTE PAYMENTS. No amount that could be received ---------------------------- (whether in cash or property or the vesting of property) in connection with any of the transactions contemplated by this Agreement by any employee, officer or director of the Company who is a "disqualified individual" (as such term is defined in proposed Treasury Regulation Section 1.280G-1) under any employment, severance or termination agreement, other compensation arrangement or Benefit Plan currently in effect would be an "excess parachute payment" (as such term is defined in Section 280G(b)(1) of the Code). No such person is entitled to receive any additional payment from the Company, the Surviving Corporation or any other person (a "PARACHUTE GROSS-UP PAYMENT") in the event that the excise tax of Section 4999(a) of the Code is imposed on such person. The Board of Directors of the Company has not granted to any officer, director or employee of the Company any right to receive any Parachute Gross-Up Payment. 3.14 TITLE TO PROPERTIES. ------------------- (a) The Company has good and marketable title to, or valid leasehold interests in, all of its properties and assets except for such as are no longer used or useful in the conduct of its business or as have been disposed of in the ordinary course of business and except for defects in title, easements, restrictive covenants and similar encumbrances that individually or in the aggregate would not have a Material Adverse Effect on the Company. All such material assets and properties, other than assets and properties in which the Company has a leasehold interest, are free and clear of all Liens (other than Liens for current taxes not yet due and payable), except for Liens that individually or in the aggregate would not have a Material Adverse Effect on the Company. (b) The Company has complied in all material respects with the terms of all leases to which it is a party and under which it is in occupancy, all such leases are in full force and -15- effect and have been made available to the Parent. The Company enjoys peaceful and undisturbed possession under all such leases. 3.15 INTELLECTUAL PROPERTY. --------------------- (a) The Company owns, or has the right to use, sell or license all intellectual property necessary or required for the conduct of its business as presently conducted and as presently contemplated (such intellectual property and the rights thereto are collectively referred to as the "COMPANY IP RIGHTS"). (b) Section 3.15 of the Company Schedules sets forth with respect to the intellectual property of the Company: (i) for each patent and patent application, the number, normal expiration date, title and priority information for each country in which such patent has been issued, or, the application number, date of filing, title and priority information for each country, (ii) for each trademark, trade name or service mark, whether or not registered, the date first used, and, if registered, the application serial number or registration number, the class of goods covered, the nature of the goods or services, the countries in which the names or mark is used and the expiration date for each country in which a trademark has been registered and (iii) for each copyright for which registration has been sought, whether or not registered, the date of creation and first publication of the work, the number and date of registration for each country in which a copyright application has been registered. (c) The Company has taken all reasonable steps necessary or appropriate (including, entering into appropriate confidentiality, nondisclosure agreements with officers, directors, subcontractors, independent contractors, full-time and part-time employees, licensees and customers) to safeguard and maintain the secrecy and confidentiality of, and the proprietary rights in, the Company IP Rights. (d) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not constitute a breach of any instrument or agreement governing any Company IP Right (the "COMPANY IP RIGHTS AGREEMENTS"), will not cause the forfeiture or termination or give rise to a right of forfeiture or termination of any Company IP Right or impair the right of the Company, the Surviving Corporation or the Parent to use, sell or license any Company IP Right or portion thereof. (e) (i) Neither the manufacture, marketing, license, sale or intended use of any product or technology currently licensed or sold by the Company violates any license or agreement between the Company and any third party or infringes any proprietary right of any other party; and (ii) there is no pending or, to the knowledge of the Company, threatened claim or litigation contesting the validity, ownership or right to use, sell, license or dispose of any Company IP Right or operate the Company's Web service. -16- 3.16 YEAR 2000 COMPLIANCE. -------------------- (a) All of the current or past products and services offered by the Company, including each item of hardware, software, or firmware, any system, equipment, or products consisting of or containing one or more thereof, any and all enhancements, upgrades, customizations, modifications, maintenance and the like are Year 2000 Compliant (as defined below). The Company is not subject to any pending or threatened claim, regulatory action, processing or investigation concerning the Year 2000 Compliance of its respective products, services or operations, and, to the best of the Company's knowledge, there is no basis for any such claim, regulatory action, investigation or proceeding. To the Best of the Company's knowledge, all of the internal management information systems (including hardware, firmware, operating system software, utilities, and applications software) and all facilities and systems used in the ordinary course of business by or on behalf of the Company, including payroll, accounting, billing/receivables, customer service, human resources, and e-mail systems used by the Company, are Year 2000 Compliant. To the best of the Company's knowledge, all vendors of products or services to the Company, and its respective products, services and operations, are Year 2000 Compliant, and each such vendor will continue to furnish its products or services to the Company, without interruption or material delay, on and after January 1, 2000. (b) For purposes of this Agreement, "Year 2000 Compliant" means that (i) the products, services, or other items (s) at issue accurately process, provide and/or receive all date/time data (including calculating, comparing, and sequencing) within, from, into, and between centuries (including the twentieth and twenty-first centuries and the years 1999 and 2000), including leap year calculations, and (ii) neither the performance nor the functionality nor the Company's provision of the products, services, and other item (s) at issue will be affected by any dates/times prior to, on, after, or spanning January 1, 2000. The design of the products, services, and other item (s) at issue includes proper date/time data century recognition and recognition of 1999 and 2000, calculations that accommodate single century and multi-century formulae and date/time values before, on, after spanning January 1, 2000, and date/time data interface values that reflect the century, 1999, and 2000. 3.17 VOTING REQUIREMENTS. The affirmative vote of the holders of a ------------------- majority of the outstanding shares of Company Common Stock and of a majority of the outstanding Company Preferred Stock, voting as separate classes, are the only votes of the holders of any capital stock of the Company necessary to approve and adopt this Agreement and approve the Merger. 3.18 PAYMENTS. Neither the Company nor any of its representatives acting -------- on its behalf have, directly or indirectly, paid or delivered any fee, commission or other sum of money or property, however characterized, to any finder, agent, government official or other party, in the U.S. or any other country which the Company knows or has reason to believe to have been illegal under any federal, state or local laws of the U.S. or any other country having jurisdiction. Neither the Company nor any of its representatives acting on its behalf, have accepted or received any unlawful contributions, payments, gifts or expenditures. -17- 3.19 TRANSACTIONS WITH RELATED PARTIES. Except for compensation --------------------------------- arrangements in the ordinary course of business, as disclosed on Section 3.18 of the Company Schedules or for amounts less than $10,000, no Related Party (as defined below) of the Company has (a) borrowed or loaned money or other property to the Company which has not been repaid or returned, (b) any currently enforceable contractual or other claims, express or implied, of any kind whatsoever against the Company or (c) has or had any material economic interest in any property currently used by the Company or any subsidiary thereof. For purposes of this Agreement, (I) "RELATED PARTY" means as to any person, any of such person's officers and directors, any Affiliate thereof or the respective officers and directors of any such Affiliate, or any other person in which any of the foregoing persons have any direct or material indirect interest, (ii) "AFFILIATE" of a person means any other person which directly or indirectly controls, is controlled by, or is under common control with, such person and (iii) "CONTROL" (including, with correlative meaning, the terms "CONTROLLED BY" and "UNDER COMMON CONTROL WITH"), as used with respect to any person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, whether through the ownership of voting securities, by contract or otherwise. 3.20 RESTRICTIONS ON BUSINESS ACTIVITIES. There is no agreement ----------------------------------- (noncompete, grant of exclusivity or otherwise), commitment, judgment, injunction, order or decree to which the Company is a party or otherwise binding upon the Company which has or reasonably could be expected to have the effect of prohibiting or impairing any business practice of the Company, any acquisition of property (tangible or intangible) by the Company or the conduct of business by the Company. 3.21 ACCOUNTS RECEIVABLE; INVENTORY. ------------------------------ (a) The Company has made available to Parent a list of all accounts receivable of the Company reflected on the Balance Sheet ("ACCOUNTS RECEIVABLE") along with a range of days elapsed since invoice. (b) All Accounts Receivable of the Company are collectible except to the extent of reserves therefor set forth in the Balance Sheet. No person has any Lien on any of such Accounts Receivable and no request or agreement for deduction or discount has been made with respect to any of such Accounts Receivable. (c) All of the inventories of the Company reflected on the Balance Sheet and the Company's books and records on the date of this Agreement were purchased, acquired or produced in the ordinary and regular course of business and in a manner consistent with the Company's regular inventory practices and are set forth on the Company's books and records in accordance with the practices and principles of the Company consistent with the method of treating said items in prior periods. -18- 3.22 MINUTE BOOKS. The minute books of the Company made available to ------------ counsel for Parent are the only minute books of the Company and contain an accurate summary of all meetings of directors (or committees thereof) and shareholders or actions by written consent since the date of incorporation of the Company. 3.23 ENVIRONMENTAL MATTERS. --------------------- (a) Except as set forth in Section 3.22 of the Company Schedules, to the knowledge of the Company, no underground storage tanks and no amount of any substance that has been designated by any Governmental Entity or by applicable federal, state, local or other applicable law to be radioactive, toxic, hazardous or otherwise a danger to health or the environment, including, without limitation, PCBs, asbestos, petroleum, urea-formaldehyde and all substances listed as hazardous substances pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, or defined as a hazardous waste pursuant to the United States Resource Conservation and Recovery Act of 1976, as amended, and the regulations promulgated pursuant to said laws, but excluding office and janitorial supplies properly and safely maintained (a "HAZARDOUS MATERIAL"), are present in, on or under any property, including the land and the improvements, ground water and surface water thereof, that the Company has at any time owned, operated, occupied or leased. (b) To the knowledge of the Company, the Company has not transported, stored, used, manufactured, disposed of, released or exposed its employees or others to Hazardous Materials in violation of any law in effect on or before the Closing Date, nor has the Company disposed of, transported, sold, or manufactured any product containing a Hazardous Material (collectively, "COMPANY HAZARDOUS MATERIALS ACTIVITIES") in violation of any rule, regulation, treaty or statute promulgated by any Governmental Entity in effect prior to or as of the date hereof to prohibit, regulate or control Hazardous Materials or any Hazardous Material Activity. (c) To the knowledge of the Company, the Company currently holds all environmental approvals, permits, licenses, clearances and consents (the "ENVIRONMENTAL PERMITS") necessary for the conduct of the Company's Hazardous Material Activities and other business of the Company as such activities and business are currently being conducted other than any Environmental Permits, the lack of which would not, individually or in the aggregate, have a Material Adverse Effect. All Environmental Permits are in full force and effect. The Company (A) is in compliance with all material terms and conditions of the Environmental Permits and (B) is in compliance in all material respects with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in the laws of all Governmental Entities relating to pollution or protection of the environment or contained in any regulation, code, plan, order, decree, judgment, notice or demand letter issued, entered, promulgated or approved thereunder. (d) No action, proceeding, revocation proceeding, amendment procedure, writ, injunction or claim is pending, or to the Company's knowledge, threatened, concerning any -19- Environmental Permit, Hazardous Material or any Company Hazardous Materials Activity. The Company is not aware of any fact or circumstance which could involve the Company in any environmental litigation or impose upon the Company any material environmental liability. 3.24 INSURANCE. Section 3.23 of the Company Schedules lists all insurance --------- policies and fidelity bonds covering the assets, business, equipment, properties, operations, employees, officers and directors of the Company. There is no claim by the Company pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due and payable under all such policies and bonds have been paid and the Company is otherwise in material compliance with the terms of such policies and bonds (or other policies and bonds providing substantially similar insurance coverage). The Company has not received any notice that the insurers intend to terminate or materially increase the premiums payable under any of such policies. 3.25 WARRANTIES; INDEMNITIES. Section 3.24 of the Company Schedules sets ----------------------- forth a list of all agreements containing warranties and indemnities relating to products sold or services rendered by the Company, and no warranty or indemnity has been given by the Company which differs therefrom in any material respect. Section 3.24 of the Company Schedules also indicates all warranty and indemnity claims in excess of $5,000 made against the Company. 3.26 REPRESENTATIONS COMPLETE. None of the representations or warranties ------------------------ made by the Company, nor any document, written information, statement, financial statement, certificate, schedule or exhibit prepared or furnished by the Company or its representatives pursuant to this Agreement or in connection with the transactions contemplated hereby, or furnished in or in connection with the Shareholder Materials (or defined in Section 5.3) mailed or delivered to the shareholders of the Company in connection with soliciting their consent to this Agreement and the transactions contemplated hereby, contains or will contain at the Effective Time, any untrue statement of a material fact, or omits or will omit at the Effective Time to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. To the Company's knowledge, there is no event, fact or condition that has resulted in, or could reasonably be expected to result in, a Material Adverse Effect that has not been set forth in this Agreement or in the Company Schedules. SECTION 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB Except as disclosed in writing in a disclosure letter referring specifically to the representations and warranties in this Agreement that specifically identifies the section and subsection to which such disclosure relates and that is delivered to the Company by the Parent and -20- certified by a duly authorized officer of the Parent prior to the date of this Agreement, Parent and Sub represent and warrant to the Company as follows: 4.1 ORGANIZATION, STANDING AND CORPORATE POWER. Each of the Parent and ------------------------------------------ Sub is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has all requisite corporate power and authority to carry on its business as now being conducted. Each of the Parent and Sub is duly qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership, leasing or operation of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed or be in good standing individually or in the aggregate would not have a Material Adverse Effect on Parent. 4.2 AUTHORITY/NONCONTRAVENTION. Each of the Parent and Sub has the -------------------------- requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated by this Agreement. The execution, delivery and performance of this Agreement by the Company and the consummation by each of the Parent and Sub of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of each of the Parent and Sub and no other corporate proceedings on the part of each of the Parent and Sub are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by each of the Parent and Sub and constitutes valid and binding obligations of Parent and Sub, enforceable against the Parent and Sub in accordance with its terms. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions of this Agreement will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a material benefit or require any consent, approval or authorization under, or result in the creation of any Liens in or upon any of the properties or assets of the Parent under, any provision of (a) the Certificate of Incorporation or Bylaws of the Parent or the certificates of incorporation or bylaws (or similar organizational documents) of any of its subsidiaries, (b) any loan or credit agreement, bond, debenture, note, mortgage, indenture, lease or other material contract, commitment, agreement, arrangement, obligation, undertaking, instrument, permit, concession, franchise or license applicable to Parent or its properties or assets or (c) subject to the governmental filings and other matters referred to in the following sentence, any statute, law, ordinance, rule or regulation or judgment, order or decree, in each case, applicable to Parent or its properties or assets, other than, in the case of clauses (b) and (c), any such conflicts, violations, defaults, rights, or Liens or other occurrences that individually or in the aggregate would not have a Material Adverse Effect on Parent. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to the Parent or Sub in connection with the execution and delivery of this Agreement by Parent or Sub or the consummation by Parent or Sub of the Merger or the other transactions contemplated by this Agreement, except for (a) the receipt of a valid exemption from the registration requirements of the Securities Act, (b) the filing of the Agreement of Merger with the California Secretary of State and appropriate documents with the -21- relevant authorities of other states in which Parent is qualified to do business and (c) such other consents, approvals, orders, authorizations, registrations, declarations and filings the failure of which to be obtained or made individually or in the aggregate would not have a Material Adverse Effect on the Parent or impair the ability of Parent or Sub to perform their obligations under this Agreement. 4.3 SEC DOCUMENTS; PARENT FINANCIAL STATEMENTS. Parent has furnished or ------------------------------------------ made available to the Company a true and complete copy of its Registration Statement on Form S-1 dated December 2, 1998 (the "REGISTRATION STATEMENT"), which Parent filed under the Securities Act with the Securities and Exchange Commission (the "SEC"). As of its date, the Registration Statement complied in all material respects with the requirements of the Securities Act and did 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 made therein, in light of the circumstances in which they were made, not misleading. The financial statements of Parent, including the notes thereto, included in the Registration Statement (the "PARENT FINANCIAL STATEMENTS") comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP consistently applied (except as may be indicated in the notes thereto or, in the case of unaudited statements, as permitted by applicable rules and regulations of the SEC) and fairly present the consolidated financial position of Parent at the dates thereof and of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal, recurring audit adjustments). There has been no change in Parent accounting policies except as described in the notes to the Parent Financial Statements. Parent has no material obligations other than (i) those set forth in the Parent Financial Statements and (ii) those not required to be set forth in the Parent Financial Statements under generally accepted accounting principles. 4.4 PARENT COMMON STOCK. The shares of Parent Common Stock, when issued ------------------- in the Merger in compliance with this Agreement, will be validly issued, fully paid and nonassessable. Such shares will be issued in compliance with applicable state and federal securities laws. SECTION 5 COVENANTS 5.1 CONDUCT OF BUSINESS OF THE COMPANY. During the period from the date ---------------------------------- of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, the Company shall carry on its business in the usual, regular and ordinary course in substantially the same manner as conducted prior to the date of this Agreement and, to the extent consistent with such business, use all commercially reasonable efforts consistent with past practice and policies to preserve intact its present business organization, keep available the services of its present officers and key employees and preserve its relationships with customers, suppliers, distributors, licensors, licensees, and others having business dealings with it, with the objective -22- that its goodwill and ongoing business shall be unimpaired at the Effective Time. The Company shall promptly notify Parent of any event or occurrence not in the ordinary course of business of the Company. Except as expressly contemplated by this Agreement or disclosed in the Company Schedules, the Company shall not, without the prior written consent of Parent: (a) Declare or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any of its capital stock, or split, combine or reclassify any of its capital stock, or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or repurchase or otherwise acquire, directly or indirectly, any shares of its capital stock; (b) Issue, deliver or sell, authorize or propose the issuance, delivery or sale of, or purchase or propose the purchase of, any shares of its capital stock or securities convertible into, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities or authorize or propose any change in its equity capitalization; (c) Accelerate, amend or change the period of exercisability of the Company Stock Options or authorize cash payments in exchange therefor, except as contemplated by this Agreement; (d) Solicit approval for or effect any amendments to the Company's Articles of Incorporation or Bylaws; (e) Acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to the Company; (f) Sell, lease, license, pledge or otherwise dispose of or encumber any of its properties or assets except in the ordinary course of business consistent with past practice (including without limitation any indebtedness owed to it or any claims held by it); (g) Except in the ordinary course of business consistent with past practice, incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or guarantee, endorse or otherwise become responsible for the obligations of others, or make loans or advances; (h) Pay, discharge or satisfy in an amount in excess of $10,000 in any one case any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business consistent with past practice of liabilities reflected or reserved against in the Company's Financial Statements or those incurred after the Balance Sheet in the ordinary course of business; -23- (i) Adopt or amend any employee benefit or employee stock purchase or employee option plan, or enter into any employment contract, pay any special bonus or special remuneration to any director or employee, or increase the salaries or wage rates of its officers or employees other than in the ordinary course of business, consistent with past practice, or change in any material respect any management policies or procedures; (j) Commence a lawsuit other than for the routine collection of bills; (k) Transfer or license to any person or entity or otherwise extend, amend or modify in any material respect any rights to the Company IP Rights or enter into grants to future patent rights, other than in the ordinary course of business; (l) Except in the ordinary course of business with prior notice to Parent, violate, amend or otherwise modify the terms of any of the Company's contracts binding on the Company as set forth in Section 3.8 of the Company Schedules; (m) Revalue any of its assets, including without limitation, writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business and consistent with past practice; (n) Make any material tax election other than in the ordinary course of business and consistent with past practice, change any material tax election, adopt any material tax accounting method other than in the ordinary course of business and consistent with past practice, change any material tax accounting method, file any material tax return (other than any estimated tax returns, payroll tax returns or sale tax returns) or any amendment to a material tax return, enter into any closing agreement, settle any tax claim or assessment, or consent to any tax claim or assessment, without the prior written consent of the Parent, which consent will not be reasonably withheld; (o) Engage in any activities or transactions that are outside the ordinary course of its business consistent with past practice; (p) Fail to pay or otherwise satisfy its monetary obligations as they become due, except such as are being contested in good faith; or waive or commit to waive any rights of substantial value; or cancel, materially amend or renew any insurance policy; or (q) Take, or agree (in writing or otherwise) to take, any of the actions described in Sections 5.1(a) through (p) above, or any action which would make any of the representations or warranties of the Company contained in this Agreement untrue or incorrect or result in any of the conditions to the Merger set forth in Section 6 not being satisfied. 5.2 NO SOLICITATION. Until the earlier of the Effective Time or the --------------- termination of this Agreement pursuant to the provisions of Section 8.1, neither the Company nor the Principal -24- Shareholders will (nor will the Company permit any of the Company's officers, directors, agents, representatives or affiliates to) directly or indirectly, take any of the following actions with any party other than Parent and its designees: (a) solicit, conduct discussions with or engage in negotiations with any person or take any other action intended or designed to facilitate the efforts of any person, other than Parent, relating to the possible acquisition of the Company (whether by way of merger, purchase of capital stock, purchase of assets or otherwise) or any material portion of its capital stock or assets, (b) provide information with respect to it to any person, other than Parent, relating to the possible acquisition of the Company (whether by way of merger, purchase of capital stock, purchase of assets or otherwise) or any portion of its or their capital stock or assets, (c) enter into an agreement with any person, other than Parent, providing for the acquisition of the Company (whether by way of merger, purchase of capital stock, purchase of assets or otherwise) or any portion of its capital stock or assets or (d) make or authorize any statement, recommendation or solicitation in support of any possible acquisition of the Company (whether by way of merger, purchase of capital stock, purchase of assets or otherwise) or any portion of its capital stock or assets by any person, other than by Parent. In addition to the foregoing, if the Company or the Principal Shareholder receives any unsolicited bona fide offer or proposal ---- ---- relating to any of the above, the Company or the Principal Shareholder (as the case may be) shall immediately notify Parent thereof, including information as to the identity of the offeror or the party making any such offer or proposal and the specific terms of such offer or proposal, as the case may be. 5.3 SHAREHOLDER APPROVAL. The Company will call a meeting of its -------------------- shareholders (the "SHAREHOLDERS' MEETING") to be held as promptly as practicable for the purpose of obtaining the shareholder approval required in connection with the transactions contemplated hereby and by the Merger Agreement and shall use all reasonable efforts to obtain such approval. In connection with the Shareholders Meeting, the Company shall submit materials to its shareholders (the "SHAREHOLDERS MATERIALS") in compliance with federal and state laws and shall include information regarding the Company, the terms of the Merger and this Agreement and the unanimous recommendation of the Board of Directors of the Company in favor of the Merger. The Shareholder Materials shall further include an investment representation statement and questionnaire in the form provided to the Company by Parent, as well as Parent's SEC Documents and other information regarding the Parent and the Company as may be required to comply with Federal and state securities laws. The Company shall provide the Shareholder Materials to Parent for its review and approval prior to distributing the Shareholder Materials to the Company's shareholders. The Company shall coordinate and cooperate with the Parent with respect to the timing of the Shareholders' Meeting. The Company shall not change the date of the Shareholders' Meeting without the prior written consent of the Parent, nor shall the Company adjourn the Shareholders' Meeting without the prior written consent of the Parent, unless such adjournment is due to the lack of a quorum, in which case the Chairman of the Shareholders' Meeting shall announce at such meeting the time and place of the adjourned meeting. 5.4 ACCESS TO INFORMATION. Upon reasonable notice, the Company shall --------------------- afford Parent and its accountants, counsel and other representatives, reasonable access during normal business -25- hours during the period prior to the Effective Time to (a) all of the Company's properties, books, contracts, commitments and records, and (b) all other information concerning the business, properties and personnel (subject to restrictions imposed by applicable law) of the Company as Parent may reasonably request, including without limitation access upon reasonable request to the Company's employees, customers and vendors for due diligence inquiry. The Company agrees to provide to Parent and its accountants, counsel and other representatives copies of internal financial statements, business plans and projections promptly upon request. No information or knowledge obtained in any investigation pursuant to this Section 5.4 shall affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the parties to consummate the Merger. 5.5 CONFIDENTIALITY. Each of the parties agrees to keep such information --------------- or knowledge obtained in any investigation pursuant to Section 5.4, or pursuant to the negotiation and execution of this Agreement or the effectuation of the transactions contemplated hereby, confidential pursuant to the mutual Nondisclosure Agreement dated as of January 5, 1999 by and between Parent and the Company (the "CONFIDENTIALITY AGREEMENT"). 5.6 EXPENSES. Whether or not the Merger is consummated, all reasonable -------- and customary fees and expenses incurred in connection with the Merger including, without limitation, all legal, accounting, financial advisory, consulting and all other fees and expenses of third parties incurred by a party in connection with the negotiation and effectuation of the terms and conditions of this Agreement and the transactions contemplated hereby, shall be the obligation of the respective party incurring such fees and expenses. Such fees and expenses of the Company and its shareholders shall be incurred entirely by the Company. 5.7 PUBLIC DISCLOSURE. Unless otherwise required by law, prior to the ----------------- Effective Time, no disclosure (whether or not in response to an inquiry) of the subject matter of this Agreement shall be made by any party hereto unless approved by Parent and the Company prior to release, provided that such approval shall not be unreasonably withheld, subject, in the case of Parent, to Parent's obligation to comply with applicable securities laws. 5.8 CONSENTS. Each of Parent and the Company shall promptly apply for or -------- otherwise seek, and use its reasonable efforts to obtain, all consents and approvals required to be obtained by it for the consummation of the Merger, and the Company shall use all reasonable efforts to obtain all consents, waivers and approvals under any of the Company's agreements, contracts, licenses or leases in order to preserve the benefits thereunder for the Surviving Corporation and otherwise in connection with the Merger. All of such Company consents and approvals are set forth in Section 5.8 of the Company Schedules. 5.9 FIRPTA COMPLIANCE. On the Closing Date, the Company shall deliver to ----------------- Parent a properly executed statement in a form reasonably acceptable to Parent for purposes of satisfying Parent's obligations under Treasury Regulation Section 1.1445-2(c)(3). -26- 5.10 REASONABLE EFFORTS. Subject to the terms and conditions provided in ------------------ this Agreement, each of the parties hereto shall use all reasonable efforts to take promptly, or cause to be taken, all actions, and to do promptly, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated hereby to obtain all necessary waivers, consents and approvals and to effect all necessary registrations and filings and to remove any injunctions or other impediments or delays, legal or otherwise, in order to consummate and make effective the transactions contemplated by this Agreement for the purpose of securing to the parties hereto the benefits contemplated by this Agreement; provided that Parent shall not be required to agree to any divestiture by Parent or the Company or any of Parent's subsidiaries or affiliates of shares of capital stock or of any business, assets or property of Parent or its subsidiaries or affiliates or the Company or its affiliates, or the imposition of any material limitation on the ability of any of them to conduct their businesses or to own or exercise control of such assets, properties and stock. 5.11 NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt notice ------------------------------- to Parent, and Parent shall give prompt notice to the Company, of (i) the occurrence or non-occurrence of any event, the occurrence or non-occurrence of which may cause any representation or warranty of the Company and Parent, respectively, contained in this Agreement to be untrue or inaccurate in any material respect at or prior to the Effective Time and (ii) any failure of the Company or Parent, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 5.11 - -------- ------- shall not limit or otherwise affect any remedies available to the party receiving such notice. 5.12 BLUE SKY LAWS. Parent shall take such steps as may be necessary to ------------- comply with the securities and blue sky laws of all jurisdictions which are applicable to the issuance of Parent Common Stock pursuant hereto. The Company shall use its best efforts to assist Parent as may be necessary to comply with the securities and blue sky laws of all jurisdictions which are applicable in connection with the issuance of Parent Common Stock pursuant hereto. 5.13 NONCOMPETITION AND EMPLOYMENT AGREEMENTS. At the Effective Time (a) ---------------------------------------- the Parent and the Company mangers identified in Section 5.14 of the Company Schedules shall enter into noncompetition agreements in the form attached as Exhibit C (the "NONCOMPETITION AGREEMENTS") and (b) Andrew Rebele and Monica Lee - --------- shall enter into employment agreements with the Parent in a form satisfactory to the parties thereto (the "EMPLOYMENT AGREEMENTS"). The Noncompetition Agreements and the Employment Agreements shall become effective as of the Effective Time. 5.14 INVESTMENT REPRESENTATION AGREEMENTS. All of the holders of ------------------------------------ outstanding shares of capital stock of the Company shall execute and deliver to Parent Investment Representation Agreements in the form attached hereto as Exhibit D. - --------- -27- 5.15 APPOINTMENT. Andrew Rebele shall be appointed by the Parent as an ----------- Executive Vice President of the Parent and General Manager of the CityAuction division, effective as of the Effective Time. Mr. Rebele shall report to either the Chief Executive Officer, the President or the Chief Operating Officer of the Parent at the discretion of the Board of Directors of the Parent. 5.16 STOCK OPTIONS. ------------- (a) At the Effective Time, each outstanding Company Stock Option, whether vested or unvested, shall be assumed by Parent. Accordingly, each Company Stock Option shall be deemed to constitute an option to acquire, on the same terms and conditions as were applicable under such Company Stock Option, the number, rounded down to the nearest whole integer, of full shares of Parent Common Stock the holder of such Company Stock Option would have been entitled to receive pursuant to the Merger had such holder exercised such Company Stock Option in full, including as to unvested shares, immediately prior to the Effective Time, at a price per share equal to (y) the aggregate exercise price for the shares of Company Common Stock otherwise purchasable pursuant to such Company Stock Option divided by (z) the number of full shares of Parent Common Stock deemed purchasable pursuant to such Company Stock Option with such exercise price per share rounded up to the nearest whole cent. The term, vesting schedule, status as an "incentive stock option" under Section 422 of the Code, if applicable, and all other terms and conditions of the Company Stock Options will otherwise be unchanged, except that all CityAuction employees, who held stock options under the Company Stock Option Plan, shall receive 12 months vesting credit and acceleration effective as of the Effective Time. (b) Form S-8 Registration. As soon as practicable after the --------------------- Effective Time, Parent shall file a registration statement on Form S-8 (or any successor or other appropriate form), or another appropriate form with respect to the shares of Parent Common Stock subject to such assumed Company Stock Options (the "ASSUMED OPTIONS") and shall use its reasonable efforts to maintain the effectiveness of such registration statement (and maintain the current status of the prospectus or prospectuses contained therein) for so long as such Assumed Options remain outstanding. SECTION 6 CONDITIONS TO THE MERGER 6.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER. The ------------------------------------------------------------ respective obligations of each party to this Agreement to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) Shareholder Approval. This Agreement, the agreements -------------------- contemplated hereunder and the Merger and other transactions contemplated hereby and thereby shall have been approved and adopted by the affirmative vote or consent of the holders of at least a majority of the -28- outstanding Company Common Stock and at least a majority of the outstanding Company Preferred Stock present, in person or by proxy, at the Shareholders Meeting contemplated by Section 5.3, in compliance with applicable law and the Company's Articles of Incorporation and Bylaws. (b) Employment Agreements. The Employment Agreements shall have been --------------------- executed and delivered by the parties thereto. 6.2 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF PARENT AND SUB. The ---------------------------------------------------------- obligations of Parent and Sub to consummate and effect this Agreement and the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions, any of which may be waived, in writing, exclusively by Parent: (a) Representations, Warranties and Covenants. The representations ----------------------------------------- and warranties of the Company and the Principal Shareholders in this Agreement shall be true and correct in all material respects (such that a breach of such representations and warranties would not have a Material Adverse Effect on the Company) on and as of the date of this Agreement and as of the Closing Date as though such representations and warranties were made on and as of such time and the Company and the Principal Shareholders shall have performed and complied with all covenants, obligations and conditions of this Agreement required to be performed and complied with by each of them as of the Closing Date. Parent shall have been provided with a certificate dated as of the Closing Date executed on behalf of the Company by its Chief Executive Officer and Chief Financial Officer to such effect. (b) Legal Opinion. Parent shall have received a legal opinion from ------------- General Counsel Associates LLP, legal counsel to the Company, substantially in the form of Exhibit E. --------- (c) No Injunctions or Restraints on Conduct of Business. No temporary --------------------------------------------------- restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or provision challenging Parent's proposed acquisition of the Company, or limiting or restricting Parent's conduct or operation of the business of the Company (or its own business) following the Merger shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking any of the foregoing be pending. (d) Litigation. There shall be no action, suit, claim or proceeding ---------- of any nature pending, or overtly threatened, against the Parent, Sub or the Company, their respective properties or any of their officers or directors, arising out of, or in any way connected with, the Merger or the other transactions contemplated by the terms of this Agreement, or that could materially and adversely affect the business, assets, liabilities, financial condition, results of operations or prospects of the Company. -29- (e) Due Diligence. The Parent shall be satisfied with the results of ------------- its due diligence review of the Company. (f) Investment Representations. Parent shall have received from each -------------------------- of the shareholders of the Company an executed Investment Representation Agreement which shall be in full force and effect. (g) No Dissenters. Holders of more than 5% of the outstanding capital ------------- stock of the Company shall not have exercised, nor shall they continue to have the right to exercise, appraisal rights with respect to the transactions contemplated by this Agreement. (h) Noncompetition Agreements. The Noncompetition Agreements shall ------------------------- have been duly executed and delivered by the parties thereto. (i) Securities Law Compliance. Parent shall have received from the ------------------------- shareholders of the Company executed investment representation statements and completed questionnaires in form and substance satisfactory to Parent that the issuance of the shares of Parent Common Stock pursuant to the Merger is exempt from the registration requirements of the Securities Act and is exempt from registration under applicable state securities laws. (j) Exercise/Conversion. The Warrant shall have been exercised and/or ------------------- terminated and all outstanding shares of Preferred Stock of the Company shall have been converted into Company Common Stock prior to the Effective Time. (k) Board of Directors' Approval. The Board of Directors of Parent ---------------------------- shall have approved the Merger. 6.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF COMPANY. The obligations of ----------------------------------------------- the Company to consummate and effect this Agreement and the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions, any of which may be waived, in writing, exclusively by the Company: (a) Representations, Warranties and Covenants. The representations ----------------------------------------- and warranties of Parent and Sub in this Agreement shall be true and correct in all material respects (such that a breach of such representations and warranties would not have a Material Adverse Effect on Parent) on and as of the date of this Agreement and as of the Closing Date as though such representations and warranties were made on and as of such time and each of Parent and Sub shall have performed and complied with all covenants, obligations and conditions of this Agreement required to be performed and complied with by it as of the Closing Date. The Company shall have been provided with a certificate dated as of the Closing Date and executed on behalf of Parent by an executive officer of Parent to such effect. (b) Registration Rights Agreement. The Registration Rights Agreement ----------------------------- in the form of Exhibit F shall have been executed and delivered by Parent. --------- -30- (c) Employee Stock Options. The Employee Stock Options shall have ---------------------- been delivered by Parent. (d) Litigation. There shall be no action, suit, claim or proceeding ---------- of any nature pending, or overtly threatened, against Parent or Sub, their respective properties or any of their officers or directors, arising out of, or in any way connected with, the Merger or the other transactions contemplated by the terms of this Agreement, or that would materially and adversely affect the business, assets, liabilities, financial condition, results of operations or prospects of Parent. SECTION 7 INDEMNIFICATION 7.1 GENERAL INDEMNIFICATION. The Shareholders covenant and agree to ----------------------- indemnify, defend, protect and hold harmless Parent and the Surviving Corporation and their respective officers, directors, employees, shareholders, assigns, successors and affiliates (individually, an "INDEMNIFIED PARTY" and collectively, "INDEMNIFIED PARTIES") from, against and in respect of: (a) all liabilities, losses, claims, damages, punitive damages, courses of actions, lawsuits, administrative proceedings (including informal proceedings), investigations, audits, demands, assessments, adjustments, judgments, settlement payments, deficiencies, penalties, fines, interest (including interest from the date of such damages) and costs and expenses (including without limitation reasonable attorneys' fees and disbursements of every kind, nature and description) (collectively, "DAMAGES") suffered, sustained or incurred by the Indemnified Persons in connection with, resulting from or arising out of, directly or indirectly: (i) any breach of any representation or warranty of the Company or the Principal Shareholders set forth in this Agreement or any certificate, document or instrument delivered by or on behalf of the Company or the Principal Shareholders in connection herewith; (ii) any nonfulfillment of any covenant or agreement on the part of the Company or the Principal Shareholders in this Agreement; (iii) the business, operations or assets of the Company prior to the Closing Date, including without limitation all taxes due and payable prior to the Closing Date, except as otherwise disclosed in the Company Financial Statements or the Company Schedules; or (iv) the actions or omissions of the Company's directors, officers, shareholders, employees or agents prior to the Closing Date; and -31- (b) any and all Damages incident to any of the foregoing or to the enforcement of this Section 8.1. 7.2 LIMITATION AND EXPIRATION. Notwithstanding the above: ------------------------- (a) There shall be no liability for indemnification under Section 7.1 unless the aggregate amount of Damages exceeds $100,000 (the "INDEMNIFICATION THRESHOLD"), in which event the liability for indemnification will apply to the entire aggregate amount of Damages. The Pledged Shares shall represent the exclusive means of satisfying any claims under this Section 7 except with respect to Claims (as defined below) relating to any breach of the representations and warranties set forth in Section 3.12 (Taxes) and 3.22 (Environmental Matters) or for Claims relating to fraud or willful misconduct. For purposes of satisfying indemnification obligations pursuant to Section 7.1, the Pledged Shares shall be valued at the average of the closing price of the Parent Common Stock as reported on the Nasdaq National Market for the ten trading days preceding the Closing. Any Damages paid pursuant to this Section 7 shall be paid on a prorated basis by the Shareholders in relation to their allocable portion of the Pledged Shares; and (b) The indemnification obligations under this Section 7 shall terminate as follows: (i) with respect to claims or demands (a "CLAIM") relating to a breach of the representations and warranties set forth in Section 3.12 (Taxes) and 3.22 (Environmental Matters) or fraud or willful misconduct, upon the later of the expiration of the applicable statute of limitations period or the final resolution of any and all such Claims pending as of such date; and (ii) with respect to all other Claims for indemnification under this Section 7, upon the later of the first anniversary of the Closing Date or the final resolution of any such claims pending as of the first anniversary. The term "INDEMNIFICATION DEADLINE DATE" refers to the expiration date of the applicable statute of limitations period with respect to Claims under clause (i) above and the first anniversary with respect to claims under clause (ii) above. The term "PENDING CLAIMS" refers to the pending claims described in clauses (i) and (ii) above. From and after the applicable Indemnification Deadline Date, the indemnification obligations under this Section 7 shall survive only to the extent of Pending Claims. 7.3 INDEMNIFICATION PROCEDURES. All Claims for indemnification under this -------------------------- Section 7 shall be asserted and resolved as follows: (a) In the event the Indemnified Party has a Claim hereunder which does not involve a Claim being asserted against or sought to be collected by a third party, the Indemnified Party shall with reasonable promptness send a Claim Notice (as defined in Section 7.3(c) below) -32- with respect to such Claim to the Shareholder Representative (as defined in Section 7.4 below). If the Shareholder Representative does not notify the Indemnified Party within 45 days from the date of receipt of such Claim Notice that the Shareholders dispute such Claim, the amount of such Claim shall be conclusively deemed a liability of the Shareholders hereunder. In case the Shareholder Representative shall object in writing to any Claim made in accordance with this Section 7.3(a), the Indemnified Party shall have fifteen (15) days to respond in a written statement to the objection of the Shareholder Representative. If after such fifteen (15) day period there remains a dispute as to any Claims, the parties shall attempt in good faith for sixty (60) days to agree upon the rights of the respective parties with respect to each of such Claims. If the parties should so agree, a memorandum setting forth such agreement shall be prepared and signed by both parties. If no such agreement can be reached after good faith negotiation, either party may demand arbitration of the matter unless the amount of the damage or loss is at issue in pending litigation with a third party, in which event arbitration shall not be commenced until such amount is ascertained or both parties agree to arbitration; and in either such event the matter shall be settled by arbitration conducted by three arbitrators. Parent and the Shareholders' Representative shall each select one arbitrator, and the two arbitrators so selected shall select a third arbitrator, each of which arbitrators shall be independent and have at least ten years relevant experience. The arbitrators shall set a limited time period and establish procedures designed to reduce the cost and time for discovery while allowing the parties an opportunity, adequate in the sole judgment of the arbitrators, to discover relevant information from the opposing parties about the subject matter of the dispute. The arbitrators shall rule upon motions to compel or limit discovery and shall have the authority to impose sanctions, including attorneys fees and costs, to the extent as a court of competent law or equity, should the arbitrators determine that discovery was sought without substantial justification or that discovery was refused or objected to without substantial justification. The decision of a majority of the three arbitrators as to the validity and amount of any Claim in such Claim Notice shall be binding and conclusive upon the parties to this Agreement. Such decision shall be written and shall be supported by written findings of fact and conclusions which shall set forth the award, judgment, decree or order awarded by the arbitrators. (b) Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction. Any such arbitration shall be held in Los Angeles County, California under the rules then in effect of the American Arbitration Association. For purposes of this Section 7.3, in any arbitration hereunder in which any claim or the amount thereof stated in the Claim Notice is at issue, the Indemnified Party shall be deemed to be the Non-Prevailing Party in the event that the arbitrators award such Indemnified Party less than the sum of one-half (1/2) of the disputed amount plus any amounts not in dispute; otherwise, the Indemnifying Party shall be deemed to be the Non-Prevailing Party. The Non-Prevailing Party to an arbitration shall pay its own expenses, the fees of each arbitrator, the administrative costs of the arbitration, and the expenses, including without limitation, reasonable attorneys' fees and costs, incurred by the other party to the arbitration. (c) In the event that any Claim for which the Shareholders would be liable to an Indemnified Party hereunder is asserted against an Indemnified Party by a third party, the Indemnified Party shall with reasonable promptness notify the Shareholder Representative of such -33- Claim, including a copy of the Claim made if the Claim was made in writing, specifying the nature of such claim and the amount or the estimated amount thereof to the extent then feasible (which estimate shall not be conclusive of the final amount of such Claim) (the "CLAIM NOTICE"). The Shareholder Representative shall have 30 days from the receipt of the Claim Notice (the "NOTICE PERIOD") to notify the Indemnified Party (i) whether or not the Shareholder Representative disputes the Shareholders' liability to the Indemnified Party hereunder with respect to such Claim and (ii) if the Shareholder Representative does not dispute such liability, whether or not the Shareholder Representative desires, at the sole cost and expense of the Shareholders, to defend against such Claim, provided that the Shareholder is hereby authorized (but not obligated) prior to and during the Notice Period to file any motion, answer or other pleading and to take any other action which the Shareholder Representative shall deem necessary or appropriate to protect the Shareholders' interests. In the event that the Shareholder Representative notifies the Indemnified Party within the Notice Period that the Shareholder Representative does not dispute the Shareholders' obligation to indemnify hereunder and desires to defend the Indemnified Party against such Claim and except as hereinafter provided, the Shareholder Representative shall have the right to defend by appropriate proceedings, which proceedings shall be diligently settled or prosecuted by the Shareholder Representative to a final conclusion; provided that, unless the Indemnified Party otherwise agrees in -------- writing, the Shareholder Representative may not settle any matter (in whole or in part) unless such settlement includes a complete and unconditional release of the Indemnified Party. If the Indemnified Party desires to participate in, but not control, any such defense or settlement the Indemnified Party may do so at the Indemnified Party's sole cost and expense. If the Shareholder Representative elects not to defend the Indemnified Party against such Claim, whether by failure of the Shareholder Representative to give the Indemnified Party timely notice as provided above or otherwise, then the Indemnified Party, without waiving any rights against the Shareholders, may settle or defend against any such Claim in the Indemnified Party's sole discretion and the Indemnified Party shall be entitled to recover from the Shareholders the amount of any settlement or judgment and, on an ongoing basis, all indemnifiable costs and expenses of the Indemnified Party with respect thereto, including interest from the date such costs and expenses were incurred. (d) Notwithstanding Section 7.4(b) above, the Indemnified Party shall have the right to control or assume (as the case may be) the defense of any Claim and the amount of any judgment or settlement and the reasonable costs and expenses of defense shall be included as part of the indemnification obligations of the Shareholders hereunder if any Claim seeks material prospective relief which, in the reasonable opinion of the Indemnified Party, could have a material adverse effect on the assets, liabilities, financial condition, results of operations or business prospects of Parent and the Indemnified Party shall have given the Shareholder Representative written notice of the same. If the Indemnified Party should elect to exercise such right, the Shareholder Representative shall have the right to participate in, but not control, the defense of such claim or demand at the sole cost and expense of the Shareholders. Notwithstanding the foregoing, the Indemnified Party shall not settle any Claim without the written consent of the Shareholder Representative, which consent shall not be unreasonably withheld. -34- (e) Nothing herein shall be deemed to prevent the Indemnified Party from making a Claim, and an Indemnified Party may make a Claim hereunder, for potential or contingent claims or demands provided the Claim Notice sets forth the specific basis for any such potential or contingent claim or demand to the extent then feasible and the Indemnified Party has reasonable grounds to believe that such a claim or demand may be made. (f) The Indemnified Party's failure to give reasonably prompt notice to the Shareholder Representative of any actual, threatened or possible claim or demand which may give rise to a right of indemnification hereunder shall not relieve the Shareholders of any liability which the Shareholders may have to the Indemnified Party unless the failure to give such notice materially and adversely prejudiced the Shareholders. (g) The parties will make appropriate adjustments for any tax benefits, tax detriments or insurance proceeds in determining the amount of any indemnification obligation under Section 7, provided that the Shareholder -------- Representative shall not be obligated to seek any payment pursuant to the terms of any insurance policy. (h) The Pledged Shares shall be available to satisfy the indemnification obligations of the Shareholder pursuant to this Section 7 through the first anniversary of this Agreement; provided however, that in the event that any Pending Claims are outstanding as of such date, an amount of Pledged Shares equal to 125% of such Pending Claims shall remain available to satisfy such Pending Claims until the resolution of such Pending Claims (the "PLEDGED SHARES EXPIRATION DATE"). As soon as reasonably practicable following the Pledged Shares Expiration Date, Parent shall distribute all Pledged Shares not required to satisfy indemnification obligations under this Section 7 to the Shareholders. The Pledged Shares shall bear a restrictive legend preventing their transfer pending expiration of such indemnification obligations in substantially the form set forth below: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN PLEDGED AS COLLATERAL PURSUANT TO THAT CERTAIN AGREEMENT AND PLAN OF REORGANIZATION DATED JANUARY 8, 1999 BY AND AMONG TICKETMASTER ONLINE-CITYSEARCH, INC., NERO ACQUISITION CORPORATION AND CITYAUCTION. PRIOR TO THE EXPIRATION OF THE PLEDGE AS SET FORTH IN SUCH AGREEMENT, SUCH SHARES MAY NOT BE OFFERED, SOLD, EXCHANGED, TRANSFERRED OR OTHERWISE DISPOSED OF." Within three (3) business days following the Indemnification Deadline Date, Parent shall use its reasonable commercial efforts to remove any stop transfer orders made to the Transfer Agent, shall authorize the Transfer Agent to remove the restrictive legend relating to the obligations of this Section 7 and shall release the number of Pledged Shares equal to (i) the total number of Pledged Shares minus (ii) the number of Pledged Shares having a Value (as defined below) equal to the amount of all indemnification obligations of the Shareholders through the Indemnification Deadline Date plus any amount necessary to satisfy any Pending Claims as of the Indemnification Deadline Date. Upon final resolution of all Pending Claims, Parent shall remove any stop transfer -35- orders made to the Transfer Agent, shall authorize its Transfer Agent to remove the restrictive legend relating to the indemnification obligations of this Section 7 and shall release the number of Pledged Shares equal to (i) the number of Pledged Shares that were retained by Parent on the Indemnification Deadline Date pursuant to the foregoing sentence minus (ii) the number of Pledged Shares having a Value equal to the amount of the indemnification obligations of the Shareholders under this Section 7 as determined upon the resolution of the Pending Claims. For purposes of this Agreement, the term "Value" per Pledged Share shall mean the lower of the per share price of Parent Company Common Stock as reported on the Nasdaq National Market on (i) the Effective Date or (ii) date of delivery of a Claim. 7.4 SHAREHOLDERS' REPRESENTATIVE. ---------------------------- (a) Upon the closing of the Merger, Andrew Rebele shall be constituted and appointed as agent and attorney-in-fact (the "SHAREHOLDERS' REPRESENTATIVE") for and on behalf of each of the Shareholders to give and receive notices and communications, to authorize delivery to Parent of Pledged Shares in satisfaction of Claims, to object to such deliveries, to agree to, negotiate, enter into settlements and compromises of, and demand arbitration and comply with orders of courts and awards of arbitrators with respect to Claims, and to take all actions necessary or appropriate in the judgment of the Shareholders' Representative for the accomplishment of the foregoing. Such agency may be changed (whether pursuant to vacancy, removal or resignation) by the vote of a majority of the Shareholders from time to time upon not less than thirty (30) days prior written notice to Parent. No bond shall be required of the Shareholders' Representative, and the Shareholders' Representative shall receive no compensation for its services, except for payment by the Shareholders of expenses, including fees of counsel, reasonably incurred by the Shareholders' Representative in connection with the performance of its duties hereunder. (b) The Shareholders' Representative shall not be liable for any act done or omitted hereunder as Shareholders' Representative while acting in good faith, and any act done or omitted pursuant to the advice of counsel shall be conclusive evidence of such good faith. The Shareholders shall severally indemnify the Shareholders' Representative and hold such agent harmless against any loss, liability or expense incurred without bad faith on the part of the Shareholders' Representative and arising out of or in connection with the acceptance or administration of the Shareholders' Representative's duties hereunder. (c) A decision, act, consent or instruction of the Shareholders' Representative shall constitute a decision of all Shareholders and shall be final, binding and conclusive upon each Shareholder, and Parent may rely upon any decision, act, consent or instruction of the Shareholders' Representative taken in such manner as being the decision, act, consent or instruction of each and every Shareholder. The Parent is hereby relieved from any liability to any person for any acts done by them in accordance with such decision, act, consent or instruction of the Shareholders' Representative. -36- 7.5 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All ----------------------------------------------------- representations, warranties and covenants made by the Company and the Principal Shareholders in or pursuant to this Agreement or in any document delivered pursuant hereto will survive the Closing and will remain in effect until, and will expire upon the Indemnification Deadline Date, provided, however, that the indemnification obligations with respect to any Pending Claim (and the related representations, warranties and covenants) will survive until the final resolution of such Pending Claim. SECTION 8 TERMINATION, AMENDMENT AND WAIVER 8.1 TERMINATION. This Agreement may be terminated and the Merger ----------- abandoned at any time prior to the Effective Time, whether before or after approval of the Merger by the shareholders of the Company: (a) by mutual written consent of the Company and Parent; (b) by Parent or the Company if the Closing has not occurred by March 31, 1998: provided however, that the right to terminate this Agreement under this Section 8.1(b) shall not be available to any party whose action or failure to act has been the principal cause of the failure of the Merger to occur on or before such date and such action or failure to act constitutes a material breach of this Agreement; (c) by Parent or the Company if there shall be a final nonappealable order of a federal or state court in effect preventing consummation of the Merger; or there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any Governmental Entity which would make the consummation of the Merger illegal; (d) by Parent if there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any Governmental Entity, which would: (i) prohibit Parent's or the Company's ownership or operation of all or a portion of the business of the Company or (ii) compel Parent or the Company to dispose of or hold separate all or a portion of the business or assets of the Company or Parent as a result of the Merger; (e) by Parent if it is not in breach of its obligations under this Agreement and there has been a breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of the Company or the Principal Shareholders and such breach has not been cured within five (5) business days after written notice to the Company and the Principal Shareholder (provided that no cure period shall be required for a breach which by its nature cannot be cured); or -37- (f) by the Company if it is not in breach of its obligations under this Agreement and there has been a breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of Parent or Sub and such breach has not been cured within five (5) business days after written notice to Parent (provided that no cure period shall be required for a breach which by its nature cannot be cured). Where action is taken to terminate this Agreement pursuant to this Section 8.1, it shall be sufficient for such action to be authorized by the Board of Directors (as applicable) of the party taking such action. 8.2 EFFECT OF TERMINATION. In the event of termination of this Agreement --------------------- as provided in Section 8.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Parent, Sub, the Company or the Principal Shareholders, or their respective officers, directors or shareholders, provided that each party shall remain liable for any breaches of this Agreement prior to its termination; and provided further that, the provisions of Sections 5.5, 5.6, 8 and 9 of this Agreement shall remain in full force and effect and survive any termination of this Agreement. 8.3 AMENDMENT. This Agreement may be amended by the parties hereto at any --------- time prior to the Closing by execution of an instrument in writing signed on behalf of each of the parties hereto, provided however that no amendment shall be made which by law requires the further approval of the shareholders of the Company without obtaining such approval. 8.4 EXTENSION; WAIVER. At any time prior to the Effective Time, Parent ----------------- and Sub, on the one hand, and the Company, on the other, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations of the other party hereto, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto, and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. 8.5 NOTICE OF TERMINATION. Any termination of this Agreement under --------------------- Section 8.1 above will be effective immediately upon the delivery of written notice of the terminating party to the other parties hereto. SECTION 9 MISCELLANEOUS 9.1 NOTICES. All notices and other communications hereunder shall be in ------- writing and shall be deemed given if delivered personally or by commercial delivery service, or mailed by -38- registered or certified mail (return receipt requested) or sent via facsimile (with acknowledgment of complete transmission) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Parent or Sub, to: Ticketmaster Online - CitySearch, Inc. 790 E. Colorado Boulevard, Suite 200, Pasadena, CA 91101 Attention: Chief Executive Officer Telephone No.: (626) 405-0050 Facsimile No.: (626) 405-9929 with a copy at the same address to the attention of Douglas McPherson, Chief Legal Counsel with a copy to: Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, CA 94304-1050 Attention: Larry W. Sonsini, Esq. John T. Sheridan, Esq. Telephone No.: (650) 493-9300 Facsimile No.: (650) 496-4088 (b) if to the Company, to: CityAuction, Inc. 153 Kearney Street, #207 San Francisco, CA 94108 Attention: Andrew Rebele Telephone No.: (415) 951-0650 Facsimile No.: (415) 781-0256 with a copy to: General Counsel Associates LLP 1891 Landings Drive Mountain View, CA 94043 Attention: John Montgomery Telephone No.: (650) 428-3900 Facsimile No.: (650) 428-3901 -39- (c) if to the Principal Shareholders, to: Andrew Rebele c/o: CityAuction, Inc. 153 Kearney Street, #207 San Francisco, CA 94108 Monica Lee c/o: CityAuction, Inc. 153 Kearney Street, #207 San Francisco, CA 94108 9.2 INTERPRETATION. -------------- (a)iv When a reference is made in this Agreement to Exhibits, such reference shall be to an Exhibit to this Agreement unless otherwise indicated. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The words "INCLUDE," "INCLUDES" and "INCLUDING" when used herein shall be deemed in each case to be followed by the words "without limitation." The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. When reference is made herein to "THE BUSINESS OF" an entity, such reference shall be deemed to include the business of all direct and indirect subsidiaries of such entity. (b)iv For purposes of this Agreement the term "KNOWLEDGE" means with respect to a party hereto, with respect to any matter in question, that any of the chief executive officer, chief operating officer, president, chief financial officer, general counsel or controller of such party, has actual knowledge of such matter. (c)iv For purposes of this Agreement, the term "MATERIAL ADVERSE EFFECT" when used in connection with an entity means any change, event, violation, inaccuracy, circumstance or other matter, if such change, event, violation, inaccuracy, circumstance or other matter would have a material adverse effect on the business, assets (including intangible assets), capitalization or financial condition of (i) such entity and its subsidiaries taken as a whole, or (ii) the Surviving Corporation, except for those changes, events and effects that (x) are primarily caused by conditions affecting the United States or world economy as a whole or affecting the industry in which such entity competes as a whole, or (y) result from announcement or pendency of the Merger. (d)iv For purposes of this Agreement, the term "SUBSIDIARY" of any entity means any other entity of which securities or other ownership interests having ordinary voting power to -40- elect a majority of the board of directors or other persons performing similar functions are directly or indirectly owned or controlled by such entity. 9.3 COUNTERPARTS. This Agreement may be executed in one or more ------------ counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart. 9.4 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement, the schedules and ---------------------------- Exhibits hereto, the Confidentiality Agreement and the documents and instruments and other agreements among the parties hereto referenced herein: (a) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof; (b) are not intended to confer upon any other person any rights or remedies hereunder; and (c) shall not be assigned by operation of law or otherwise except as otherwise specifically provided, except that Parent and Sub may assign their respective rights and delegate their respective obligations hereunder to their respective affiliates. This Agreement is binding upon and will inure to the benefit of the parties hereto and their respective successors and permitted assigns. 9.5 SEVERABILITY. In the event that any provision of this Agreement or ------------ the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision. 9.6 OTHER REMEDIES. Except as otherwise provided herein, any and all -------------- remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. 9.7 GOVERNING LAW. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of California, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. 9.8 FURTHER ASSURANCES. Each party agrees to cooperate fully with the ------------------ other parties and to execute such further instruments, documents and agreements and to give such further written assurances as may be reasonably requested by any other party to evidence and reflect the transactions described herein and contemplated hereby and to carry into effect the intents and purposes of this Agreement. -41- 9.9 ABSENCE OF THIRD PARTY BENEFICIARY RIGHTS. No provision of this ----------------------------------------- Agreement is intended, nor will be interpreted, to provide to create any third party beneficiary rights or any other rights of any kind in any client, customer, affiliate, shareholder, employee, partner of any party hereto or any other person or entity. 9.10 MUTUAL DRAFTING. This Agreement is the joint product of the parties --------------- hereto, and each provision hereof has been subject to the mutual consultation, negotiation and agreement of each of the parties, and shall not be construed for or against any party hereto. 9.11 FURTHER REPRESENTATIONS. Each party to this Agreement acknowledges ------------------------ and represents that it has been represented by its own legal counsel in connection with the transactions contemplated by this Agreement, with the opportunity to seek advice as to its legal rights from such counsel. Each party further represents that it is being independently advised as to the tax consequences of the transactions contemplated by this Agreement and is not relying on any representation or statements made by the other party as to such tax consequences. The Company also represents that it has communicated the above to its shareholders. -42- IN WITNESS WHEREOF, Parent, Sub, the Company and the Principal Shareholders have entered into this Agreement as of the date first written above. CITYAUCTION, INC. TICKETMASTER ONLINE - CITYSEARCH, INC. By /s/ Andrew Rebele By /s/ Douglas McPherson ------------------------ --------------------------------------- Name Andrew Rebele Name Douglas McPherson ---------------------- ------------------------------------- Title President Title Chief Legal Officer / V.P. --------------------- ------------------------------------- PRINCIPAL SHAREHOLDERS NERO ACQUISITION CORPORATION /s/ Andrew Rebele By /s/ Douglas McPherson - ---------------------------- --------------------------------------- Andrew Rebele Name Douglas McPherson ------------------------------------- /s/ Monica Lee - ---------------------------- Monica Lee Title Chief Legal Officer / V.P. ------------------------------------ [SIGNATURE PAGE TO REORGANIZATION AGREEMENT] -43- EXHIBIT A --------- AGREEMENT OF MERGER THIS AGREEMENT OF MERGER (the "Merger Agreement") is made and entered into as of March 29, 1999, by and between Nero Acquisition Corporation, a California corporation ("Sub") and CityAuction, Inc., a California corporation (the "Company" or the "Surviving Corporation"; Sub and the Company are sometimes referred to as the "Constituent Corporations"). Capitalized terms used herein and not defined in this Merger Agreement shall have their defined meanings as set forth in the Agreement and Plan of Reorganization, dated as of January 8, 1999 (the "Reorganization Agreement"), entered into by and among TicketMaster Online-CitySearch Inc., a Delaware corporation ("Parent"), Sub and the Company. NOW THEREFORE, in consideration of the premises and mutual covenants and agreements contained herein, Sub and the Company agree as follows: ARTICLE I 1.1 Merger of Sub With and Into the Company. --------------------------------------- (a) Agreement to Acquire the Company. Subject to the terms of this -------------------------------- Merger Agreement and the Reorganization Agreement, the Company shall be acquired by Parent through a merger (the "Merger") of Sub with and into the Company. (b) Effective Time of the Merger. The Merger shall become effective upon ---------------------------- the filing of this Merger Agreement and officers' certificates of each Constituent Corporation with the Secretary of State of the State of California pursuant to Section 1103 of the California Corporations Code (the "Code"). The time of such filing is referred to as the "Effective Time." (c) Surviving Corporation. At the Effective Time, Sub shall be merged --------------------- into the Company and the separate corporate existence of Sub shall thereupon cease. The Company shall be the surviving corporation in the Merger and shall succeed, without other transfer, to all the rights and property of Sub and shall be subject to all the debts and liabilities of Sub in the same manner as if the Surviving Corporation had itself incurred them. 1.2 Effect of the Merger; Additional Actions. ---------------------------------------- (a) Effects. The Merger shall have the effects set forth in Section 1107 ------- of the Code. (b) Additional Actions. If, at any time after the Effective Time, the ------------------ Surviving Corporation shall consider or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable (i) to vest, perfect or confirm of record or otherwise in the Surviving Corporation its right, title or interest in, to or under any of the rights, properties or assets of either Constituent Corporation acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger or (ii) to otherwise carry out the purposes of this Merger Agreement, each Constituent Corporation and its officers and directors shall be deemed to have granted to the Surviving Corporation an irrevocable power of attorney to execute and deliver all such deeds, bills of sale, assignments and assurances and to take and do all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, properties or assets in the Surviving Corporation and otherwise to carry out the purposes of this Merger Agreement; and the officers and directors of the Surviving Corporation are fully authorized in the name of each Constituent Corporation or otherwise to take any and all such actions. ARTICLE II THE CONSTITUENT CORPORATIONS 2.1 Organization of the Company. --------------------------- (a) Incorporation. The Company was incorporated under the laws of the ------------- State of California on April 21, 1998. (b) Authorized Stock. The Company is authorized to issue an aggregate of ---------------- 10,000,000 shares of Common Stock, no par value ("Company Common Stock") and an aggregate of 1,015,000 shares of Preferred Stock, no par value ("Company Preferred Stock"). (c) Outstanding Securities. ---------------------- (i) Outstanding Stock. At the close of business on March 29, 1999, ----------------- 2,815,000 shares of Company Common Stock were issued and outstanding. (ii) Outstanding Options. At the close of business on March 29, 1999, ------------------- the Company has reserved 300,000 shares of Company Common Stock for issuance to employees and consultants pursuant to outstanding options (the "Company Stock Options"), of which 22,394 were issued pursuant to the Company's 1998 Stock Option Plan and 277,606 shares remain available for future grant. 2.2 Organization of Sub. ------------------- (a) Incorporation. Sub was incorporated under the laws of the State of ------------- California on January 8, 1999. (b) Authorized Stock. Sub is authorized to issue an aggregate of 1,000 ---------------- shares of Common Stock, no par value ("Sub Stock"). (c) Outstanding Stock. On the date of this Merger Agreement, an ----------------- aggregate of 1,000 shares of Sub Stock are outstanding. -2- ARTICLE III ARTICLES OF INCORPORATION AND BYLAWS OF THE SURVIVING CORPORATION 3.1 Articles of Incorporation of the Surviving Corporation. The Articles of ------------------------------------------------------ Incorporation of Sub in effect at the Effective Time shall be the Articles of Incorporation of the Surviving Corporation unless and until amended as provided by law and such Articles of Incorporation. 3.2 Bylaws of Surviving Corporation. The Bylaws of Sub as in effect ------------------------------- immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation unless and until amended or repealed as provided by applicable law, the Articles of Incorporation of the Surviving Corporation and such Bylaws. ARTICLE IV EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES 4.1 Effect on Capital Stock. As of the Effective Time, by virtue of the ----------------------- Merger and without any action on the part of the holder of any shares of capital stock of the Company: (a) Capital Stock of Sub. Each issued and outstanding share of capital -------------------- stock of Sub shall continue to be issued and outstanding and shall be converted into one share of validly issued, fully paid and non-assessable Common Stock of the Surviving Corporation. Each stock certificate of Sub evidencing ownership of any such shares shall continue to evidence ownership of such shares of capital stock of the Surviving Corporation. (b) Cancellation of Certain Shares of Capital Stock of the Company. All -------------------------------------------------------------- shares of Common Stock and Preferred Stock of the Company that are owned directly or indirectly by the Company shall be canceled and no stock of Parent or other consideration shall be delivered in exchange therefor. (c) Conversion of Capital Stock of the Company. Subject to Sections ------------------------------------------ 4.1(d), (e), (f) and (g) below, each issued and outstanding share of Common Stock of Company (other than shares to be canceled pursuant to Section 4.1(b) hereof and the Reorganization Agreement) that is issued and outstanding immediately prior to the Effective Time shall automatically be canceled and extinguished and converted, without any action on the part of the holder thereof, into the right to receive 0.279971340 shares of Class B Common Stock, $.01 par value, of Parent ("Parent Common Stock"). Each issued and outstanding share of Preferred Stock of the Company that is issued and outstanding immediately prior to the Effective Time shall automatically be canceled and exstinguished and converted, without any action on the part of the holder thereof, into the right to receive the number of shares of Parent Common Stock equal to the number of shares of Company Preferred Stock held multiplied by 0.013520482 plus the number of shares of Company Preferred -3- Stock held multiplied by 0.279971340. All such shares of Company capital stock, when so converted, shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such shares shall cease to have any rights with respect thereto, except the right to receive the shares of Parent Class B Common Stock to be issued or paid in consideration therefor upon the surrender of such certificate in accordance with Section 4.2 hereof and the Reorganization Agreement. The ratios pursuant to which each share of Company Common Stock and each share of Company Preferred Stock will be exchanged for shares of Parent Class B Common Stock, determined in accordance with the foregoing provisions, is referred to as the "Exchange Ratios." (d) Dissenters' Rights. Any shares of Company Common or Preferred Stock ------------------ held by a holder who has properly exercised dissenters' rights for such shares in accordance with the California Code and who, as of the Effective Time, has not effectively withdrawn or lost such dissenters' rights ("Dissenting Shares") shall not be converted into Parent Common Stock but shall be converted into the right to receive such consideration as may be determined to be due with respect to such Dissenting Shares pursuant to the California Code. The Company shall give Parent prompt notice of any demand received by the Company to require the Company to purchase shares of Company Common or Preferred Stock, and Parent shall have the right to participate in all negotiations and proceedings with respect to such demand. The Company agrees that, except with the prior written consent of Parent, or as required under the California Code, it will not voluntarily make any payment with respect to, or settle or offer to settle, any such purchase demand. Each holder of Dissenting Shares (a "Dissenting Shareholder") who, pursuant to the provisions of the California Code, becomes entitled to payment of the value of shares of Company Common Stock shall receive payment therefor (but only after the value therefor shall have been agreed upon or finally determined pursuant to such provisions). In the event of legal obligation, after the Effective Time, to deliver shares of Parent Common Stock to any holder of shares of Company Common or Preferred Stock who shall have failed to make an effective purchase demand or shall have lost its status as a Dissenting Shareholder, Parent shall issue and deliver, upon surrender by such Dissenting Shareholder of such holder's certificate or certificates representing shares of capital stock of the Company, the shares of Parent Common Stock to which such Dissenting Shareholder is then entitled under this Section 2.1 and the Reorganization Agreement. (e) Fractional Shares. No fractional shares of Parent Common Stock shall ----------------- be issued, but in lieu thereof each holder of shares of Company Preferred Stock or Common Stock who would otherwise be entitled to receive a fraction of a share of Parent Common Stock shall receive from Parent an amount of cash equal to the per share market value of Parent Common Stock (based on the last sales price of Parent Common Stock as reported on the Nasdaq National Market on the date of confirmation of the filing of the Merger Agreement, together with the required officers' certificates, in accordance with the Code on the closing date of the Merger) multiplied by the fraction of a share of Parent Common Stock to which such holder would otherwise be entitled. The fractional share interests of each shareholder of the Company shall be aggregated, so that no Company shareholder shall receive cash in an amount greater than the value of one full share of Parent Common Stock. -4- (f) Pledged Shares. Upon the Closing, 75,000 shares (of Parent Common -------------- Stock) of the purchase price shall be held by Parent and shall be available for satisfaction of indemnification claims made by Parent under Section 7 of the Reorganization Agreement and such shares shall bear a restrictive legend to such effect. (g) Stock Options. At the Effective Time, all Company Stock Options then ------------- outstanding shall be assumed by Parent in accordance with Section 5.16 of the Reorganization Agreement. 4.2 Exchange of Certificates. ------------------------ (a) Exchange Agent. Prior to the Effective Time, Parent shall designate -------------- a bank or trust company, reasonably acceptable to the Company, to act as exchange agent (the "Exchange Agent") in the Merger. (b) Parent to Provide Common Stock. Promptly after the Effective Time, ------------------------------ Parent shall deliver to the Exchange Agent in accordance with Section 4 hereof and the Reorganization Agreement, the shares of Parent Common Stock issuable pursuant to Section 4.1 hereof and the Reorganization Agreement in exchange for outstanding shares of capital stock of the Company, and cash in an amount sufficient for payment in lieu of fractional shares pursuant to Section 4.1(f) above. (c) Exchange Procedures. As soon as practicable after the Effective ------------------- Time, the Survivin g Corporation shall cause to be mailed to each holder of record of a certificate or certificates which immediately prior to the Effective Time represented outstanding shares of Company Preferred Stock or Common Stock (the "Certificates") whose shares are being converted into Parent Common Stock pursuant to Section 4.1 hereof and the Reorganization Agreement, (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for Parent Common Stock. Upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by Parent, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor the number of shares of Parent Common Stock to which the holder of Company Preferred Stock or Common Stock is entitled pursuant to Section 4.1 hereof and the Reorganization Agreement. The Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of Company Preferred Stock or Common Stock which is not registered on the transfer records of the Company, the appropriate number of shares of Parent Common Stock may be delivered to a transferee if the Certificate representing such capital stock of the Company is presented to the Exchange Agent and accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Section 4.2, each Certificate shall be deemed at any time after the Effective Time to represent the right to receive upon such surrender the -5- number of shares of Parent Common Stock as provided by this Section 2 and the provisions of the California Code. (d) No Further Ownership Rights in Capital Stock of the Company. All ----------------------------------------------------------- Parent Common Stock delivered upon the surrender for exchange of shares of Company Preferred Stock or Common Stock in accordance with the terms hereof shall be deemed to have been delivered in full satisfaction of all rights pertaining to such shares of Company Preferred Stock or Common Stock, and following the Effective Time, the Certificates shall have no further rights to, or ownership in, shares of capital stock of the Company. There shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Company Preferred Stock or Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Section 4. (e) Lost, Stolen or Destroyed Certificates. In the event any -------------------------------------- certificates evidencing shares of Company Preferred Stock or Common Stock shall have been lost, stolen or destroyed, the Exchange Agent shall make payment in exchange for such lost, stolen or destroyed certificates, upon the making of an affidavit of that fact by the holder thereof, such shares of Parent Common Stock and cash for fractional shares, if any, as may be required pursuant to Section 4.1(f) hereof and the Reorganization Agreement; provided, however, that Parent may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Parent or the Exchange Agent with respect to the certificates alleged to have been lost, stolen or destroyed. (f) No Liability. Notwithstanding anything to the contrary in this ------------ Section 4.2, none of the Exchange Agent, the Surviving Corporation or any party hereto shall be liable to a holder of shares of Company Preferred or Common Stock for any amount paid to a public official pursuant to any applicable abandoned property, escheat or similar law. (g) Dissenting Shares. The provisions of this Section 4.2 shall also ----------------- apply to Dissenting Shares that lose their status as such, except that the obligations of Parent under this Section 4.2 shall commence on the date of loss of such status. ARTICLE V TERMINATION 5.1 Termination by Mutual Agreement. Notwithstanding the approval of this ------------------------------- Merger Agreement by the shareholders of the Company and Sub, this Merger Agreement may be terminated at any time prior to the Effective Time by mutual agreement of the Boards of Directors of the Company and Sub. -6- 5.2 Termination of Reorganization Agreement. Notwithstanding the approval of --------------------------------------- this Merger Agreement by the shareholders of the Company and Sub, this Merger Agreement shall terminate forthwith in the event that the Reorganization Agreement shall be terminated as therein provided. 5.3 Effects of Termination. In the event of the termination of this Merger ---------------------- Agreement, this Merger Agreement shall forthwith become void and there shall be no liability on the part of Parent, Sub or the Company or their respective officers or directors, except as otherwise provided in the Reorganization Agreement. ARTICLE VI GENERAL PROVISIONS 6.1 Amendment. This Merger Agreement may be amended by the parties hereto at --------- any time before or after approval hereof by the shareholders of the Company or Sub by execution of an instrument in writing signed on behalf of each of the parties hereto, provided however that no amendment shall be made which by law requires the further approval of the shareholders of the Company without obtaining such approval. 6.2 Counterparts. This Merger Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one agreement. 6.3 Governing Law. This Merger Agreement shall be governed in all respects, ------------- including validity, interpretation and effect, by the laws of the State of California. -7- IN WITNESS WHEREOF, the parties have duly executed this Merger Agreement as of the date first written above. NERO ACQUISITION CORPORATION By: ----------------------------- Title: --------------------------- CITYAUCTION, INC. By: ----------------------------- Title: --------------------------- [SIGNATURE PAGE TO MERGER AGREEMENT] -8- EXHIBIT B --------- ALLOCATION OF EMPLOYEE STOCK OPTIONS First 100,000 Options (No acceleration provision) - --------------------- ====================================================================== Name Number of Options ====================================================================== Andrew Rebele 85,200 - ---------------------------------------------------------------------- Monica Lee 8,500 - ---------------------------------------------------------------------- Steven Walther 4,000 - ---------------------------------------------------------------------- Nikki Martinez 1,500 - ---------------------------------------------------------------------- Noelle Birmingham 800 - ---------------------------------------------------------------------- Second 100,000 Options (Accleration based on performance) - ---------------------- ====================================================================== Name Number of Options ====================================================================== Andrew Rebele 89,000 - ---------------------------------------------------------------------- Monica Lee 9,000 - ---------------------------------------------------------------------- Steven Walther 2,000 - ---------------------------------------------------------------------- - ---------------------------------------------------------------------- EXHIBIT C --------- NON-COMPETITION AGREEMENT THIS NON-COMPETITION AGREEMENT (the "Agreement") is entered into as of ___________, 1999 by and among Ticketmaster Online-CitySearch, Inc., a Delaware corporation ("Parent"), CityAuction, Inc., a California corporation (the "Company") and ________________________________ (the "Manager"). Background A. Parent, Caligula Acquisition Corporation ("Sub") and the Company have entered into an Agreement and Plan of Reorganization dated as of January __, 1999 (the "Reorganization Agreement"), which provides for the merger (the "Merger") of Sub with and into the Company. Capitalized terms not otherwise defined in this Agreement have the meanings defined for them in the Reorganization Agreement. B. As a condition to the Merger, to preserve the value of the business being acquired by Parent, the Reorganization Agreement contemplates, among other things, that the Manager enter into this Agreement effective upon the Effective Time of the Merger. NOW THEREFORE, in consideration of the mutual promises made in this Agreement, Parent, the Company and the Manager agree as follows: 1. Covenant Not to Compete or Solicit. ---------------------------------- (a) For two (2) years after the termination of Manager's employment with Parent, the Company or any sudsidiary thereof (the "Non-Compete Period"), the Manager shall not directly or indirectly for himself/herself or on behalf of or in conjunction with any other person, company, partnership, corporation, business, group or other entity, without the prior written consent of Parent, engage anywhere in the world in (whether as an employee, consultant, proprietor, partner, director or otherwise), or have any ownership interest in (except for ownership of one percent (1%) or less of the outstanding securities of an entity whose securities are listed on a national securities exchange), or participate in the financing, operation, management or control of, any firm, corporation or business or any business unit of any firm or corporation in any business selling products or services in direct competition with the Parent's or the Company's business, including the on-line ticketing, city guide, on-line auctions, and/or on-line classifieds businesses. During the Non-Compete Period, the Manager shall not, directly or indirectly, without the prior written consent of Parent, (i) solicit, encourage, hire or take any other action which is intended to induce any employee of the Company or Parent or any subsidiary thereof to terminate his or her employment with the Company or Parent or any subsidiary thereof (as the case may be), or (ii) interfere in any manner with the contractual or employment relationship between the Company and any employee of the Company or Parent and any employee of Parent or any subsidiary of the Company or Parent and any employee of any such subsidiary. (b) The covenants contained in the preceding paragraphs shall be construed as a series of separate convents, one of each county, city and state of any geographic area where any business is presently carried on by Parent or the Company. Except for geographic coverage, each such separate covenant shall be identical in terms to the covenant contained in the preceding paragraphs. If, in any judicial proceeding, a court refuses to enforce any of such separate covenants (or any part thereof), then such unenforceable covenant (or such part) shall be eliminated from this Agreement to the extent necessary to permit the remaining separate covenants (or portions thereof) to be enforced. In the event that the provisions of this Section 1 are deemed to exceed the time, geographic or scope limitations permitted by applicable law, then such provisions shall be reformed to the maximum time, geographic or scope limitations, as the case may be, permitted by applicable laws. (c) The Manager acknowledges that the Manager's covenant not to compete or solicit contained in this Section 1 is a condition precedent to the Merger to preserve the value of the business being purchased by Parent pursuant to the Merger. The Manager further acknowledges that breach of this Section 1 would cause irreparable injury to Parent and the Company and agrees that in the event of such breach, Parent and the Company shall each be entitled to injunctive relief without the necessity of proving actual damages. 2. Miscellaneous. ------------- (a) Severability. If any portion of this Agreement is held by a court of ------------ competent jurisdiction to conflict with any federal, state or local law, such portion of this Agreement shall be of no force or effect and this Agreement shall otherwise remain in full force and effect and be construed as if such portion had not been included in this Agreement. (b) No Assignment. The Manager shall not assign this Agreement or any ------------- rights or obligations under this Agreement without the prior written consent of Parent. (c) Notice. Any notice or other communication required or permitted ------ under this Agreement shall be made in writing and delivered personally to the other parties or sent by certified or registered mail, return receipt requested and postage prepaid to the addresses set forth on the signature page hereto or such other address as any such party shall have furnished to the other parties in writing in accordance with this Section 2(c). (d) Entire Agreement. This Agreement contains the entire agreement and ---------------- understanding of the parties and supersedes all prior discussions, agreements and understandings relating to the subject matter of this Agreement. This Agreement may not be changed or modified, except by an agreement in writing executed by Parent and the Manager. (e) Effectiveness: Term. This Agreement shall become effective upon the ------------------- Effective Date and shall continue in full force and effect for two (2) years from its effectiveness. -2- (f) Other. The waiver of a breach of any term or provision of this ----- Agreement shall not operate as or be construed to be a waiver of any other previous or subsequent breach of this Agreement. This Agreement shall be governed by the laws of the State of California. All captions and section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement. This Agreement may be executed in counterparts, and each counterpart shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned. -3- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written above. TICKETMASTER ONLINE-CITYSEARCH, INC. MANAGER By: ________________________________ _______________________________ Name: Name: Title: Address: Address: CITYAUCTION, INC. By: ________________________________ Name: Title: Address: [Signature Page to Non-Competition Agreement] -4- EXHIBIT D --------- INVESTMENT REPRESENTATION AGREEMENT The undersigned is aware that pursuant to an Agreement and Plan of Reorganization, dated as of January 8, 1999, (the "Reorganization Agreement"), entered into by and among Ticketmaster Online - CitySearch, Inc., a Delaware corporation ("Parent"), Nero Acquisition Corporation, a California corporation and a wholly owned subsidiary of Parent ("Sub"), CityAuction, Inc., a California corporation (the "Company"), and Andrew Rebele and Monica Lee, individuals and principal shareholders of the Company (each, a "Principal Shareholder"), Sub will merge (the "Merger") with and into the Company and all shares of Company Capital Stock will be exchanged for shares of Parent Common Stock set forth in the Reorganization Agreement (the "Merger Consideration"). Unless otherwise indicated, capitalized terms not defined herein have the meanings set forth in the Reorganization Agreement. The undersigned understands that the execution of this Certificate is a condition precedent to Parent and Sub's obligation to consummate the Merger and to the receipt of the shares of Parent Common Stock in connection with the Merger (pursuant to the terms and conditions of the Reorganization Agreement). The undersigned hereby represents and warrants as follows: 1. The Parent Common Stock issued to the undersigned will be acquired for investment for the undersigned's own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof in violation of the Securities Act of 1933, as amended (the "1933 Act"), and the undersigned has no present intention of selling, granting any participation in, or otherwise distributing the same. The undersigned represents that the entire legal and beneficial interest of the Parent Common Stock will be held for the undersigned's account only, and neither in whole or in part for any other person other than a wholly owned subsidiary of the undersigned. By executing this Agreement, the undersigned further represents that the undersigned has no present contract, undertaking, agreement or arrangement with any person to sell, transfer, or grant participation to such person or to any third person, with respect to any of the Parent Common Stock. 2. The undersigned represents that (without limiting or affecting the representations and warranties of Parent or Sub under the Reorganization Agreement) it: (i) has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the undersigned's prospective investment in the shares of Parent Common Stock; (ii) has received copies of Parent's Registration Statement on Form S-1 dated December 2, 1998; (iii) has received all the information it has requested from the Parent and the Company it considers necessary or appropriate for deciding whether to accept the Parent Common Stock; (iv) has the ability to bear the economic risks of the undersigned's prospective investment; and (v) is able, without materially impairing its financial condition, to hold the Parent Common Stock for an indefinite period of time and to suffer complete loss on its investment. 3. Each certificate representing Parent Company Stock issued pursuant hereto to the undersigned and any shares issued or issuable in respect of any such Parent Common Stock upon any stock split, stock dividend, recapitalization, or similar event, shall be stamped or otherwise imprinted with legends 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. THESE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE AGREEMENT COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER, AS SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION. SUCH TRANSFER RESTRICTIONS ARE BINDING ON TRANSFEREES OF THESE SHARES. 4. The certificates evidencing the Parent Common Stock shall also bear any legend required pursuant to any state, local or foreign law governing such securities or the Reorganization Agreement. 5. The undersigned understands and acknowledges that the Parent Common Stock has not been registered under the 1933 Act and Parent Common Stock must be held indefinitely unless subsequently registered under the 1933 Act or an exemption from such registration is available and that the Parent is obligated to register the Parent Common Stock only in accordance with the terms of the Registration Rights Agreement. 6. The undersigned acknowledges that the Parent Common stock shall not be transferable except upon the conditions specified in this Agreement and the Reorganization Agreement. 7. Prior to any proposed transfer of any Parent Common Stock, unless there is in effect a registration statement under the 1933 Act covering the proposed transfer, the undersigned shall -2- give written notice to the Company of its 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 Parent so requests, be accompanied by either (i) a written opinion of legal counsel who shall be satisfactory to Parent, addressed to Parent and satisfactory in form and substance to Parent's counsel, to the effect that the proposed transfer of Parent Common Stock may be effected without registration under the 1933 Act, or (ii) a "No Action" letter from the Securities and Exchange Commission (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 Parent Common Stock shall be entitled to transfer such shares of Parent Common Stock in accordance with the terms of the notice delivered by the holder to Parent. Each certificate evidencing the shares of Parent Common Stock transferred as above provided shall bear the appropriate restrictive legend set forth in Section (c) above, except that such certificate shall not bear such restrictive legend if in the opinion of counsel for Parent such legend is not required in order to establish compliance with any provisions of the 1933 Act. 8. The undersigned is familiar with the provisions of Rule 144, promulgated under the 1933 Act, which in substance, permits limited public resale of "restricted securities" acquired, directly or indirectly from the issuer thereof (or from an affiliate of such issuer) in a non-public offering subject to the satisfaction of certain conditions, including, among other things: (i) a public trading market then exists for the Parent Common Stock; (ii) the availability of certain public information about Parent; (iii) the resale occurring not less than one (1) year after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and (iv) the sale being made through a broker in an unsolicited "broker transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three (3) month period not exceeding the specified limitations stated therein, if applicable. The undersigned further understands that at the time the undersigned wishes to sell the shares of Parent Common Stock received from Parent there may be no public market upon which to make such a sale, and that, even if such a public market then exists, Parent may not be satisfying the current public information requirements of Rule 144, and that, in such event, the undersigned would be precluded from selling the shares of Parent Common Stock received from Parent under Rule 144 even if the one (1) year minimum holding period had been satisfied. The undersigned further understands that in the event all of the applicable requirements of Rule 144 are not satisfied, registration under the 1933 Act, compliance with Regulation A, or some other registration exemption would be required to sell the shares of Parent Common Stock received from Parent. 9. The undersigned is the sole record and beneficial owner of capital stock of the Company in the amount set forth next to its name on the signature page hereto. Such capital stock is not subject to any claim, lien, pledge, charge, security interest or other encumbrance or to any rights of first refusal of any kind, and the undersigned has not granted any rights to purchase such shares to any other person or entity. The undersigned has the sole right to transfer such shares. Such shares constitute all of the capital stock owned, beneficially or of record, by the undersigned, and the undersigned has no other rights to acquire any capital stock of the Company except as set forth on the signature page hereto. -3- 10. The undersigned has had an opportunity to review with its own tax advisors the tax consequences to the undersigned of the Merger and the transactions contemplated by the Reorganization Agreement. The undersigned understands that it must rely solely on its advisors and not on any statements or representations by Parent, the Company or any of their agents with respect to tax matters. The undersigned understands that it (and not Parent or the Company) shall be responsible for its own tax liability that may arise as a result of the Merger or the transactions contemplated by the Reorganization Agreement. 11. The undersigned will have sufficient assets, after completion of the Merger, to satisfy all of the undersigned's obligations to its creditors, as the same become due and payable. 12. This Agreement shall be governed in all respects, including validity, interpretation and effect, by the laws of the State of California. 13. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one agreement. -4- IN WITNESS WHEREOF, the undersigned has executed this Certificate this ____ day of March, 1999. ------------------------------------------- Print Name of Stockholder ------------------------------------------- Signature of Authorized Signatory Number of Shares and Type of Capital Stock of the Company: (indicate class of stock, i.e., common, preferred, etc.) ------------------------------------------- [SIGNATURE PAGE TO INVESTMENT REPRESENTATION STATEMENT] -5- EXHIBIT E --------- FORM OF OPINION Reference is made to the Agreement and Plan of Reorganization, dated as of January 8, 1999 the "Reorganization Agreement"), excluding all listed exhibits thereto, by and among Ticketmaster Online - CitySearch, Inc., a Delaware corporation ("Parent"), and CityAuction, Inc., a California corporation (the "Company"), which provides for the merger (the "Merger") of a wholly-owned subsidiary of Parent with and into the Company. Reference is also made to the Registration Rights Agreement, the Employment Agreements, the Non-Competition Agreements and the Voting Agreement, dated January ___, 1999 by and among Parent and certain shareholders of the Company (such agreements, including the Reorganization Agreement, are referred to collectively hereinafter as the "Agreements"). This opinion is rendered to you pursuant to Section 6.2(b) of the Agreement, and all terms used herein have the meanings defined for them in the Agreement unless otherwise defined herein. Based upon and subject to the foregoing, and except as set forth in the Company Schedules, we are of the opinion that: 1. The Company is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and is duly qualified as a foreign corporation and in good standing in each other jurisdiction in which the failure to so qualify would have a material adverse effect on such Company's business condition. The Company has no subsidiaries. The Company has all requisite power and authority to own, operate and lease its properties and to carry on its business as now being conducted. 2. (a) The authorized capital stock of the Company consists (i) of 10,000,000 shares of Common Stock, of which 2,400,000 shares are issued and outstanding and (ii) 1,015,000 shares of Preferred Stock, of which 415,000 shares, designated Series A Preferred Stock, are outstanding. All of such outstanding shares have been duly authorized, validly issued, fully paid and non-assessable and have been issued in compliance with all applicable federal and state securities laws. The outstanding shares of Company Capital Stock are not subject to preemptive rights created by statute, the Articles of Incorporation or Bylaws of the Company, or any agreement to which the Company is a party or by which it may be bound. There are no voting agreements or voting trusts with respect to any of the outstanding shares of capital stock of the Company. The outstanding shares of capital stock of the Company are held by the persons and in the amounts set forth in Section 3.2 of the Company Schedules. (b) The Company has reserved 300,000 shares of Company Common Stock for issuance to employees and consultants pursuant to outstanding options (the "Company Stock Options"), of which 15,019 were issued pursuant to the Company's 1998 Stock Option Plan (the "Company's Stock Option Plan") and 284,981 shares remain available for future grant under the -1- plan. Section 3.2(b) of the Company Schedules sets forth for each outstanding Company Stock Options the name of the holder of such option, the number of shares of Company Common Stock subject to such option, the exercise price of such option and the vesting schedule for such option, including the extent vested to date. The Company has reserved 600,000 shares of Series A Preferred Stock issuable upon exercise of a warrant issued to Snap! LLC (the "Warrant"). Except for the Company Stock Options described in Section 3.2(b) of the Company Schedules and the Warrant, there are no options, warrants, calls, rights, commitments or agreements of any character, written or oral, to which the Company is a party or by which it is bound obligating the Company to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of the capital stock of the Company or obligating the Company to grant, extend, accelerate the vesting of, change the price of, otherwise amend or enter into any such option, warrant, call, right, commitment or agreement. The Company's Stock Options and the Warrant have been issued in compliance with all applicable federal and state securities laws. The holders of Company Stock Options and the Warrant have given, or have properly waived, any required notice prior to the Merger. As a result of the Merger, Parent will be the record and beneficial owner of all outstanding capital stock of the Company and, except for stock options granted pursuant to the Company's Stock Option Plan [and the Warrant], rights to acquire capital stock of the Company. 3. The execution and delivery of the Reorganization Agreement, the Agreement of Merger, the Non-Competition Agreement, the Employment Agreement(s) and the Registration Rights Agreement (the "Agreements") do not, and the consummation of the transactions contemplated by the Agreements will not, conflict with or result in any violation of any statute, law, rule, regulation, judgment, or, to our knowledge, any order, decree or ordinance applicable to the Company or its properties or assets, or, conflict with or result in any material breach or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation, or acceleration of any obligation or to loss of a material benefit under, or result in the creation of a material lien or encumbrance on any of the properties or assets of the Company pursuant to (i) any provision of the Articles of Incorporation or Bylaws of the Company currently in effect or (ii) to the best of our knowledge, except as disclosed in the Reorganization Agreement and the Company Schedules, any agreement, contract, note, mortgage, indenture, lease, instrument, permit, concession, franchise or license to which the Company is a party or by which the Company or any of its properties or assets may be bound or affected. 4. The Company has all requisite corporate power and authority to enter into the Agreements, to perform its obligations thereunder and to consummate the transactions contemplated thereby. The execution and delivery of the Agreements, the performance by the Company of its obligations thereunder and the consummation of the transactions contemplated thereby have been duly and validly authorized by all necessary corporate action on the part of the Company, and have been approved by the Board of Directors and shareholders of the Company. No other corporate proceeding on the part of the Company is necessary to authorize the Agreements by the Company or the performance of the Company's obligations thereunder or the consummation of the transactions contemplated thereby. The Agreements to which the Company is a party have been duly executed -2- and delivered by the Company and constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms. 5. No consent, approval, authorization or order of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to the Company or in connection with the execution and delivery by the Company of the Agreements to which it is a party, or the consummation by the Company of the transactions contemplated thereby, except for (i) the filing of the Merger Agreement by the California Secretary of State, (ii) such as have been obtained or accomplished, and (iii) such consents, approvals, orders authorizations, registrations, declarations and filings as may be required under the laws of California, which if not obtained or made would not have a material adverse effect on the business condition of the Company. 6. The Agreements have been duly approved and adopted by the affirmative vote of a number of outstanding shares of the Company's capital stock that equals or exceeds the number of such shares required to approve the Agreements, under the California Corporations Code and the Company's Articles of Incorporation. 7. There is no action, suit, proceeding, claim or investigation pending or, to the best of our knowledge, threatened against the Company which could, individually or in the aggregate, have a material adverse effect on the business condition of the Company or which in any manner challenges or seeks to prevent, enjoin, alter or materially delay any of the transactions contemplated by the Agreements. 8. To the best of our knowledge, the Company has not received notice that it would be, with the passage of time, in default or violation of any material term, condition or provision of any material judgment, order, injunction or stipulation applicable to the Company. -3- EXHIBIT F --------- REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement"), is made as of March __, 1999, by and among Ticketmaster Online-CitySearch, Inc., a Delaware corporation ("Parent"), and certain former shareholders of CityAuction, Inc., a California corporation (the "Company"), listed on the signature pages hereto (the "Shareholders"). WHEREAS: A. Pursuant to the terms of the Agreement and Plan of Reorganization dated as of January 8, 1999 (the "Reorganization Agreement"), by and among Parent, the Company, and Nero Acquisition Corporation, a California corporation and wholly owned subsidiary of Parent ("Sub"), Sub is being merged with and into the Company (the "Merger"), with the Company being the surviving corporation. B. In connection with the Merger, the Shareholders shall receive shares (the "Shares") of Class B Common Stock of Parent, par value $.01 per share ("Parent Common Stock"). C. The Reorganization Agreement provides for the execution and delivery of this Agreement at the closing of the transactions contemplated thereby which grants the Shareholders certain rights to have their Shares registered under the Securities Act of 1933, as amended. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. DEFINITIONS. ----------- a. As used in this Agreement, the following terms shall have the following meanings: (i) "Lock-up Period" means the time period commencing on the closing date of Parent's initial public offering and expiring 180 days therefrom. (ii) "register," "registered," and "registration" refer to a registration effected by preparing and filing a Registration Statement or Statements in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous basis ("Rule 415"), and the declaration or ordering of effectiveness of such Registration Statement by the United States Securities and Exchange Commission (the "SEC"). (iii) "Registrable Securities" means the Shares and any shares of capital stock issued or issuable as a dividend on or in exchange for or otherwise with respect to the Shares, provided, however, that such securities shall only be treated as Registrable Securities if and so long as they have not been (A) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) sold or are, in the opinion of counsel for Parent, available for sale in a single transaction exempt from the registration and prospectus delivery requirements of the 1933 Act so that all transfer restrictions and restrictive legends with respect thereto are removed upon the consummation such sale. (iv) "Registration Statement" means a registration statement of Parent under the 1933 Act. b. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Purchase Agreement. 2. REGISTRATION. ------------ a. Parent shall prepare and file with the SEC a Registration Statement on Form S-1 (or, another appropriate form in the discretion of Parent as is then available to effect a registration of the Registrable Securities) covering the resale of the Registrable Securities as soon as practicable following the Closing of the Merger. b. As a condition of Parent's efforts to file a Registration Statement, the Shareholders shall execute and deliver to Parent, in forms acceptable to Parent (i) agreements prohibiting the sale or other transfer of the Registrable Securities until the expiration of the Lock-up Period and (ii) agreements prohibiting the sale or other transfer of the Registrable Securities during periods outside of the trading windows applicable to the officers of Parent as set forth in Parent's Insider Trading Program adopted by Parent's Board of Directors. 3. OBLIGATIONS OF THE COMPANY. ------------------------- In connection with the registration of the Registrable Securities, Parent shall have the following obligations: a. Parent shall prepare promptly and file with the SEC a Registration Statement with respect to the Registrable Securities as provided in Section 2(a), and thereafter use its reasonable commercial efforts to cause such Registration Statement relating to Registrable Securities to become effective, and keep the Registration Statement effective pursuant to Rule 415 at all times until such date as is the earlier of (i) the date on which all of the Registrable Securities have been sold and (ii) the date on which the Registrable Securities (in the opinion of counsel to the Shareholders) may be immediately sold without restriction (including without limitation as to volume by each holder thereof) without registration under the 1933 Act (the "Registration Period"). b. Parent shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to keep the Registration Statement effective at all times during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement until such time as all of such Registrable Securities -2- have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in the Registration Statement. c. Parent shall furnish to the Shareholders (i) promptly after the Registration Statement is prepared and publicly distributed, filed with the SEC, or received by Parent, one copy of the Registration Statement and any amendment thereto, each preliminary prospectus and prospectus and each amendment or supplement thereto and (ii) such number of copies of a prospectus, including a preliminary prospectus, and all amendments and supplements thereto and such other documents as the Shareholders may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Shareholders. Parent will immediately notify the Shareholders by facsimile of the effectiveness of the Registration Statement or any post-effective amendment. Parent will promptly file an acceleration request as soon as practicable following the resolution or clearance of all SEC comments or, if applicable, following notification by the SEC that the Registration Statement or any amendment thereto will not be subject to review. d. Parent shall use reasonable efforts to (i) register and qualify the Registrable Securities covered by the Registration Statement under such other securities or "blue sky" laws of such jurisdictions in the United States as the Shareholders reasonably request, (ii) prepare and file in those jurisdictions such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that Parent shall not be -------- ------- required in connection therewith or as a condition thereto to (a) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (b) subject itself to general taxation in any such jurisdiction, (c) file a general consent to service of process in any such jurisdiction, (d) provide any undertakings that cause the Company undue expense or burden, or (e) make any change in its charter or bylaws. e. In the event the Shareholders select underwriters for the offering, Parent shall enter into and perform its obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the underwriters of such offering. f. As promptly as practicable after becoming aware of such event, Parent shall notify the Shareholders of (x) the issuance by the SEC of a stop order suspending the effectiveness of the Registration Statement, (y) the happening of any event, of which Parent has knowledge, as a result of which the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (z) the occurrence or existence of any pending corporate development that, in the reasonable discretion of Parent, makes it appropriate to suspend the availability of the Registration Statement and use its best efforts promptly to prepare a supplement or amendment to the Registration Statement to correct such untrue statement or omission, and deliver such number of copies of such supplement or amendment to the Shareholders, -3- as the Shareholders may reasonably request; provided that, for not more than twenty (20) consecutive trading days (or a total of not more than thirty (30) trading days in any twelve (12) month period) (or 60 trading days in any 12 month period, in the case of an event described in clause (z) above that arises from an acquisition or a probable acquisition or financing, recapitalization, business combination or other similar transaction), Parent may delay the disclosure of material non-public information concerning Parent (as well as prospectus or Registration Statement updating) the disclosure of which at the time is not, in the good faith opinion of Parent, the best interests of Parent (an "Allowed Delay"); provided, further, that Parent shall promptly (i) notify the Shareholders in writing of the existence of (but in no event, without the prior written consent of the Shareholders, shall Parent disclose to such Shareholder any of the facts or circumstances regarding) material non-public information giving rise to an Allowed Delay and (ii) advise the Shareholders in writing to cease all sales under the Registration Statement until the end of the Allowed Delay. Upon expiration of the Allowed Delay, Parent shall again be bound by the first sentence of this Section 3(f) with respect to the information giving rise thereto. g. Parent shall use its best efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement, and, if such an order is issued, to obtain the withdrawal of such order at the earliest possible moment and to notify each Shareholder who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance of such order and the resolution thereof. h. Parent shall permit a single firm of counsel designated by the Shareholders to review the Registration Statement and all amendments and supplements thereto (as well as all requests for acceleration or effectiveness thereof) a reasonable period of time prior to their filing with the SEC, and not file any document in a form to which such counsel reasonably objects and will not request acceleration of the Registration Statement without prior notice to such counsel. The sections of the Registration Statement covering information with respect to the Shareholders, the Shareholders' beneficial ownership of securities of Parent or the Shareholders' intended method of disposition of Registrable Securities shall conform to the information provided to Parent by each of the Shareholders. i. Parent shall (i) cause all the Registrable Securities covered by the Registration Statement to be listed on each national securities exchange on which securities of the same class or series issued by Parent are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange, or (ii) secure the designation and quotation, of all the Registrable Securities covered by the Registration Statement on the Nasdaq or, if not eligible for the Nasdaq on the Nasdaq SmallCap. 4. OBLIGATIONS OF THE SHAREHOLDERS. ------------------------------- In connection with the registration of the Registrable Securities, the Shareholders shall have the following obligations: -4- a. It shall be a condition precedent to the obligations of Parent to complete the registration pursuant to this Agreement with respect to the Registrable Securities that the Shareholders shall furnish to Parent such information regarding themselves, the Registrable Securities held by them and the intended method of disposition of the Registrable Securities held by them as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as Parent may reasonably request. At least three (3) business days prior to the first anticipated filing date of the Registration Statement, Parent shall notify the Shareholders of the information Parent requires from the Shareholders. b. The Shareholders, by their acceptance of the Registrable Securities, agree to cooperate with Parent as reasonably requested by Parent in connection with the preparation and filing of the Registration Statement hereunder, unless the Shareholders have notified Parent in writing of the Shareholders' election to exclude all of their Registrable Securities from the Registration Statement. c. In the event the Shareholders determine to engage the services of an underwriter, the Shareholders agree to enter into and perform the Shareholders' obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the managing underwriter of such offering and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities. d. The Shareholders agree that, upon receipt of any notice from Parent of the happening of any event of the kind described in Section 3(f) or 3(g), the Shareholders will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until the Shareholders' receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by Parent, the Shareholders shall deliver to Parent (at the expense of Parent) or destroy (and deliver to Parent a certificate of destruction) all copies in the Shareholders' possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. e. The Shareholders may not participate in any underwritten registration hereunder unless they (i) agree to sell their Registrable Securities on the basis provided in any underwriting arrangements in usual and customary form entered into by Parent, (ii) complete and execute all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements, and (iii) agree to pay all underwriting discounts and commissions and any expenses in excess of those payable by Parent pursuant to Section 5 below. 5. EXPENSES OF REGISTRATION. ------------------------ All reasonable expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualification fees, printers and accounting fees, the -5- fees and disbursements of counsel for Parent, and the reasonable fees and disbursements of one counsel selected by the Shareholders pursuant to Section 3(h) hereof, up to a maximum of [$20,000], shall be borne by Parent. 6. INDEMNIFICATION. --------------- In the event any Registrable Securities are included in a Registration Statement under this Agreement: a. To the extent permitted by law, Parent will indemnify, hold harmless and defend (i) each Shareholder who holds such Registrable Securities, (ii) the directors, officers, partners, employees, agents and each person who controls any Shareholder within the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), if any, (iii) any underwriter (as defined in the 1933 Act) for the Shareholders, and (iv) the directors, officers, partners, employees and each person who controls any such underwriter within the meaning of the 1933 Act or the 1934 Act, if any (each, an "Indemnified Person"), against any joint or several losses, claims, damages, liabilities or expenses (collectively, together with actions, proceedings or inquiries by any regulatory or self-regulatory organization, whether commenced or threatened, in respect thereof, "Claims") to which any of them may become subject insofar as such Claims arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a Registration Statement or the omission or alleged omission to state therein a material fact required to be stated or necessary to make the statements therein not misleading; (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such Registration Statement, or contained in the final prospectus (as amended or supplemented, if Parent files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading; or (iii) any violation or alleged violation by Parent of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the Registrable Securities (the matters in the foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject to the restrictions set forth in Section 6(c) with respect to the number of legal counsel, Parent shall reimburse the Indemnified Person, promptly as such expenses are incurred and are due and payable, for any reasonable legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (i) shall not apply to a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to Parent by any Indemnified Person or underwriter for such Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto, if such prospectus was timely made available by Parent pursuant to Section 3(c) hereof; (ii) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of Parent, which consent shall not be unreasonably withheld; and (iii) with respect to any preliminary prospectus, shall not inure to the benefit of any Indemnified Person if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected on a -6- timely basis in the prospectus, as then amended or supplemented, such corrected prospectus was timely made available by Parent pursuant to Section 3(c) hereof, and the Indemnified Person was promptly advised in writing not to use the incorrect prospectus prior to the use giving rise to a Violation and such Indemnified Person, notwithstanding such advice, used it. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person. b. In connection with any Registration Statement in which the Shareholders are participating, the Shareholders agree to indemnify, hold harmless and defend, to the same extent and in the same manner set forth in Section 6(a), Parent, each of its directors, each of its officers who signs the Registration Statement, each person, if any, who controls Parent within the meaning of the 1933 Act or the 1934 Act, any underwriter and any other stockholder selling securities pursuant to the Registration Statement or any of its directors or officers or any person who controls such stockholder or underwriter within the meaning of the 1933 Act or the 1934 Act (collectively and together with an Indemnified Person, an "Indemnified Party"), against any Claim to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim arises out of or is based upon any Violation by such Shareholder, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished to Parent by such Shareholder expressly for use in connection with such Registration Statement; and subject to Section 6(c) such Shareholder will reimburse any legal or other expenses (promptly as such expenses are incurred and are due and payable) reasonably incurred by them in connection with investigating or defending any Claim; provided, however, that the indemnity -------- ------- agreement contained in this Section 6(b) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Shareholder, which consent shall not be unreasonably withheld; provided, further, however, that the Shareholder shall be liable under this - -------- ------- ------- Agreement (including this Section 6(b)) for only that amount as does not exceed the net proceeds to such Shareholder as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected on a timely basis in the prospectus, as then amended or supplemented. c. Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action (including any governmental action), such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, -------- however, that an Indemnified Person or Indemnified Party shall have the right to - ------- retain its own counsel with the fees and expenses to be paid by the indemnifying party, if, in the reasonable -7- opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The indemnifying party shall pay for only one separate legal counsel for the Indemnified Persons or the Indemnified Parties, as applicable, and such legal counsel shall be selected by the Shareholders, if the Shareholders are entitled to indemnification hereunder, or Parent, if Parent is entitled to indemnification hereunder, as applicable. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is actually prejudiced in its ability to defend such action. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as such expense, loss, damage or liability is incurred and is due and payable. 7. AMENDMENT OF REGISTRATION RIGHTS. -------------------------------- Provisions of this Agreement may be amended and the observance thereof may be waived only by the mutual written consent of Parent and the Shareholders. 8. MISCELLANEOUS. ------------- a. Any notices required or permitted to be given under the terms hereof shall be sent by certified or registered mail (return receipt requested) or delivered personally or by courier (including a recognized overnight delivery service) or by facsimile and shall be effective five days after being placed in the mail, if mailed by regular U.S. mail, or upon receipt, if delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, in each case addressed to a party. The addresses for such communications shall be: If to Parent: Ticketmaster Online - CitySearch, Inc. 790 E. Colorado Blvd., Suite 200 Pasadena, California 91101 Attention: Chief Executive Officer Facsimile: (626) 405-9929 With copy to: Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, California 94304-1050 Attention: John T. Sheridan Facsimile: (650) 496-4088 -8- If to the Shareholders: to the address set forth immediately below each Shareholder's name on the signature page to the Purchase Agreement. Each party shall provide notice to the other party of any change of its address. b. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. c. This Agreement shall be enforced, governed by and construed in accordance with the laws of the State of Delaware applicable to agreements made and to be performed entirely within such State. In the event that any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof. d. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. e. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. f. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. g. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. h. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. -9- IN WITNESS WHEREOF, Parent and the undersigned Shareholder have caused this Agreement to be duly executed as of the date first above written. TICKETMASTER ONLINE - CITYSEARCH, INC. By: ----------------------------------- Douglas McPherson Chief Legal Officer SHAREHOLDER By: ----------------------------------- Name: Title: Address: [Signature Page to Registration Rights Agreement] -10- AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF REORGANIZATION THIS AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF REORGANIZATION (this "Amendment") is entered into as of March 19, 1999, by and between Ticketmaster Online -CitySearch, Inc., a Delaware corporation ("Parent"), Nero Acquisition Corporation, a California corporation and wholly-owned subsidiary of Parent ("Sub"), CityAuction, Inc., a California corporation (the "Company"), Andrew Rebele and Monica Lee (collectively, the "Shareholders"). RECITALS A. Parent and the Company are parties to that certain Agreement and Plan of Reorganization, dated as of January 8, 1999 (the "Reorganization Agreement"), subject to the terms and conditions of which Sub will merge with and into the Company (the "Merger"). Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Reorganization Agreement. B. On February __, 1999, the Company restated its Articles of Incorporation, changing the liquidation preference of the holders of the Series A Preferred Stock to an amount equal to $0.50 per share. C. Parent and the Company wish to amend the Reorganization Agreement upon the terms set forth in this Amendment. NOW, THEREFORE, the parties hereby agree as follows: 1. Amended Provisions. Sections 2.1(c), (d) and (e) of the Reorganization Agreement shall be amended and restated in their entirety as follows: "(c) Conversion of Capital Stock of the Company. Subject to Sections ------------------------------------------ 2.1(d), (e), (f), (g) and (h) below, each issued and outstanding share of preferred stock of the Company, $0.01 par value ("COMPANY PREFERRED STOCK") (other than shares canceled pursuant to Section 2.1(b)), and each issued and outstanding share of common stock of the Company, $0.01 par value, ("COMPANY COMMON STOCK") (other than shares cancelled pursuant to Section 2.1(b)), that is issued and outstanding immediately prior to the Effective Time shall automatically be canceled and extinguished and converted, without any action on the part of the holder thereof into the right to receive the number of shares of Parent Common Stock calculated as set forth below. For purposes of this Section 2.1(c), the following terms shall have the meanings set forth below: "Average Trading Price" shall mean average of the closing prices of --------------------- the securities on the NASDAQ National Market System over the 30-day period ending three (3) days prior to the Closing. "Liquidation Preference Amount" shall mean $207,500. ----------------------------- "Preference Shares" shall mean the number of shares of Parent Common ----------------- Stock equal to the Liquidation Preference divided by the Average Trading Price. "Primary Exchange Ratio" shall equal the Preference Shares divided by ---------------------- 415,000 (the number of outstanding shares of Company Preferred Stock). "Remainder Shares" shall equal the number of shares of Parent Common ---------------- Stock equal to 800,000 shares minus the Preference Shares. "Secondary Exchange Ratio" shall equal the Remainder Shares divided by ------------------------ 2,837,394 (the number of outstanding shares of Parent capital Stock plus outstanding stock options). The Primary Exchange Ratio and the Secondary Ratio shall be subject to recalculation in the manner set forth in the definitions above in the event the number of outstanding shares of Company Preferred Stock of Common Stock or outstanding Company Stock options is changed prior to the Effective Time. Each holder of Company Preferred Stock shall be entitled to receive the number of shares of Parent Common Stock at the Effective Time equal to the following: [Number of shares of Company Preferred Stock held multiplied by the Primary Exchange Ratio] plus [Number of shares of Preferred Stock held multiplied by the Secondary Exchange Ratio] Each holder of Company Common Stock shall be entitled to receive the number of shares of Parent Common Stock at the Effective Time equal to the following: [Number of shares of Company Common Stock held multiplied by the Secondary Exchange Ratio] FOR EXAMPLE, if the Average Trading Price equaled $45, the Primary Exchange Ratio would equal 0.01111111 and the Secondary Exchange Ratio would equal 0.280323737. In such event, a holder of 400,000 shares of Company Preferred Stock would receive 116,574 shares of Parent Common Stock at the Effective Time, and a holder of 400,000 shares of Company Common Stock would receive 112,129 shares of Parent Common Stock at the Effective Time. (d) Adjustment of Exchange Ratios. If, between the date of this ----------------------------- Agreement and the Effective Time, the outstanding shares of Parent Common Stock (or, subject to Section 5.1 below, Company Preferred Stock or Common Stock) shall have been changed into a different -2- number of shares or a different class by reason of any reclassification, split- up, stock dividend, stock combination, then the Primary and Secondary Exchange Ratios shall be correspondingly adjusted. (e) Dissenters' Rights. Any shares of Company Preferred Stock or ------------------ Common Stock held by a holder who has properly exercised dissenters' rights for such shares in accordance with the California Code and who, as of the Effective Time, has not effectively withdrawn or lost such dissenters' rights ("DISSENTING SHARES") shall not be converted into Parent Common Stock but shall be converted into the right to receive such consideration as may be determined to be due with respect to such Dissenting Shares pursuant to the California Code. The Company shall give Parent prompt notice of any demand received by the Company to require the Company to purchase shares of Company Preferred Stock or Common Stock, and Parent shall have the right to participate in all negotiations and proceedings with respect to such demand. The Company agrees that, except with the prior written consent of Parent, or as required under the California Code, it will not voluntarily make any payment with respect to, or settle or offer to settle, any such purchase demand. Each holder of Dissenting Shares (a "DISSENTING SHAREHOLDER") who, pursuant to the provisions of the California Code, becomes entitled to payment of the value of shares of Company Common Stock shall receive payment therefor (but only after the value therefor shall have been agreed upon or finally determined pursuant to such provisions). In the event of legal obligation, after the Effective Time, to deliver shares of Parent Common Stock to any holder of shares of Company Preferred Stock or Common Stock who shall have failed to make an effective purchase demand or shall have lost its status as a Dissenting Shareholder, Parent shall issue and deliver, upon surrender by such Dissenting Shareholder of such holder's certificate or certificates representing shares of capital stock of the Company, the shares of Parent Common Stock to which such Dissenting Shareholder is then entitled under this Section 2.1 and the Merger Agreement." The second sentence of Section 2.1(i)(ii) is amended and restated to read as follows: "The exercise price for such option shall be equal to the closing price of the Parent Common Stock on the NASDAQ National Market System on the date of the Closing." The first sentence of Section 2.1(f) is amended and restated to read as follows: "No fractional shares of Parent Common Stock shall be issued, but in lieu thereof each holder of shares of Company Preferred Stock or Common Stock who would otherwise be entitled to receive a fraction of a share of Parent Common Stock shall receive from Parent an amount of cash equal to the per share market value of Parent Common Stock (based on the last sales price of Parent Common Stock as reported on the Nasdaq National Market on the Effective Date) multiplied by the fraction of a share of Parent Common Stock to which such holder would otherwise be entitled." The first sentence of Section 2.2(g) shall be amended and restated to read as follows: The maximum consideration to be paid by Parent (including Parent Common Stock to be reserved for issuance upon exercise of the Company's options assumed by Parent -3- pursuant to Section 5.16) pursuant to the Merger shall be equal to (i) 800,000 shares of Parent Common Stock (plus any additional shares of Parent Common Stock exchanged in the Merger at the Secondary Exchange Ratio for shares of capital stock of the Company issued upon exercise of the Warrant (as defined in Section 3.2)) plus (ii) an additional 200,000 shares of Parent Common Stock to be reserved for issuance upon exercise of options to purchase Parent Common Stock to be granted to the employees of CityAuction as set forth in Section 2.1(i)(b) below. The second paragraph of Section 2.1(h)(i)(B) is amended and restated to read as follows: "The Pledged Shares shall be withheld from the shareholders in relation to the prorated percentage of shares of Parent Common Stock issuable to such shareholders in the Merger as set forth in Section 2.1(c)." Sections 2.2 (c), (d), (e) and (f) shall be amended and restated in their entirety as follows: "(c) Exchange Procedures. As soon as practicable after the Effective ------------------- Time, the Surviving Corporation shall cause to be mailed to each holder of record of a certificate or certificates which immediately prior to the Effective Time represented outstanding shares of Company Preferred Stock or Common Stock (the "Certificates") whose shares are being converted into Parent Common Stock pursuant to Section 2.1 and the Merger Agreement, (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for Parent Common Stock. Upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by Parent, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor the number of shares of Parent Common Stock to which the holder of Company Preferred Stock or Common Stock is entitled pursuant to Section 2.1. The Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of Company Preferred Stock or Common Stock which is not registered on the transfer records of the Company, the appropriate number of shares of Parent Common Stock may be delivered to a transferee if the Certificate representing such capital stock of the Company is presented to the Exchange Agent and accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Section 2.2, each Certificate shall be deemed at any time after the Effective Time to represent the right to receive upon such surrender the number of shares of Parent Common Stock as provided by this Section 2 and the provisions of the California Code. (d) No Further Ownership Rights in Capital Stock of the Company. All ----------------------------------------------------------- Parent Common Stock delivered upon the surrender for exchange of shares of Company Preferred Stock or Common Stock in accordance with the terms hereof shall be deemed to have been delivered in full satisfaction of all rights pertaining to such shares of Company Preferred Stock or Common Stock, and following the Effective Time, the Certificates shall have no further rights to, or -4- ownership in, shares of capital stock of the Company. There shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Company Preferred Stock or Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Section 2. (e) Lost, Stolen or Destroyed Certificates. In the event any -------------------------------------- certificates evidencing shares of Company Preferred Stock or Common Stock shall have been lost, stolen or destroyed, the Exchange Agent shall make payment in exchange for such lost, stolen or destroyed certificates, upon the making of an affidavit of that fact by the holder thereof, such shares of Parent Common Stock and cash for fractional shares, if any, as may be required pursuant to Section 2.1(f); provided, however, that Parent may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Parent or the Exchange Agent with respect to the certificates alleged to have been lost, stolen or destroyed. (f) No Liability. Notwithstanding anything to the contrary in this ------------ Section 2.2, none of the Exchange Agent, the Surviving Corporation or any party hereto shall be liable to a holder of shares of Company Preferred or Common Stock for any amount paid to a public official pursuant to any applicable abandoned property, escheat or similar law." 2. Agreement of Merger. The parties agree that the Agreement of Merger shall be revised to reflect the amendments, described above. 3. Authority. The Company represents and warrants that the execution and delivery of this Amendment by the Company has been duly authorized by all necessary corporate action on the part of the Company, that this Amendment has been duly executed and delivered by the Company and that this Amendment is the valid and binding obligation of the Company, enforceable in accordance with its terms, except that such enforceability may be subject to (i) bankruptcy, insolvency, reorganization or other similar laws affecting or relating to enforcement of creditors' rights generally and (ii) general equitable principles. Parent represents and warrants that the execution and delivery of this Amendment by Parent has been duly authorized by all necessary corporate action on the part of Parent, that this Amendment has been duly executed and delivered by Parent and that this Amendment is the valid and binding obligation of Parent, enforceable in accordance with its terms, except that such enforceability may be subject to (i) bankruptcy, insolvency, reorganization or other similar laws affecting or relating to enforcement of creditors' rights generally and (ii) general equitable principles. 4. Governing Law; Counterparts. The internal laws of the State of California (irrespective of its choice of law principles) will govern the validity of this Amendment, and this Amendment may be executed in counterparts each of which shall be deemed an original and all of which shall constitute one instrument. -5- TICKETMASTER ONLINE - CITYAUCTION, INC. CITYSEARCH, INC. By: s/s Douglas McPherson By: /s/ Andrew Rebele -------------------------------- -------------------------------- Douglas McPherson Andrew Rebele Chief Legal Officer President NERO ACQUISITION CORPORATION SHAREHOLDERS By: /s/ Douglas McPherson By: /s/ Andrew Rebele -------------------------------- -------------------------------- Douglas McPherson Andrew Rebele President By: /s/ Andrew Rebele -------------------------------- Monica Lee -6- EX-10.30 3 EMPLOYMENT AGREEMENT - PERKINS EXHIBIT 10.30 TICKETMASTER ONLINE - CITYSEARCH, INC. 790 East Colorado Boulevard, Ste. 200 Pasadena, California 91010 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of this 25th day of November 1998, by and between Robert Perkins, an Individual ("Employee"), and Ticketmaster Online - CitySearch, Inc., a Delaware corporation ("Company"). RECITALS WHEREAS, the Company desires to employ the Employee, and the Employee desires to be employed by the Company, on the terms and conditions set forth herein; WHEREAS, the Employee's services are considered to be valuable to the future business and operations of the Company. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto agree as follows: AGREEMENT 1. Employment. ---------- By execution of this Agreement, the Company agrees to employ the Employee, and the Employee agrees to be employed by the Company, upon the terms and subject to the conditions set forth in this agreement. 2. Positions and Duties. -------------------- Employee shall serve as the Executive Vice President of the Company, with such duties and responsibilities as the Company's Board of Directors ("Board") or the Company's Chief Executive Officer ("CEO") may from time to time assign to him. Unless otherwise determined by the Board, Employee shall report directly to the CEO. Employee and the Company agree that the Employee's initial responsibilities shall include but not be limited to duties commensurate with Employee's management position. Employee acknowledges and agrees that these duties and the scope and responsibilities of Employee's position may be modified from time to time as determined by the Board and/or the CEO. 3. Term of Agreement. ----------------- This agreement shall be in effect from January 1, 1999 to December 31, 2000. The agreement may be terminated as set forth in paragraph 5. 4. Compensation. ------------ As compensation for his services to be performed hereunder, Company shall provide Employee with the following compensation and benefits: 4.1 Base Salary. Employee's initial base salary shall be $205,000 per ----------- annum in 1999 and $215,000 per annum in 2000. Employee's base salary shall be payable in accordance with this Company's payroll practices as in effect from time to time. The Company may make such deductions, withholdings and other payments from all sums payable to Employee pursuant to this Agreement which are required by law or as Employee requests for taxes and other charges. 4.2 Stock Options. (a) Company shall grant to Employee an option to ------------- purchase a total of 25,000 shares of Common Stock of the Company. The exercise price of these options shall be $8.67 per share. One-fourth of such options shall vest on October 1, 1999, and 1/48th of the options would vest at the end of each of the subsequent 36 months. At the end of four years, all options under this grant will have vested. A copy of the option agreement is attached hereto as Exhibit A. (b) Employee shall also have the opportunity to receive an additional 5,000 options on each first business day following March 31, 1999, June 30, 1999, September 30, 1999 and December 31, 1999, provided that the Company has met or exceeded the on-line ticket revenue forecast for each preceding quarter, as determined by the Company model dated 11/12/98. A copy of this model is attached as Exhibit B. This model is not subject to any adjustments. These options will vest ratably over 48 months with no cliff. 4.3 Benefits. Employee will be eligible for participation in all Company -------- benefits, including medical PPO plan, dental, vision, flexible benefits, long term disability and 401(k) programs. Employee's dependent will be eligible for participation in Company's medical PPO, dental and vision plans. Participation by Employee and Employee's dependent in the Company's medical PPO, dental and vision plans will be at no expense to Employee. The Company also agrees to maintain in effect, during the term of employment, a life insurance policy payable to employee's estate or named beneficiary, in the amount of $200,000. In addition, the Employee shall be eligible for paid time off benefits including holiday pay, in accordance with company policies. 4.4 Car Lease. Company shall reimburse payments for the existing lease on --------- Employee's car, for the term of this agreement. Costs shall not exceed $10,000 per year. 4.5 Expenses. Employee shall be reimbursed for reasonable expenses in -------- accordance with Company policies for senior management as amended from time to time. 5. Termination of Agreement. ------------------------ 5.1 Voluntary Termination; Termination for Cause. -------------------------------------------- (a) No Severance Payment. In the event that Employee voluntarily -------------------- terminates his employment with the Company or the Company terminates his employment for "cause" (as defined below), then the Company's sole obligation to Employee will be (i) to pay Employee any salary, paid time off (PTO) or the like accrued but not paid as of the date of termination and (ii) to provide Employee with such right to continue health care benefits (at Employee's expense) as required by applicable law. (b) Termination for Cause Defined. For purposes of this Agreement, ----------------------------- the term "cause" shall mean: (i) the death or permanent disability of Employee, with the term "permanent disability" defined as meaning a total or partial physical or mental disability continuing for a period of not less than three (3) consecutive months, which prevents Employee from substantially discharging the essential functions of his position as set forth herein; (ii) Employee's malfeasance in connection with his employment or neglect or inadequate performance of his duties as determined at any time in the sole and absolute discretion of the Board of Directors; (iii) Employee's material breach of this Agreement; (iv) Employee's material breach of the inventions and confidentiality agreement and non disclosure agreement which employee must sign contemporaneously with the execution of this agreement. (v) Employee personally engaging in knowing and intentional illegal conduct which is injurious to the Company or its affiliates. 5.2 Involuntary Termination; Severance. ---------------------------------- (a) In the event the Company shall determine to terminate Employee for cause, the Company shall provide the Employee, not less than ten business days prior, written notice of the Company's intention to terminate such employment, including a statement describing the basis for such termination. Employee shall then have the opportunity to respond to the Company during the ten day notice period and cure the breach giving rise to the basis for the termination. Company will consider Employee's response and cure prior to reaching a final determination which it shall make in its sole discretion. (b) In the event that Employee's employment with the Company is terminated by the Company for any reason other than cause (as defined above), the Company shall pay to Employee as severance pay, full base salary for the remainder of the term of this agreement. Termination of employment for any reason whatsoever, shall not affect employee's ability to exercise stock options that have vested prior to date of termination. Nothing contained herein shall be construed to limit Employee's ability to exercise options vested prior to termination. 6. Miscellaneous. ------------- 6.1 Arbitration. If any dispute between the parties arises out of this ----------- agreement, such dispute shall be finally resolved by binding arbitration conducted in accordance with commercial rules of the American Arbitration Association then in effect. Any such arbitration shall be conducted before a single arbitrator at any location mutually agreeable to Employee and the Company. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. 6.2 Assignment. This Agreement shall inure to the benefit of and shall be ---------- binding upon the successors and the assigns of the Company. This Agreement is personal to Employee and may not be assigned by him. 6.3 Severability. If any provision of the Agreement shall be found ------------ invalid by any court of competent jurisdiction, such findings shall not affect the validity of the other provisions hereof and the invalid provisions shall be deemed to have been severed herefrom. 6.4 Applicable Law. This Agreement shall be governed in all respects by -------------- the internal laws of the State of California. 6.5 Entire Agreement. This Agreement expresses the entire understanding ---------------- of the parties with respect to the terms of Employee's employment with the Company, and supersedes any prior agreement, understanding or the like, whether written or oral. 6.6 Counterparts. This Agreement may be executed simultaneously in any ------------ number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 6.7 Attorney's Fees. In the event any party hereto commences arbitration --------------- or legal action to enforce this Agreement, the prevailing party shall be entitled to its reasonable attorneys' fees, costs and expenses incurred in such action. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth on the first page hereof. TICKETMASTER ONLINE - CITYSEARCH, INC. By: /s/ Charles Conn ---------------------------------------- Charles Conn, Chief Executive Officer EMPLOYEE By: /s/ Robert Perkins ---------------------------------------- Robert Perkins EX-10.31 4 EMPLOYMENT AGREEMENT - HAGAN EXHIBIT 10.31 November 27, 1998 David W. Hagan 196 Cottingham Street Toronto, Ontario M4V1C5 Dear David: We are impressed by your background and look forward to you joining the Ticketmaster Online-CitySearch Team. This letter confirms the terms of our offer of employment that we have recently discussed. We would like you to begin employment on November 16, 1998. You will be the Chief Operating Officer, reporting to Charles Conn, Chief Executive Officer and Thomas Layton, President. Your base salary will be $170,000 annually. In addition, you are eligible to receive an annual bonus of $30,000, paid quarterly. Your bonus will be earned based on successful achievement of the financial and operating objectives set out as part of the Company's initial public offering plan. Base salary will be paid out on the 30th of each month. You have the option of having us deposit your checks directly to your account or having the checks mailed to you. You may receive a stock option grant to purchase shares of Ticketmaster Online - CitySearch Common Stock. We anticipate that the Board of Directors will consider granting you an option for 175,000 shares (as adjusted for any stock splits or similar recapitalizations of the company that may occur prior to that time). The current strike price is $8.67 per share. One-fourth the options would vest on your one-year anniversary date and 1/48th of the options would vest at the end of each of the subsequent 36 months. At the end of four years, all options will have vested. The grant and terms of the options are subject to modification and approval by the Board of Directors when it considers the option. As discussed, we anticipate that you will grow in your leadership role and that you will assume the additional title of President within 3 to 6 months. In the case of that eventuality, we would make an additional option grant of no less than 50,000 option shares of company stock, with a strike price equal to the then prevailing market price. You and your dependents will be eligible to participate in the benefits program on the first of the month following 30 days of employment. The Company will cover the costs for HMO medical, dental and vision benefits; however, you may elect to participate in the PPO plan and are able to pay for the incremental costs through payroll deductions. You will also be enrolled in our long-term disability (LTD) plan on the first of the month following 3 months of employment. You are also eligible to participate in the 401(k) plan in the next quarterly open enrollment period following the completion of 3 months of employment. In addition, you will accrue 15 days paid time off (PTO) on an annual basis, and are eligible to take accrued PTO after you have worked at the company for 3 continuous months. PTO may be requested for any reason, and need not be explained by the employee at any time. Examples of PTO use are for vacation, sick days, doctor/dentist appointments, jury duty, personal days or other miscellaneous reasons. In addition, the Company will cover reasonable costs of relocating you and your family, including: . Transaction costs associated with selling your current home; . Reasonable costs associated with moving your physical possessions; . Reasonable travel expenses associated with trips by you to visit your family, and for them to visit you, up to 7 months after your start date and before you have relocated your family to the Los Angeles region. We expect that you will be traveling to Toronto on a bi-weekly basis and expect your family to visit Los Angeles on a monthly basis; . Temporary housing in the company corporate apartment prior to the purchase of a home in the Los Angeles region. November 27, 1998 D. Hagan In the event that you must repay your current Sprint Canada mortgage prior to closing on the sale of your house, the company will give you a short-term bridge loan of $250,000, at an interest rate still to be determined, for a period not to exceed 6 months. Repayment of this amount would be due on the closing of the sale of your current home. Your employment with Ticketmaster Online - CitySearch is "at will." This means that you are free to terminate your employment, at any time, with or without a reason, and Ticketmaster Online - CitySearch has the right to terminate your employment at any time, with or without a reason. Although the Company may choose to terminate employment for cause, cause is not required. In the event that you are terminated, the Company will continue to pay your base salary for 9 months, or until you find alternative full-time employment, whichever comes first. This salary continuation will not be granted in the event that: . You have willfully failed to carry out the reasonable directions of the CEO within 10 business days after written demand for substantial performance is delivered to you by an Officer of The Company; . You have committed an act or acts of personal dishonesty which results in personal enrichment by you at the expense of the company or an act or acts of personal dishonesty which causes substantial injury to the business, operations or reputation of The Company; . You have been convicted of a felony; . You have violated our alcohol and drug policy. The United States government requires all U.S. employers to verify that a new employee is eligible to work in the United States. This law applies to citizens as well as to non-citizens. You will receive the necessary information and documentation requirements upon joining Ticketmaster Online - CitySearch. In addition, you will need to sign the company's standard Non-Disclosure Agreement, Employment Agreement and Inventions and Confidentiality Agreement on or before your first day of employment. This letter covers all aspects of our offer. If you have any questions, please do not hesitate to get in touch with one of us. We can be reached at (626) 660- 2532. Our fax number is (626) 660-2537. Sincerely, /s/ Sharon Smith /s/ Brad Ramberg - ---------------------------------- ----------------------------------- Sharon Smith Brad Ramberg Vice President, People Chief Financial Officer Please confirm acceptance of these terms by signing in the space provided below and return the original offer letter to our office. A duplicate copy is enclosed for your records. I accept the position of Chief Operating Officer with Ticketmaster Online - CitySearch and will start work on _______________. /s/ David W. Hagan - ---------------------------------- ___________________________________ Signature Date -2- EX-23.1 5 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-71059) pertaining to the 1996 Stock Option Plan, 1998 Stock Plan and the 1998 Employee Stock Purchase Plan of Ticketmaster Online-CitySearch, Inc. of our report dated January 29, 1999, with respect to the consolidated financial statements and schedule of Ticketmaster Online-CitySearch, Inc. included in the Annual Report (Form 10-K) for the eleven months ended December 31, 1998. /s/ Ernst & Young LLP Woodland Hills, California March 29, 1999 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR YEAR JAN-31-1998 DEC-31-1998 FEB-01-1997 FEB-01-1998 JAN-31-1998 DEC-31-1998 0 106,910 0 0 167 1,307 0 (58) 0 0 291 111,189 585 7,216 (188) (1,323) 688 416,725 391 11,618 0 0 0 0 0 0 0 715 (289) 402,873 688 416,725 9,905 27,873 9,905 27,873 3,522 13,863 5,731 42,195 0 0 0 0 0 (54) 4,174 (14,268) 1,827 2,951 2,347 (17,219) 0 0 0 0 0 0 2,347 (17,219) .06 (.38) .06 (.38)
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