-----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, H4ntueb60RlsSAtKAIKF3HNXOmdmGU7LmUDGsDJivXLHpUpxV4HIqPwwtIhduVeF D0ChRznhenvdjRscC+Xakw== 0001012870-99-002109.txt : 19990630 0001012870-99-002109.hdr.sgml : 19990630 ACCESSION NUMBER: 0001012870-99-002109 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19990629 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: S-1 SEC ACT: SEC FILE NUMBER: 333-81761 FILM NUMBER: 99654044 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 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on June 28, 1999 Registration No. ________________ ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------- Form S-1 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 TICKETMASTER ONLINE-CITYSEARCH, INC. (Exact name of Registrant as specified in its charter) Delaware 7375 95-4546874 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
---------------------------------- 790 E. Colorado Boulevard, Suite 200 Pasadena, California 91101 (626) 405-0050 (Address and telephone number of Registrant's principal executive offices) ---------------------------------- Charles Conn Chief Executive Officer Ticketmaster Online-CitySearch, Inc. 790 E. Colorado Boulevard, Suite 200 Pasadena, California 91101 (626) 405-0050 (Name, address and telephone number of agent for service of process) ----------------------------------- Copies to: Larry W. Sonsini, Esq. Eric J. Bock, Esq. John T. Sheridan, Esq. Cendant Corporation WILSON SONSINI GOODRICH & ROSATI 9 West 57th Street Professional Corporation New York, New York 10019 650 Page Mill Road (212) 493-9300 Palo Alto, CA 94304 (650) 493-9300 ---------------------------------- Approximate date of commencement of proposed sale to the public: From time to time as the selling stockholders may decide. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] ----------------------------------- CALCULATION OF REGISTRATION FEE
================================================================================================================== Title of each class of Amount Proposed maximum Proposed maximum securities to be registered to be offering price aggregate Amount of registered per share(1) offering price(1) registration fee - ------------------------------------------------------------------------------------------------------------------- Common stock, par value 2,046,574 $22.8125 $46,687,470 $12,980 ==================================================================================================================
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(c) of the Securities Act of 1933, as amended, based on the average of the high and low sales price as reported on Nasdaq on June 23, 1999. ----------------------------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED JUNE 28, 1999 2,046,574 shares LOGO CLASS B COMMON STOCK ------------------ The selling stockholders identified in this prospectus are offering up to 2,046,574 shares of Ticketmaster Online-City Search, Inc.'s Class B Common Stock. Ticketmaster Online-CitySearch's stock is traded on the Nasdaq National Market under the symbol "TMCS." The last reported sale price for the Class B Common Stock on the Nasdaq National Market on June 25, 1999 was $25.69 per ----- share. We will not receive any of the proceeds from the sale of shares by the selling stockholders and we are not offering any shares for sale under this prospectus. See "Plan of Distribution" for a description of sales of the shares by the selling stockholders. ------------------ Investing in the Class B Common Stock involves risks. See "Risk Factors" beginning on page 7. ------------------ The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this prospectus is _____________, 1999 You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. The selling stockholders are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. In this prospectus, references to "Ticketmaster Online-CitySearch," "we," "us" and "our" refer to Ticketmaster Online-CitySearch, Inc. and its subsidiaries. ------------------- TABLE OF CONTENTS
Page -------- Summary................................................................................................ 3 Risk Factors........................................................................................... 7 Special Note Regarding Forward-Looking Statements...................................................... 26 Use of Proceeds........................................................................................ 28 Price Range of Common Stock............................................................................ 28 Dividend Policy........................................................................................ 28 Capitalization......................................................................................... 29 Selected Financial Data................................................................................ 30 Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 33 Business............................................................................................... 42 Management............................................................................................. 55 Principal and Selling Stockholders..................................................................... 66 Plan of Distribution................................................................................... 72 Certain Transactions................................................................................... 73 Description of Capital Stock........................................................................... 76 Shares Eligible for Future Sale........................................................................ 81 Legal Matters.......................................................................................... 81 Experts................................................................................................ 81 Where You Can Find More Information.................................................................... 82 Index to Financial Statements.......................................................................... F-1
------------------- We own the CitySearch logo, Match.com and the Match.com logo trademarks. We are the exclusive licensee in our field of use of the trademark "CitySearch," a registered trademark of a third party. "Ticketmaster" is a registered United States trademark of Ticketmaster Corp. The Ticketmaster Online logo is a registered United States service mark of Ticketmaster Corp. This prospectus also includes trademarks owned by other companies. 2 SUMMARY Because this is only a summary, it does not contain all the information that may be important to you. You should read the entire prospectus, especially "Risk Factors" and the Financial Statements and Notes, before deciding to invest in our common stock. We have 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 Corporation, a leading provider of live event automated ticketing services in the United States. We are integrating our local CitySearch city guides with our 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 44 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 specific limitations, Ticketmaster Online is the exclusive agent for Ticketmaster Corp. for the online sale of tickets to live events presented by Ticketmaster Corp.'s clients. We intend 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. We include selected CitySearch editorial content on the Ticketmaster Online Web site, thereby providing additional information to assist purchasing decisions. We believe that by expanding our branded network of local city guides and increasing the sales of tickets sold online, our Web sites will increasingly attract local, regional and national advertisers and local consumers seeking to transact on our Websites. We have recently expanded our Internet offerings by purchasing CityAuction, Inc., an online person-to-person auction company, and Match.com, Inc., a leading online personals company. We have also agreed to purchase Web Media Ventures LLC (d/b/a One and Only Network), another leading online personal company which also operates one of the largest affiliate programs on the Internet. We have two classes of authorized Common Stock outstanding, Class A Common Stock and Class B Common Stock. On December 2, 1998, we filed a Registration Statement on Form S-1 for 8,050,000 shares of Class B Common Stock. As of June 9, 1999, there were approximately 62,395,683 shares of Class A Common Stock outstanding and approximately 10,288,584 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. We have also authorized Class C Common Stock which is nonvoting and of which no shares are issued and outstanding. We are currently a direct, non-wholly-owned subsidiary of Ticketmaster Corporation, an Illinois corporation, which is an indirect, wholly-owned subsidiary of USA Networks, Inc., a Delaware corporation, which is referred to in this prospectus as USAi. USAi beneficially owns 42,480,143 shares of Class A Common Stock, or approximately 68.1%, of our total outstanding Class A Common Stock, representing approximately 67% of the total voting power of the outstanding Common Stock. Our principal executive offices are located at 790 E. Colorado Boulevard, Suite 200, Pasadena, California 91101, and our telephone number at that address is (626) 405-0050. 3 Ticketmaster Online-CitySearch Merger On September 28, 1998, pursuant to an Amended and Restated Agreement and Plan of Reorganization, dated August 12, 1998, by and among CitySearch, Inc., USAi, Ticketmaster Group, Ticketmaster Corp., a wholly-owned subsidiary of Ticketmaster Group, Ticketmaster Multimedia Holdings, Inc. (Ticketmaster Online), and a wholly-owned merger subsidiary of CitySearch, the merger subsidiary was merged with and into Ticketmaster Online, with Ticketmaster Online continuing as the surviving corporation and as a wholly- owned subsidiary of CitySearch. Recent Developments Acquisition of CityAuction, Inc. On March 29, 1999, we completed the acquisition of CityAuction Inc., a person-to-person online auction community. In connection with the acquisition, we issued an aggregate of 793,726 shares of our Class B Common Stock for all the outstanding capital stock of CityAuction. A portion of these shares are being offered pursuant to this prospectus by certain of the selling stockholders. The acquisition was accounted for using the purchase method of accounting which resulted in $28.2 million of goodwill that will be amortized over five years. Acquisition of Match.com, Inc. On June 14, 1999, we completed the acquisition of Match.com, Inc., an Internet personals company. In connection with the acquisition, we issued 1,924,777 shares of Class B Common Stock to the former owners of Match.com. These shares are being offered pursuant to this prospectus by one of the selling stockholders. The acquisition was accounted for using the purchase method of accounting which resulted in approximately $47.5 million of goodwill that will be amortized over five years. Pending Acquisition of One and Only On June 10, 1999, Ticketmaster Online-CitySearch, Web Media Ventures, LLC, a Texas limited liability company (d/b/a One & Only Network), William Bunker, David Kennedy and Glenn Wiggins entered into a Reorganization Agreement pursuant to which we will purchase all the outstanding units of One & Only for shares of our Class B Common Stock. One & Only is an Internet personals company distributing its services through a network of affiliated Internet sites. The Company has the option to pay cash or issue shares of Class B Common Stock in exchange for all of the One & Only units. The initial target purchase price for the One & Only units is $40.6 million of the Company's Class B Common Stock, of which $30 million of Class B Common Stock is payable upon the closing of the transaction and $2,195,000 of Class B Common Stock is payable in two quarterly installments with the remainder of the target purchase price due 270 days after the closing of the transaction. The target purchase price is subject to a 10% increase or decrease based on, among other things, the achievement of certain 1999 calendar revenue targets of One & Only. The number of shares of Class B Common Stock to be issued in the acquisition will be determined by dividing the average closing price of the Class B Common Stock shortly before the closing of the acquisition and shortly before each subsequent payment date into the portion of the purchase price, as adjusted, currently payable subject to certain minimum and maximum share prices. The final purchase price to be recorded will also depend on the price of the Class B Common Stock at the date of closing. The closing of the acquisition is subject to several conditions, including but not limited to the effectiveness of a registration statement to be filed by Ticketmaster Online-CitySearch with respect to the Class B Common Stock to be issued in the transaction. The acquisition will be accounted for using the purchase method. We expect that the acquisition will result in additional goodwill in an amount approximating the purchase price that we will amortize over a period of five years. 4 The Offering
Class B Common Stock to be offered by the selling stockholders 2,046,574 shares Common Stock to be outstanding after the offering: Class A Common Stock........................................................ 62,395,683 shares Class B Common Stock........................................................ 10,288,584 shares Total Common Stock....................................................... 72,684,267 shares Use of proceeds............................................................. We will not receive any proceeds from the sales of Class B Common Stock by the selling stockholders. See "Use of Proceeds." Nasdaq National Market Symbol............................................... TMCS The information concerning outstanding Common Stock above is as of June 9, 1999 and does not include the 1,924,277 shares of Class B Common Stock issued by Ticketmaster Online--Citysearch on June 14, 1999 in connection with the acquisition of Match.com. The information also assumes no sales of Class A Common Stock subsequent to June 9, 1999. Each share of Class A common stock automatically converts into one share of Class B common stock upon transfer. See "Description of Capital Stock."
Unless otherwise stated, all information contained in this prospectus excludes: (1) 2,656,811 shares of Class A Common Stock issuable upon the exercise of options outstanding at June 9, 1999 at a weighted average price of $5.16 per share under the 1996 Stock Plan; (2) 728,612 shares of Class B Common Stock issuable upon the exercise of options outstanding at June 9, 1999 at a weighted average price of $21.52 per share under the 1998 Stock Plan; and (3) an aggregate of 4,270,700 shares of Class B Common Stock available for future grant or issuance as of March 31, 1999 under the 1998 Stock Plan and the Purchase Plan. See "Management - Employee Benefit Plans." 5 SUMMARY FINANCIAL DATA (in thousands, except per share data) The summary 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 summary financial data presented below for the year ended January 31, 1998, are derived from audited Financial Statements of Ticketmaster Online as the predecessor entity. The statements of operations data for the three-month periods ended March 31, 1998 and 1999 and the balance sheet data at March 31, 1999 are derived from unaudited financial statements included elsewhere in this Prospectus. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the audited financial statements and contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of Ticketmaster Online-CitySearch, Inc.'s results of operations for such periods and financial condition at such date. The results of operations for the three-months ended March 31, 1999 are not necessarily indicative of the results to be expected for the full year or future periods. The selected Ticketmaster Online-CitySearch, Inc. 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, Inc. and Notes thereto included elsewhere in this report.
Three Months Ended Year Ended Eleven Months ----------------------- January Ended March 31, March 31, Consolidated Statements of Operations Data: 31, 1998 December 31, 1998 1998 1999(1) ------------- ------------------ ------------ --------- Revenues: Ticketing operations.................................... $ 5,972 $ 15,743 $ 2,237 $ 9,386 Sponsorship and advertising............................. 3,933 6,754 917 1,032 City guide and related.................................. -- 5,376 -- 5,553 ------- --------- ------- --------- Total revenues....................................... 9,905 27,873 3,154 15,971 Costs and expenses: Ticketing operations.................................... 3,522 9,842 1,377 6,851 City guide and related.................................. -- 4,021 -- 4,607 Sales and marketing..................................... 490 6,834 225 6,200 Research and development................................ -- 1,728 -- 1,933 General and administrative.............................. 1,719 3,495 515 3,287 Amortization of goodwill................................ -- 16,275 -- 11,976 ------- --------- ------- --------- Total costs and expenses............................. 5,731 42,195 2,117 34,854 ------- --------- ------- --------- Income (loss) from operations................................ 4,174 (14,322) 1037 (18,883) Interest income, net......................................... -- 54 -- 1,200 ------- --------- ------- --------- Income (loss) before provision for income taxes.............. 4,174 (14,268) 1037 (17,683) Income taxes provision....................................... 1,827 2,951 452 57 ------- --------- ------- --------- Net income (loss)............................................ $ 2,347 $ (17,219) $ 585 $ (17,740) ======= ========= ======= ========= Basic and diluted net income (loss) per share(2)............. $ 0.06 $ (0.38) $ 0.02 $ (0.25) ======= ========= ======= ========= Shares used to compute basic and diluted net income loss(2).. 37,238 45,201 37,238 71,555 ======= ========= ======= =========
December 31, 1998 March 31, 1999 ------------------ ---------------- Balance Sheet Data: Cash and cash equivalents................................................................... $ 106,910 $ 99,284 Working capital............................................................................. 100,691 94,175 Total assets (3)............................................................................ 416,725 426,416 Stockholders' equity........................................................................ 403,588 413,345
------------------------------- (1) Includes the operating results of CitySearch from September 29, 1998 to December 31, 1998 as a result of the merger of Ticketmaster Online and CitySearch. The eleven month period reflects our 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 our continuing growth, such presentation would not be considered meaningful. (2) Basic and diluted net income (loss) per share is based on the weighted average number of outstanding Class A and Class B Common Stock shares for the eleven months ended December 31, 1998 and three months ended March 31, 1999. For the three months ended March 31, 1998 and the year ended January 31, 1998 the calculation is based on the number of shares of City Search Common Stock exchanged in the merger with Ticketmaster Online. (3) Total assets at December 31, 1998 reflect $299.6 million of goodwill, net of accumulated amortization of $16.3 million resulting from the merger of Ticketmaster Online and CitySearch and USAi's acquisition of all of the outstanding equity of Ticketmaster Group in June 1998 and USAi's acquisition of 1,997,502 shares of Class A Common Stock for $17.2 million in a tender offer completed in November 1998. Total assets at March 31, 1999 reflect $315.9 million of goodwill, net of accumulated amortization of $28.3 million resulting from the transaction previously mentioned in addition to an aggregate of $28.2 million of goodwill associated with the acquisition of CityAuction. 6 RISK FACTORS An investment in this Class B Common Stock offering is very risky. You should carefully consider the following risk factors in addition to the remainder of this prospectus before purchasing the Class B Common Stock. This prospectus contains forward-looking statements that involve risks and uncertainties. Many factors, including those described below, may cause actual results to differ materially from anticipated results. We Have A History Of Losses, We Expect Future Losses And We Cannot Assure You That We Will Achieve Or Maintain Profitability We incurred net losses of $17.2 million and $17.7 million for the eleven months ended December 31, 1998 and the three months ended March 31, 1999, respectively. We expect to expend significant financial and management resources on the roll-out of our service in new CitySearch owned and operated and partner- led markets, site and content development on our CitySearch.com, CityAuction.com, Match.com and Ticketmaster.com sites, integration of the CitySearch, CityAuction, Match.com and Ticketmaster Online services, strategic relationships, technology and operating infrastructure. As a result, we expect to incur significant additional losses and continued negative cash flow from operations for the foreseeable future. We believe that our future profitability and success will depend in large part on, among other things: . our ability to generate sufficient revenues from online ticketing, online auctions, sales of our Web sites to businesses and from the licensing of our technology and business systems to partners setting up our services in partner-led markets; . the ability of Ticketmaster Corp. to maintain existing relationships and enter into new relationships with live event venues, sports franchises, promoters and other clients for which it sells live event tickets; . the ability of Ticketmaster Corp. to obtain or retain for us the right to sell live event tickets and related merchandise online; . our ability to effectively maintain existing relationships with our media partners; . our ability to successfully enter into new strategic relationships for distribution and increased usage of our services; . our ability to provide superior customer service; . our ability to continue to develop and upgrade our technologies and commercialize our services incorporating these technologies; . and our ability to generate sufficient online traffic and sales volume to achieve profitability. As a result of the merger of Ticketmaster Online and CitySearch in September 1998, we recorded a significant amount of goodwill which will adversely affect our earnings and profitability for the foreseeable future. We recorded an aggregate of $315.9 million of goodwill and other intangibles, $154.8 million of which related to the transaction in which Ticketmaster Group, Inc. became a wholly-owned subsidiary of USAi, and is to be amortized through 2008, and $161.1 million of which related directly to the merger of Ticketmaster Online and CitySearch and is to be amortized through 2003. In addition, our acquisitions of CityAuction and Match.com resulted in an aggregate of $83.6 million in goodwill which will be amortized through 2004. Our proposed acquisition of One and Only would result in additional goodwill of approximately $40.7 million, assuming the final purchase price is in the middle of the range, which will be amortized through 2004. To the extent the amount of recorded goodwill is increased or we have future losses and are unable to demonstrate our ability to recover the amount of goodwill recorded during these time periods, the period of amortization could be shortened, which may further increase 7 annual amortization charges. In this case, our business, financial condition and results of operations could be materially and adversely affected. Furthermore, we completed our initial public offering in December 1998 and have a limited history as a company with public reporting obligations. We are hiring additional management personnel and are expanding our operating systems to address these reporting obligations. To the extent these expenditures precede and are not subsequently followed by increased revenues, our business, financial condition and results of operations could be materially and adversely affected. Our Online Ticketing Service Is Dependent Upon Our Relationship With Ticketmaster Corp. In connection with the merger of CitySearch and Ticketmaster Online, Ticketmaster Online, Ticketmaster Corp. and USAi entered into a license agreement which designates, subject to certain limitations, Ticketmaster Online as Ticketmaster Corp.'s exclusive agent for online live event ticket sales and as its non-exclusive agent for the online sale of merchandise. For the foreseeable future, we anticipate that a majority of our revenues will be derived from the online sale of tickets. We also expect that we will continue to derive a substantial portion of our revenues from per ticket convenience charges and per order handling charges paid by consumers in connection with online purchases of tickets to live events presented or promoted by clients of Ticketmaster Corp. We do not have contractual relationships with the entities for which our Ticketmaster Online service sells tickets as Ticketmaster Corp.'s agent and we are restricted under the license agreement from having such relationships, whether with current Ticketmaster Corp. clients or its potential clients. Accordingly, our future revenues and business success are dependent on Ticketmaster Corp.'s ability to maintain and renew relationships with its existing clients and to establish relationships with additional clients. For the year ended December 31, 1998, Ticketmaster Corp. processed ticket sales for over 3,750 clients. Approximately 20% of Ticketmaster Corp.'s client contracts are subject to renewal each year. We are dependent upon Ticketmaster Corp.'s ability to enter into and maintain client contracts on terms that are favorable to Ticketmaster Corp. and our Ticketmaster Online service. There can be no assurance that Ticketmaster Corp. will be able to enter into or maintain client contracts on such terms. All of our online ticket sales are processed through Ticketmaster Corp.'s systems. Under the license agreement, Ticketmaster Corp. is generally obligated to provide order fulfillment services at least at the same level as such services were generally provided as of the date of the license agreement. The license agreement obligates Ticketmaster Corp. to process a specified number of tickets sold online each year through December 31, 2001. As a result, our future online ticketing revenues are dependent upon Ticketmaster Corp.'s ability to process online ticket sales in an accurate and timely manner. While we believe that, due to our perpetual right to serve as Ticketmaster Corp.'s exclusive agent for online live event ticket sales, Ticketmaster Corp. has a substantial interest in its relationship with us, there can be no assurance that Ticketmaster Corp. will provide fulfillment services to us in excess of the requirements of the license agreement and, in particular, after December 31, 2001. Our ability to generate ticket and merchandise sales on our Ticketmaster Online Web sites is also dependent in part on Ticketmaster Corp.'s ability to maintain and enhance the Ticketmaster brand name. Any failure on the part of Ticketmaster Corp. to maintain its existing base of clients, to establish relationships with new clients upon terms favorable to our Ticketmaster Online service, to obtain or retain for us the right to sell tickets and merchandise online for Ticketmaster Corp.'s clients, to process our online ticket sales in a timely and accurate manner or at levels necessary to support our business or to maintain and enhance the Ticketmaster brand name would have a material adverse effect on our business, financial condition and results of operations. We Are Controlled By USAi We are currently a direct, majority-owned subsidiary of Ticketmaster Corp., which is an indirect wholly-owned subsidiary of USAi. As of June 9, 1999, USAi owned approximately 68% of our total outstanding Class A Common Stock, representing approximately 67% of the total voting power of our total outstanding common stock. As a result of its ownership of Class A Common Stock, USAi generally has the ability to control the outcome of any 8 matter submitted for the vote or consent of our stockholders, except where a separate vote of the holders of Class B Common Stock is required by Delaware law. Subject to applicable Delaware law, USAi is generally not restricted with regard to its ability to control the election of our directors, to cause the amendment of our Amended and Restated Certificate of Incorporation, or generally to exercise a controlling influence over our business and affairs. This control relationship may have the effect of delaying or preventing a change in control of our company and might adversely affect the market price of the Class B Common Stock. Subject to applicable Delaware law, USAi could elect to sell all or a substantial portion of its equity interest in us to a third party, which would represent a controlling or substantial interest in us, without offering to our other stockholders the opportunity to participate in such a transaction. In the event of a sale of USAi's interest to a third party, that third party may be able to control us in the manner that USAi is able to control us, including the ability to control the election of directors. USAi is currently controlled by Barry Diller, who is also a director of our company. Mr. Diller is the Chairman and Chief Executive Officer of USAi. Under stockholder and governance agreements with Liberty Media and Universal Studios, two other significant USAi stockholders, Mr. Diller generally has the right to control the outcome of any matter requiring the approval of USAi stockholders, other than with respect to specified fundamental changes relating to USAi or its subsidiaries. To engage in these fundamental changes, the approval of each of Mr. Diller, Liberty Media and Universal Studios is generally required. Copies of the governance and stockholders agreements among USAi, Universal Studios, Liberty Media and Mr. Diller have been filed with the Securities Exhange Commission as Appendices B and C, respectively, to USAi's Definitive Proxy Statement, dated January 12, 1998 and are available from the SEC. Mr. Diller does not have an employment agreement with USAi, although he has been granted options to purchase a substantial number of shares of USAi common stock. The vesting of the unvested portion of these options, which should occur in the next two years, is conditioned on Mr. Diller remaining at USAi. If Mr. Diller no longer serves in his positions at USAi, generally Universal Studios and Liberty Media will be able to control USAi. Any change in the governance, management, operations or business of USAi could have a material adverse effect on our relationship with USAi and Ticketmaster Corp., and could materially and adversely affect our business, financial condition and results of operations. Conflicts Of Interest May Arise Between Our Company And USAi Conflicts of interest may arise between us, including our Ticketmaster Online service, on the one hand, and USAi and its affiliates, including Ticketmaster Corp., on the other hand, in areas relating to past, ongoing and future relationships and other matters. These also include: . corporate opportunities; . indemnity arrangements; . tax and intellectual property matters; . potential acquisitions or financing transactions; . sales or other dispositions by USAi of shares of the our Class A Common Stock held by it; and . the exercise by USAi of its ability to control our management and affairs. These conflicts also may include disagreements regarding our license agreement with Ticketmaster Corp., including possible amendments to, or waivers of provisions of, the agreement. Due to USAi's ability to control our board of directors and subject to Delaware law, USAi may be able to effect amendments without seeking the approval of any other party. These amendments, modifications or waivers may adversely affect our business, financial condition and results of operations. Ownership interests of our directors or officers in the USAi Common Stock, or service as both a director or officer of us and a director, officer or employee of USAi, could create or appear to create potential conflicts of 9 interest when directors and officers are faced with decisions that could have different implications for us and USAi. Several of the members of our board of directors are also directors, officers or employees of USAi. In addition, USAi is engaged in a diverse range of media and entertainment- related businesses, including businesses engaged in electronic and online commerce including Home Shopping Network and its USA Interactive business. These businesses may have interests that conflict or compete in some manner with our businesses. Subject to applicable Delaware law, USAi is under no obligation, and has not indicated any intention, to share any future business opportunities available to it with us except as expressly provided by our license agreement with Ticketmaster Corp. Our Amended and Restated Certificate of Incorporation also includes provisions which provide that: . USAi shall have no duty to refrain from engaging in the same or similar activities or lines of our business, thereby competing with us; . USAi, its officers, directors and employees shall not be liable to us or our stockholders for breach of any fiduciary duty by reason of any activities of USAi in competition with us; and . USAi shall have no duty to communicate or offer corporate opportunities to us and shall not be liable for breach of any fiduciary duty as a stockholder of us in connection with these opportunities, provided that the relevant procedures set forth in the Amended and Restated Certificate of Incorporation are followed. There can be no assurance that any conflicts that may arise between us and USAi, any loss of a corporate opportunity to USAi that might otherwise be available to us, or any engagement by USAi in any activity that is similar to our businesses will not have a material adverse effect on our business, financial condition and results of operations or our other stockholders. USAi May Sell A Significant Portion Of Our Common Stock That It Owns Which Could Adversely Effect The Price Of Our Stock Subject to applicable federal securities laws, USAi may sell a significant portion of the shares of Class A Common Stock beneficially owned by it or distribute any or all of its shares of Class A Common Stock to its stockholders. At June 9, 1999, USAi's holdings represented approximately 68% of the outstanding Class A Common Stock, representing approximately 67% of the voting power of our total outstanding common stock. Pursuant to our Amended and Restated Certificate of Incorporation, each share of Class A Common Stock will generally be converted automatically into one share of Class B Common Stock upon any transfer by the initial registered holder. Any sales or distributions by USAi of substantial amounts of Common Stock in the public market or to its stockholders, or the perception that these sales or distributions could occur, could adversely affect the prevailing market prices for the Class B Common Stock. USAi is not subject to any obligation to retain any portion of its controlling interest in us. Our Future Operations Depend On The Successful Integration Of Our Component Companies Before the transactions that combined CitySearch and Ticketmaster Online, these companies operated independently and Ticketmaster Online operated as a wholly-owned subsidiary of Ticketmaster Corp. and USAi. CityAuction and Match.com also operated independently prior to their acquisition by us. Our future success will depend to a significant extent on the efficient, effective and timely integration of the operations of these companies. This integration includes the combination of different business models, different technologies and personnel with different expertise and backgrounds and the development of services in which CitySearch's local content, CityAuction's auction functionality, Match.com's Internet personals technology and Ticketmaster Online's live event-specific content and transactional capabilities are integrated with each other. To the extent we close additional acquisitions such as One and Only, we will need to integrate those companies as well. We are also evaluating our existing technologies and our ability to support the expanded range of products and services we are expected to offer. We are currently linking the Ticketmaster Online ticketing service more closely 10 with some of our CitySearch city guides and promoting CityAuction's and Match.com's services throughout the city guides. We have not executed this integration in the past, and this integration could require adaptation of existing technologies or development of new technologies. There can be no assurance that we will be able to coordinate either operational or technological integration effectively or efficiently with these entities. If we do not effectively accomplish the integration of the companies' operations or lose any key employees from these companies, our business, financial condition and results of operations could be materially and adversely affected. We May Have Future Capital Needs And May Not Be Able To Obtain Additional Financing On Acceptable Terms We expect to continue to experience significant negative cash flow from operations for the foreseeable future. USAi has no obligation or agreement to provide any future capital or other funding to us. We may be required to raise additional funds at some point in the future. If additional funds are raised through the issuance of equity securities, our stockholders 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 our stockholders or us. If this financing is not available when required or is not available on acceptable terms, we may be unable to develop or enhance our services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations. Our Future Revenues Are Difficult To Predict And We Expect Our Operating Results To Fluctuate As a result of our limited operating history and the emerging nature of the markets in which we compete, we are unable to accurately forecast our future revenues. Our current and future expense levels are based predominantly on our operating plans and estimates of future revenues and are to a large extent fixed. For example, the CitySearch business model, particularly in our owned and operated markets, requires significant staffing to develop content and to create and maintain relationships with small- and medium-size businesses. We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenues would likely have an immediate material adverse effect on our business, financial condition and results of operations. Furthermore, we currently intend to increase our operating expenses to roll out our CitySearch service in new markets, to fund increased sales and marketing and customer service operations, to further develop our technology infrastructure, to integrate our local content with the event-specific content and transactional capabilities of our Ticketmaster Online service and to broaden our management personnel. To the extent these expenses precede or are not subsequently followed by increased revenues, our operating results will fluctuate and net anticipated losses in a given quarter may be greater than expected. We expect to experience significant fluctuations in our future operating results due to a variety of factors, many of which are outside of our control. Factors that may adversely affect our operating results include, but are not limited to: . Ticketmaster Corp.'s ability to maintain and increase the number of clients for which it provides online ticketing services; . the ability of our partners to meet roll-out schedules for CitySearch city guide services; . the timing and amount of license and royalty payments from our partners; . our ability to increase the volume of online ticket sales through the Ticketmaster Online Web site; . our ability to offer our online ticketing services through our city guides in our partner-led markets on terms acceptable to us; . our ability to increase the number of users of the CityAuction service and revenues generated from auctions; 11 . our ability to retain existing business customers, attract new business customers at a steady rate and maintain customer satisfaction; . the timing and volume of new business Web site orders and our capacity to meet such orders; . our ability to maintain or increase current rates of sales productivity; . the announcement or introduction of new or enhanced sites and services by us or our competitors; . the amount of traffic on our online sites; . the amount of expenditures for online advertising by businesses; . the level of use of the Web and online services and consumer acceptance of the Internet for services such as those offered by us; . our ability to upgrade and develop our systems and attract personnel in a timely and effective manner; . the amount and timing of operating costs and capital expenditures relating to expansion of our business and infrastructure, technical difficulties, system downtime or Internet brownouts; . political or economic events affecting the cities in which we operate; and . general economic conditions. Unfavorable changes in any of the above factors could adversely affect our revenues, gross margins and results of operations in future periods. In addition, we derive a majority of our Ticketmaster Online revenues directly or indirectly from the sale of tickets and related merchandise for live entertainment, sporting and leisure events and this revenue is directly affected by the popularity, frequency and location of these events. Factors affecting the demand for and attendance of these events include general economic conditions, consumer trends and work stoppages. Any occurrence or condition that results in decreased attendance or demand for these entertainment, sporting and leisure events would likely have a material adverse effect on our business, financial condition and results of operations. As a result of the foregoing, we believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of future performance. In addition, the results of any quarterly period are not indicative of results to be expected for a full fiscal year. The foregoing factors are largely unpredictable and our quarterly results of operations may be below the expectations of public market analysts or investors in some future period. We Compete In New And Emerging Markets And Our Services May Not Gain Widespread Acceptance In These Markets The markets for our services have only recently begun to develop, are rapidly evolving and are characterized by a number of entrants that have introduced or plan to introduce competing services. As is typical in the case of new and rapidly evolving industries, demand and market acceptance for recently introduced services are subject to a high level of uncertainty and risk. It is therefore difficult to predict the size and future growth rate, if any, of these markets. There can be no assurance that the markets for our services will develop or that demand for our services will emerge or become economically sustainable. For example, the success of our Ticketmaster Online service will depend on the willingness of consumers to purchase tickets to live events and related merchandise online and our ability to significantly increase online traffic and sales volume. The success of the CityAuction service will depend, in part, on users' willingness to post and purchase goods or services online. The success of Match.com's service will depend on the willingness of single adults to subscribe to online dating services. The success of CitySearch's city guide service will depend, in part, on the willingness of local businesses to pay for custom business Web sites developed by us and to retain the service, which in turn may depend on the popularity of the guides to consumers 12 and on the actual or perceived revenues attributable to the services. If the markets for our services fail to develop or develop more slowly than anticipated or we are not successful in gaining widespread acceptance in these markets, our business, financial condition and results of operations could be materially and adversely affected. Our Turnover Rate Of Business Customers For the CitySearch Service Is Higher Than We Initially Had Anticipated And, If It Does Not Improve, Our CitySearch Service Will Suffer The turnover rate of business customers using our CitySearch service has been higher than we had anticipated, and we cannot provide assurance that turnover rates will decrease and will not in the future materially and adversely affect our business, financial condition and results of operations. Specifically, the turnover rate has been higher than we expected due to several factors, including: . our early belief that our services would be suited to a broader base of business customers; . the challenges of proving advertising value to a broad range of small businesses that may not have significant experience with online services; . our continuing refinements to our sales, production and customer service processes to meet the needs of our business customers; and . our initial underestimation of the need for continuous marketing support of our business customers. We cannot provide assurance that businesses will elect to outsource the design, development and maintenance of their Web sites to services such as CitySearch. Businesses may elect to perform such tasks internally, particularly if third-party providers of such services prove to be unreliable, ineffective, too expensive or if software companies offer user-friendly and cost-effective tools for such purpose. In the event that a significant number of businesses internalize tasks, our business, financial condition and results of operations could be materially and adversely affected. We Depend On The Continued Growth Of Online Commerce Our future revenues and any future profits are substantially dependent upon the widespread acceptance and use of the Web and online services as an effective medium of commerce by consumers. The rapid growth in the use of and interest in the Web, the Internet and commercial online services is a recent phenomenon. There can be no assurance that acceptance and use will continue to develop or that a sufficiently broad base of consumers will adopt, and continue to use, the Web and online services as a medium of commerce, particularly for purchasing tickets to live events and related merchandise. Demand for recently introduced services and products over the Web and online services is subject to a high level of uncertainty, and there are relatively few proven services and products to date. The development of the Web and online services as a viable commercial marketplace is subject to a number of factors, including: . continued growth in the number of Internet users and users of such services; . concerns about transaction security; . continued development of the necessary technological infrastructure; and . the development of complementary services and products. If the Web and online services do not become a viable commercial marketplace, our business, financial condition and results of operations would be materially and adversely affected. 13 The Success Of Our CitySearch Service Depends On Establishing And Maintaining Strategic Relationships with Local Media Companies An important element of our current business strategy with respect to the CitySearch service is to enter into agreements with local media companies to establish and support city guides. We have entered into, and intend to enter into, agreements with media companies to address opportunities. In these "partner-led" markets, we develop and design a city guide for local media companies and license certain intellectual property to these companies in exchange for certain up-front and continuing license payments and royalty payments. These royalty payments are based on the amount of revenues generated by these companies through the partner-led city guides. We currently anticipate that royalty payments from these agreements will constitute an increasing portion of our revenues in future periods. Accordingly, our success will depend in large part upon the ability of our partners to timely launch city guides in partner-led markets and the extent to which these partners are able to generate revenue through their city guides. Under the terms of our agreements with our media company partners, we have very limited control over the amount of time and financial resources that a partner devotes to the launch of a city guide or over the day-to-day operations and management of the city guide, including the marketing and sale of business Web sites to potential business customers. For example, one of our partners did not launch our city guide in accordance with our initial expectations, thereby delaying revenues subject to royalty payments payable to us. Some of our agreements also grant exclusivity in certain territories. There can be no assurance that our partners that are in the process of developing new city guides or future partners will launch their sites in a timely manner, or at all, or that if launched, such sites will generate revenues consistent with our expectations. Furthermore, we are unable to accurately forecast our revenues to be derived from these agreements with the partners. The exclusivity provisions in some of our agreements also place certain limitations on our ability to license our intellectual property to other partners. There also can be no assurance that we will successfully enter into partnerships with media companies in additional cities with respect to the CitySearch service. In addition, some of our agreements with our media company partners may be terminated for failure to meet performance criteria. Any failure by one of our proposed partner-led city guides to launch in a timely manner or by one of our existing partner-led city guides to generate sufficient revenues, or a failure by us to enter into or to renew agreements with media company partners on terms favorable to us or early termination of certain existing agreements could have a material adverse effect on our business, financial condition and results of operations. We have entered into a license and services agreement with Classified Ventures, pursuant to which we license elements of our technology and business systems to Classified Ventures and provide services in automotive and real estate classified advertising categories. We receive significant revenues from licensing and service fees under this agreement. Under this agreement, we are restricted from entering into certain classified advertising markets and from licensing our technology and business systems to competitors of Classified Ventures. In addition, this agreement may be terminated by the parties prior to the period that the shares of Class B Common Stock offered pursuant to this Prospectus are sold. Our failure to meet certain milestones under this agreement, early termination of this agreement or our inability to compete with Classified Ventures or to license technology to competitors of Classified Ventures may have a material adverse effect on our business, financial condition and results of operations. In our owned and operated markets, we have entered into co-promotion or distribution agreements with a number of television, radio, print media and online companies. Some of these agreements are of a short duration and there can be no assurance that our co-promotion or distribution partners with respect to the CitySearch business will not terminate their agreements with us or that we will secure additional co-promotion or distribution partners in the future which could have a material adverse effect on our business, financial condition and results of operations. Our Ticketmaster Online Service Also Relies On Strategic Relationships Our Ticketmaster Online service is to an extent dependent on its and Ticketmaster Corp.'s relationships with certain strategic partners relating to the sharing of certain Ticketmaster Online Web site and user links. We hope to derive significant benefits, including increased revenues and consumer awareness, from these relationships. The 14 arrangements also include, in certain cases, non-competition provisions that restrict our ability to engage in similar activities on our own or with other partners. There can be no assurance that these relationships will continue, that the relationships will be successful in any respect or that we will be able to find suitable additional or replacement strategic partners. The failure of these relationships could have a material adverse effect on our business, financial condition and results of operations. A Shortage of Trained Sales Personnel Would Limit Our Ability To Sell Our Services We currently derive and, for the foreseeable future, intend to derive a substantial portion of our revenues from sales of business Web sites to local businesses in markets in which we own and operate CitySearch city guides. We depend on our direct sales force to sell business Web sites in these markets. The creation of new revenue from CitySearch's city guide service and our roll- out in additional cities requires the services of a highly trained sales force working directly for us. Accordingly, a shortage in the number of trained salespeople could limit our ability to sell business Web sites as we roll out our service in new cities or to maintain or increase our number of business customers in cities in which we already operate. We have in the past and expect in the future to experience a high rate of turnover in our direct sales force. There can be no assurance that turnover will not increase in the future or have a material adverse effect on our sales, which could have a material adverse effect on our business, financial condition and results of operations. In addition, we currently derive a portion of our Ticketmaster Online revenues from the sale of banner advertising and sponsorships. A shortage in the number of trained salespeople could limit our ability to sell additional banner advertising or sponsorships or renew existing sponsorship or advertising relationships, which could have a material adverse effect on our business, financial condition and results of operations. We Depend On Key Personnel And Need To Hire Additional Qualified Personnel Our success depends to a significant degree upon the continued contributions of our executive management team, including Charles Conn, our Chief Executive Officer. The loss of the services of Mr. Conn or other members of our management team could have a material adverse effect on our business, financial condition and results of operations. In addition, the Ticketmaster Online service has been managed historically by the management of Ticketmaster Corp. Our success will depend upon a successful completion of the transition of the Ticketmaster Online management responsibility to our senior management team. Our employees, including our senior officers, may voluntarily terminate their employment with us at any time, and competition for qualified employees is intense. Our success also depends upon our ability to attract and retain additional highly qualified management, technical and sales and marketing personnel. The process of locating and hiring such personnel with the combination of skills and attributes required to carry out our strategy is often lengthy. The loss of the services of key personnel or the inability to attract additional qualified personnel could have a material adverse effect on our business, financial condition and results of operations. We Must Maintain and Promote Our Brands To Be Successful We believe that maintaining and promoting the CitySearch brand and, to a lesser extent, the CityAuction and Match.com brands, are critical to our efforts to attract consumers and business customers to our sites. We also believe that the importance of brand recognition will increase due to the growing number of Internet sites and relatively low barriers to entry to providing Internet content. Promotion of our brands will depend largely on our success and the success of our media company partners in providing high quality Internet content. Under the terms of our agreements with media company partners, we have very limited control over the content provided on the CitySearch partners' sites. If consumers and business customers do not perceive the content of our or our partners' existing sites to be of high quality, we will be unsuccessful in promoting and maintaining the CitySearch brand. Furthermore, not all of our partners promote the CitySearch brand on their services with a high level of prominence. In addition, users accessing partner-led market sites that contain different interfaces from our owned and operated sites may be confused by the differences in interface or navigation, and this confusion may inhibit our ability to develop our brand and network. 15 In order to attract and retain consumers and business customers, and to promote our brands in response to competitive pressures, we may find it necessary to increase our budget for content or otherwise to increase substantially our financial commitment to creating and maintaining a distinct brand loyalty among consumers and business customers. If either we or our media company partners are unable to provide high quality content or otherwise fail to promote and maintain our brands or if we incur excessive expenses in an attempt to improve our content or promote and maintain our brands, our business, financial condition and results of operations could be materially and adversely affected. We Must Rapidly Rollout Our CitySearch Service In Additional Cities In The United States And Internationally To Be Successful Our future success will depend to a significant extent on our ability, on our own and with partners, to rapidly roll out the CitySearch local city guide service in additional cities in the United States and internationally. As of June 17, 1999, we had launched our local city guide service in 30 metropolitan areas and intend to expand our service in additional cities in the United States and internationally. There can be no assurance that we will be able to launch our CitySearch service in additional markets in a cost-effective or timely manner or in accordance with our planned schedule, or that any newly launched service will achieve market acceptance. Any new service that is not favorably received by local businesses or consumers could damage our reputation or the CitySearch brand. Launching the CitySearch service or future services offered by us will also require significant additional expenses and will strain our management, financial and operational resources. In particular, the launch of the CitySearch service in additional cities will require us to expand and upgrade our technology infrastructure and business systems, including our enterprise management system and our business Web site production system. We are in the process of launching a new version of the software underlying the CitySearch service. There can be no assurance that this new version will function as intended, and any failure of the software could have a material adverse effect on our business, financial condition and results of operations. There also can be no assurance that the existing technology used with respect to our Ticketmaster Online service will be able to accommodate increased volumes of traffic and transactions that may arise in the future. Expansion of our technology capabilities could result in significant expenses. Moreover, the strain placed on our resources by simultaneous launches of the CitySearch service in multiple cities and our efforts to integrate CitySearch's local content with the event-specific content and transactional capabilities of Ticketmaster Online and the product specific content of the CityAuction and Match.com acquisitions may adversely affect the roll-out schedule or quality of the service in a particular city. Our failure to launch the CitySearch service in new markets in a timely and cost effective manner in accordance with our planned schedule or the lack of market acceptance of new services would have a material adverse effect on our business, financial condition and results of operations. Our Fixed Price Contracts Expose Us To Cost Overruns And Other Risks The services we offer to CitySearch business customers typically consist of the design, implementation, hosting and maintenance of customized Web sites, for which the customers are billed on a fixed-price basis, consisting of an up-front fee and monthly fees. Our failure to estimate accurately the resources and time required for providing such services, to manage client expectations effectively regarding the scope of services to be delivered for the estimated fees or to complete the services within budget, on time and to clients' satisfaction would expose us to risks associated with cost overruns and customer dissatisfaction. The Markets In Which We Sell Our Services Are Intensely Competitive And Our Business Would Be Adversely Affected If We Fail To Grow Our Market Share Or Otherwise Fail To Successfully Compete In These Markets The markets for local interactive content and services, the selling of live event tickets and related merchandise and our other services are highly competitive and diverse. CitySearch's primary competitors include Digital City, Inc., a company wholly owned by America Online, Inc. and Tribune Company, Microsoft Corporation (Sidewalk) and InfoSpace. CitySearch also competes with numerous search engines and other site aggregation companies, media, telecommunications and cable companies, Internet service providers and niche competitors which focus on a specific category or geography and compete with specific content offerings provided by us. Furthermore, additional 16 major media and other companies with financial and other resources greater than ours may introduce new Internet products addressing the local interactive content and service market in the future. Ticketmaster Corp.'s and Ticketmaster Online's online services compete with 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. In certain specific geographic regions, including certain of the local markets in which CitySearch provides or intends to provide our local city guide service, one or more of Ticketmaster Corp.'s and our Ticketmaster Online service's competitors may serve as the primary ticketing service in the region. We believe that our Ticketmaster Online service 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 our business, financial condition and results of operations. Furthermore, substantially all of the tickets sold through our Ticketmaster Online Web site are also sold by Ticketmaster Corp. by telephone and through independent retail outlets. These sales by Ticketmaster Corp. could have a material adverse effect on our online sales, and as a result, on our business, financial condition and results of operations. The online auction market is highly competitive. Currently, eBay.com dominates the online auction market, both in terms of number of users and value of goods auctioned. Search engine companies and other site aggregation companies also offer auction functionality to Web users. The online personals market is highly competitive and these services also compete directly with off line personal services such as weekly newspapers, magazines and direct mail and video dating services. We believe that the principal competitive factors for all our services include: . depth, quality and comprehensiveness of content; . ease of use; . distribution; . search capability; and . brand recognition. Many of our competitors have greater financial and marketing resources than we and may have significant competitive advantages through other lines of business and existing business relationships. There can be no assurance that we will be able to successfully compete against our current or future competitors or that competition will not have a material adverse effect on our business, financial condition and results of operations. Furthermore, as a strategic response to changes in the competitive environment, we may make certain pricing, servicing or marketing decisions or enter into acquisitions or new ventures that could have a material adverse effect on our business, financial condition and results of operations. We Need To Successfully Introduce New Services To Grow Our Business We expect to introduce new and expanded services in order to generate additional revenues, attract more businesses and consumers, and respond to competition. For example, we recently introduced business Web sites containing new and enhanced functionality for our CitySearch business customers. We also offer services facilitating the purchase of goods by consumers from CitySearch's business customers or others. A key element of our strategy is to technologically enable our city guides so that consumers and our business customers can buy and sell goods and services online through our city guides. We have limited experience in building e-commerce functionality with our city guides. There can be no assurance that we will be able to offer e-commerce or other new services in a cost-effective or timely manner or that our efforts would be successful. Furthermore, any new service 17 launched by us that is not favorably received by consumers could damage our reputation or our brand names. Expansion of our services in this manner would also require significant additional expenses and development and may strain our management, financial and operational resources. If we do not generate revenues from expanded services sufficient to offset their costs, our business would suffer. We Have Recently Experienced And Are Currently Experiencing Rapid Growth And Our Inability To Manage This Growth Could Harm Our Business Our businesses have grown rapidly in recent periods. The growth of these businesses and expansion of our consumer bases have placed a significant strain on our management and operations. The growth of our businesses has resulted, and is expected in the future to result, in the growth in the number of our employees, in the establishment of offices in disparate regions of the country and in increased responsibility for both existing and new management personnel. In addition, this growth has and will put additional pressure on existing operational, financial and management information systems. Our success will depend to a significant extent on the ability of our executive officers and other members of senior management to operate effectively, both independently and as a group. To manage our growth, we must continue to implement and improve operational, financial and management information systems and hire and train additional qualified personnel, including sales and marketing staff. There can be no assurance that we will be able to manage recent or any future expansions successfully, and any failure by us to do so could have a material adverse effect on our business, financial condition and results of operations. There also can be no assurance that our CitySearch, CityAuction, Match.com or Ticketmaster Online services will be able to sustain the rate of expansion that each has experienced in the past. Our Services Are Substantially Dependent On Our Ability To Continue To Develop Compelling Content Our success depends in part, upon our ability to deliver compelling interactive content on our CitySearch service, such as local events information, recreation, business, shopping, professional services and news/sports/weather and online ticketing services. We need to develop this content in order to attract consumers with demographic characteristics valuable to CitySearch's business customers. Our success also depends on our ability to develop and integrate compelling content with existing ticketing capabilities on our Ticketmaster Online Web site. There can be no assurance that we will be successful in developing new content and services or enhancing CitySearch's existing local city guide service, or the Ticketmaster Online, CityAuction or Match.com services on a timely basis, or that such content and services will effectively address consumer requirements and achieve market acceptance. If we, for technological or other reasons, are unable to develop and enhance our local interactive content and services in a manner compatible with emerging industry standards and that allows us to attract, retain and expand a consumer base possessing demographic characteristics attractive to CitySearch's business customers, Ticketmaster Online's advertisers and sponsors, and CityAuction's and Match.com's users, our business, financial condition and results of operations would be materially and adversely affected. Our Business Depends On The Increased Usage Of And The Stability Of The Internet The usage of the Internet for services such as those offered by us will depend in significant part on continued rapid growth in the number of households and commercial, educational and government institutions with access to the Internet, in the level of usage by individuals and in the number and quality of products and services designed for use on the Internet. Because usage of the Internet as a source for information, products and services is a relatively recent phenomenon, it is difficult to predict whether the number of users drawn to the Internet will continue to increase and whether any significant market for usage of the Internet for such purposes will continue to develop and expand. There can be no assurance that Internet usage patterns will not decline as the novelty of the medium recedes or that the quality of products and services offered online will improve sufficiently to continue to support user interest. If the Internet fails to stimulate user interest and be accessible to a broad audience at moderate costs, the markets for our services would be jeopardized. Moreover, issues regarding the stability of the Internet's infrastructure remain unresolved. The rapid rise in the number of Internet users and increased transmission of audio, video, graphical and other multimedia content over the Internet has placed increasing strains on the Internet's communications and transmission infrastructures. Continuation of such trends could lead to significant deterioration in transmission speeds and reliability of the Internet and could reduce the usage of the Internet by businesses and individuals. In addition, to the extent that the Internet continues to experience significant growth in the number of users and level of use without corresponding increases and improvements in the Internet infrastructure, there can be no assurance that the Internet will be able to support the demands placed upon it by such continued growth. If the Internet fails to support an increasing number of users due to inadequate infrastructure or otherwise, the development of the Internet as a viable source of local interactive content and services would be severely limited, which could materially and adversely affect the acceptance of our services. Our Plans To Expand Internationally Will Require Us To Develop Localized Versions Of Our Sites And Address Other Risks Of Operating Internationally A key component of our strategy is to continue to expand our services into international markets. We expect to expend significant financial and management resources to operate overseas and, with respect to the CitySearch service, create localized user interfaces through the launch of additional partner-led markets. We believe Ticketmaster Corp. intends to continue to expand its operations outside of the United States, which will require additional resources from our Ticketmaster Online service to the extent it distributes tickets online in those markets. If the revenues generated by these international operations are insufficient to offset the expense of establishing and maintaining such operations, our business, financial condition and results of operations will be materially and adversely affected. To date, we have limited experience in developing localized versions of our CitySearch online sites and marketing and distributing our products and services internationally. There can be no assurance that our partners or we will be able to successfully market or sell our services in these international markets. In addition to the uncertainty as to our ability to expand our international presence, there are certain risks inherent in conducting business on an international level, such as: . unexpected changes in regulatory requirements, tariffs and other trade barriers; . difficulties in staffing and managing foreign operations; . political instability; . currency rate fluctuations; and . potentially adverse tax consequences. There can be no assurance that one or more of the foregoing factors will not have a material adverse effect on our current and future international operations and, consequently, on our business, financial condition and results of operations. Our Business Relies On The Performance Of Our Systems and The Performance and Availability of Third Party Systems The satisfactory performance, reliability and availability of our city guides, online ticketing services, auction services, Internet personals services and our network infrastructures are critical to attracting Web users and maintaining relationships with business customers and consumers. System interruptions that result in the unavailability of sites or slower response times for consumers would reduce the number of business Web sites and advertisements purchased and reduce the attractiveness of our CitySearch local city guides, CityAuction and Match.com services, and Ticketmaster Online's online services to business customers and consumers. Our services have experienced system interruptions in the past and we believe that such interruptions will continue to occur from time to time in the future. 19 Any substantial increase in traffic on our services will also require us to expand and adapt our network infrastructure. Our inability to add additional software and hardware to accommodate increased traffic on our services may cause unanticipated system disruptions and result in slower response times. In addition, we currently depend on a limited number of suppliers for certain key technologies used to roll out and manage our services, including Exodus Communications, Inc., which hosts the CitySearch city guides, and PSINet, which hosts the Ticketmaster Online service. There can be no assurance that we will be able to expand our network infrastructure on a timely basis to meet increased demand or that key technology suppliers will continue to provide us with products and services that meet our requirements. Any increase in system interruptions or slower response times resulting from the foregoing factors could have a material adverse effect on our business, financial condition and results of operations. Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control. Substantially all of our server equipment is currently located in California in areas that are susceptible to earthquakes. Our business interruption insurance may not be sufficient to compensate us for losses that may occur and would not compensate us for the loss of consumer goodwill due to disruption of service. In addition, our Ticketmaster Online operations are substantially dependent upon services and infrastructure provided by Ticketmaster Corp. that enable Ticketmaster Online to access information on ticket and merchandise inventory, events and consumers maintained by Ticketmaster Corp. In addition, Ticketmaster Corp. has agreed to provide all order processing, payment processing and fulfillment services for tickets to live events and merchandise ordered through Ticketmaster Online pursuant to the terms and subject to the limitations of our license agreement. Any discontinuation or disruption of these services by Ticketmaster Corp. would be disruptive to the Ticketmaster Online business and would likely have a material adverse effect on our business, financial condition and results of operations. We use a custom-developed system for our Ticketmaster Online ticketing operations and certain aspects of transaction processing. Ticketmaster Online has experienced temporary system interruptions, which may continue to occur in the future from time to time. Any substantial increase in the volume of traffic on our online sites or the number of tickets purchased by consumers may require us to expand and upgrade further Ticketmaster Online technology, transaction- processing systems and network infrastructure. The Ticketmaster Online service has experienced, and we expect to continue to experience, temporary capacity constraints due to sharply increased traffic for certain events, which may cause unanticipated system disruptions, slower response times and degradation in levels of service. In addition, to the extent we experience delays in processing ticketing confirmations and reporting accurate financial information, our operations would be adversely affected. There can be no assurance that our Ticketmaster Online service's transaction- processing systems and network infrastructure will be able to accommodate such increases in traffic in the future, or that we will, in general, be able to accurately project the rate or timing of such increases or upgrade our systems and infrastructure to accommodate future traffic levels on our online sites. In addition, there can be no assurance that we will be able to effectively upgrade and expand our Ticketmaster Online transaction-processing systems in a timely manner or to successfully integrate any newly developed or purchased components of its existing systems. Any inability to do so could have a material adverse effect on our business, financial condition and results of operations. Security Breaches Of Our Network Systems Would Significantly Adversely Affect Our Business A fundamental requirement for online commerce and communications is the secure transmission of confidential information over public networks. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to effect secure transmission of confidential information, such as consumers credit card numbers. In addition, we maintain an extensive confidential database of consumer profiles and transaction information. There can be no assurance that advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments will not result in a compromise or breach of the methods used by us to protect consumer transaction and personal data contained in our database. If any such compromise of our security were to occur, it could have a material adverse effect on our reputation and on our business, operating results and financial condition. A party who is able to circumvent our security measures 20 could misappropriate proprietary information or cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against security breaches or to alleviate problems caused by breaches. Concerns over the security of transactions conducted on the Internet and commercial online services and the privacy of users may also inhibit the growth of the Web and online services as a means of conducting commercial transactions. To the extent that our activities or those of third-party contractors involve the storage and transmission of proprietary information, such as credit card numbers or other personal information, security breaches could expose us to a risk of loss or litigation and possible liability. In addition, we may suffer losses as a result of orders placed with fraudulent credit card data, even though the consumer's payment for such orders has been authorized by the associated financial institution. Under current credit card practices, a merchant is liable for fraudulent credit card transactions where, as is the case with the transactions processed by us, no cardholder signature is obtained. There can be no assurance that we will not suffer significant losses as a result of fraudulent use of credit card data in the future, which could have a material adverse effect on our business, financial condition and results of operations. Our Business Will Suffer If We Are Unable To Adapt To The Rapid Technological Changes That Characterize The Internet And The Online Commerce Industry The Internet and the online commerce industry are characterized by the following: . rapid technological change; . changes in user and customer requirements and preferences; . frequent new product and service introductions embodying new technologies; and . the emergence of new industry standards and practices that could render our existing online sites and proprietary technology and systems obsolete. The emerging nature of these products and services and their rapid evolution will require that we continually improve the performance, features and reliability of our online services, particularly in response to competitive offerings. Our success will depend, in part, upon our ability: . to enhance our existing services; . to develop new services and technology that address the increasingly sophisticated and varied needs of our prospective customers; and . to respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development of online sites and other proprietary technology entails significant technical and business risks and requires substantial expenditures and lead time. There can be no assurance that we will successfully use new technologies effectively or adapt our online sites, proprietary technology and transaction-processing systems to customer requirements or emerging industry standards. If we are unable, for technical, legal, financial or other reasons, to adapt in a timely manner in response to changing market conditions or customer requirements, our business, operating results and financial condition could be materially adversely affected. If Our Internal Systems, Or The Internal Systems Of Our Suppliers, Are Not Year 2000 Compliant, Our Business Could Be Seriously Disrupted 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 us and our Internet services, to malfunction prior to or in the year 2000 and lead to significant business delays and disruptions in our business and operations in the United States and internationally. We have developed a plan to minimize the impact of this year 2000 issue. Pursuant to the plan, we have established a Year 2000 Committee consisting of 21 senior managers from relevant functional areas. The Year 2000 Committee has reviewed all areas of our business and operations that may be affected and has assigned responsibility for each area to individuals knowledgeable about their respective areas. We concluded our initial assessment in the fourth quarter of 1998 and have commenced the implementation of remediation necessary to achieve compliance. We estimate that the dollar cost of year 2000 compliance is approximately $200,000. However, we have not yet completed our comprehensive assessment of remediation costs and actual costs could materially differ. Several systems provided by third parties are required for the operation of our services, any of which may contain software code that is not year 2000 compliant. These systems include: . server software used to operate our network servers; . software controlling routers; . switches and other components of our data network; . disk management software used to control our data disk arrays; . firewall, security, monitoring and back-up software used by us; and . desktop PC applications software. In most cases, we employ widely available software applications and other products from leading third party vendors, and expect 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 us could result in a temporary disruption of our services or otherwise disrupt our operations. In addition, we intend to provide our partners which host their own city guides using software that we have provided to them with software upgrades to make their hosted city guides year 2000 compliant. In addition, our partners may operate their city guide sites in proximity to other applications that may not be year 2000 compliant. While we intend to assign an individual to coordinate each partner's compliance efforts to ensure uninterrupted operations, we have limited ability to influence decisions by our partners. Our partner's inability or unwillingness to timely install our year 2000 upgrades to their hosted city guide sites or noncompliant systems that adjoin partners' city guide applications could result in interruption or disruption of our city guide service, which in turn could reduce royalties or other amounts due to us. There can no assurance that we, our third party suppliers or our partners will be year 2000 compliant at the end of the millennium. Failure to achieve compliance could result in complete failure or inaccessibility of our or our partners' services, and could adversely affect our business, financial condition and results of operations. Year 2000 compliance problems could also undermine the general infrastructure necessary to support our operations. For instance, we depend on third party Internet service providers for connectivity to the Internet. Any interruption of service from our Internet service providers could result in a temporary interruption of our 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 our services and adversely impact our business, financial condition and results of operations. Information Displayed On Or Accessed From Our Web Sites May Subject Us To Liability We may face potential liability for defamation, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of the materials that appear on the CitySearch, CityAuction, Match.com or Ticketmaster Online sites or on sites operated by our partners. These claims have been brought, and sometimes successfully pressed, against online services. Although we intend to maintain our general liability insurance at current levels, our insurance may not cover claims of these types or may not be adequate to indemnify us for any liability that may be imposed. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage, could have a material adverse effect on our reputation and our business, financial conditions and results of operations. 22 Our Business Will Be Adversely Affected If We Are Unable To Protect Our Intellectual Property Rights From Third Party Challenges Or If We Are Subject To Litigation We regard our copyrights, service marks, trademarks, trade dress, trade secrets, proprietary software and similar intellectual property as critical to our success, and rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with employees, customers, partners and others to protect our proprietary rights. We do not hold any patents. We pursue the registration of certain of our 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 us in every country in which our products and services are made available online. We have licensed in the past, and expect to license in the future, certain proprietary rights, such as trademarks or copyrighted material, to third parties. In addition, we have licensed in the past, and expect that we may license in the future, certain content, including trademarks and copyrighted material, from third parties. While we attempt to ensure that the quality of our 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 our proprietary rights or reputation, which could have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that the steps taken by us to protect our proprietary rights will be adequate or that third parties will not infringe or misappropriate our 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 us. We license the trademark "CitySearch" from a third party, and there can be no assurance that we will be able to continue to license the trademark on terms acceptable to us. We license the trademark "Ticketmaster" and related trademarks from Ticketmaster Corp. pursuant to our license agreement with Ticketmaster Corp. We may be subject to legal proceedings and claims of alleged infringement of the trademarks and other intellectual property rights of third parties by us and our licensees. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources which could result in a material adverse effect on our business, financial condition and results of operations. We are dependent upon Ticketmaster Corp. to maintain and assert its rights to the trademarks and defend infringement claims, if any. If We Fail To Comply With The Laws And Regulations That Govern Our Services, Our Business Could Be Adversely Affected We are subject to regulations applicable to businesses generally and laws or regulations directly applicable to access to online commerce. Although there are currently few laws and regulations directly applicable to the Internet and commercial online services, it is possible that a number of laws and regulations may be adopted with respect to the Internet or commercial online services covering issues such as: . user privacy; . pricing; . content; . taxation; . copyrights; . distribution; . antitrust; . and characteristics and quality of products and services. 23 Furthermore, the growth and development of the market for online commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on those companies conducting business online. The adoption of any additional laws or regulations may decrease the growth of the Internet or commercial online services, which could, in turn, decrease the demand for our products and services and increase our cost of doing business, or otherwise have a material adverse effect on our business, financial condition and results of operations. Moreover, the applicability to the Internet and commercial online services of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. For example, tax authorities in a number of states are currently reviewing the appropriate tax treatment of companies engaged in online commerce, and new state tax regulations may subject us to additional state sales and income taxes. Any such new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and commercial online services could have a material adverse effect on our business, financial condition and results of operations. Our Ticketmaster Online service is regulated by certain state and local regulations, including, but not limited to, a law in Georgia that establishes maximum convenience charges on tickets for certain sporting events. Other legislation that could affect the way our Ticketmaster Online service does business, including bills that would regulate the amount of convenience charges and handling charges, are introduced from time to time in federal, state and local legislative bodies. We are unable to predict whether any such bills will be adopted and, if so, whether such legislation would have a material effect on our business, financial condition and results of operations. We May Be Subject To Governmental Investigations And Litigations From time to time, federal, state and local authorities have conducted investigations or inquiries with respect to Ticketmaster Corp.'s compliance with antitrust, unfair business practice and other laws. The most recent federal investigation was commenced in 1994 by the Antitrust Division of the Department of Justice and was concluded in 1995 with no enforcement action being taken against Ticketmaster Corp. In addition, we are a party to various legal proceedings involving commercial disputes and intellectual property issues arising in the ordinary course of business. While the outcomes of these proceedings are uncertain, we do not currently expect that they will have a material adverse effect on our business, financial condition or results of operations. 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. 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 24 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, or the 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 and violations of the injunction and, on May 17, 1999, it posted a bond to stay enforcement of the damage award for violations of the injunction. There can be no assurance that we, Ticketmaster Online or Ticketmaster Corp. or our affiliates will not become the subject of future governmental investigations or inquiries or be named as a defendant in claims alleging violations of federal or state antitrust laws or any other laws. Any adverse outcome in such litigation, investigation or proceeding against us, Ticketmaster Online or Ticketmaster Corp. or our affiliates could limit or prevent Ticketmaster Online from engaging in its online ticketing business or subject us to potential damage assessments, all of which could have a material adverse effect on our business, financial condition or results of operations. Regardless of its merit, source or outcome, any such litigation, investigation or proceeding would at a minimum be costly and could divert the efforts of our management and other personnel from productive tasks, which could have a material adverse effect on our business, financial condition or results of operations. Any Acquisitions That We Undertake Could Be Difficult To Integrate, Disrupt Our Business, Dilute Stockholder Value And Adversely Affect Our Operating Results As part of our business strategy, we intend to make acquisitions of or significant investments in, complementary companies, products or technologies. For example, we recently completed our acquisitions of CityAuction and Match.com and anticipate that we will close our acquisition of One and Only. These acquisitions and any future acquisitions are and will be accompanied by the risks commonly encountered in acquisitions of companies. These risks include, among other things: . the difficulty of assimilating the operations and personnel of the acquired companies; . the potential disruption of our ongoing business; . the diversion of resources from our existing businesses, sites and technologies; 25 . the inability of management to maximize our financial and strategic position through the successful incorporation of the acquired technology into our products and services; . additional expense associated with amortization of acquired intangible assets; . the maintenance of uniform standards, controls, procedures and policies; and . the impairment of relationships with employees and customers as a result of any integration of new management personnel. There can be no assurance that we would be successful in overcoming these risks or any other problems encountered with such acquisitions. Our inability to overcome such risks could dilute our stockholder value and materially adversely affect our operating results. Our Business Will Be Adversely Affected If We Do Not Maintain The Value Of Our Domain Names We currently hold and license various Web domain names relating to our brand, including the "citysearch.com", "cityauction.com", "match.com" and "ticketmaster.com" domain names. The acquisition and maintenance of domain names generally is regulated by governmental agencies and their designees. The regulation of domain names in the United States and in foreign countries is subject to change. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, there can be no assurance that we will be able to acquire or maintain relevant domain names in all countries in which we conduct business. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. We, therefore, may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights. Any such inability could have a material adverse effect on our business, financial condition and results of operations. We Are Subject To Anti-Takeover Provisions That May Affect The Price Of Our Stock Our Restated Certificate of Incorporation and the Restated Bylaws and Delaware General Corporation Law Section 203 contains provisions that may render more difficult, or have the effect of discouraging, unsolicited takeover bids from third parties or the removal of our incumbent management. These provisions include the right of the holders of the Class A Common Stock to 15 votes per share, versus one vote per share for the holders of Class B Common Stock and provide that the stockholders may not call special meetings. In addition, our Restated Certificate of Incorporation authorizes the Board of Directors to issue, without stockholder approval, 2,000,000 shares of preferred stock, par value $.01 per share, with voting, conversion and other rights and preferences that could adversely affect the voting power or other rights of the holders of our Common Stock. Although we have no current plans to issue any shares of Preferred Stock, the issuance of Preferred Stock or rights to purchase Preferred Stock could render more difficult, or have the effect of discouraging, unsolicited takeover bids from third parties or the removal of incumbent management, or otherwise adversely affect the market price for the Class B Common Stock. Although such provisions do not have a substantial practical significance to investors while USAi, through its ownership of Class A Common Stock, is in a position to effectively control all matters affecting us, such provisions could have the effect of depriving stockholders of an opportunity to sell their shares at a premium over prevailing market prices should USAi no longer be in such control. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "intend," "potential," or "continue" or the negative of such terms or other comparable terminology. These statements are only predictions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our actual results could differ materially from those 26 anticipated in these forward-looking statements as a result of various factors, including the risks outlined under "Risk Factors" and elsewhere in this prospectus. 27 USE OF PROCEEDS We will not receive any proceeds from the sales of Class B Common Stock by the selling stockholders pursuant to this prospectus. PRICE RANGE OF CLASS B COMMON STOCK Our Class B Common Stock began trading publicly on the Nasdaq National Market on December 3, 1998 under the symbol "TMCS. " The following table lists quarterly information on the price range of the Class B Common Stock based on the high and low reported last sale prices for our common stock as reported on the Nasdaq National Market for the periods indicated below. These prices do not include retail markups, markdowns or commissions.
High Low Fiscal 1999: ------------- ----------- Second Quarter (through June 9, 1998)....................... $45.00 $22.62 First Quarter............................................... 74.87 32.00 Fiscal 1998: Fourth Quarter.............................................. $80.50 $31.81
As of June 9, 1999, there were approximately 162 holders of record of the Class B Common Stock. On June 25, 1999, the last reported sale price on the Nasdaq National Market for the Class B Common Stock was $25.689. DIVIDEND POLICY We have never declared or paid cash dividends on our capital stock. We currently expect to retain our future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. 28 CAPITALIZATION The following table sets forth our capitalization at March 31, 1999. You should read our capitalization information set forth below in conjunction with our Financial Statements and Notes included elsewhere in this prospectus.
March 31, 1999 ---------------- (in thousands) Long-term obligations, less current portion............................................ $ 940 Stockholders' equity(1): Class A Common Stock, $0.01 par value; 100,000,000 shares authorized; 63,156,226 shares issued and outstanding....................................................... 632 Class B Common Stock, $0.01 par value; 250,000,000 shares authorized; 9,238,109 shares issued and outstanding....................................................... 92 Class C Common Stock, $0.01 par value; no 2,883,506 shares authorized; no shares issued and outstanding.............................................................. Additional paid-in capital............................................................. 446,398 Accumulated deficit.................................................................... (33,777) ------------- Total stockholders' equity (2)......................................................... 413,345 ------------- Total capitalization................................................................. $414,285 =============
- ------------------------ (1) The number of shares outstanding at March 31, 1999 excludes: 2,988,157 shares of Class A Common Stock issuable upon the exercise of options outstanding at March 31, 1999 at a weighted average price of $4.94 per share under the 1996 Stock Plan; 729,300 shares of Class B Common Stock issuable upon the exercise of options outstanding at March 31, 1999 at a weighted average price of $21.43 per share under the 1998 Stock Plan; and an aggregate of 4,270,700 shares of Class B Common Stock available for future grant or issuance as of March 31, 1999 under the 1998 Stock Plan and the Purchase Plan. See "Management - Employee Benefit Plans." (2) Stockholders' equity reflects $299.6 million of goodwill net of accumulated amortization, resulting from the merger of Ticketmaster Online and CitySearch, USAi's acquisition of all the outstanding equity of Ticketmaster Group in June 1998, USAi's acquisition of 1,947,502 shares of Class A Common Stock in a tender offer completed in November 1998, and the acquisition of CityAuction in March 1999. 29 SELECTED FINANCIAL DATA Ticketmaster - Online CitySearch 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 three 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 statements of operations data for the three-month periods ended March 31, 1998 and 1999 and the balance sheet data at March 31, 1999 are derived from unaudited financial statements included elsewhere in this Prospectus. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the audited financial statements and contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of Ticketmaster Online-CitySearch, Inc.'s results of operations for such periods and financial condition at such date. The results of operations for the three- months ended March 31, 1999 are not necessarily indicative of the results to be expected for the full year or future periods. The selected Ticketmaster Online-CitySearch, Inc. 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, Inc. and Notes thereto included elsewhere in this prospectus.
Eleven Months Three Months Ended Combined Statements of Year Ended January 31, Ended --------------------- ----------------------------- December 31, March 31, March 31, Operations Data: 1996 1997 1998 1998 1998 1999(1) -------- -------- -------- ------------- --------- --------- Revenues: (In thousands, except per share data) Ticketing operations....................... $ -- $ 199 $ 5,972 $ 15,743 $ 2,237 $ 9,386 Sponsorship and advertising................ 14 997 3,933 6,754 917 1,032 City guide and related..................... -- -- -- 5,376 -- 5,553 ------- ------- ------- -------- ------- -------- Total revenues........................... 14 1,196 9,905 27,873 3,154 15,971 Costs and expenses: Ticketing operations....................... -- 635 3,522 9,842 1,377 6,851 City guide and related..................... -- -- -- 4,021 -- 4,607 Sales and marketing........................ -- 290 490 6,834 225 6,200 Research and development................... -- -- -- 1,728 -- 1,933 General and administrative................. 548 1,260 1,719 3,495 515 3,287 Amortization of goodwill................... -- -- -- 16,275 -- 11,976 ------- ------- ------- -------- ------- -------- Total costs and expenses................. 548 2,185 5,731 42,195 2,117 34,854 ------- ------- ------- -------- ------- -------- Income (loss) from operations................ (534) (989) 4,174 (14,322) 1037 (18,883) Interest income, net......................... -- -- -- 54 -- 1,200 ------- ------- ------- -------- ------- -------- Income (loss) before provision for income taxes............................... (534) (989) 4,174 (14,268) 1037 (17,883) Income taxes provision....................... (204) (374) 1,827 2,951 452 57 ------- ------- ------- -------- ------- -------- Net income (loss)............................ $ (330) $ (615) $ 2,347 $(17,219) $ 585 $(17,740) ======= ======= ======= ======== ======= ======== Basic and diluted net income (loss) per share(2).................................. $(0.01) $(0.02) $(0.06) $(0.38) $0.02 $(0.25) ======= ======= ======= ======== ======= ======== Shares used to compute basic and diluted net income (loss) (2)............. 37,238 37,238 37,238 45,201 37,238 71,555 ======= ======= ======= ======== ======= ========
January 31 ------------------------- Balance Sheet Data: 1996 1997 1998 December 31, 1998 March 31, 1999 ------ ------ ------ ----------------- -------------- Cash and cash equivalents................... $ -- $ 3 $ -- $106,910 $ 99,284 Working capital............................. 223 218 (100) 100,691 94,175 Total assets (3)............................ 354 554 688 416,725 426,416 Stockholders' equity........................ 354 489 289 403,588 413,345
(1) Includes the operating results of CitySearch from September 29, 1998 to December 31, 1998 as a result of the merger of Ticketmaster Online and CitySearch. The eleven month period reflects our 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 our continuing growth such presentation would not be considered meaningful. (2) Basic and diluted net income (loss) per share is based on the weighted average number of outstanding Class A and Class B Common Stock shares for the eleven months ended December 31, 1998 and three months ended March 31, 1999, and for the three months ended March 31, 1998 the number of shares of City Search Common Stock exchanged in the merger with Ticketmaster Online. 30 (3) 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 on November 3, 1998. Total assets at March 31, 1999 reflect $315.9 million of goodwill, net of accumulated amortization of $28.3 million resulting from the transactions previously mentioned in addition to $28.2 million of goodwill associated with the purchase of CityAuction. CitySearch, Inc. Historical Financial Data The selected consolidated financial data presented below for the period from September 20, 1995 (date of formation) through December 31, 1995 and for, and as of the end of, each of the years in the two-year period ended December 31, 1997, are derived from the Consolidated Financial Statements of CitySearch, Inc., which consolidated financial statements have been audited by Ernst & Young LLP, independent auditors, and are included elsewhere in this prospectus. The consolidated balance sheet data as of December 31, 1995 are derived from audited Consolidated Financial Statements of CitySearch, Inc. that are not included herein. The consolidated statements of operations data for the nine-month periods ended September 30, 1997 and September 28, 1998, respectively, and the consolidated balance sheet data at September 28, 1998 are derived from unaudited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of CitySearch's results of operations for such periods and financial condition at such date. The selected consolidated 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 Consolidated Financial Statements of CitySearch, Inc. and Notes thereto included elsewhere in this prospectus.
Period from September 20, Year Ended 1995 (date of December 31, Nine Months Ended formation) to ------------------------- ------------------------------- December 31, Sept. 30, Sept. 28, 1995 1996 1997 1997 1998(1) --------------- ----------- ------------ -------------- ------------- (in thousands, except per share data) Consolidated Statements of Operations Data: Revenues: Subscription and services..................... $ -- $ 203 $ 4,913 $ 2,986 $ 9,458 Licensing and royalty......................... -- -- 1,271 677 1,859 ------ -------- -------- -------- -------- Total revenues................................ -- 203 6,184 3,663 11,317 Costs and expenses: Cost of revenues.............................. -- 2,908 9,688 7,612 10,491 Sales and marketing........................... 57 6,369 20,172 13,716 14,902 Research and development...................... 152 2,563 7,182 4,949 5,000 General and administrative.................... 104 2,475 5,883 4,263 5,104 Merger and other transactions costs........... -- -- -- -- 3,101 ------ -------- -------- -------- -------- Total costs and expenses...................... 313 14,315 42,925 30,540 38,598 ------ -------- -------- -------- -------- Loss from operations............................... (313) (14,112) (36,741) (26,877) (27,281) Interest income, net............................... 5 217 223 104 227 ------ -------- -------- -------- -------- Loss before provision for income taxes............. (308) (13,895) (36,518) (26,773) (27,054) Provision for income taxes......................... -- 2 8 -- -- ------ -------- -------- -------- -------- Net loss........................................... $ (308) $(13,897) $(36,526) $(26,773) $(27,054) ====== ======== ======== ======== ======== Historical basic and diluted net loss per share(2). $(0.04) $ (1.58) $ (3.86) $ (2.84) $ (2.73) ====== ======== ======== ======== ======== Pro forma basic and diluted net loss per share(2).. $ (1.96) $ (1.51) $ (1.10) ======== ======== ======== Shares used to compute historical basic and diluted net loss per share(2)............................. 7,895 8,786 9,452 9,431 9,923 ====== ======== ======== ======== ======== Shares used to compute pro forma basic and diluted. 18,660 17,764 24,547 net loss per share(2)............................. ======== ======== ========
31
December 31, ------------------------------ Sept. 28 1995 1996 1997 1998(1) -------- -------- -------- ------------ (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents.................................................... $1,413 $ 7,527 $ 25,227 $57,877 Working capital.......................................................... 1,323 4,257 19,375 50,940 Total assets............................................................. 1,490 13,370 31,655 65,209 Long-term obligations, less current portion.............................. -- 1,451 2,420 52,320 Redeemable Convertible Preferred Stock................................... -- 20,309 70,882 -- Stockholders' equity (deficit)........................................... 8,366 (11,943) (47,911) 3,837
(1) The historical financial data of CitySearch is presented through September 28, 1998, the effective date of the merger of Ticketmaster Online and CitySearch. References throughout this prospectus to the nine months ended September 28, 1998 refer to the period from January 1, 1998 through September 28, 1998. (2) Shares used to compute pro forma basic and diluted net loss per share give effect to the conversion of outstanding CitySearch Convertible Preferred Stock as if converted at the earlier of the beginning of the period or issue date. See Note 1 of Notes to Consolidated Financial Statements of CitySearch, Inc. for an explanation of the determination of the number of shares used to compute historical and pro forma basic and diluted net loss per share. 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements based upon current expectations that involve risks and uncertainties. When used in this prospectus, the words "intend," "anticipate," "believe," "estimate," "plan" and "expect" and similar expressions as they relate to Ticketmaster Online - CitySearch are included to identify forward-looking statements. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this prospectus. 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. We are integrating our local CitySearch city guides with our 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, 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 several sources: online ticketing, sales of sponsorships and advertising and City guide services. The Company also derives revenues from fees generated from CityAuction transactions and subscription fees and other revenues from Match.com transactions. We view our 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 our licensing agreement with Ticketmaster Corp., subject to certain limitations, Ticketmaster Corp. has granted us an exclusive, perpetual, irrevocable, worldwide license to use the Ticketmaster trademark and certain Ticketmaster Corp. databases to sell live event tickets online for Ticketmaster Corp.'s clients. In addition, Ticketmaster Corp. has authorized us to be Ticketmaster Corp.'s exclusive, perpetual, worldwide agent for such online ticket sales. The license agreement further provides that Ticketmaster Corp. may use and permit others to use the Ticketmaster trademark 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 license agreement defines such non-online means to include: . by telephone; . by other voice-to-voice means or voice-to-voice recognition unit systems; . by non-interactive broadcast, cable and satellite television; and . 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. 33 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 us for processing of online ticket sales and provides all transaction processing and fulfillment services for online live event ticket sales. We are required under the license agreement to comply with the terms of Ticketmaster Corp.'s client agreements. Our rights, contained in the license agreement, are subject to the client agreements. The license agreement also generally restricts us 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 license agreement, we pay Ticketmaster Corp. a royalty which is a percentage of the net profit we derive from online ticket sales. We also reimburse Ticketmaster Corp. for its direct expenses related to online ticket sales. Under the license agreement, we have has also been granted the non-exclusive right to promote and sell online certain merchandise available through Ticketmaster Corp. Ticketmaster Corp. serves as our 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 us from third parties, Ticketmaster Corp. or its affiliates will serve as our 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; . the amount of advertising and/or promotional allowances to be provided; . the type of event; and . whether the ticket is purchased at a remote sales outlet, by telephone, through our 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 our Web sites in a bundle with other sponsorship and advertising opportunities offered by Ticketmaster Corp. We have two primary means of providing our local city guides. In our owned and operated markets, we systematically produce the majority of our own content, hire and rapidly deploy a direct sales force to sell custom-built Web sites as well as related services to local and regional businesses and launch a presence in approximately three to six months. In other markets, we partner with a local media company that contracts with us to assist in developing, designing and launching a city guide. These partners license our business and technology systems and provide royalty payments to us for revenues derived from operations. In partner-led markets, our partners hire and train the local city guide staff and purchase all necessary third-party hardware and software. We currently own and operate 19 sites and participate in the operation of 11 other partner-led sites in various metropolitan areas. In our owned and operated city guide markets, we derive 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. We recognize 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, we derive city guide revenue from barter agreements with television, radio and media alliances. With barter agreements, we receive 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 34 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 us. In partner-led markets, we derive licensing and royalty revenues form the licensing of our 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 our 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, we derive revenue from providing back office services, including business Web site design, hosting, customer service and billing, to certain of our partners. See Note 1 of Notes to Consolidated Financial Statements. CityAuction derives revenues from fees paid by users listing items for sale on the website as well as from advertising fees. Match.com derives revenues from membership fees paid by users who subscribe for periods of from one month to one year and also from advertising fees. Goodwill The merger of Ticketmaster Online and CitySearch and the USAi tender offer resulted in $160.6 million of goodwill to be amortized over five years and intangibles related to non-competition agreements entered into in connection with the merger of $500,000, which is being amortized over 2.5 years. We 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. Our acquisitions of CityAuction and Match.com resulted in an aggregate of $ 75.7 million in goodwill which will be amortized through 2004. Our proposed acquisition of One and Only would result in additional goodwill of in an amount approximating the purchase price which would be amortized through 2004. Results of Operations Ticketmaster Online--CitySearch Three Months Ended March 31, 1999 and 1998 Ticketing Operations Revenues. Ticketing operations revenues were $9.4 million and $2.2 million for the three months ended March 31, 1999 and 1998, respectively. The increase is primarily attributable to a significant increase in the number of tickets sold from 433,000 to 1,615,000 tickets, and a 10.6% increase in average convenience charge revenue per ticket. Sponsorship and Advertising Revenues. Sponsorship and advertising revenues were $1.0 million and $917,000 for the three months ended March 31, 1999 and 1998, respectively. The increase was primarily attributable to an increase in sponsorship and promotion activity with strategic marketing partners. City Guide and Related Revenues. City guide and related revenues were $5.6 million for the three months ended March 31, 1999 representing the CitySearch city guide and related revenue of the CitySearch business acquired. Ticketing Operations Expenses. Ticketing operations expenses consist primarily of expenses associated with ticket fulfillment, Web site design and layout, service and network infrastructure maintenance and data communications. Ticketing operations expenses were $6.9 million and $1.4 million for the three months ended March 31, 1999 and 1998, 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, we expect that ticketing operations expenses will increase as a percentage of ticketing revenues as a result of expenses associated with our license agreement with Ticketmaster Corp. 35 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 expensed as incurred. 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 sales increase and to the extent new cities are added to the network 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 $6.2 million and $225,000 for the three months ended March 31, 1999 and 1998, respectively. The increase is due primarily to the sales and marketing costs of CitySearch for the three months ended March 31, 1999 amounting to $5.8 million and increased salary related costs and operating support costs associated with the growth in sales and marketing activities. We expect that sales and marketing expenses will increase in absolute dollars and as a percentage of revenue as new cities are added to the network. Research and Development Expenses. Research and development expenses include the costs to develop, test and upgrade our 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 $1.9 million for the three months ended March 31, 1999 which represents primarily the research and development cost of CitySearch. We believe that timely deployment of new and enhanced products and technology is critical to attaining its strategic objectives and to remaining competitive. Accordingly, we intend to continue recruiting and hiring experienced research and development personnel and making other investments in research and development. As such, we expect that research and development expenditures will increase in absolute dollars in future periods. We have 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 $3.3 million and $515,000 for the three months ended March 31, 1999 and 1998, respectively. The substantial increase was due primarily to general and administrative expenses of CitySearch amounting to $2.4 million. We expect that general and administrative expenses will increase in absolute dollars. Interest Income, Net. Net interest income consists primarily of interest earned on our cash and cash equivalents, less interest expense on capital lease obligations. The Company had net interest income of $1.2 million for the three months ended March 31, 1999 primarily related to interest received on the net proceeds of our initial public offering which closed in December 1998. We invest our cash balances in short-term investment grade, interest-bearing securities. Income Taxes. The provision for income taxes was $57,000 and $452,000 for the three months ended March 31, 1999 and 1998, respectively. Our effective tax rate differs from the statutory federal income tax rate, primarily as a result of state income taxes and operating losses not benefited. We expect 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. However, net operating loss carryforwards of CitySearch existing at the date of the merger with Ticketmaster Online will not be available to further offset our taxable income. Eleven Months Ended December 31, 1998 and Fiscal Years Ended January 31, 1998 and 1997 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. 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 36 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 Revenues. 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 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. City Guide and Related Expenses. City guide and related expenses were $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 of Ticketmaster Online and CitySearch. Sales and Marketing Expenses. Sales and marketing expenses were $6.8 million, $490,00 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 of Ticketmaster Online and CitySearch amounting to $5.8 million and increased salary related costs and operating support costs associated with the growth in sales and marketing activities. Research and Development Expenses. 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 of Ticketmaster Online and CitySearch. General and Administrative Expenses. 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 of Ticketmaster Online and CitySearch amounting to $1.7 million. Interest Income, Net. We 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 of the convertible note issued to USAi in connection with the merger of Ticketmaster Online and CitySearch. 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 with CitySearch. Our effective tax rate differs from the statutory federal income tax rate, primarily as a result of state income taxes and operating losses not benefited. 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. We expect 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 our taxable income. CitySearch Revenues. CitySearch's revenues increased from $3.7 million for the nine months ended September 30, 1997 to $11.3 million for the nine months ended September 28, 1998, and increased from $203,000 for the year ended December 31, 1996 to $6.2 million for the year ended December 31, 1997. CitySearch did not recognize any revenue from September 20, 1995, its date of formation, to December 31, 1995. CitySearch has two revenue sources: (1) subscription and services revenue and (2) licensing and royalty revenue. Subscription and services revenue was $3.0 million and $9.5 million for the nine months ended September 30, 1997 and September 28, 1998, 37 respectively, and was $203,000 and $4.9 million for the years ended December 31, 1996 and 1997 respectively. Subscription and services revenue increased for the nine months ended September 28, 1998 as compared to the nine months ended September 30, 1997, primarily as the result of increases in business Web site subscription revenue of $4.2 million, due to an increase in the average sales price of new business Web sites sold from approximately $80 in September 1997 to approximately $190 in September 1998. Subscription and services revenue increased for the year ended December 31, 1997 as compared to the year ended December 31, 1996 primarily as the result of the increases in business Web site subscription revenue of $3.2 million, due to the launch of two new city guides and an increase in the average sales price of new business Web sites sold from approximately $50 in December 1996 to approximately $100 in December 1997. The increases in subscription and services revenue for the nine months ended September 28, 1998 and for the year ended December 31, 1997 also resulted from increases in consulting revenue of $1.7 million and $306,000, respectively, barter revenue of $337,000 and $1.1 million, respectively, and banner revenue of $316,000 and $113,000, respectively. Licensing and royalty revenue was $677,000 and $1.90 million for the nine months ended September 30, 1997 and September 28, 1998, respectively, and was $0 and $1.30 million for the years ended December 31, 1996 and 1997, respectively. CitySearch began licensing and royalty revenue after the launch of its initial partner-led market city guide in July 1997. Cost of Revenues. Cost of revenues consists primarily of the expenses associated with the design, layout, photography, customer service and editorial resources used in the production and maintenance of business Web sites and editorial content, network infrastructure maintenance and the costs of consulting services in partner-led markets. Cost of revenues is expended as incurred. CitySearch had no cost of revenues from September 20, 1995 to December 31, 1995. Cost of revenues were $7.6 million and $10.5 million for the nine months ended September 30, 1997 and September 28, 1998, respectively, and were $2.9 million and $9.7 million for the years ended December 31, 1996 and 1997, respectively. The increases for the nine months ended September 28, 1998 as compared to the nine months ended September 30, 1997 and for the year ended December 31, 1997 as compared to the year ended December 31, 1996 were due primarily to increased personnel and freelance labor amounting to $2.30 million and $5.2 million, respectively, required to produce and maintain the increased number of business Web sites and amount of editorial content. The remaining amount of the increase during the periods was due to operating support costs associated with the growth in the business. Sales and Marketing Expenses. Sales and marketing expenses consist primarily of the costs related to compensation of sales and marketing personnel, advertising, public relations, travel, sales force training and marketing literature. Sales and marketing expenses were $13.7 million and $14.9 million for the nine months ended September 30, 1997 and September 28, 1998, respectively, and were $57,000, $6.4 million and $20.2 million for the period from September 20, 1995 to December 31, 1995 and for the years ended December 31, 1996 and 1997, respectively. The increase for the nine months ended September 28, 1998 as compared to the nine months ended September 30, 1997 was primarily due to increased sales and marketing personnel and increased advertising expenses. The increase for the year ended December 31, 1997 as compared to the year ended December 31, 1996 was due primarily to increased labor related costs of $7.6 million. The increase in the year ended December 31, 1997 was also attributable, to a lesser extent, to an increase of $2.0 million in advertising costs. The remaining increase in the period was related to operating costs associated with the growth in sales and marketing activities. Research and Development Expenses. Research and development expenses include the costs to develop, test and upgrade the CitySearch online service and the enterprise management systems. These costs consist primarily of salaries for product development personnel, contract labor expense, consulting fees, software licenses, hardware costs and recruiting fees. Research and development expenses were $4.9 million and $5.0 million for the nine months ended September 30, 1997 and September 28, 1998, respectively, and were $152,000, $2.6 million and $7.20 million for the period from September 20, 1995 to December 31, 1995 and for the years ended December 31, 1996 and 1997, respectively. The increases in research and development expenses were primarily attributable to increased staffing levels required to design, test, deploy and support expanded city guide functionality and back-office systems. As such, the Company expects that research and development expenditures will increase in absolute dollars in future periods. CitySearch has expended research and development costs as incurred. General and Administrative Expenses. General and administrative expenses consist primarily of administrative and executive personnel costs, fees for professional services and the costs of in-house infrastructure to support the operations of CitySearch. General and administrative expenses were $4.3 million and $5.1 million for the nine 38 months ended September 30, 1997 and September 28, 1998, respectively, and were $104,000, $2.5 million and $5.90 million for the period from September 20, 1995 to December 31, 1995 and for the years ended December 31, 1996 and 1997, respectively. These increases were due primarily to increased staffing levels to manage and support CitySearch's expanding operations. Merger and Other Transactions Costs. CitySearch recorded $3.1 million in costs during the nine months ended September 28, 1998, which were primarily related to the merger of Ticketmaster Online and CitySearch. Interest Income, Net. Net interest income consists primarily of interest earned on CitySearch's cash and cash equivalents, less interest expense on capital lease obligations. CitySearch had net interest income of $104,000 and $227,000 for the nine months ended September 30, 1997 and September 28, 1998, respectively, and $5,000, $217,000 and $223,000 for the period from September 20, 1995 to December 31, 1995 and for the years ended December 31, 1996 and 1997, respectively. Included in net interest income during the nine months ended September 28, 1998 is interest expense of $469,000 on the convertible note in the principal amount of $50.0 million issued by USAi to CitySearch in connection with the merger of Ticketmaster Online and CitySearch. Income Taxes. The provision for income, franchise and capital taxes of $800, $1,600 and $8,330 for the for the period from September 20, 1995 to December 31, 1995 and for the years ended December 31, 1996 and December 31, 1997, respectively, is based solely on minimum state tax requirements. CitySearch's effective tax rate differs from the statutory federal income tax rate, primarily as a result of operating losses not benefited. Due to the uncertainty surrounding the timing of realizing the benefits of its favorable tax attributes in future tax returns, CitySearch has placed a valuation allowance against its otherwise recognizable deferred tax assets. At December 31, 1997, CitySearch had net operating loss carryforwards for federal and state income tax purposes of approximately $47.5 million. The federal carryforwards expire principally in the period from 2010 to 2012, and the state carryforwards expire principally in 2003. See Note 4 of Notes to Consolidated Financial Statements of CitySearch, Inc. The Tax Reform Act of 1986 imposes substantial restrictions on the utilization of net operating losses and tax credits in the event of an "ownership change" of a corporation. CitySearch's ability to utilize net operating loss carryforwards may be limited as a result of "ownership change" as defined in the Internal Revenue Code. The merger of Ticketmaster Online-- CitySearch and prior issuances of CitySearch Convertible Preferred Stock, have constituted "ownership changes" that could result in limitations on the use of net operating loss carryforwards in future periods. Liquidity and Capital Resources Prior to the merger of Ticketmaster Online and CitySearch, our primary sources of liquidity were cash from operations and funding from Ticketmaster Corp. Consistent with cash management policies of Ticketmaster Corp., we did not maintain any cash balances prior to the date of the merger (September 28, 1998). Net cash used in operating activities was $6.2 million for the three months ended March 31, 1999 and net cash provided by operating activities was $662,000 for the three months ended March 31, 1998. Net cash used in operating activities was $438,000 for the eleven months ended December 31, 1998, net cash provided from operating activities was $2.9 million for the fiscal year January 31, 1998, and net cash used in operating activities was $556,000 for the year ended January 31, 1997. Net cash used in investing activities was $1.0 million and $25,000 for the three months ended March 31, 1999 and March 31, 1998, respectively. Net cash used in investing activities in these periods consisted primarily of capital expenditures for computers, software, equipment and leasehold improvements. Net cash used in financing activities was $433,000 and $637,000 for the three months ended March 31, 1999 and 1998, respectively. 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 our initial public offering and repayment of a convertible note in the principal amount of $50.0 million which was paid upon closing of our initial public offering. 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 us and distributions to Ticketmaster Corp. Net cash provided by 39 financing activities was $748,000 for the fiscal year ended January 31, 1997, attributable to intercompany funding from Ticketmaster Corp. At March 31, 1999, our cash and cash equivalents were $99.3 million. Existing cash and cash equivalents are expected to be sufficient to meet working capital and capital expenditures requirements for at least the next 12 months. Thereafter, we may be required to raise additional funds. No assurance can be given that we will not be required to raise additional financing prior to such time. If additional funds are raised through the issuance of equity securities, our stockholders 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 us or our stockholders. If such financing is not available when required or is not available on acceptable terms, we may be unable to develop or enhance our products and services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our 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 us and our Web services, to malfunction prior to or in the Year 2000 and lead to significant business delays and disruptions in our business and operations in the United States and internationally. We have developed a plan to minimize the impact of this Year 2000 problem. Pursuant to our plan, we have established a Year 2000 Committee consisting of senior managers from relevant functional areas. The Year 2000 Committee has reviewed all areas of our 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. We concluded our initial assessment in the fourth quarter of 1998 and are commencing implementation of remediation necessary to achieve compliance. Remediation will continue in 1999. We estimate that the dollar cost of Year 2000 compliance is approximately $200,000. However, we have not yet completed our comprehensive assessment of remediation costs and actual costs could materially differ. Several systems provided by third parties are required for the operation of our services, any of which may contain software code that is not Year 2000 compliant. These systems include: . server software used to operate our network servers,; . software controlling routers; . switches and other components of our data network; . disk management software used to control our data disk arrays; . firewall, security, monitoring and back-up software used by us; and . desktop PC applications software. In most cases, we employ 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 us could result in a temporary disruption of our services or otherwise disrupt our operations. In addition, we intend to provide our partners which host their own city guides using software that we have provided to them with software upgrades to make their hosted city guides Year 2000 compliant. In addition, our partners may operate their city guide sites in proximity to other applications that may not be Year 2000 compliant. While we intend to assign an individual to coordinate each partner's compliance efforts to ensure uninterrupted operations, we have limited ability to influence decisions by our partners. Our partners' inability or unwillingness to timely install our Year 2000 upgrades to their hosted city guide sites or noncompliant 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 us. There can be no assurance that we, our third party suppliers or our partners will be Year 2000 compliant 40 at the end of the millennium. Failure to achieve compliance could result in complete failure or inaccessibility of our or our partners' services, and could adversely affect our business, financial condition and results of operations. Year 2000 compliance problems could also undermine the general infrastructure necessary to support our operations. For instance, we depend on third party Internet service providers for connectivity to the Internet. Any interruption of service from our Internet service providers could result in a temporary interruption of our 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 our services and adversely impact our business, financial condition and results of operations. Quantitative and Qualitative Disclosures about Market Risk Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We have not used derivative financial instruments in our investment portfolio. We invest our excess cash in debt instruments of the U.S. Government and its agencies, and in high-quality corporate issuers and, by policy, limit the amount of credit exposure to any one issuer. We protect and preserve our 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, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. 41 BUSINESS We have 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., a leading provider of live event automated ticketing services in the United States. We are integrating our local CitySearch city guides with our 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 and integrating these activities with the additional services offered by CityAuction, Match.com and, once the transaction closes, One & Only. 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 44 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 specified limitations, Ticketmaster Online is the exclusive agent for Ticketmaster Corp. for the online sale of tickets to live events presented by Ticketmaster Corp.'s clients. CitySearch Business CitySearch Service for Consumers We produce and deliver 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 us and our 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 web sites of Ticketmaster Online, CityAuction and Match.com through CitySearch city guides to purchase live event tickets and related merchandise, participate in auctions and seek relationships 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. We will continue to expand the service both in owned and operated 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 us to build out our national and international network of sites faster than we could solely through owned and operated sites. As of June 17, 1999, we have launched CitySearch sites in 30 markets, including 11 partner-led markets and 19 owned and operated markets. CitySearch Service for Business Customers We create and host CitySearch Web sites for local and regional businesses and organizations for a monthly fee. We offer 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, we provide categorical, geographic and editorial context to a 42 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, we believe 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. We believe that these demographics are attractive to our business customers. We provide 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 our products and services including photographs, prices, location, schedules of live entertainment, sales and other relevant information. Unlike traditional media such as yellow pages advertising, we offer 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. We recently introduced a strategy of bundling enhanced features and functionality, including panoramic images and audio clips. These services, when bundled with our 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 our offerings. We believe our broad offering of services and our prices compare favorably to other Web advertising options available to businesses. These 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, we believe that our services address the demand of the large number of businesses whose online needs fall between these market extremes. Our proprietary site design tools and production economies enable us 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 our headquarters to better control quality and cost and provide rapid production. Business Web site creation follows a standardized process. First, sales representatives in the field work with customers to design their sites and gather images and text. Once content is collected, sales representatives forward this information to our central production site in Pasadena, California where data entry personnel input the text. Graphic designers then use our 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 us 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. We believe the systems and processes we have developed to produce business Web sites allow us to create higher quality, more informative sites in a more cost-effective and timely manner than our competitors. We intend to be the leading personalized source for local information and transactions. Our rapidly expanding city guide network now includes a full range of local transaction services, including tickets, hotel reservations, merchandise, e-Commerce, employment classifieds and matchmaking to help local consumers get things done online. CitySearch Strategic Alliances We have entered into partnerships and strategic alliances with third parties in order to: . rapidly build our national and international network of CitySearch local city guides; . generate licensing revenue in CitySearch partner-led markets; . facilitate branding; . gain access to additional content; and . drive traffic on our network of sites. We intend to continue to negotiate further partnerships and alliances. 43 Newspaper and Telephony Partnerships. We have 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 we contribute technology, a business model, consulting services, business systems and processes and network participation. We 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, we 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. We believe these arrangements allow us to expand our national and international network of cities in a more rapid and cost-effective manner than a solely owned and operated network would allow. We have 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, our city guide sites and content partners create co-branded areas and host certain content supplied by the content partners. In August 1998, we restructured our 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. We hold a 10% interest in the partnership and license our technology and business systems to the partnership for use in the defined territory. In July 1998, we entered into an 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. We licensed elements of our technology and business systems to Classified Ventures and provide services in automotive and real estate classified advertising categories. The agreement may be terminated effective 2001 by Classified Ventures, although it may be terminated earlier by agreement of the parties. Certain CitySearch owned and operated city guides may also participate as Classified Ventures affiliates in their respective markets. Television and Radio Media Alliances. We have entered into co- promotion agreements with local television and radio stations in most of the CitySearch owned and operated markets. These relationships typically offer content sharing and co-promotion to both parties. We work with each partner to develop a multimedia Web site within the CitySearch site, while the partner offers promotion and a recognized brand within the market. We typically receive significant on-air promotion from these television and radio stations that increases brand awareness and drives traffic to the CitySearch site. For example, we have 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, we have agreements with the ABC television station (KGO) and two radio stations owned by CBS. Marketing Agreements. We have entered into both local and national marketing agreements. For example, we are a party to an agreement with American Express which included an equity investment in Ticketmaster Online-CitySearch. The agreement provides for distribution of co-branded marketing materials to American Express Travel Related Services Company, Inc. merchant customers in our local markets that will offer merchant customers online Web site presences through our 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 Ticketmaster Online-CitySearch. We intend to 44 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. We have entered into agreements with a number of companies to distribute our content and drive traffic to our Web sites. For example, we have 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 We emphasize marketing activities in our owned and operated markets aimed at increasing awareness of our CitySearch local city guides for both consumers and business customers. Our 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. We conduct advertising and public relations campaigns through low-cost "guerilla" marketing efforts and our local media partners in radio, television and print advertising to both drive business customer sales and consumer usage. We also purchase 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, our 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. We provide our partners with a roll-out team to launch the service and ongoing support, including assistance with recruiting, sales strategy and back office operations. After a site has been launched, we, or our partners, rely upon a direct sales force to accelerate the momentum established by the roll-out team. As of March 31, 1999 we employed 262 sales representatives and IMAs in our 19 owned and operated markets. Sales Representatives sell directly to local businesses and IMA's maintain regular contact with customers and facilitate up-selling of Web site functionality. Sales representatives in new markets perform both selling and active customer relationship management. Each sales representative completes an intensive training program at our headquarters with follow-up field training. Our proprietary enterprise management system tracks sales leads and prospect status and allows sales managers to track performance. Sales representatives participate in ongoing training sessions in sales techniques and new products. Operations We have created a systematic approach to market roll-out of our CitySearch local city guides that is designed to enable us to launch our service in owned and operated markets and to support a local service once launched. In addition, we license our roll-out capabilities to media companies in our partner-led markets. We have analyzed and documented the best practices associated with our early city launches to refine and standardize our field and home office production processes. Our software systems monitor much of the sales and customer care functions. Additionally, we have built custom systems that streamline the site creation and maintenance process. Our growing network of local city sites has allowed us to refine and streamline the content and the roll-out process of new owned and operated sites. We refer to these new sites as "Quicksilver Sites." Quicksilver Sites incorporate content produced by us for use nationally by all our local sites, such as movie and music reviews, with local edits to provide a broader content base for our new sites in their start up phase. We believe we realize economies of scale in the production of such content. The Quicksilver Sites are focused more on arts and entertainment as a result of our analysis of traffic patterns on our older owned and operated sites. This traffic analysis indicates that arts and entertainment is where the majority of site visitors spend their time. Our streamlined roll-out strategy allows us to launch a new Quicksilver site in approximately one-half of the time needed for the launch of older owned and operated sites. We also staff our Quicksilver Sites with less than one-half of the employees needed to staff the older sites. We attribute this to allowing the Quicksilver Site local account managers to manage their relationships with advertisers from start to finish and the reduced need to generate local content due to the use of a national content feed. As a result of the Quicksilver Site program, we plan to launch new sites faster than in the past and at less incremental cost. 45 Customer service operations are located in our Pasadena headquarters. Our 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 We have developed and implemented a number of technologies to support its local city guide service and business operations, including (1) an online city guide application, (2) a set of content creation and management tools and (3) a suite of integrated enterprise management systems. CitySearch Online Application. Our 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 our application includes: . concurrently performed keyword, geographic and temporal searches; . personalization that permits consumers, for example, to receive newsletters in areas of interest, and register for special offers from our business customers that have chosen to implement a one-to-one marketing approach; . dynamic map rendering and "nearby" functionality; . and message boards. We employ a multi-tiered architecture, separating a standard relational database from business rules and presentation logic. Our online application is designed to permit city guide publishers to create and to change the appearance of the product quickly and easily. As result, we believe that both it and its partners will be able to respond readily to changes in the marketplace and to evolving user preferences. In addition, the tiered architecture is designed to provide for rapid development cycles and code rouse. We have made a substantial investment in our product development infrastructure and intend to continue to release product enhancements that address changing demands of business customers and consumers. Content Creation and Management Tools. We have created the following applications to support editorial and advertising content production: . SiteWorks, for design of business Web sites and editorial features; . EditWorks, for editorial content entry; . User Interface Tree editor, for defining and managing the site hierarchy; and . 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. We have 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. The sales force automation and production tracking systems enhance our ability to manage the planning, scheduling, forecasting and tracking of business Web sites, banners and other services through the various stages of design and production. These tools enable us to manage the large number of business Web sites and banners developed simultaneously and originating from numerous cities. We believe the systems and processes it has 46 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. We intend to expand the types and range of merchandise that can be ordered by consumers through the Ticketmaster Online Web site. We also intend 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 $59.5 million in the quarter ended March 31, 1999. 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 March 31, 1999 represented 8.7% of tickets sold. 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 2,800 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. We 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. 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 47 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 and the first quarter 1999, the convenience charges generally ranged from $1.50 to $7.00 per ticket. 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) 1,000,000 in the aggregate, of which less than (Pounds) 300,000 is normally unsold at any time. 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. We believe that the primary benefits derived by Ticketmaster Corp.'s clients by use of the Ticketmaster System include the following: . centralized control of total ticket inventory as well as accounting information and market research data; . centralized accountability for ticket proceeds; . manageable and predictable transaction costs; . broader and expedited distribution of tickets; . wide dissemination of information about upcoming events through Ticketmaster Corp.'s call centers, Ticketmaster Online and other media platforms; . the ability to easily add additional performances if warranted by demand; and . marketing and promotional support. 48 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 our license agreement with Ticketmaster Corp., subject to specified limitations, Ticketmaster Corp. has granted us an exclusive, perpetual, irrevocable, worldwide license to use the Ticketmaster trademark and specified Ticketmaster Corp. databases to sell live event tickets online for Ticketmaster Corp.'s clients. In addition, Ticketmaster Corp. authorized us to be its exclusive, perpetual, worldwide agent for such online ticket sales. The 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 license agreement defines such non-online means to include: . by telephone; . by other voice-to-voice means or voice-to-voice recognition unit systems; . by non-interactive broadcast, cable and satellite television; and . 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 license agreement to comply with the terms of Ticketmaster Corp.'s client agreements. Our rights, contained in the license agreement, are subject to the client agreements. The license agreement also generally restricts us 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 license agreement, we pay Ticketmaster Corp. a royalty which is a percentage of the net profit we derive from online ticket sales. We also reimburse Ticketmaster Corp. for Ticketmaster Corp.'s direct expenses related to online ticket sales. Under the license agreement, we have also been granted the non-exclusive right to promote and sell online specified 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 us from third parties, Ticketmaster Corp. or its affiliates will serve as our exclusive fulfillment provider for the online sales of all other merchandise available through Ticketmaster Corp. Ticketmaster Corp. may also solicit sponsorship and advertising for our sites in a bundle with other sponsorship and advertising opportunities offered by Ticketmaster Corp. Ticketmaster Online Strategic Alliances Ticketmaster Online participates in certain strategic partnerships with leading marketing and technology partners. We believes that these alliances continue to build the Ticketmaster Online brand name and expand our promotional opportunities. 49 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 our Ticketmaster Online Web site through banners and links that encourage viewers to click through for additional information. We intend to continue to pursue such advertising, sponsorship and marketing opportunities. Technology Partnerships. We also participate in certain arrangements with technology partners to provide enhanced features and functionality on our Ticketmaster Online Web site. For example, our "my Ticketmaster" Web site, which we 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 We believe that we will benefit from Ticketmaster Corp.'s continued promotion of its brand name through Ticketmaster Corp.'s services and advertising sales force. We intend 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 our 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 March 31, 1999, we had 11 employees dedicated to advertising and promotion of Ticketmaster Online's services. Operations Our Ticketmaster Online 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 Corp.'s other distribution methods (e.g., telephone call centers and independent retail outlets) and to enable consumers to 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. We utilize 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. 50 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. CityAuction In March 1999, we purchased CityAuction, Inc. which provides person-to-person online auctions. In addition to national and regional auctions, City Auction lets users post and search in their own locality, allowing them to trade items that would be considered too valuable or difficult to transport, such as electronic/office equipment, furniture and automobiles. Match.com We have recently purchased Match.com, a leading on-line matching and dating service. The acquisition closed on June 14, 1999. Match.com provides adults with a secure, effective environment for meeting other single adults. Match.com provides users with access to other users personal profiles. Match.Com members are, on average, upscale, professional singles seeking meaningful romantic relationships. Users interested in meeting others can send email messages to one another. Email recipients can respond, or not, depending on their level of interest in the sender. Match.com allows seven days of free viewing of personals, but to receive unlimited usage and the ability to email other users, users must subscribe to the service on a month to month basis. Match.com has focused on keeping the number of users balanced between men and women by forming relationships with women oriented Internet sites. Match.com also expends a considerable amount of effort to keep the site secure for use by single women. One and Only Network We have signed an agreement to purchase One and Only Network. One & Only Network is a leading Internet classifieds company, and operates a large online associates program. One & Only Network provides classified content to large and small businesses with easy and affordable methods of tapping into the world-wide classifieds market. One & Only Network currently operates Internet classifieds programs in two categories: personals and person-to-person auctions. One and Only Network is one of the leaders in the online personals category and, following the closing of the acquisition, we intend to combine the online personals operations of Match.com and One and Only Network. 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, Microsoft Corporation (Sidewalk) and InfoSpace. 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 us. We 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 51 budgets. We face different competitors in most of our CitySearch markets. For example, competitors in the San Francisco Bay 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 ours may introduce new Internet products and services addressing these markets in the future. There can be no assurance that our competitors will not develop services that are superior to those of ours or that achieve greater market acceptance than our 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. We believe that our 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 us to compete effectively with other online ticketing services. However, in a number of specific geographic regions, including a number of local markets in which we provide or intend to provide our 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. We believe that our Ticketmaster Online Service 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 our business, financial condition and results of operations. Furthermore, some of Ticketmaster Online's competitors may have financial and other resources greater than ours 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 our Ticketmaster Online Service offerings. In addition, pursuant to our license agreement with Ticketmaster Corp., 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 our Ticketmaster Online Web site are also sold by Ticketmaster Corp. by telephone and through independent retail outlets. These sales by Ticketmaster Corp. could have a material adverse effect on our online ticket sales, and as a result, on our business, financial condition and results of operations. We believe that principal competitive factors include the following: . depth; . quality and comprehensiveness of content; . ease of use; . distribution; 52 . search capability; and . brand recognition. Many of our competitors, whether with respect to our CitySearch service or Ticketmaster Online service, have greater financial and marketing resources than us and may have significant competitive advantages through other lines of business and existing business relationships. There can be no assurance that we will be able to successfully compete against our current or future competitors or that competition will not have a material adverse effect on our business, financial condition and results of operations. Furthermore, as a strategic response to changes in the competitive environment, we may make certain pricing, servicing or marketing decisions or enter into acquisitions or new ventures that could have a material adverse effect on our business, financial condition and results of operations. Proprietary Rights We regard our copyrights, service marks, trademarks, trade dress, trade secrets, proprietary software and similar intellectual property as critical to our success, and rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with employees, customers, partners and others to protect our proprietary rights. We do not hold any patents. We pursue the registration of certain of our 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 us in every country in which our products and services are made available online. We have licensed in the past, and expect that we may license in the future, certain proprietary rights, such as trademarks or copyrighted material, to third parties. In addition, we have licensed in the past, and expect to license in the future, certain content, including trademarks and copyrighted material, from third parties. While we attempt to ensure that the quality of our 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 our proprietary rights or reputation, which could have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that the steps taken by us to protect our proprietary rights will be adequate or that third parties will not infringe or misappropriate our 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 us. We license the registered trademark "CitySearch" from a third party, and there can be no assurance that we will be able to continue to license the trademark on terms acceptable to us. The initial term of the license expires in 2001, subject to renewal at our option. We license the trademark "Ticketmaster" and related trademarks from Ticketmaster Corp. pursuant to our license agreement with them. We are dependent upon Ticketmaster Corp. to maintain and assert our rights to the trademarks licensed from Ticketmaster Corp. and defend infringement claims, if any, relating to our use of such marks. We may be subject to legal proceedings and claims of alleged infringement of the trademarks and other intellectual property rights of third parties by us and our 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 our business, financial condition and results of operations. Employees As of March 31, 1999, we employed 658 persons with respect to the CitySearch business, including: . 290 persons in functions related to cost of revenue, including 265 persons in design, content collection, editorial and photography, 25 persons in customer service and 13 persons in professional services; . 262 persons in sales and marketing; . 45 persons in research and development; and . 61 persons in general and administrative areas. As of March 31, 1999, we employed 23 persons with respect to the Ticketmaster Online business, including nine in advertising and promotion, six in operations and technical support, five in graphic design and editorial and content development and three in general and administrative services. None of our employees is represented by a labor union, and we consider our employee relations to be good. 53 Properties Our headquarters are located in Pasadena, California, where we currently lease approximately 28,000 square feet under a lease expiring in 2002. We also lease local office space in approximately 27 cities throughout the United States and abroad. Local offices range in size from less than 1,000 square feet to 10,000 square feet and have lease terms that range from month-to-month to seven years. None of such leases expires later than 2004. We also lease temporary office space 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 that we believe are at least as favorable as those we could obtain from a third party in an arm's-length transaction. We believe that our facilities are adequate in the locations where we currently do business. Legal Proceedings We are not currently subject to any material legal proceedings, however, we may from time to time become a party to various legal proceedings arising in the ordinary course of our business. 54 MANAGEMENT Executive Officers and Directors The following table sets forth certain information regarding the executive officers and directors of the Company as of June 25, 1999:
Name Age Position - --------------------------------------------- ----- ----------------------------------------------------------- Alan Citron.................................. 40 Chairman of the Board Charles Conn................................. 37 Chief Executive Officer and Director David Hagan.................................. 39 Chief Operating Officer John Pleasants............................... 33 President, Ticketing Transactions Thomas McInerney............................. 34 Chief Financial Officer, Executive Vice President, Finance and Administration and Treasurer Brad Serwin.................................. 38 General Counsel, Vice President and Secretary Barry Baker.................................. 46 Director Terry Barnes................................. 47 Director Eugene L. Cobuzzi............................ 42 Director Barry Diller................................. 57 Director Joseph Gleberman............................. 41 Director William Gross................................ 40 Director Victor A. Kaufman............................ 56 Director Robert Kavner(1)............................. 55 Director William D. Savoy(1)(2)....................... 34 Director Alan Spoon................................... 48 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 Ticketmaster Online-- CitySearch 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 Chief Executive Officer of Ticketmaster Online-- CitySearch since September 1998 and as a director since March 1999. He has served as Chief Executive Officer of CitySearch since he co-founded CitySearch in September 1995, 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. Hagan has served as Chief Operating Officer of Ticketmaster Online-- CitySearch since January 1999. From April 1994 until December 1998, he served in a variety of senior management positions with Sprint Canada, a 55 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. Pleasants has served as President - Ticketing and Transactions of Ticketmaster Online-CitySearch since May 1999. Prior to such position, Mr. Pleasants served as Executive Vice President - New Markets from November 1998 to April 1999 and General Manager - New Markets from November 1996 to November 1998. From September 1993 to November 1996, Mr. Pleasants served as Product Manager for PepsiCo's Frito-Lay division. From May 1988 to August 1991, he worked as a Plant Manager and sales and marketing executive at Hygiene Industries, a textile manufacturer. Mr. Pleasants holds a MBA from Harvard Business School. Mr. McInerney has served as Chief Financial Officer, Executive Vice President, Finance and Administration and Treasurer of Ticketmaster Online- CitySearch since May 1999 when he joined the company. Prior to joining Ticketmaster Online-CitySearch, Mr. McInerney was an investment banker with Morgan Stanley Dean Witter for nine years, most recently as a Principal. Prior to Morgan Stanley, Mr. McInerney attended Harvard Business School from September 1988 to June 1990. Mr. Serwin has served as General Counsel, Vice President and Secretary of Ticketmaster Online-CitySearch since June 1999 when he joined the company. From March 1995 to May 1999, Mr. Serwin served as General Counsel, Senior Vice President and Secretary of PAULA Financial, a publicly traded insurance holding company. Prior to joining PAULA Financial, Mr. Serwin practiced law for nine years with Gibson, Dunn & Crutcher LLP, where he specialized in transactional and securities law matters. Mr. Baker has served as a director of Ticketmaster Online--CitySearch since March 1999. Mr. Baker has been President and Chief Operating Officer of USAi since March 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 acquired by Sinclair Broadcasting. Mr. Barnes has served as a director of Ticketmaster Online--CitySearch 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 Ticketmaster Online--CitySearch 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. Diller has served as a director of Ticketmaster Online--CitySearch 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 Ticketmaster Online--CitySearch 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, 56 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 Ticketmaster Online-CitySearch 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. Gross also serves as a director of goto.com, Inc. Mr. Kaufman has served as a director of Ticketmaster Online-CitySearch 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. 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. 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. 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 Ticketmaster Online--CitySearch since September 1998. Mr. Kavner has served as the Chief Executive Officer, President and a director of On Command Corporation, a provider of hotel in-room entertainment and movies, since September 1996 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. Mr. Savoy has served as a director of Ticketmaster Online--CitySearch 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 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 Ticketmaster Online--CitySearch 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 Ticketmaster Online--CitySearch 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. 57 Board Composition The Board of Directors Ticketmaster Online-CitySearch is currently comprised of 13 directors, one of whom is an officer of Ticketmaster Online--CitySearch. Pursuant to our Restated Certificate of Incorporation, the number of directors 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 our stockholders. Several of our 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 our officers and employees, including equity compensation for senior executives. In addition, the Board of Directors has an Audit Committee, comprised of Messrs. Savoy and Unterman with Mr. Michael Durney, who serves as the Controller for USAi as an observer, that reviews and monitors corporate financial reporting and audits of the company, as well as any other accounting related matters. Director Compensation The members of the Board of Directors are not currently compensated for their services to Ticketmaster Online--CitySearch 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 our 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 Savoy, with Mr. Citron serving as an observer to such Committee. Neither of the members of the Compensation Committee is an officer or employee of Ticketmaster Online--CitySearch. No interlocking relationship exists between our 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. 58 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 our Chief Executive Officer. None of our current executive officers earned in excess of $100,000 in compensation during that year. 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
- ----------------------------- (1) Options to purchase 200,000 shares of Class A Common Stock were granted to Mr. Conn, pursuant to the 1996 Stock Plan. In addition, options to purchase 150,000 shares of Class B Common Stock were granted to Mr. Conn pursuant to the 1998 Stock Plan. 59 Option Grants in 1998 The following table sets forth certain information regarding option grants to our Chief Executive Officer 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 Underlying Granted to Exercise For Term (5) Options Employees Price Per Expiration -------------------------------- Name Granted (#) in 1998 (3) Share (4) Date 5% 10% - ----------------------- -------------- --------------- ------------- -------------- --------------- --------------- Charles Conn........... 200,000(1) 8.7% $ 7.00 6/17/08 $16,843,620 $27,649,916 150,000(2) 23.1% $32.69 12/17/08 8,779,215 16,883,937
(1) These options were granted under the 1996 Stock Plan and are exercisable for Class A Common Stock. As of December 31, 1998, 325,000 shares were vested. (2) These options were granted under the 1998 Stock Plan and are exercisable for Class B Common Stock. No shares were vested as of December 31, 1998. (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 our employees, including Mr. Conn, during the year ended December 31, 1998. These options exclude options to purchase 419,231 and 0 shares of 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 our underlying Common Stock on the date of grant as determined by the 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 Securities and Exchange Commission and do not represent Ticketmaster Online--CitySearch'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, our future financial performance and overall market conditions. 60 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 our Chief Executive Officer 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 Value ------------------------------ ------------------------------ Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ------------------- ----------- ------------ ----------- ------------- ----------- ------------- Charles Conn......... -- -- 325,000(1) 0 $16,550,000 $ 0 0 150,000(2) 0 3,496,500
- ------------------------ (1) These options shown were granted under the 1996 Stock Plan and are exercisable for Class A Common Stock. (2) These 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 the Class B Common Stock of $56.00 per share, less the exercise price. Employment Agreement On May 9, 1996, CitySearch entered into an at-will employment agreement with Mr. Conn. Pursuant to the employment agreement, in the event that Mr. Conn 's employment is terminated, he will be entitled to receive severance payments until the earlier of (1) such time as he is employed by a recognized company or (2) six months after termination. The 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. In addition, pursuant to stock option agreements between Ticketmaster Online--CitySearch and Mr. Conn, the vesting of his stock options was accelerated and such stock options fully vested upon completion of the merger between Ticketmaster Online and CitySearch. Moreover, in connection with the merger, Mr. Conn entered into the noncompetition agreement. See "Certain Transactions--Acceleration of Stock Options" and "--Non-Competition Agreement." Employee Benefit Plans 1996 Stock Option Plan The Board of Directors of CitySearch adopted and the stockholders approved the 1996 Stock Plan and the reservation of 2,500,000 shares of Common Stock thereunder on March 1, 1996. On September 18, 1996, the Board of Directors and the stockholders of CitySearch approved an increase of 500,000 shares reserved for issuance under the 1996 Stock Plan. The Board of Directors and the stockholders of CitySearch approved a further increase of 1,000,000 shares on November 18, 1996 and November 20, 1996, respectively. The Board of Directors and the stockholders of CitySearch approved a final increase of 1,500,000 shares, for an aggregate of 5,500,000 shares reserved for issuance under the 1996 Stock Plan, on June 15, 1998 and August 5, 1998, respectively. Pursuant to the terms of the 1996 Stock Plan, the merger of Ticketmaster Online and CitySearch and the reclassification of shares subsequent thereto, the CitySearch Common Stock reserved for issuance under the 1996 Stock Plan has been reclassified as Class A Common Stock. As of June 9, 1999, there were options to purchase an aggregate of 2,656,811 shares of Class A Common Stock outstanding under the 1996 Stock Plan. We do not intend to grant any additional options under the 1996 Stock Plan. The 1996 Stock Plan provides for the granting to employees, including officers and employee directors, of incentive stock options within the meaning of Section 422 of the Internal Revenue Code and for the granting to these employees, and consultants, including non-employee directors, of nonstatutory stock options. 61 Unless determined otherwise by the administrator, an option granted under the 1996 Stock Plan is not transferable by the optionee other than by will or by the laws of descent or distribution, and is exercisable during the lifetime of the optionee only by such optionee. Unless otherwise provided by the administrator, an option granted under the 1996 Stock Plan must be exercised within three months after termination of the optionee's status as an employee or consultant of Ticketmaster Online--CitySearch, or within 12 months after termination of such status by death or disability, but in no event later than the expiration of the option in accordance with its terms. The shares subject to options granted under the 1996 Stock Plan may be fully and immediately exercisable or may be exercisable cumulatively over time or upon satisfaction of specified performance criteria, as determined by the administrator. In most cases, 25% of the shares subject to options granted under the 1996 Stock Plan are exercisable at the end of one year with one forty-eighth of the shares subject to the option becoming exercisable each month thereafter. The 1996 Stock Plan provides that in the event of a merger of Ticketmaster Online--CitySearch with or into another corporation, or a sale of substantially all of our assets, each option shall be assumed or an equivalent option substituted for by the successor corporation. If the outstanding options are not assumed or substituted for by the successor corporation, the administrator shall provide for the optionee to have the right to exercise the option as to all of the optioned stock, including shares as to which it would not otherwise be exercisable. If the administrator makes an option exercisable in full in the event of a merger or sale of assets, the administrator shall notify the optionee that the option shall be fully exercisable for a period of 15 days from the date of such notice, and the option will terminate upon the expiration of such period. 1998 Stock Option Plan Ticketmaster Online--CitySearch has adopted the 1998 Stock Plan and reserved 4,000,000 shares of Class B Common Stock 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, or SPRs, to employees, directors and consultants. Unless terminated sooner, the 1998 Stock Plan will terminate automatically in September 2008. As of June 9, 1999, there were options to purchase an aggregate of 728,612 shares of Class B Common Stock outstanding under the 1998 Stock Plan. The administrator of the 1998 Stock Plan has the power to determine the terms of the options or SPRs granted, including the exercise price of the option or SPR, the number of shares subject to each option or SPR, the exercisability thereof, and the form of consideration payable upon such exercise. In addition, the administrator has the authority to amend, suspend or terminate the 1998 Stock Plan, provided that no such action may affect any shares of Class B Common Stock previously issued and sold or any option previously granted under the 1998 Stock Plan. The maximum number of shares covered by options that each optionee may be granted during a fiscal year is 500,000 shares. In addition, in connection with an optionee's initial employment with Ticketmaster Online-- CitySearch, such optionee may be granted an option covering an additional 1,000,000 shares. Options and SPRs granted under the 1998 Stock Plan are generally not transferable by the optionee, and each option and SPR is exercisable during the lifetime of the optionee only by such optionee. Options granted under the 1998 Stock Plan generally must be exercised within three months after the end of the optionee's status as an employee, director or consultant of Ticketmaster Online- - -CitySearch, or within 12 months after such optionee's termination by death or disability, but in no event later than the expiration of the option's term. In the case of SPRs, unless the administrator determines otherwise, the restricted stock purchase agreement shall grant Ticketmaster Online--CitySearch a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment or consulting relationship with Ticketmaster Online-- CitySearch for any reason, including death or disability. The purchase price for shares repurchased pursuant to the restricted stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to Ticketmaster Online--CitySearch. The repurchase option shall lapse at a rate determined by the administrator. The exercise price of all incentive stock options granted under the 1998 Stock Plan must be at least equal to the fair market value of the Class B Common Stock on the date of grant. The exercise price of nonstatutory stock options and SPRs granted under the 1998 Stock Plan is determined by the administrator, but with respect to nonstatutory stock options intended to qualify as "performance- based compensation" within the meaning of Section 62 162(m) of the Internal Revenue Code, the exercise price must be at least equal to the fair market value of the Class B Common Stock on the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of Ticketmaster Online--CitySearch's outstanding capital stock, the exercise price of any incentive stock option granted must be at least equal 110% of the fair market value on the grant date, and the term of such incentive stock option must not exceed five years. The term of all other options granted under the 1998 Stock Plan may not exceed ten years. The 1998 Stock Plan provides that in the event of a merger of Ticketmaster Online--CitySearch with or into another corporation, or a sale of substantially all of Ticketmaster Online--CitySearch's assets, each option and SPR shall be assumed or an equivalent option substituted for by the successor corporation. If the outstanding options and SPRs are not assumed or substituted for by the successor corporation, the administrator shall provide for the optionee to vest and to have the right to exercise the option or SPR as to all of the optioned stock, including shares as to which it would not otherwise be vested or exercisable. If the administrator makes an option or SPR vested and exercisable in full in the event of a merger or sale of assets, the administrator shall notify the optionee that the option or SPR shall be fully exercisable for a period of 15 days from the date of such notice, and the option or SPR will terminate upon the expiration of such period. 1998 Employee Stock Purchase Plan Ticketmaster Online--CitySearch has adopted the 1998 Employee Stock 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 Company's fiscal year beginning in 2000 by an amount equal to (1) 200,000 shares of Class B Common Stock or (2) 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 Internal Revenue 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 on December 2, 1998 and ends on August 14, 1999. Thereafter, new six-month offering periods will commence each February 15 and August 15. Unless otherwise determined by the Board of Directors, employees are eligible to participate in the Purchase Plan only if they are customarily employed by Ticketmaster Online--CitySearch or a subsidiary of Ticketmaster Online-- CitySearch designated by the Board of Directors for at least 20 hours per week and for at least five months per calendar year. Amounts deducted and accumulated by the participant are used to purchase shares of Class B Common Stock at the end of each offering period. Employees who participate in an offering may have up to 15% of their compensation withheld pursuant to the Purchase Plan. The price of Class B Common Stock purchased under the Purchase Plan will be equal to 85% of the fair market value of the Class B Common Stock on the relevant purchase date. Shares purchased under the Purchase Plan generally may not be sold or otherwise disposed of for 180 days after their date of purchase. Employees may end their participation in any offering period at any time during any offering period, and participation ends automatically on termination of employment with Ticketmaster Online--CitySearch. The maximum number of shares that a participant may purchase during each offering period is 2,000 shares. In addition, no person may purchase shares under the Purchase Plan to the extent such person would own 5% or more of the total combined value or voting power of all classes of the capital stock of Ticketmaster Online--CitySearch or any of its subsidiaries or its parent corporation, or to the extent that such person's rights to purchase stock under all employee stock purchase plans would accrue at a rate which exceeded $25,000 for any calendar year. The Purchase Plan will terminate ten years from the date of adoption of the Purchase Plan, unless terminated earlier in accordance with the provisions of the Purchase Plan. In the event of a proposed sale of all or substantially all the assets of Ticketmaster Online--CitySearch, or the merger of Ticketmaster Online-- CitySearch with or into another corporation, each outstanding option to purchase Class B Common Stock will be assumed or an equivalent option substituted by the successor corporation. In the event the successor corporation does not assume or substitute for the option, the offering period then in progress shall be shortened to a new date prior to the proposed sale or merger. The Board of Directors has the authority to amend or terminate the Purchase Plan. No such Board action may adversely affect any outstanding options to 63 purchase Class B Common Stock under the Purchase Plan unless the ongoing operation of the Purchase Plan would result in unfavorable accounting consequences to Ticketmaster Online--CitySearch. USAi Options In connection with prior employment with Ticketmaster Online some of our employees were previously given options to purchase USAi Common Stock. USAi has informed Ticketmaster Online--CitySearch that all outstanding options to purchase shares of USAi Common Stock held by employees of Ticketmaster Online shall remain outstanding until the earliest to occur of the exercise thereof, the expiration thereof and the date that the optionholder is no longer an employee of Ticketmaster Online or another business of Ticketmaster Online-- CitySearch, and that the unvested options shall continue to vest and become exercisable pursuant to the terms of grant until the earlier of the expiration thereof and the date the optionholder is no longer an employee of Ticketmaster Online or another business of Ticketmaster Online--CitySearch. 401(k) Plan Ticketmaster Online--CitySearch participates in a tax-qualified employee savings and retirement plan, or 401(k) Plan, which covers all of our full-time employees who are at least 21 years of age and who have been employed with us for at least three months. Pursuant to the 401(k) Plan, eligible employees may defer up to 20% of their pre-tax earnings, subject to the Internal Revenue Service's annual contribution limit. The 401(k) Plan permits additional discretionary matching contributions by Ticketmaster Online--CitySearch on behalf of all participants in the 401(k) Plan in such a percentage amount as may be determined annually by our Board of Directors. To date, we have made no such matching contributions. Our 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code so that contributions by employees or by Ticketmaster Online--CitySearch to the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that contributions by Ticketmaster Online--CitySearch, if any, will be deductible by us when made. The trustee under the 401(k) Plan, at the direction of each participant, invests the assets of the 401(k) Plan in any of a number of investment options. Limitations on Liability and Indemnification Matters Our Restated Certificate of Incorporation limits the liability of directors for breach of fiduciary duty as a director to the maximum extent permitted by the Delaware General Corporation Law. This law provides that a corporation's certificate of incorporation may contain a provision eliminating or limiting the personal liability of directors for monetary damages for breach of their fiduciary duties as directors, except for liability: . for any breach of their duty of loyalty to the corporation or its stockholders; . for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided for in Section 174 of the Delaware General Corporation Law; or . for any transaction from which the director derived an improper personal benefit. Our Restated Certificate of Incorporation also provides that we are required to indemnify to the fullest extent permitted by law any of our directors, officers or employees. 64 Our Restated Bylaws provide that: . we are required to indemnify our directors and officers to the maximum extent permitted by the Delaware General Corporation Law, subject to very limited exceptions; . we may indemnify our other employees and agents to the maximum extent permitted by the Delaware General Corporation Law; . we are required to advance expenses, as incurred, to our directors and officers in connection with a legal proceeding, subject to very limited exceptions; and . the rights conferred in the Restated Bylaws are not exclusive. At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents where indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. 65 PRINCIPAL AND SELLING STOCKHOLDERS The following tables set forth certain beneficial ownership information with respect to Ticketmaster Online--CitySearch, USAi, the majority owner of Ticketmaster Online--CitySearch, and the selling stockholders. Ticketmaster Online--CitySearch Class B Common Stock The following table sets forth, as of June 14, 1999, certain information regarding the beneficial ownership of our Class B Common Stock by (1) each person or entity who is known by us to own beneficially 5% or more of our outstanding Class B Common Stock; (2) each of our directors; (3) our Chief Executive Officer; and (iv) all of our directors and executive officers as a group.
Shares Beneficially Shares Beneficially Owned Prior to Offering Owned After Offering ------------------------ Number ----------------------- of Shares Number(2) Percent(2) Offered Number(2) Percent(2) Voting Power (3) --------- ---------- --------- --------- ---------- ----------------- Beneficial Owner, Directors, Officers and 5% Stockholders(1) USA Networks, Inc.......................... 42,480,143 77.3 % -- 42,480,143 77.3% 67.3% 152 West 57th Street, 42nd Floor New York, NY 10019 Barry Diller(4)............................ 42,480,143 77.3 -- 42,480,143 77.3 67.3 William Gross(5)........................... 2,828,261 18.4 -- 2,828,261 18.4 4.5 Joseph Gleberman(6)........................ 2,387,981 16.0 -- 2,387,981 16.0 3.8 Charles Conn(7)............................ 1,551,874 11.0 -- 1,551,874 11.0 2.4 Thomas Unterman(8)......................... 750,413 5.7 -- 750,413 5.7 1.2 Alan Spoon(9).............................. 748,692 5.6 -- 748,692 5.6 1.2 Robert Kavner(10).......................... 247,031 1.9 -- 247,031 1.9 * William D. Savoy........................... 10,000 * -- 10,000 * * Alan Citron................................ 2,500 * -- 2,500 * * Terry Barnes............................... 2,500 * -- 2,500 * * Eugene L. Cobuzzi(11)...................... 2,500 * -- 2,500 * * Victor A. Kaufman.......................... 2,000 * -- 2,000 * * Barry Baker................................ -- * -- -- * * All executive officers and directors as a group (17 persons)(12).................... 51,068,021 80.3 51,068,021 80.3 80.9 Selling Stockholders Cendant Corporation(13)................... 1,924,777 13.3 1,924,777 -- -- -- 9 West 57th Street New York, NY 10019 Charter Ventures III LLC.................. 117,396 * 117,396 -- -- -- GCA Investments '98....................... 2,934 * 2,934 -- -- -- John Montgomery........................... 1,467 * 1,467 -- -- --
- -------------------- * Less than 1% of the total voting power of the 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. Except as otherwise indicated, 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 our 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 the 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 Securities and Exchange 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 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 June 14, 1999. 66 (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. The voting power is calculated as of June 14, 1999. (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 2,387,981 shares of Class A Common Stock which are held by entities affiliated with The Goldman Sachs Group L.P. Mr. Gleberman is a managing director of Goldman, Sachs & Co., the general partner of which is The Goldman Sachs Group L.P. Mr. Gleberman disclaims beneficial ownership of the shares owned by The Goldman Sachs Group L.P., except to the extent of his pecuniary interest therein. (7) Includes 1,205,000 shares of Class A Common Stock, and options to purchase 325,000 shares of Class A Common Stock and 21,874 shares of Class B Common Stock exercisable by Mr. Conn within 60 days of June 14, 1999. (8) 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. (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 115,282 shares of Class A Common Stock and options to purchase 131,749 shares of Class A Common Stock exercisable by Mr. Kavner within 60 days of June 14, 1999. (11) 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. (12) See notes (2) through (11). (13) Represents shares of Class B Common Stock owned by Cendant Intermediate Holdings, Inc., a wholly owned subsidiary of Cendant Corporation. 67 Ticketmaster Online--CitySearch Class A Common Stock The following table sets forth, as of June 14, 1999, certain information relating to the beneficial ownership of our Class A Common Stock by (1) each person or entity who is known by us to beneficially own 5% or more of our outstanding Class A Common Stock; (2) each of our directors; (3) our Chief Executive Officer; and (4) all of our directors and executive officers as a group.
Beneficially Percentage of Class Name and Address of Beneficial Owner (1) Owned (2) (2) - ---------------------------------------------------------------------- ---------------- --------------------- USA Networks, Inc..................................................... 42,480,143 68.1% 152 West 57/th/ Street, 42nd Floor New York, NY 10019 Barry Diller(3)....................................................... 42,480,143 68.1 William Gross(4)...................................................... 2,828,261 4.5 Joseph Gleberman(5)................................................... 2,387,981 3.8 Charles Conn(6)....................................................... 1,530,000 2.4 Thomas Unterman(7).................................................... 750,413 1.2 Alan Spoon(8)......................................................... 748,692 1.2 Robert Kavner(9)...................................................... 247,031 * William D. Savoy...................................................... -- -- Alan Citron........................................................... -- -- Terry Barnes.......................................................... -- -- Eugene L. Cobuzzi..................................................... -- -- Victor A. Kaufman..................................................... -- -- Barry Baker........................................................... -- -- All executive officers and directors as a group (17 persons)(10)..................................................... 51,022,981 81.1
- --------------------------- * Less than 1% of the 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 Securities and Exchange 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 62,395,683 shares of Class A Common Stock outstanding as of June 9, 1999. 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 June 9, 1999. 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 Goldman Sachs Group L.P. Mr. Gleberman is a managing director of Goldman, Sachs & Co., the general partner of which is The Goldman Sachs Group L.P. Mr. Gleberman disclaims beneficial ownership of the shares owned by The Goldman Sachs Group L.P., except to the extent of his pecuniary interest therein. (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 748,692 shares of Class A Common Stock held by Washingtonpost.Newsweek Interactive Company, as to which Mr. Spoon disclaims beneficial ownership. (9) Includes 131,749 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 June 14, 1999. 68 (6) 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 June 14, 1999. (10) See notes (2) through (14). 69 USAi Common Stock The following table sets forth, as of June 9, 1999, information relating to the beneficial ownership of the USAi Common Stock by (1) each of our directors; (2) our Chief Executive Officer; and (3) all of our executive officers and directors 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)........................... 60,671,714 34.3% 74.7% William Gross............................. -- -- -- Joseph Gleberman.......................... -- -- -- Charles Conn.............................. -- -- -- Thomas Unterman........................... -- -- -- Alan Spoon................................ -- -- -- Robert Kavner............................. -- -- -- William D. Savoy(5)....................... 81,744 * ** Alan Citron(6)............................ 33,781 * ** Terry Barnes(6)........................... 75,000 * ** Eugene L. Cobuzzi(6)...................... 56,952 * ** Victor A. Kaufman(6)...................... 335,000 * ** Barry Baker(7)............................ 5,300 All executive officers and group (17 persons)....................... 61,259,491 34.5% 74.8%
- ------------------------------- * 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. (1) The address of Mr. Diller, Mr. Baker 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) 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 Securities and Exchange 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 pursuant to which Liberty and Mr. Diller have formed BDTV INC., BDTV II INC., BDTV III INC. and BDTV IV INC., or together the "BDTV Entities," which entities, as of June 9, 1999, held 4,000,000, 15,618,222, 4,005,182 and 800,000 shares of USAi Class B Common Stock, respectively, and an aggregate of 22 shares of USAi Common Stock collectively. Includes 6,715,000 shares of USAi Class B Common Stock, and 9,090,654 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. Also consists of 1,029,954 shares of USAi Common Stock owned by Mr. Diller, vested options to purchase 14,153,771 shares of USAi Common Stock, and 60,000 share of USAi Common Stock held by a private foundation as to which Mr. Diller disclaims beneficial ownership. Pursuant to the stockholders agreement, Mr. Diller 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. held by Liberty HSN, Inc. and the shares of USANi LLC beneficially owned by Liberty or Seagram. (5) Consists of 29,000 shares of USAi Common Stock and vested options to purchase 52,744 shares of USAi Common Stock. (6) Consists solely of vested options to purchase shares of USAi Common Stock. (7) Consists of 5,300 shares of USAi Common Stock. 70 USAi Class B Common Stock The following table sets forth, as of June 9, 1999, 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 Name and Address of Beneficial Owner Beneficially 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 shares of USANi LLC beneficially owned by Liberty or Seagram. 71 PLAN OF DISTRIBUTION In March 1999, Ticketmaster Online-CitySearch sold 121,797 shares of the shares of Class B Common Stock offered hereby to certain of the selling stockholders in connection with our acquisition of CityAuction. In June 1999, Ticketmaster Online-CitySearch sold 1,924,777 of the shares of Class B Common Stock offered by this prospectus to one of the selling stockholders in connection with our acquisition of Match.com. Pursuant to these sales, we agreed to register the shares under the Securities Act of 1933 for resale to the public. Under the registration rights agreements between Ticketmaster Online-CitySearch and the selling stockholders, we must use reasonable commercial efforts to cause this registration statement to be declared effective by the Securities and Exchange Commission as soon as practicable and to keep this registration statement, or a replacement, continuously effective under the Securities Act until the earlier of (1) such time as the selling stockholders have sold all shares offered by this prospectus, or a replacement prospectus, (2) the date on which the shares, in the opinion of counsel to the selling stockholders, may be immediately sold without restriction, including without limitation as to volume, without registration under the Securities Act and (3) 360 days following the date of effectiveness of the registration statement. The sale of all or a portion of the shares of Class B Common Stock offered hereby by the selling stockholders may be effected from time to time at prevailing market prices at the time of such sales, at prices related to such prevailing prices, at fixed prices that may be changed or at negotiated prices. The selling stockholders may effect such transactions by selling directly to purchasers in negotiated transactions, to dealers acting as principals or through one or more brokers, or any combination of these methods of sale. In addition, shares may be transferred in connection with the settlement of call options, short sales, through the issuance of exchangeable or convertible securities or similar transactions that may be effected by the selling stockholders. Dealers or brokers may receive compensation in the form of discounts, concessions or commissions from the selling stockholders and/or purchasers of shares for whom they may act as agent (which compensation may be in excess of customary commissions). The selling stockholders and any brokers or dealers that participate in the distribution may under certain circumstances be deemed to be "underwriters" within the meaning of the Securities Act, and any commissions received by such brokers or dealers and any profits realized on the resale of shares by them may be deemed to be underwriting discounts and commissions under the Securities Act. Ticketmaster Online-CitySearch and the selling stockholders may agree to indemnify such brokers or dealers against certain liabilities, including liabilities under the Securities Act. To the extent required under the Securities Act or the rules of the Securities and Exchange Commission, a supplemental prospectus will be filed, disclosing (1) the name of any such brokers or dealers, (2) the number of shares involved, (3) the price at which such shares are to be sold, (4) the commissions paid or discounts or concessions allowed to such brokers or dealers, where applicable, (5) that such brokers or dealers did not conduct any investigation to verify the information set out in this prospectus, as supplemented, and (6) other facts material to the transaction. There is no assurance that the selling stockholders will sell any or all of the shares of Class B Common Stock offered hereby. Ticketmaster Online-CitySearch has agreed to pay the expenses incurred in connection with the registration of the shares of Class B Common Stock offered hereby. The selling stockholders will be responsible for all selling commissions, transfer taxes and related charges in connection with the offer and sale of such shares. 72 CERTAIN 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 Ticketmaster Online--CitySearch, 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 for aggregate proceeds of $84,670. These shares, together with shares of CitySearch Common Stock issued to Mr. Gross, are referred to as Founders' Stock. The Founders' Stock was reclassified as Class A Common Stock after the merger of Ticketmaster Online--CitySearch. 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 our Class A Common Stock pursuant to the reclassification of shares subsequent to the merger of Ticketmaster Online--CitySearch, 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 our Class A Common Stock) for an aggregate purchase price of approximately $9.0 million. Mr. Gleberman, a director of the Company, is a Managing Director in the Principal Investment Area of Goldman, Sachs & Co. Between December 13, 1996 and October 22, 1997, CitySearch issued and sold an aggregate of 4,430,313 shares of Series D Preferred Stock (or 4,297,824 shares of our Class A Common Stock) at a per share price of $6.5251. These sales included the following: . 766,272 shares (or 743,360 shares of our Class A Common Stock) 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 our Class A Common Stock) 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 our Class A Common Stock) were sold to Washingtonpost.Newsweek Interactive Company for an aggregate purchase price of approximately $3.0 million. Mr. Unterman, a director of Ticketmaster Online--CitySearch, is an Executive Vice President and Chief Financial Officer of The Times Mirror Company. Mr. Gleberman, a director of Ticketmaster Online--CitySearch, is Managing Director in the Principal Investment Area of Goldman, Sachs & Co. Mr. Spoon, a director of Ticketmaster Online--CitySearch, 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 our Class A Common Stock) at a per share price of $7.00. USAi purchased 2,857,143 of these shares (or 2,821,428 shares of our Class A Common Stock) for an aggregate purchase price of approximately $20.0 million. Mr. Diller, a director of Ticketmaster Online--CitySearch, is Chairman and Chief Executive Officer of USAi. Mr. Kaufman and Mr. Baker, who are directors of Ticketmaster Online-CitySearch, are directors and executive officers of USAi. In addition, 306,509 shares (or 302,677 shares of our Class A Common Stock) 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 our Class A Common Stock) at a per share price of $7.00. USAi purchased 428,571 of these shares (or 423,213 shares of our Class A Common Stock) for an aggregate purchase price of approximately $3.0 million. 73 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 terminated on October 31, 1998. CitySearch, USAi, Ticketmaster Online and various affiliates were parties to the reorganization agreement relating to the merger of Ticketmaster Online and CitySearch. In addition, pursuant to this agreement, USAi purchased 1,997,502 shares of Class A Common Stock from Ticketmaster Online-CitySearch stockholders in a tender offer which was completed in November 1998. Concurrently with the execution of the agreement, USAi loaned $50 million in cash to CitySearch in exchange for a convertible note. The convertible note was repaid in full following the completion of the initial public offering of Ticketmaster Online- CitySearch in December 1998. In August 1998, Ticketmaster Online, Ticketmaster Corp. and USAi entered into a license agreement. See "Business--Ticketmaster Online Business - Ticketmaster License Agreement." We expect that, both within and outside the ordinary course of business, we and our affiliates, other than USAi and its controlled affiliates, on the one hand, and USAi and its affiliates, other than Ticketmaster Online-CitySearch and its controlled affiliates, on the other hand, will engage in various transactions, including pursuant to our license agreement with Ticketmaster Corp.. We expect that these transactions will result in terms to us that are at least as favorable as those that could be obtained from a third party, where applicable. In February 1999, Ticketmaster Online-CitySearch entered into an agreement providing for the combination of Ticketmaster Online-CitySearch, Lycos, Inc. and USAi's Home Shopping, Ticketmaster and Internet Shopping Network/First Auction businesses. The transaction was terminated by mutual agreement in May 1999. Other Affiliates In June 1997, CitySearch entered into a license and services agreement with The Los Angeles Times, Inc., 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 Ticketmaster Online--CitySearch, 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 our 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. 74 Acceleration of Stock Options Mr. Conn is a party 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. These stock option agreements provide 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 between Ticketmaster Online and CitySearch, 277,085 shares subject to unvested options held by Mr. Conn immediately vested. Additionally, Mr. Conn is a party to stock option agreements under the 1998 Stock Plan, pursuant to which he was granted options to purchase 150,000 shares of our Class B Common Stock at an exercise price of $32.69 per share. This stock option agreement between Ticketmaster Online--CitySearch, provides that in the event of a substantial merger or a board approved acquisition of Ticketmaster Online--CitySearch, all outstanding, unvested stock options will vest upon completion of such event. Non-Competition Agreement In connection with the execution of the agreement for the merger of Ticketmaster Online and CitySearch, Mr. Conn entered into a non-competition agreement with CitySearch, Ticketmaster Corp. and Ticketmaster Online. The agreement provides that Mr. Conn will not, for a period of 30 months from the date of the 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. Mr. Conn received $250,000 from Ticketmaster Corp. in connection with the execution of his agreement. In addition, Mr. Conn may not 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 us for any reason. We have also entered into an employment agreement with Mr. Conn which provides for certain severance payments upon termination of employment. See "Executive Compensation--Employment Agreement." 75 DESCRIPTION OF CAPITAL STOCK The following summary of the terms of our capital stock is qualified in its entirety by reference to the applicable provisions of Delaware law and our Restated Certificate of Incorporation and Restated Bylaws. As of June 14, 1999, there were 62,266,592 shares of Class A Common Stock outstanding and 12,508,381 shares of Class B Common Stock outstanding, held of record by 144 stockholders, and options to purchase 2,652,088 shares of Class A Common Stock and options to purchase 728,432 shares of Class B Common Stock outstanding. Common Stock Ticketmaster Online--CitySearch is authorized to issue 100,000,000 shares of Class A Common Stock, 250,000,000 shares of Class B Common Stock and 2,883,506 shares of Class C Common Stock. The Class A Common Stock, Class B Common Stock and Class C Common Stock have the following rights, preferences and privileges: Class A Common Stock Except as otherwise provided by the Restated Certificate of Incorporation or by applicable law, each share of Class A Common Stock issued and outstanding have 15 votes on any matter submitted to a vote of stockholders. Each share of Class A Common Stock will be automatically converted into one share of Class B Common Stock upon any transfer of such share, whether or not for value by the initial registered holder thereof, other than any such transfer by such holder to: . a nominee of such holder without any change in beneficial ownership, within the meaning of Section 13(d) of the Securities and Exchange Act of 1934, as amended; or . another person that, at the time of the transfer, beneficially owns shares of Class A Common Stock or a nominee thereof. Notwithstanding the foregoing, any transfer by the initial holder without consideration to: . any affiliated entity of such initial holder; . a partner, active or retired, of such initial holder; . the estate of any initial holder or a trust established for the benefit of the descendants or any relatives or spouse of an initial holder; . a parent corporation or wholly-owned subsidiary of such initial holder or to a wholly-owned subsidiary of such parent unless and until such transferee ceases to be a parent or wholly-owned subsidiary of the initial holder or a wholly-owned subsidiary of such parent; or . the spouse of such initial holder in each case, shall not result in such conversion. In addition, notwithstanding the foregoing, any bona fide pledge to a financial institution in connection with a borrowing shall not result in such conversion; and provided further, that in the event any transfer shall not give rise to automatic conversion hereunder, then any subsequent transfer by the holder, other than any such transfer by such holder to a nominee of such holder without any change in beneficial ownership, as such term is defined under Section 13(d) of the Exchange Act, or the pledgor, as the case may be, shall be subject to automatic conversion upon such terms and conditions. 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. The one-to-one conversion ratio shall be in all events equitably preserved in the event of any merger, consolidation or other reorganization of Ticketmaster Online-CitySearch with another corporation. 76 Class B Common Stock Except as otherwise provided by applicable law, each share of Class B Common Stock issued and outstanding has one vote on any matter submitted to a vote of stockholders. The Restated Certificate of Incorporation provides that we shall at all times reserve and keep available out of our authorized but unissued shares of Class B Common Stock, solely for the purpose of effecting the conversion of the shares of the Class A Common Stock, such number of its shares of Class B Common Stock as shall be necessary to effect the conversion of all outstanding shares of Class A Common Stock. 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 of stockholders. Class C Common Stock No shares of Class C Common Stock issued and outstanding shall have any vote on any matter submitted to a vote of stockholders, except as otherwise required by applicable law. Except as set forth in the Restated Certificate of Incorporation and summarized in this prospectus, with respect to voting rights, conversion and transfer, and except as otherwise provided by applicable law, the Class A Common Stock, Class B Common Stock and the Class C Common Stock have identical rights, preferences and privileges. As such, subject to preferences that may apply to shares of Preferred Stock outstanding from time to time, the holders of outstanding shares of our Common Stock are entitled to receive, on a share-for- share basis, such dividends if, as and when declared from time to time by the Board of Directors. Cumulative voting for the election of directors is not provided for in the Restated Certificate of Incorporation. Therefore, subject to applicable law, the holders of a majority of the total voting power of the outstanding shares of Common Stock voted will have the power to elect all of the directors then standing for election. No class of Common Stock is entitled to preemptive or redemption rights. Upon a liquidation, dissolution or winding-up Ticketmaster Online-CitySearch, the assets legally available for distribution to stockholders are distributable ratably among the holders of each class of Common Stock, subject to the preferences, if any, of any outstanding Preferred Stock and payment of claims of creditors. The Restated Certificate of Incorporation further provides that in no event will any stock dividends or stock splits or combinations of stock be declared or made on Class A Common Stock, Class B Common Stock or Class C Common Stock unless all shares of Class A Common Stock, Class B Common Stock and Class C Common Stock then outstanding are treated equally and identically. Each outstanding share of Common Stock is fully paid and nonassessable. Preferred Stock We are authorized to issue 2,000,000 shares of Preferred Stock. The Board of Directors is authorized, subject to limitations prescribed by Delaware law, to provide for the issuance of shares of Preferred Stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the powers, designations, preferences and rights of the shares of each wholly unissued series and designate any qualifications, limitations or restrictions thereon and to increase or decrease the number of shares of any such series, but not below the number of shares of such series then outstanding, without any further vote or action by the stockholders. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of Ticketmaster Online--CitySearch and may adversely affect the voting and other rights of the holders of our Common Stock, which could have an adverse impact on the market price of the Class B Common Stock. We have no current plan to issue any shares of Preferred Stock. Corporate Opportunities Our Restated Certificate of Incorporation provides that "USA Networks" which, for purposes of this section only, is defined below, shall have no duty to refrain from engaging in the same or similar activities or lines of business as Ticketmaster Online--CitySearch, and neither USA Networks nor any officer, director or employee, thereof, except as described below, shall be liable to Ticketmaster Online--CitySearch or its stockholders for breach of any fiduciary duty by reason of any such activities of USA Networks. In the event that USA Networks acquires knowledge of a potential transaction or matter which may be a corporate opportunity for both USA Networks and Ticketmaster Online--CitySearch, USA Networks shall have no duty to communicate or offer such corporate opportunity to Ticketmaster Online--CitySearch and shall not be liable to us or our stockholders for breach of any fiduciary duty as a stockholder of Ticketmaster Online--CitySearch by reason of the fact that USA Networks 77 pursues or acquires such corporate opportunity for itself, directs such corporate opportunity to another person, or does not communicate information regarding such corporate opportunity to us. Nothing in this provision of our Restated Certificate of Incorporation shall amend or modify in any respect any written contractual agreement between USA Networks and Ticketmaster Online-- CitySearch. In the event that a director or officer of Ticketmaster Online--CitySearch who is also a director, officer or employee of USA Networks acquires knowledge of a potential transaction or matter which may be a corporate opportunity for both Ticketmaster Online--CitySearch and USA Networks, such director or officer of Ticketmaster Online--CitySearch shall have fully satisfied and fulfilled the fiduciary duty of such director or officer to Ticketmaster Online--CitySearch and its stockholders with respect to such corporate opportunity, if such director or officer acts in a manner consistent with the following policy: . a corporate opportunity offered to any person who is an officer of Ticketmaster Online--CitySearch, and who is also a director but not an officer or employee of USA Networks, shall belong to Ticketmaster Online-- CitySearch; . a corporate opportunity offered to any person who is a director but not an officer of Ticketmaster Online--CitySearch, and who is also a director, officer or employee of USA Networks shall belong to Ticketmaster Online-- CitySearch if such opportunity is expressly offered to such person in his or her capacity as a director of Ticketmaster Online--CitySearch, and otherwise shall belong to USA Networks; and . a corporate opportunity offered to any person who is an officer or employee of USA Networks and an officer of Ticketmaster Online--CitySearch shall belong to Ticketmaster Online--CitySearch if such opportunity is expressly offered to such person in his or her capacity as an officer or employee of Ticketmaster Online--CitySearch, and otherwise shall belong to USA Networks. For purposes of the foregoing: . a director of Ticketmaster Online--CitySearch who is Chairman of the Board of Directors of Ticketmaster Online--CitySearch or of a committee thereof shall not be deemed to be an officer of Ticketmaster Online--CitySearch by reason of holding such position without regard to whether such position is deemed an office of Ticketmaster Online--CitySearch under our Restated Bylaws, unless such person is a full-time employee of Ticketmaster Online--CitySearch; and . the term "Ticketmaster Online-CitySearch" shall mean Ticketmaster Online-- CitySearch and all corporations, partnerships, joint ventures, associations and other entities in which Ticketmaster Online--CitySearch beneficially owns, directly or indirectly, 50% or more of the outstanding voting stock, voting power, partnership interests or similar voting interests. The term "USA Networks" shall mean USA Networks, Inc., a Delaware corporation, USANi LLC, a Delaware limited liability company, and all corporations, partnerships, joint ventures, associations and other entities (other than Ticketmaster Online--CitySearch, as defined in accordance with this paragraph) in which USA Networks beneficially owns, directly or indirectly, 50% or more of the outstanding voting stock, voting power, partnership interests or similar voting interests. The foregoing provisions of our Restated Certificate of Incorporation shall expire on the date that USA Networks ceases to beneficially own Common Stock representing at least 20% of the total voting power of all classes of outstanding capital stock of Ticketmaster Online--CitySearch entitled to vote in the election of directors and no person who is a director or officer of Ticketmaster Online--CitySearch is also a director or officer of USA Networks. In addition to any vote of the stockholders required by law, until the time that USA Networks ceases to beneficially own Common Stock representing at least 20% of the total voting power of all classes of outstanding capital stock of Ticketmaster Online--CitySearch entitled to vote in the election of directors, the affirmative vote of the holders of more than 80% of the total voting power of all such classes of outstanding capital stock of Ticketmaster Online-- CitySearch shall be required to alter, amend or repeal in a manner adverse to the interests of USA Networks, or adopt any provision adverse to the interests of USA Networks and inconsistent with, the corporate opportunity provisions described above. 78 Any person purchasing or otherwise acquiring any interest in shares of the capital stock of Ticketmaster Online--CitySearch shall be deemed to have notice of and to have consented to the foregoing provisions of our Restated Certificate of Incorporation. Antitakeover Effects of Provisions of Certificate of Incorporation and Bylaws Our Restated Certificate of Incorporation and Restated Bylaws contain provisions that may render more difficult, or have the effect of discouraging, unsolicited takeover bids from third parties or the removal of incumbent management of Ticketmaster Online--CitySearch. These provisions include the right of the holders of Class A Common Stock to 15 votes per share, versus one vote per share for the holders of Class B Common Stock, and provide that the stockholders may not call special meetings. In addition, the Restated Certificate of Incorporation authorizes the Board of Directors to issue, without stockholder approval, 2,000,000 shares of Preferred Stock with voting, conversion and other rights and preferences that could adversely affect the voting power or other rights of the holders of Common Stock of Ticketmaster Online--CitySearch. Although we have no current plans to issue any shares of Preferred Stock, the issuance of Preferred Stock or rights to purchase Preferred Stock could render more difficult, or have the effect of discouraging, unsolicited takeover bids from third parties or the removal of incumbent management of Ticketmaster Online--CitySearch, or otherwise adversely affect the market price for the Class B Common Stock. See "--Preferred Stock." Although, such provisions do not have a substantial practical significance to investors while USAi, through its ownership of Class A Common Stock, is in a position to effectively control all matters affecting Ticketmaster Online--CitySearch, such provisions could have the effect of depriving stockholders of an opportunity to sell their shares at a premium over prevailing market prices should USAi no longer be in such control. Effect of Delaware Antitakeover Statute We are subject to Section 203 of the Delaware General Corporate Law, which regulates corporate acquisitions. The law prevents certain Delaware corporations, including those whose securities are listed for trading on the Nasdaq National Market, from engaging under certain circumstances in a "business combination" with any "interested stockholder" for three years following the date that such stockholder became an interested stockholder. For purposes of the law, a "business combination" includes, among other things, a merger or consolidation involving Ticketmaster Online--CitySearch and the interested stockholder and the sale of more than ten percent of our assets. In general, the law defines an "interested stockholder" as any entity or person beneficially owning 15% or more of our outstanding voting stock and any entity or person affiliated with or controlling or controlled by such entity or person. A Delaware corporation may "opt out" of the law with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or bylaws resulting from amendments approved by the holders of at least a majority of our outstanding voting shares. We have not "opted out" of the provisions of the antitakeover law. The restrictions of the antitakeover law will not apply to USAi, however, because (1) our Board of Directors approved the transaction which resulted in USAi becoming an "interested stockholder" prior to the consummation of that transaction and (2) at the time USAi became an "interested stockholder," the restrictions of Section 203 did not apply to Ticketmaster Online--CitySearch because we did not have a class of voting stock (x) listed on a national securities exchange, (y) authorized for quotation on the Nasdaq Stock Market or (z) held of record by more than 2,000 stockholders. Registration Rights The holders of approximately 470,846 shares of Class A Common Stock, based on shares outstanding as of June 9, 1999, will have the right in certain circumstances to request us to register their shares under the Securities Act of 1933 for resale to the public in the event we initiate a registration. Under the terms of the agreements between us and the holders of such registrable securities, if we propose to register any of our securities under the Securities Act, such holders are entitled to notice of such registration and are entitled to include shares of Class A Common Stock therein. In addition, the agreement between us, One & Only Network and the current owners of One & Only Network provides that we must register the shares issued to the current owners of One & Only Network upon closing of that transaction, which is expected in August or September 1999, under the Securities Act of 1933 for resale. The amount of shares to be issued to such holder at the closing will be no more than 1,442,308 shares and no less than 961,539 shares. After the initial closing of that transaction, we will, under certain circumstances, be required to 79 issue and register additional shares to the current owners of One & Only Network in a series of additional closings culminating on a final payment date on or around March 31, 2000. The total number of shares which may be issued to such holders in the transaction and registered will be no more than 2,573,933 shares and no less than 1,130,387 shares. Transfer Agent The Transfer Agent and Registrar for the Common Stock is ChaseMellon Shareholder Services, L.L.C. 80 SHARES ELIGIBLE FOR FUTURE SALE Future sales of substantial amounts of our Class B Common Stock in the public market, including shares issued upon exercise of outstanding options, could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through sale of our equity securities. Sales of substantial amounts of our Class B Common Stock in the public market after the restriction lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. We have outstanding an aggregate of 74,774,973 shares of Class A and Class B Common stock (based upon shares outstanding as of June 14, 1999), assuming no exercise of outstanding options after June 14, 1999. Of these shares, the 2,046,574 shares sold in this offering will be freely tradable without restriction under the Securities Act of 1933 except for any shares purchased by our "affiliates" as that term is defined in Rule 144 under the Securities Act. In addition, the 8,050,000 of our Class B shares sold in our initial public offering in December 1998 and an additional aggregate of 9,809,775 of our Class A and Class B shares are freely tradable. The remaining 54,868,624 shares of our Class A Common stock held by existing stockholders may not be sold publicly unless they are registered under the Securities Act or are sold pursuant to Rule 144 or another exemption from registration. Of these shares, 8,236,701 shares have been held for at least one year and may be sold pursuant to Rule 144, subject to the restrictions stated therein. The remaining shares will become eligible for public resale at various times over a period of less than one year from the date of this prospectus, subject to limitations of Rule 144. With respect to the shares otherwise eligible for sale referred to in the preceding paragraph,in connection with our early release of the lock-up agreements entered into in connection with our initial public offering on May 5, 1999, certain stockholders who, in the aggregate, hold 1,010,369 of the shares of our Class A Common stock, entered into extended lock-up agreements under which they have agreed not to offer, sell, contract to sell, grant any option to purchase or otherwise dispose of, or agree to dispose of, directly or indirectly, any shares of Common Stock or options to acquire shares of Common Stock or securities exchangeable for or convertible into Common Stock owned by them until September 1, 1999, without the prior written consent of NationsBanc Montgomery Securities LLP. Upon expiration of lock-up agreements, all 1,010,369 of these shares will become eligible for public resale, subjection to volume limitations imposed by Rule 144. On January 22, 1999, we filed a Registration Statement on Form S-8 registering 8,351,857 shares of Class A and Class B Common Stock subject to outstanding options or reserved for future issuance under our stock plans, thus permitting the resale of such shares in the public market without restriction under the Securities Act after expiration of any vesting restrictions. In connection with the acquisition of CityAuction, Inc., we filed a Registration Statement on Form S-8/S-3 on May 5, 1999 registering 678,203 shares of Class B Common Stock, thus permitting the resale of such shares in the public market without restriction under the Securities Act. In general, under Rule 144 as currently in effect, a person or persons whose shares are aggregated, who has beneficially owned shares for at least one year, including the holding period of any prior owner except an affiliate, is entitled to sell in "broker's transactions" or to market makers, a number of shares during any three-month period that does not exceed the greater of (1) one percent of the number of shares of common stock then outstanding, approximately 125,084 shares currently, or (2) the average weekly trading volume of the common stock during the four calendar weeks preceding the required filing of a Form 144 with respect to such sale. Sales under Rule 144 are generally subject to certain manner of sale provisions and notice requirements and to the availability of current public information about Ticketmaster Online-CitySearch. Under Rule 144(k), a person who is not deemed to have been an affiliate of Ticketmaster Online-CitySearch at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell such shares without having to comply with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Under Rule 701 of the Securities Act, persons who purchase shares upon exercise of options granted prior to the effective date of our initial public offering are currently entitled to sell such shares in reliance on Rule 144, without having to comply with the holding period requirements of Rule 144 and, in the case of non-affiliates, without having to comply with the public information, volume limitation or notice provisions of Rule 144. LEGAL MATTERS The validity of the Class B Common Stock offered hereby will be passed upon for Ticketmaster Online--CitySearch by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. As of June 9, 1999 an entity affiliated with Wilson Sonsini Goodrich & Rosati, Professional Corporation, holds an aggregate of 60,225 shares of Class A Common Stock. EXPERTS The consolidated financial statements of CitySearch, Inc. at December 31, 1996 and 1997 and for the period from September 20, 1995 (date of formation) to December 31, 1995 and for the years ended December 31, 1996 and 1997, and the financial statements of Ticketmaster Online-CitySearch, Inc. (Ticketmaster Online) (formerly Ticketmaster Multimedia Holdings, Inc.) at January 31, 1998 and for the years ended January 31, 1996 and 1997 and the eleven month period ended December 31, 1998, included in this prospectus have been audited by Ernst & Young LLP, independent auditors, as stated in their reports thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. 81 WHERE YOU CAN FIND ADDITIONAL INFORMATION Ticketmaster Online--CitySearch has filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act of 1933 with respect to the Class B Common Stock offered hereby by the selling stockholders. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to Ticketmaster Online--CitySearch and our Common Stock, reference is made to the registration statement and the exhibits and schedules filed as a part thereof. Statements contained in this prospectus as to the contents of any contract or any other document referred to are not necessarily complete. In each instance, reference is made to the copy of such contract or document filed as an exhibit to the registration statement, and each such statement is qualified in all respects by such reference. Copies of the registration statement, including exhibits and schedules thereto, may be inspected without charge at the Securities and Exchange Commission's principal office in Washington, D.C., or obtained at prescribed rates from the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Securities and Exchange Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission. The address of the site is http://www.sec.gov. Ticketmaster Online--CitySearch is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Securities Exchange Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the Commission's following Regional Offices: Suite 1400, Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois 60661; and 13th Floor, Seven World Trade Center, New York, New York 10048. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 82 INDEX TO FINANCIAL STATEMENTS CONTENTS
Unaudited Pro Forma Condensed Combined Financial Statements Introduction....................................................................................................... F-2 Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1998............................................................................................. F-3 Notes to Unaudited Pro Forma Condensed Combined Financial Statements............................................... F-4 Unaudited Condensed Consolidated Statements Unaudited condensed consolidated balance sheets as of December 31, 1998 and March 31, 1999......................... F-6 Unaudited condensed consolidated statements of operations for the three-months ended March 31, 1998 and 1999...................................................................................................... F-7 Unaudited condensed consolidated statements of cash flows for the three-months ended March 31, 1998 and 1999...................................................................................................... F-8 Notes to condensed consolidated financial statements............................................................... F-9 Ticketmaster Online-Citysearch, Inc. (Ticketmaster Online) Report of Independent Auditors..................................................................................... F-13 Balance Sheets at January 31, 1998 and December 31, 1998........................................................... F-14 Statements of Operations for the years ended January 31, 1997 and 1998 and the eleven months ended December 31, 1998............................................................................................. F-15 Statements of Stockholders' Equity for the years ended January 31, 1997 and 1998 and the eleven months ended September 30, 1998........................................................................ F-16 Statements of Cash Flows for the years ended January 31, 1997 and 1998 and the eleven months ended December 31, 1998...................................................................................... F-17 Notes to Financial Statements...................................................................................... F-18 Citysearch, Inc. Report of Independent Auditors..................................................................................... F-35 Consolidated Balance Sheets at December 31, 1996 and 1997 and at September 28, 1998 (unaudited).................... F-36 Consolidated Statements of Operations for the period from September 20, 1995 (date of formation) to December 31, 1995, the years ended December 31, 1996 and 1997 and the nine months ended September 30, 1997 and September 28, 1998 (unaudited)......................................................... F-37 Consolidated Statements of Stockholders' Equity (Deficit) for the period from September 20, 1995 (date of formation) to December 31, 1995, the years ended December 31, 1996 and 1997 and the nine months ended September 28, 1998 (unaudited).......................................................................... F-38 Consolidated Statements of Cash Flows for the period from September 20, 1995 (date of formation) to December 31, 1995, the years ended December 31, 1996 and 1997 and the nine months ended September 30, 1997 and September 28, 1998 (unaudited)......................................................... F-39 Notes to Consolidated Financial Statements......................................................................... F-41
F-1 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The following unaudited pro forma condensed combined statement of operations (the "Condensed Statement") has been prepared to give effect to the merger of Ticketmaster Online and CitySearch, Inc. (the "Merger"), which was effective September 28, 1998, and the Tender Offer (as described below). In addition, the Condensed Statement has been prepared to give effect to the Ticketmaster Transaction (as described below) and the license agreement entered into by Ticketmaster Online, Ticketmaster Corp. and USAi in connection with the Merger (the "Ticketmaster License Agreement.") 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 and liabilities of CitySearch were recorded at their respective fair values under the purchase method of accounting. The Condensed Statement reflects certain assumptions regarding the Merger and the Tender Offer and is based on the historical consolidated financial statements of the respective entities. The Condensed Statement, including the notes thereto, are qualified in their entirety by reference to and should be read in conjunction with, the audited financial statements of CitySearch, Inc. and Ticketmaster Online-CitySearch, Inc., including the notes thereto, which are included in this Prospectus. The unaudited financial statements of Ticketmaster Online-CitySearch, Inc. for the year ended December 31, 1998 were derived from the historical financial information of Ticketmaster Online- CitySearch, Inc. which has been adjusted to reflect a change in year end to December 31. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 1998 reflects the unaudited consolidated statement of operations of CitySearch for the nine-month period ended September 28, 1998, combined with the unaudited results of operations of Ticketmaster Online- CitySearch, Inc. for the year ended December 31, 1998 (including the pro forma effects of the USAi's acquisition of all the outstanding equity of Ticketmaster Group in June 1998 (the "Ticketmaster Transaction"). On October 2, 1998 USAi commenced a tender offer ("the Tender Offer") to purchase up to 20% of each stockholder's Common Stock at a per share purchase price of $8.67 in cash, up to an aggregate of 2,924,339 shares. Upon expiration of the Tender Offer on November 3, 1998, USAi purchased 1,997,502 shares of Common Stock. The Company is in the process of evaluating the fair value of assets acquired and liabilities assumed in order to make a final allocation of the excess purchase price, including allocation to the intangibles other than goodwill. Accordingly, the purchase accounting information is preliminary and has been made solely for the purpose of developing such unaudited pro forma condensed combined financial information. Based on current information the preliminary determination of the costs in excess of the net assets acquired and the allocation to goodwill should not materially differ from the final determination. The Condensed Statement is presented for illustrative purposes only and is not necessarily indicative of the results of operations which would have actually been reported for the year ended December 31, 1998 had the Merger and Ticketmaster Transaction occurred as of January 1, 1998, nor is the Condensed Statement necessarily indicative of future results of operations. F-2 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS OF TICKETMASTER ONLINE-CITYSEARCH, INC. Year Ended December 31, 1998 (In Thousands, Except Per Share Data)
Ticketmaster Ticketmaster Pro Forma Online and Historical Online Pro Adjusted CitySearch Ticketmaster Forma Ticketmaster Historic Pro Forma Pro Forma Online Adjustments Online CitySearch Adjustments Combined ------------ ------------ ------------ ------------ ------------ ------------ Revenues: Ticketing Operations................ $ 16,366 $ -- $ 16,366 $ -- $ -- $ 16,366 Sponsorship and advertising........ 7,099 -- 7,099 360 -- 7,459 City guide and related.............. 5,375 -- 5,375 10,957 -- 16,332 -------- -------- --------- --------- --------- --------- 28,840 -- 28,840 11,317 -- 40,157 Costs and expenses: Ticketing operations................ 10,269 -- 10,269 -- 2,613 (2) 12,132 (750)(3) City guide and related.............. 4,021 -- 4,021 10,491 -- 14,512 Sales and marketing................. 6,895 -- 6,895 14,902 -- 21,797 Research and development............ 1,728 -- 1,728 5,000 -- 6,728 General and administrative.......... 3,670 -- 3,670 5,104 (573)(3) 8,201 Amortization of goodwill............ 16,275 7,439(1) 23,714 -- 23,991 (4) 47,705 Merger and other transaction costs.. 11 -- 11 3,101 -- 3,112 -------- -------- --------- --------- --------- --------- 42,869 7,439 50,308 38,598 25,281 114,187 -------- -------- --------- --------- --------- --------- Income (loss) from operations............ (14,029) (7,439) (21,468) (27,281) (25,281) (74,030) Interest income.......................... 867 -- 867 995 -- 1,862 Interest expense......................... (813) -- (813) (768) 1,151(5) (430) --------- -------- --------- --------- --------- --------- Income/(loss) before provision for income taxes....................... (13,975) (7,439) (21,414) (27,054) (24,130) (72,598) Provision for income taxes.............. 2,993 -- 2,993 -- (2,993)(6) -- --------- -------- --------- --------- --------- --------- Net income (loss)....................... $ (16,968) $ (7,439) $ (24,407) $ (27,054) $ (21,137) $ (72,598) ========= ======== ========= ========= ========= ========= Basic and diluted net loss per share......................... $ (0.38) $(1.16) ======== ========= Shares used to compute basic and diluted net loss per share........ 44,525 62,682 ======== =========
See accompanying notes to the unaudited pro forma condensed combined financial statements. F-3 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS Merger Costs Merger costs and the preliminary determination of the unallocated 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 Shares purchased under the Tender Offer.......................................... 17,318 Estimated transaction costs (including non-competition agreements)............... 2,464 -------- Total acquisition costs.................................................... 163,646 Net assets acquired.............................................................. (2,517) -------- Unallocated excess of acquisition cost over net assets acquired (See Note 4)..... $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. The value of the non-monetary exchange between Ticketmaster Online and CitySearch was valued 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. The assumed fair value of the CitySearch Common Stock of $8.67 per share is based on the Tender Offer consideration per share determined in a negotiated transaction. Based on current information the preliminary determination of the costs in excess of the net assets acquired and the allocation to goodwill should not materially differ from the final determination. Pro Forma Adjustments (1) Reflects amortization expense resulting from the increase in goodwill and other intangible assets recorded in June 1998. The adjustment to the statement of operations for the year ended December 31, 1998 represents six months of amortization expense to adjust the six months of amortization expense already recorded in the historical statement of operations. Additional goodwill of $154.8 million represents a preliminary allocation of goodwill resulting from USAi's acquisition of Ticketmaster Group, which is being amortized straight line over ten years. (2) Represents a royalty that would have been required to be paid to Ticketmaster Corp. under the Ticketmaster License Agreement had the Ticketmaster License Agreement been in effect. Under the agreement, Ticketmaster Online is required to pay Ticketmaster Corp. a royalty based on a percentage of the net profit it derives from online ticket sales. (3) Represents certain costs allocated from Ticketmaster Corp. to Ticketmaster Online which are now covered under the license fee (see note 2). (4) Reflects additional amortization expense resulting from the increase in goodwill and other intangible assets due to the Merger. The unallocated excess of acquisition costs over net assets acquired has been preliminarily allocated as follows: $500,000 to intangibles related to the Non- Competition Agreements, which is being amortized over 2.5 years, and $160.6 million to goodwill, which is being amortized over five years. F-4 (5) Reflects elimination of interest expense resulting from the Convertible Note issued in connection with the Merger since the Convertible Note was repaid from the proceeds of the offering. (6) Represents income tax benefit of the Merger, as taxable income of Ticketmaster Online is offset by tax losses of CitySearch. (7) For the year ended December 31, 1998, the calculation of shares used in calculating basic and diluted pro forma loss per share adjusts the 44,525,000 historical weighted average shares of Tickmaster Online- CitySearch, Inc. to reflect the 25,248,000 shares of CitySearch outstanding at December 31, 1997 (including 14,624,000 shares of Preferred Stock as if converted) and the weighted average number of the shares of common stock issued by CitySearch during the period from January 1, 1998 through September 28, 1998. F-5 TICKETMASTER ONLINE-CITYSEARCH, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
December 31, March 31, 1998 1999 ASSETS ----------------- -------------- Current assets: (see note 1) (unaudited) Cash and cash equivalents.................................................. $106,910 $ 99,284 Accounts receivable (net of allowance for doubtful accounts of $175 and $58 1,249 1,160 respectively)........................................................ Related party receivable................................................... 813 278 Due from licensees......................................................... 1,440 2,647 Prepaid expenses........................................................... 777 1,109 ----------------- -------------- Total current assets................................................. 111,189 104,478 Computers, software, equipment and leasehold improvements, net.................. 5,893 6,140 Goodwill and other intangibles, net............................................. 299,643 315,798 ----------------- -------------- Total assets......................................................... $416,725 $426,416 ================= ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................................................... $ 2,734 $ 2,479 Accrued expenses........................................................... 4,551 3,992 Deferred revenue........................................................... 1,882 1,643 Related party payable...................................................... -- 1,020 Current portion of capital lease obligations............................... 1,331 1,169 ------------------ -------------- Total current liabilities............................................ 10,498 10,303 Other long-term liabilities..................................................... 1,557 1,828 Capital lease obligations, net of current portion............................... 1,082 940 Stockholders' equity: Class A Common Stock, $0.01 par value: Authorized shares --100,000,000 at March 31, 1999 Issued and outstanding--63,291,653 and 63,156,226 at December 31, 1998 and March 31, 1999, respectively................................ 633 632 Class B Common Stock--$0.01 par value; Authorized shares--250,000,000 at March 31, 1999 Issued and outstanding--8,167,000 and 9,238,109 at December 31, 1998 and March 31, 1999, respectively..................................... 82 92 Class C Common Stock--$0.01 par value: Authorized shares--2,883,506 at March 31, 1999 Issued and outstanding--none......................................... -- -- Additional paid-in capital................................................. 418,918 446,398 Accumulated deficit........................................................ (16,045) (33,777) ------------------ -------------- Total stockholders' equity........................................... 403,588 413,345 ------------------ -------------- Total liabilities and stockholders' equity........................... $416,725 $426,416 ================== ==============
See accompanying notes. F-6 TICKETMASTER ONLINE-CITYSEARCH, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Three Months Ended March 31, ---------------------------- 1998 1999 ------------- ------------- Revenues: (unaudited) Ticketing operations....................................................... $ 2,237 $ 9,386 Sponsorship and advertising................................................ 917 1,032 City guide and related..................................................... -- 5,553 -------------- ------------- Total revenues....................................................... 3,154 15,971 Operating costs and expenses Ticketing operations....................................................... 1,377 6,851 City guide and related..................................................... -- 4,607 Sales and marketing........................................................ 225 6,200 Research and development................................................... -- 1,933 General and administrative................................................. 515 3,287 Amortization of goodwill................................................... -- 11,976 -------------- ------------- Total costs and expenses............................................. 2,117 34,854 -------------- ------------- Income (loss) from operations................................................... 1,037 (18,883) Interest income (expense) net................................................... -- 1,200 -------------- ------------- Income (loss) before income taxes............................................... 1,037 (17,683) Income tax provision............................................................ 452 57 -------------- ------------- Net income (loss)............................................................... $ 585 $(17,740) -------------- ------------- Basic and diluted net income (loss) per share................................... $ 0.02 $ (0.25) -------------- ------------- Shares used to compute basic and diluted net income (loss) per share...................................................................... 37,238 71,555 ============= =============
See accompanying notes. F-7 TICKETMASTER ONLINE-CITYSEARCH, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Three Months Ended March 31, ---------------------------- 1998 1999 ------------- ------------- Operating activities (unaudited) Net income (loss).............................................................. $ 585 $ (17,740) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization........................................ 39 12,854 Changes in operating assets and liabilities: Accounts receivable............................................ (79) 89 Related parties receivable..................................... -- 536 Due from licensees............................................. -- (1,207) Prepaid expenses............................................... 63 (276) Accounts payable............................................... (5) (1,083) Accrued expenses............................................... 57 (419) Related party payable.......................................... -- 1,020 Deferred revenue............................................... 2 33 ------------- ------------- Net cash provided by (used in) operating activities..... 662 (6,193) Investing activities Capital expenditures............................................................ (25) (1,013) ------------- ------------- Net cash used in investing activities................... (25) (1,013) Net proceeds from (distributions to) Ticketmaster Corp..................... (637) -- Net proceeds from exercise of options and warrants......................... -- 296 Costs of initial public offering........................................... -- (336) Payments on capital leases................................................. -- (393) ------------- ------------- Net cash provided by (used in) financing activities..... (637) (433) Net cash acquired in CityAuction Merger......................................... -- 13 ------------- ------------- Net increase (decrease) in cash and cash equivalents............................ -- (7,626) Cash and cash equivalents at beginning of period................................ -- 106,910 ------------- ------------- Cash and cash equivalents at end of period...................................... $ -- $ 99,284 ------------- ------------- Supplemental statement of cash flow information: Noncash investing and financing information: Acquisition of CityAuction, Inc. Fair value of assets acquired (including cash and cash equivalents of $13 and goodwill)................................................. $ 28,223 Less: Fair value of liabilities assumed.................................... 1,023 Issuance of Class B Common Stock..................................... 27,200 ------------- Cash paid...................................................... $ -- -------------
See accompanying notes. F-8 Ticketmaster Online-CitySearch, Inc. Notes to Condensed Consolidated Financial Statements (unaudited) Note 1--The Company and Summary of Significant Accounting Policies Description of Business Ticketmaster Online-CitySearch, Inc. (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. Basis of Presentation 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 (the "Ticketmaster Acquisition"). In June 1998, USAi completed its acquisition of Ticketmaster Group in a tax-free merger (collectively with the Ticketmaster Acquisition, 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., 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. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) F-9 Ticketmaster Online-CitySearch, Inc. Notes to Condensed Consolidated Financial Statements (unaudited) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. The balance sheet at December 31, 1998 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1998. Pro Forma Financial Data (Unaudited) The following unaudited pro forma information presents a summary of results of the Company assuming the Merger, the Ticketmaster Transaction and the tender offer by USAi to purchase shares of Common Stock from CitySearch stockholders in connection with the Merger had occurred as of January 1, 1998, with pro forma adjustments to give effect to amortization of goodwill, certain other adjustments to conform to the terms of the License and Services Agreement dated August 12, 1998 by and among Ticketmaster Corp., Ticketmaster Online and USAi (the "Ticketmaster 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, 1998.
Three Months Ended March 31, 1998 ------------------ (in thousands) Revenues........................................ $ 6,245 Net loss........................................ $(18,974) Net loss per share.............................. $ (.31)
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 (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 three months ended March 31, 1999 because the effects of outstanding stock options are antidilutive. Basic and dilutive earnings (loss) per share are the same for the three months ended March 31, 1998 because there were no dilutive securities outstanding during those periods. The number of shares used in computing basis and diluted earnings (loss) per share for the three months ended March 31, 1998 represent the number of shares of CitySearch Common Stock exchanged in the Merger. F-10 Ticketmaster Online-CitySearch, Inc. Notes to Condensed Consolidated Financial Statements (unaudited) Reclassifications Certain reclassifications have been made to the prior year's balances to conform to the current year presentation. Note 2--Business Combinations Acquisition of CityAuction, Inc. On March 29, 1999, the Company completed the acquisition of CityAuction, Inc. ("CityAuction"), a person-to-person online auction community. In connection with the acquisition, the Company issued an aggregate of approximately 800,000 shares of its Class B Common Stock for all the outstanding capital stock of CityAuction, Inc. representing an aggregate purchase price of $27.2 million. The acquisition was accounted for using the purchase method of accounting which resulted in $28.2 million of goodwill that will be amortized over 5 years. The results of operations of CityAuction are included in the accompanying statement of operations from the date of acquisition. Note 3--Subsequent Events Merger with Lycos On February 8, 1999, USAi and USANi LLC, Lycos, Inc. ("Lycos"), the Company, USA Interactive, Inc. ("Newco") and two wholly-owned subsidiaries of Newco entered into agreements relating to the combination of Lycos, the Company and certain of USAi's assets in an entity to be controlled by USAi. On May 12, 1999, the parties jointly announced that they had agreed by mutual consent to terminate these agreements. The agreement terminating the transaction requires Lycos to pay $25.5 million to USAi and $9.5 million to the Company if prior to July 15, 1999, Lycos entered into an agreement with respect to or under certain circumstances, becomes subject to, certain acquisition proposals. In addition, subject to certain exceptions, USAi and the Company each has agreed that until July 15, 1999 it will not acquire Lycos stock or make any proposals to acquire Lycos. Any transaction charges related to the termination will be recorded in the second quarter. Acquisition of Match.com, Inc. On June 14, 1999, the Company completed the acquisition of Match.com, Inc. an Internet personals company. In connection with the acquisition the Company issued 1,924,777 shares of Class B Common Stock to the former owners of Match.com representing a total purchase price of approximately $45.0 million. The acquisition was accounted for using the purchase method of accounting which resulted in approximately $47.5 million of goodwill that will be amortized over five years. Pending Acquisition of One and Only On June 10, 1999, Ticketmaster Online-CitySearch, Web Media Ventures, LLC, a Texas limited liability company (d/b/a One & Only Network), William Bunker, David Kennedy and Glenn Wiggins entered into Reorganization Agreement pursuant to which the Company will purchase all the outstanding units of One and Only for shares of the Company Class B Common Stock. One & Only is an Internet personals company distributing its services through a network of affiliated Internet sites. The Company has the option to pay cash or issue shares of Class B Common Stock in exchange for all of the One & Only units. The initial target purchase price for the One & Only units is $40.6 million of the Company's Class B Common Stock, of which $30 million of Class B Common Stock is payable upon the closing of the transaction and $2,195,000 of Class B Common Stock is payable in two quarterly installments with remainder of the target purchase price due 270 days after the closing of the transaction. The target purchase price is subject to a 10% increase or decrease based on, among other things, the achievement of certain 1999 calendar revenue targets of One & Only. The number of shares of Class B Common Stock to be issued in the acquisition will be determined by dividing the average closing price of the Class B Common Stock shortly before the closing of the acquisition and shortly before each subsequent payment date into the portion of the purchase price, as adjusted, currently payable subject to certain minimum and maximum share prices. The final purchase price to be recorded will also depend on the price of the Class B Common Stock at the date of closing. The closing of the acquisition is subject to several conditions, including but not limited to the effectiveness of a registration statement to be filed by Ticketmaster Online-CitySearch with respect to the Class B Common Stock to be issued in the transaction. The acquisition will be accounted for using the purchase method. The acquisition will result in goodwill in an amount approximating the purchase price that will be amortized over a period of five years. F-11 million, assuming the final purchase price is in the middle of the possible range that will be amortized by Ticketmaster Online-CitySearch over a period of five years. F-12 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, stockholder's 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. These financial statements are in the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of 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. /s/ ERNST & YOUNG LLP Woodland Hills, California January 29, 1999 F-13 TICKETMASTER ONLINE-CITYSEARCH, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
Predecessor ---------------- December 31, 1998 January 31, 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...................................................... 1,882 89 Current portion of capital lease obligations.......................... 1,331 -- --------- -------- Total current liabilities........................................ 10,498 391 Other long-term liabilities................................................ 1,557 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 (deficit)...................................... 403,588 289 --------- -------- Total liabilities and stockholders' equity............................ $ 416,725 $ 688 ========= ========
F-14 TICKETMASTER ONLINE-CITYSEARCH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Eleven 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-15 TICKETMASTER ONLINE-CITYSEARCH, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
Class A Class B Common Stock Common Stock Common Stock ---------------- ---------------- ---------------- Due to (from) Shares Amount Shares Amount Shares Amount Ticketmaster ------ ------ ------ ------ ------ ------ ------------- Balance at February 1, 1996................ 1 $ -- -- $ -- -- $ -- $ 684 Accounts receivable transferred to Ticketmaster Corp......................... -- -- -- -- -- -- (1,088) Operating charges transferred from Ticketmaster Corp., net of federal income tax allocation............................ -- -- -- -- -- -- 1,838 Net loss................................... -- -- -- -- -- -- -- --- ---- ------ ---- ----- ---- ------- Balance at January 1, 1997................. 1 -- -- -- -- -- 1,434 Accounts receivable transferred to Ticketmaster Corp. ....................... -- -- -- -- -- -- (9,953) Operating charges transferred from Ticketmaster Corp., net of federal income tax allocation............................ -- -- -- -- -- -- 7,406 Net income................................. -- -- -- -- -- -- -- --- ---- ------ ---- ----- ---- ------- Balance at January 31, 199................. 1 $ -- -- $ -- -- $ -- $(1,113) === ==== ====== ==== ===== ==== ======= Allocation of initial capitalization as a result of the Ticketmaster Acquisition by USAi...................................... -- $ -- -- $ -- -- $ -- $ -- Allocation of basis of Tax-free Merger of Ticketmaster by USAi...................... -- -- -- -- -- -- -- Stock exchanged in connection with CitySearch Merger (37,238) and USAi's initial investment in CitySearch at cost.. -- -- 40,483 405 -- -- -- Contribution of tendered CitySearch Common Stock from USAi to Ticketmaster........... -- -- -- -- -- -- -- Contribution of CitySearch Common Stock from USAi to Ticketmaster................. -- -- 22,003 220 -- -- -- Exercise of stock options and warrants..... -- -- 923 9 -- -- -- Initial public offering of Class B Common Stock..................................... -- -- -- -- 8,050 81 -- Class A shares converted to Class B........ -- -- (117) (1) 117 1 -- Net loss................................... -- -- -- -- -- -- -- --- ---- ------ ---- ----- ---- ------- Balance at December 31, 1998............... -- $ -- 63,292 $633 8,167 $ 82 $ -- === ==== ====== ==== ===== ==== ======= Additional Retained Paid-in Earnings Capital (Deficit) Total ----------- ---------- ----- Balance at February 1, 1996................ $ -- $ (330) $ 354 Accounts receivable transferred to Ticketmaster Corp......................... -- -- (1,088) Operating charges transferred from Ticketmaster Corp., net of federal income tax allocation............................ -- -- 1,838 Net loss................................... -- (615) (615) -------- -------- -------- Balance at January 1, 1997................. -- (945) 489 Accounts receivable transferred to Ticketmaster Corp......................... -- -- (9,953) Operating charges transferred from Ticketmaster Corp., net of federal income tax allocation............................ -- -- 7,406 Net income................................. -- 2,347 2,347 -------- -------- -------- Balance at January 31, 1998................ $ -- $ 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.. 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................. 1,100 -- 1,320 Exercise of stock options and warrants..... 1,600 -- 1,609 Initial public offering of Class B Common Stock..................................... 103,973 -- 104,054 Class A shares converted to Class B........ -- -- -- Net loss................................... -- (17,219) (17,219) -------- -------- -------- Balance at December 31, 1998............... $418,918 $(16,045) $403,588 ======== ======== ========
See accompanying notes. F-16 TICKETMASTER ONLINE-CITYSEARCH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Eleven Predecessor 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 licensee........................................ 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.............................................. $ -- $ -- $ -- ======== ======== ========
See accompanying notes. F-17 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): F-18 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 1. Organization and Business (continued) Basis of Presentation and Merger (continued) 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. 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. F-19 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 1. Organization and Business (continued) Pro Forma Financial Data (Unaudited) (continued)
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)
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. F-20 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 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 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. F-21 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 2. Summary of Significant Accounting Policies (continued) 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. 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 F-22 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 2. Summary of Significant Accounting Policies (continued) Computers, Software, Equipment and Leasehold Improvements (continued) 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. 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. F-23 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 2. Summary of Significant Accounting Policies (continued) Due to (from) Ticketmaster Corp. (continued) 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:
December 31, January 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. 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 F-24 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 2. Summary of Significant Accounting Policies (continued) Basic and Diluted Earnings (Loss) per Share (continued) 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. 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. F-25 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 2. Summary of Significant Accounting Policies (continued) 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-26 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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-27 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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. F-28 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 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. 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. F-29 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 7. Stockholders' Equity and Stock Options (continued) 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. 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 F-30 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 7. Stockholders' Equity and Stock Options (continued) 1998 Employee Stock Purchase Plan (continued) 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........................ 938 8.67 to 32.69 16.35 December 31, 1998 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 ===== =====
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: F-31 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 7. Stockholders' Equity and Stock Options (continued)
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 for ma 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-32 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 March 29, 1999, the Company completed the acquisition of CityAuction, Inc. ("CityAuction"), a person-to-person online auction community. In connection with the acquisition, the Company issued an aggregate of approximately 800,000 shares of its Class B Common Stock for all the outstanding capital stock of CityAuction, Inc. representing an aggregate purchase price of $27.2 million. The acquisition was accounted for using the purchase method of accounting which resulted in $28.2 million of goodwill that will be amortized over 5 years. The results of operations of CityAuction are included in the accompanying statement of operations from the date of acquisition. 10. Subsequent Events Unaudited Acquisition of Match.com, Inc. On June 14, 1999, the Company completed the acquisition of Match.com, Inc. an Internet personals company. In connection with the acquisition the Company issued 1,924,777 shares of Class B Common Stock to the former owners F-33 TICKETMASTER ONLINE-CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 of Match.com representing a total purchase price of approximately $45.0 million. The acquisition was accounted for using the purchase method of accounting which resulted in approximately $47.5 million of goodwill that will be amortized over five years. Pending Acquisition of One and Only On June 10, 1999, Ticketmaster Online-CitySearch, Web Media Ventures, LLC, a Texas limited liability company (d/b/a One & Only Network), William Bunker, David Kennedy and Glenn Wiggins entered into Reorganization Agreement pursuant to which the Company will purchase all the outstanding units of One and Only for shares of the Company's Class B Common Stock. One & Only is an Internet personals company distributing its services through a network of affiliated Internet sites. The Company has the option to pay cash or issue shares of Class B Common Stock in exchange for all of the One & Only units. The initial target purchase price for the One & Only units is $40.6 million of the Company's Class B Common Stock, of which $30 million of Class B Common Stock is payable upon the closing of the transaction and $2,195,000 of Class B Common Stock is payable in two quarterly installments with the remainder of the target purchase price due 270 days after the closing of the transaction. The target purchase price is subject to a 10% increase or decrease based on, among other things, the achievement of certain 1999 calendar revenue targets of One & Only. The number of shares of Class B Common Stock to be issued in the acquisition will be determined by dividing the average closing price of the Class B Common Stock shortly before the closing of the acquisition and shortly before each subsequent payment date into the portion of the purchase price, as adjusted, currently payable subject to certain minimum and maximum share prices. The final purchase price to be recorded will also depend on the price of the Class B Common Stock at the date of closing. The closing of the acquisition is subject to several conditions, including but not limited to the effectiveness of a registration statement to be filed by Ticketmaster Online-CitySearch with respect to the Class B Common Stock to be issued in the transaction. The acquisition will be accounted for using the purchase method. The acquisition will result in goodwill in an amount approximating the purchase price that will be amortized by Ticketmaster Online-CitySearch over a period of five years. F-34 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Citysearch, Inc. We have audited the accompanying consolidated balance sheets of CitySearch, Inc. as of December 31, 1996 and 1997 and the related statements of operations, stockholders' equity, and cash flows for the period from September 20, 1995 (date of formation) to December 31, 1995 and for each of the two years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CitySearch, Inc. at December 31, 1996 and 1997, and the consolidated results of its operations and its cash flows for the period from September 20, 1995 (date of formation) to December 31, 1995 and for each of the two years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Ernst & Young LLP Los Angeles, California March 11, 1998, except for Note 10 as to which the date is September 28, 1998 F-35 CITYSEARCH, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)
December 31, September 28, -------------------- ---------------- 1996 1997 1998 --------- -------- ----------------- ASSETS (unaudited) Current assets: Cash and cash equivalents.............................................................. $ 7,527 $ 25,227 $ 57,877 Accounts receivable, net of allowance for doubtful accounts of $0 in 1996 $25 in..... 34 100 264 1997 and $72 in 1998 Due from licensees..................................................................... -- 57 1,467 Due from licensees--related party...................................................... -- 136 206 Prepaid expenses and other current assets.............................................. 249 119 178 -------- -------- -------- Total current assets................................................................... 7,810 25,639 59,992 Computers, software, equipment and leasehold improvements: Computers and software................................................................. 2,074 7,716 9,236 Furniture and equipment................................................................ 391 194 194 Leasehold improvements................................................................. 194 275 248 Enterprise system development in process............................................... 1,315 -- -- -------- -------- -------- 3,974 8,185 9,678 Accumulated depreciation............................................................... (329) (2,169) (4,461) -------- -------- -------- 3,645 6,016 5,217 Intangible asset, net of accumulated amortization of $422 in 1996....................... 1,915 -- -- -------- -------- -------- Total assets........................................................................... $ 13,370 $ 31,655 $ 65,209 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable....................................................................... $ 1,975 $ 2,197 $ 2,540 Accrued payroll and related liabilities................................................ 174 664 1,270 Other accrued liabilities.............................................................. 991 760 2,398 Deferred subscription and license revenue.............................................. 327 1,836 1,936 Current portion of obligations under capital leases.................................... 86 807 908 -------- -------- -------- Total current liabilities.............................................................. 3,553 6,264 9,052 Deferred rent........................................................................... 33 189 203 Deferred purchase price of subsidiary................................................... 1,336 891 446 Obligations under capital leases, net of current portion................................ 82 1,340 1,671 Convertible promissory note payable to a related party.................................. -- -- 50,000 Commitments Redeemable Convertible Preferred Stock, $0.01 par value, Series C, D, and E: Authorized shares--12,500 at December 31, 1997 Issued and outstanding--4,706 at December 31, 1996 and 12,406 at December 31, 1997 and none at September 28, 1998 Liquidation preference--$20,731 at December 31, 1996 and $73,212 at December 31,...... 20,309 70,882 -- 1997. Stockholders' equity (deficit): Convertible Preferred Stock, $0.01 par value, Series A and B: Authorized shares--2,241 at December 31, 1997 Issued and outstanding--1,948 at December 31, 1996 and 2,016 at December 31, 1997 and none at September 30, 1998 Liquidation preference--$2,165 at December 31, 1996 and $2,610 at...................... 2,165 2,610 -- December 31, 1997 Common Stock, $0.01 par value: Authorized shares--75,000 at December 31, 1997 and September 30, 1998 Issued and outstanding shares--8,814 at December 31, 1996 and 9,540 at December 31, 1997 and 25,248 at September 28, 1998..................................... 97 472 82,582 Deferred compensation................................................................... -- (262) (960) Accumulated deficit..................................................................... (14,205) (50,731) (77,785) -------- -------- -------- Total stockholders' equity (deficit)................................................... (11,943) (47,911) 3,837 -------- -------- -------- Total liabilities and stockholders' equity (deficit)................................... $ 13,370 $ 31,655 $ 65,209 ======== ======== ========
See accompanying notes to consolidated financial statements. F-36 CITYSEARCH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Period from September 20, 1995 (date of formation) to Year Ended December 31, December 31, Nine Months Ended ------------- --------------------- --------------------------------- September 30, September 28, 1995 1996 1997 1997 1998 ------------- --------- ---------- --------------- ---------------- Revenues:........................................... (unaudited) Subscription and services.......................... $ -- $ 203 $ 4,612 $ 2,781 $ 9,122 Subscription and services--related party........... -- -- 301 205 336 Licensing and royalty.............................. -- -- 528 499 698 Licensing and royalty--related party............... -- -- 743 178 1,161 ------ -------- -------- -------- -------- Total revenues................................ -- 203 6,184 3,663 11,317 Costs and expenses: Cost of revenues................................... -- 2,908 9,688 7,612 10,491 Sales and marketing................................ 57 6,369 20,172 13,716 14,902 Research and development........................... 152 2,563 7,182 4,949 5,000 General and administrative......................... 104 2,475 5,883 4,263 5,104 Merger and other transactions costs................ -- -- -- -- 3,101 ------ -------- -------- -------- -------- Total costs and expenses...................... 313 14,315 42,925 30,540 38,598 ------ -------- -------- -------- -------- Loss from operations................................ (313) (14,112) (36,741) (26,877) (27,281) Interest income..................................... 5 229 494 279 995 Interest expense.................................... -- (12) (271) (175) (768) ------ -------- -------- -------- -------- 5 217 223 104 227 ------ -------- -------- -------- -------- Loss before provision for income taxes.............. (308) (13,895) (36,518) (26,773) (27,054) Provision for income taxes.......................... -- 2 8 -- -- ------ -------- -------- -------- -------- Net loss............................................ $ (308) $(13,897) $(36,526) $(26,773) $(27,054) ====== ======== ======== ======== ======== Historical basic and diluted net loss per........... $(0.04) $(1.58) $(3.86) $(2.84) $(2.73) Share.............................................. ====== ======== ======== ======== ======== Pro forma basic and diluted net loss per............ $(1.96) $(1.51) $(1.10) Share.............................................. ======== ======== ======== Shares used to compute historical basic............. 7,895 8,786 9,452 9,431 9,923 and diluted net loss per share..................... ====== ======== ======== ======== ======== Shares used to compute pro forma basic and.......... 18,660 17,764 24,547 diluted net loss per share......................... ======== ======== ========
See accompanying notes to consolidated financial statements. F-37 CITYSEARCH, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (In thousands)
Convertible Common Stock Preferred Stock ----------------- Deferred Accumulated (Series A and B) Shares Amount Compensation Deficit Total ------------------- -------- ------- -------------- ------------- -------- Initial issuance of Common Stock, September 20, 1995.................. -- $ -- 6,623 $ 5 $ -- $ -- $ 5 Repurchase of CommonStock............ -- -- (2,000) (2) -- -- (2) Issuance of Common Stock............. -- -- 4,233 85 -- -- 85 Issuance of Convertible Preferred.... 1,791 1,620 -- -- -- -- 1,620 Stock Net loss............................. -- -- -- -- -- (308) (308) ------ ------- ------ ------- ------- -------- -------- Balance at December 31, 1995......... 1,791 1,620 8,856 88 -- (308) 1,400 Repurchase of Common Stock........... -- -- (116) (2) -- -- (2) Exercise of stock options............ -- -- 74 11 -- -- 11 Issuance of Series B Convertible..... 157 545 -- -- -- -- 545 Preferred Stock Net loss............................. -- -- -- -- -- (13,897) (13,897) ------ ------- ------ ------- ------- -------- -------- Balance at December 31, 1996......... 1,948 2,165 8,814 97 -- (14,205) (11,943) Exercise of stock options............ -- -- 726 103 -- -- 103 Issuance of Series B Convertible..... 68 445 -- -- -- -- 445 Preferred Stock..................... Deferred compensation................ -- -- -- 272 (272) -- -- Amortization of deferred compensation -- -- -- -- 10 -- 10 Net loss............................. -- -- -- -- -- (36,526) (36,526) ------ ------- ------ ------- ------- -------- -------- Balance at December 31, 1997......... 2,016 2,610 9,540 472 (262) (50,731) (47,911) Exercise of stock options unaudited.. -- -- 517 159 -- -- 159 Issuance of Series B Convertible..... 64 446 -- -- -- -- 446 Preferred Stock (unaudited) Deferred compensation (unaudited).... -- -- -- 1,054 (1,054) -- -- Conversion of Preferred Stock........ (2,080) (3,056) 15,191 80,897 -- -- 77,841 (unaudited) Amortization of deferred............. -- -- -- -- 356 -- 356 compensation (unaudited) Net loss (unaudited)................. -- -- -- -- -- (27,054) (27,054) ------ ------- ------ ------- ------- -------- -------- Balance at September 28, 1998 (unaudited)....................... -- $ -- 25,248 $82,582 $ (960) $(77,785) $ 3,837 ====== ======= ====== ======= ======= ======== ========
See accompanying notes to consolidated financial statements. F-38 CITYSEARCH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Period from September 20, 1995 (date of Nine Months Ended formation) to Year Ended December 31, ------------------------------- December 31, -------------------------- September 30, September 28, 1995 1996 1997 1997 1998 ------------ ------------ ------------ ---------------- ------------- (unaudited) Operating activities Net loss................................................ $ (308) $(13,897) $(36,526) $(26,773) $(27,054) Adjustments to reconcile net loss to net cash used in operating activities: Equity interest in loss from partnership............... -- -- 259 113 -- Write-down of investment in partnership................ -- -- 321 321 -- Depreciation........................................... 5 325 1,841 1,087 2,291 Amortization........................................... -- 422 1,915 1,436 -- Change in operating assets and liabilities, net of assets acquired and liabilities assumed: Accounts receivable.............................. -- (34) (67) (62) (163) Due from licensees............................... -- -- (57) (177) (1,410) Due from licensees--related party................ -- -- (136) (9) (70) Prepaid expenses and other current assets........ -- (249) 129 (53) (59) Accounts payable................................. 90 2,537 317 (763) 370 Accrued payroll and related liabilities.......... -- -- 489 616 607 Other accrued liabilities........................ -- -- (221) 193 1,638 Deferred subscription and license revenue........ -- 327 1,510 1,174 100 Deferred rent.................................... -- 33 157 79 14 Deferred compensation............................ -- -- -- -- 356 ------ -------- -------- -------- -------- Net cash used in operating activities................... (213) (10,536) (30,069) (22,818) (23,380) Investing activities Purchases of software, equipment and leasehold.......... (82) (3,547) (1,391) (1,098) (171) improvements....................................... Investment in partnership............................... -- -- (580) (324) -- ------ -------- -------- -------- -------- Net cash used in investing activities................... (82) (3,547) (1,971) (1,422) (171) Financing Activities Payments on capital leases.............................. -- (121) (840) (372) (917) Exercise of stock options............................... -- 11 103 84 159 Issuance of Common Stock................................ 90 -- -- -- -- Repurchases of Common Stock............................. (2) (2) -- -- -- Convertible promissory note payable to a related party.................................................. -- -- -- -- 50,000 Issuance of Convertible Preferred Stock, net............ 1,620 20,309 50,477 18,274 6,959 ------ -------- -------- -------- -------- Net cash provided by financing activities............... 1,708 20,197 49,740 17,986 56,201 ------ -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents.... 1,413 6,114 17,700 (6,254) 32,650 Cash and cash equivalents at beginning of period........ -- 1,413 7,527 7,527 25,227 ------ -------- -------- -------- -------- Cash and cash equivalents at end of period.............. $1,413 $ 7,527 $ 25,227 $ 1,273 $ 57,877 ====== ======== ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid for: Interest......................................... $ -- $ 12 $ 271 $ 169 $ 329 Income taxes..................................... $ 1 $ 2 $ 8 $ -- $
See accompanying notes to consolidated financial statements. F-39 CITYSEARCH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, except share data) Non-Cash Investing and Financing Activities During 1996 and 1997, the Company purchased computers and office equipment under financing leases totaling $288 and $2,820, respectively. On June 19, 1996, the Company acquired Metrobeat, Inc. in exchange for an initial payment of Series B Convertible Preferred Stock valued at $544. During the year ended December 31, 1997 and the nine months ended September 30, 1998, the Company made its second and third annual installment of Series B Convertible Preferred Stock valued at $445 and $445, respectively, pursuant to the acquisition. The remaining purchase price of $446 is payable in two annual installments, principally of Series B Convertible Preferred Stock. During 1997, the Company issued 14,670 shares of Series D Redeemable Convertible Preferred Stock valued at $96 as payment for accrued advertising and recruiting fees. During the nine months ended September 30, 1997 and September 28, 1998, the Company purchased computers and office equipment under financing leases totaling $1,836 and $1,350, respectively. See accompanying notes to consolidated financial statements. F-40 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information at September 28, 1998 and for the Nine Months Ended September 30, 1997 and September 28, 1998 is Unaudited) 1. Description of Business and Summary of Significant Accounting Policies The Company and Basis of Presentation CitySearch, Inc. (the Company), a Delaware corporation, was organized on September 20, 1995. The Company and its wholly-owned subsidiaries, Metrobeat, Inc. (Metrobeat) and CitySearch Ontario, Inc. (CitySearch Ontario), produce and deliver comprehensive local city guides on the World Wide Web (the Web), providing up-to-date information regarding arts and entertainment events, community activities, recreation, business, shopping, professional services and news/sports/weather to consumers in metropolitan areas. Each local city guide consists primarily of original content developed and designed specifically for the Web by the Company and its media partners. The Company designs and produces custom-built Web sites and related services for local businesses, aggregates them in a local city guide environment and provides business customers the ability to regularly update and expand their sites. The Company 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 business Web sites as well as related services to local and regional businesses and launches a presence in the market. In its other markets, the Company contracts with a local media company to provide assistance in developing, designing and launching a city guide. Under these contracts, the partners license the Company's business and technology systems and pay a license fee and make royalty payments to the Company based on certain revenues generated by the media partner from the operation of their sites and pay the Company for additional consultation and design services not provided for under the license fee. Subscription and services revenues include revenue generated from the sale of subscriptions for custom-built business Web sites (designed and developed by the Company) and advertising on its owned and operated city guides on the Internet, and the performance of consultation and design services. Licensing and royalty revenues include revenues generated from the sale of licenses for the use of the Company's business and technology systems in its partner-led markets and the receipt of royalty payments under its license agreements. See Revenue Recognition. The cost of designing and developing custom-built business Web sites in the Company's owned and operated markets and the cost of providing other design and consultation services including the cost of developing, designing and launching a city guide in partner-led-markets is included, as incurred, in the cost of revenues. The cost of developing, designing and launching a city guide, that is not separately billable under license agreements as services revenue in the Company's partner-led markets, is not significant and is included, as incurred, in the cost of revenues. Any ongoing customer support or upgrades, after the launch of the Web site that is not separately billable under the licensing contract is insignificant. Customers include restaurants, taverns, movie theaters, museums and retail stores. The Company currently owns and operates sites in Austin, TX, Nashville, TN, New York, NY, Portland, OR, Raleigh-Durham-Chapel Hill, NC, Salt Lake City, UT, Los Angeles, CA, and San Francisco, CA. Through partnership and licensing agreements, the Company has an internet presence in Washington D.C., Melbourne and Sydney, Australia, and Toronto, Canada. The Company has experienced operating losses and negative cash flows from operations since its formation on September 20, 1995. Since its formation, the Company has raised significant capital through the sale of Convertible Preferred Stock to outside investors and expects to continue to raise capital in 1998. The Company has also successfully licensed its product domestically and internationally generating additional revenue streams. F-41 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information at September 28, 1998 and for the Nine Months Ended September 30, 1997 and September 28, 1998 is Unaudited) Management anticipates that its investment in new markets and technology will result in operating losses in the near term but believes that anticipated revenues, existing cash, cash equivalents, working capital and new capital contributions will be sufficient to fund operations over the next year. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Metrobeat and CitySearch Ontario. All significant intercompany amounts have been eliminated. Interim Financial Information The accompanying balance sheet as of September 28, 1998, the statements of operations and cash flows for the nine months ended September 30, 1997 and September 28, 1998 and the statement of changes in shareholders equity (deficit) for the nine months ended September 28, 1998 are unaudited. References to the nine months ended September 28, 1998 refer to the period from January 1, 1998 through September 28, 1998. In the opinion of management, the statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for the fair statement of interim periods. The data disclosed in these notes to the financial statements for these periods is also unaudited. The results of operations and cash flows for the interim period are not necessarily indicative of the results to be expected for any other interim future period. Estimates Used in the Preparation of Consolidated Financial Statements The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates, although management does not believe that any differences would materially affect the Company's consolidated financial position or results of operations. Revenue Recognition The Company recognizes subscription revenues over the period the services are provided. Licensing revenue, under agreements entered into prior to December 31, 1997, for partner-led markets is recognized upon the completion of the delivery and installation of the business and technology systems and training of partner personnel in each partner-led-market. Royalty revenues are recognized when earned based on the revenues generated by the license or based on the minimum royalty provisions in the contract. Revenue from consultation and design services is recognized as the services are provided. Advertising revenues, which have not been significant, are recognized as earned and are included in subscription and service revenues. Any ongoing customer support costs or upgrades, after the launch of the Web site, that are not separately billable under the licensing contract are insignificant. Effective January 1, 1998, the Company adopted Statement of Position 97-2 (SOP 97-2), "Software Revenue Recognition," which impacts the manner companies recognize revenue on sales and licensing of software. The Company, during 1997, accounted for licensing of its software under the provisions of SOP 91- 1. The Company does not sell certain undelivered elements under its license agreements separately and, accordingly, under the provisions of SOP 97-2 revenues from the sale of licenses for use of the Company's business and technology systems to its partner-led markets are 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 five to nine years. F-42 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information at September 28, 1998 and for the Nine Months Ended September 30, 1997 and September 28, 1998 is Unaudited) Licensing and royalty revenues, on a pro forma basis, for the year ended December 31, 1997, and the nine months ended September 30, 1997 and September 28, 1998 would have been $253,000, $132,000 and $783,000, respectively, had SOP 97-2 been effective January 1, 1997. SOP 97-2 is not expected to have a material effect on revenues from royalties, services, and subscriptions. Deferred revenues arise upon the prepayment of subscription services and license agreements. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Concentration Of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable and cash deposits at financial institutions. Concentration of credit risk with respect to trade receivables is limited due to the large number of customers and their geographic dispersion. The Company requires no collateral from its customers. The Company places its cash deposits with high-credit quality financial institutions. At times, balances in the Company's cash accounts may exceed the Federal Deposit Insurance Corporation (FDIC) limit. Computers, Software, Equipment and Leasehold Improvements Computers, software, equipment and leasehold improvements are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Assets acquired under capitalizable lease arrangements are recorded at the present value of the minimum lease payments. Amortization of assets capitalized under capital leases and leasehold improvements are computed using the straight-line method over the life of the asset or term of the lease, whichever is shorter, and is included in depreciation expense. 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. Merger and Other Transactions Costs Merger and other transactions costs consist of costs related to the Merger, costs related to an initial public offering that was cancelled and costs related to a previous merger transaction that was not consummated. Advertising Costs Advertising costs are expensed as incurred. Advertising costs for the years ended December 31, 1996 and 1997, amounted to $1,305,859 and $2,464,641, respectively. There was no advertising expense for the period from September 20, 1995 (date of formation) to December 31, 1995. F-43 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information at September 28, 1998 and for the Nine Months Ended September 30, 1997 and September 28, 1998 is Unaudited) During 1996 and 1997 the Company entered into several barter arrangements whereby the Company has assisted in the design of a Web site in exchange for broadcast advertising. The 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 $60,000 and $1,158,000 for the years ended December 31, 1996 and 1997, respectively, based on the estimated cost of the specific services provided by the Company. Such amounts are included in subscription and services revenue as well as recognized in sales and marketing expense in the accompanying consolidated statements of operations. Reciprocal noncash 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. Pro Forma and Historical Net Loss Per Share Pro forma net loss per share is computed using the weighted average number of shares of Common Stock outstanding. Common equivalent shares from Convertible Preferred Stock (using the if converted method) have been included in the computation when dilutive, except that the Convertible Preferred Stock which converted into Common Stock in connection with the Merger is included as if converted at the original date of issuance, for both basic and diluted net loss per share, even though inclusion is antidilutive, based on the conversion price disclosed in Note 6. Historical net loss per share is computed as described above except that it excludes the Convertible Preferred Stock because it is antidilutive for periods which incurred a net loss. Intangible Asset The intangible asset is stated at cost and consists of goodwill resulting from the purchase of Metrobeat in June 1996 (see Note 2). Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of In accordance with Statement of Financial Accounting Standards Board No. 121, "Accounting for the 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), requires 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 8). Under APB 25 compensation expense is calculated based on the difference between the exercise price and the fair market value of the underlying stock on the date of grant. The amount of compensation expense calculated under APB 25 is recognized over the vesting period of the options. F-44 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information at September 28, 1998 and for the Nine Months Ended September 30, 1997 and September 28, 1998 is Unaudited) Reclassifications Certain reclassifications have been made to the prior years' balances to conform to the current year presentation. 2. Acquisition of Metrobeat On June 19, 1996, the Company purchased Metrobeat for approximately $2,337,300. The Company assumed net liabilities of $456,303 and issued 157,074 shares of Series B Convertible Preferred Stock valued at $544,497. During the year ended December 31, 1997 and the nine months ended September 28, 1998, the Company made its second and third annual installment of Series B Convertible Preferred Stock valued at $445,495 and $445,494, respectively. The remaining purchase price of $445,506 is payable in one annual installment, principally of Series B Convertible Preferred Stock. The remaining installment has been recorded as a deferred purchase price liability in the accompanying consolidated balance sheets. The transaction was accounted for using the purchase method of accounting. The excess of the purchase price over the net assets acquired has been allocated to goodwill and was initially to be amortized over three years. Effective January 1, 1997, the Company reassessed the future life of the goodwill recorded in connection with the Metrobeat acquisition and concluded the remaining life was one year. Accordingly, the unamortized goodwill as of December 31, 1996 was fully amortized to expense in 1997. 3. Investment in Partnership On February 17, 1997, CitySearch Ontario entered into a partnership, Toronto Star CitySearch (the Partnership), with others to launch CitySearch sites in Canada. CitySearch Ontario contributed the Company's technology through a licensing agreement valued by the other partners at $390,500 and cash of $319,171 in exchange for a 20% interest in the partnership. The other partners collectively contributed cash of $2,811,600 in exchange for the remaining 80% interest. Profits are shared in accordance with the respective Partnership interests. Losses are allocated to one of the other partners up to a cumulative loss limit, and thereafter losses of the partnership shall be allocated to CitySearch Ontario and the other partners at a ratio of 10% and 90%, respectively. CitySearch Ontario is committed to funding up to 10% of any losses of the Partnership. In August 1998, the Company entered into a series of agreements which effectively admitted a new party to the Partnership, reduced the Company's interest in the Partnership to 10% and terminated its commitment to fund any losses of the Partnership. Summarized unaudited financial information of Toronto Star CitySearch as of and for the year ended December 31, 1997 is as follows (in thousands): As of December 31, 1997: Current assets................................................................................... $ 1,520 Total liabilities................................................................................ 2,006 Partners' capital................................................................................ 758 For the period ended December 31, 1997: Revenues......................................................................................... $ 123 Loss from operations............................................................................. (2,658) Net loss......................................................................................... (2,806)
CitySearch Ontario carries its investment in Toronto Star CitySearch at zero. CitySearch Ontario's share of partnership losses ($258,937) is included in costs of revenues and sales and marketing expenses. F-45 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information at September 28, 1998 and for the Nine Months Ended September 30, 1997 and September 28, 1998 is Unaudited) 4. Income Taxes Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax expense is determined by the change in the net asset or liability for deferred taxes. The provision for income, franchise and capital taxes of $800, $1,600 and $8,330 is based solely on minimum state tax requirements. The Company's effective tax rate differs from the statutory federal income tax rate, primarily as a result of operating losses not benefited. The tax effect of temporary differences resulted in net deferred income tax assets and liabilities at December 31 are as follows:
1996 1997 ------------ -------------- (in thousands) Deferred tax assets: Net operating loss and tax credits........................................ $ 5,485 $ 21,239 Various accruals.......................................................... 58 636 Deferred rent............................................................. 14 77 ------- -------- 5,557 21,952 Less valuation allowance.................................................. (5,103) (19,650) ------- -------- Net deferred tax assets.................................................... 454 2,302 Deferred tax liabilities: Federal benefit for state income taxes.................................... (427) (1,499) Excess of tax depreciation and amortization............................... (27) (803) ------- -------- Deferred tax liabilities................................................... (454) (2,302) ------- -------- $ -- $ -- ======= ========
Due to the uncertainty surrounding the timing of the realization of the benefits from its favorable tax attributes in future tax returns, the Company has placed a valuation allowance against its otherwise recognizable deferred tax assets. The Company had federal and state operating loss carryforwards of $47,450,000 at December 31, 1997. The federal carryforwards expire principally in the period from 2010 to 2012, and the state carryforwards expire principally in 2003. The Company has generated tax credit carryforwards for federal and state purposes in the amounts of $329,723 and $107,353, respectively, at December 31, 1997. Utilization of the above carryforwards is subject to utilization limitations which may inhibit the Company's ability to use carryforwards in the future. F-46 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information at September 28, 1998 and for the Nine Months Ended September 30, 1997 and September 28, 1998 is Unaudited) The following table reconciles the provision for taxes based on income before taxes to the statutory federal income tax rate of 35%:
Period from September 20, 1995 (date of Year Ended formation to December 31, December 31, ------------------------------ 1995 1996 1997 ---------- ---------- ----------- (in thousands) Tax benefit at statutory rate............................... $(108) $(4,864) $(12,781) Increase related to: State taxes, net of federal benefit......................... 1 1 5 Meals and entertainment.................................... 1 17 30 Amortization of goodwill................................... -- 143 670 Foreign operations......................................... -- -- 203 Valuation reserve on deferred taxes........................ 106 4,705 11,881 ----- ------- -------- $ -- $ 2 $ 8 ====== ======= ========
5. Commitments Leases The Company entered into noncancelable capital lease obligations for computers and equipment during the year ended December 31, 1997. In addition, the Company leases its facilities and other office equipment under noncancelable operating lease agreements expiring through 2004. Certain of the Company's leases provide for free rent and escalations. The Company is responsible for other costs such as property taxes, insurance, maintenance and utilities. The following is a schedule of future minimum lease payments:
Operating Capital Leases Leases ----------- ---------- (in thousands) December 31: 1998......................................................... $1,321 $1,115 1999......................................................... 1,191 1,028 2000......................................................... 1,167 517 2001......................................................... 1,043 4 2002......................................................... 265 -- Thereafter................................................... 332 -- ------ ------ $5,319 $2,664 ====== Less amount representing interest................................... 517 ------ Net present value of net minimum lease payments (including.......... $2,147 approximately $807 payable currently).............................. ======
F-47 Computers, software and equipment under capital leases had an original cost basis of $288,419 and $2,819,842 at December 31, 1996 and 1997, respectively. The net book value of the related computers, software and equipment was $231,267 and $2,157,717 at December 31, 1996 and 1997, respectively. F-48 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information at September 28, 1998 and for the Nine Months Ended September 30, 1997 and September 28, 1998 is Unaudited) Rent expense related to operating leases was $7,800, $291,000 and $1,372,000 for the period from September 20, 1995 (date of formation) to December 31, 1995 and for the years ended December 31, 1996 and 1997, respectively. 6. Convertible Preferred Stock At December 31, 1997 and September 28, 1998, the Company was authorized to issue 14,741,082 and 15,741,082 shares, respectively, of Convertible Preferred Stock with a par value of $0.01 per share. The Company has designated 1,791,173 shares as Series A Convertible Preferred Stock; 450,000 shares as Series B Convertible Preferred Stock; 3,261,024 shares as Series C Redeemable Convertible Preferred Stock; 4,430,313 shares as Series D Redeemable Convertible Preferred Stock; and 5,808,572 shares as Series E Redeemable Convertible Preferred Stock. Convertible Preferred Stock issued and outstanding as of December 31, 1997 and September 28, 1998 are as follows:
Original As Converted Amount Per Share Effective Per Shares (Net of Issuance Share Common Outstanding issuance cost) Price Stock Price Date First Issued ----------- -------------- ----------- --------------- ----------------- (in thousands) Series A................. 1,791 $ 1,620 $0.904 $0.904 October 31, 1995 Series B................. 157 545 3.467 3.467 June 19, 1996 Series B................. 68 445 6.525 6.525 June 19, 1997 Series B................. 64 445 7.000 7.00 June 21, 1998 Series C................. 3,261 11,261 3.467 3.57 May 15, 1996 Series D................. 4,431 28,265 6.525 6.73 December 13, 1996 Series E................. 4,714 31,356 7.000 7.09 November 10, 1997 Series E................. 1,000 6,959 7.000 7.09 May 26, 1998 ------ ------- 15,486 $80,896 ====== =======
Convertible Preferred Stock contains a liquidation preference of an amount per share equal to the price for which such share of Convertible Preferred Stock was originally issued, adjusted for any stock dividends, combinations or splits with respect to such shares, plus any declared and unpaid dividends on the Convertible Preferred Stock. The Series C Redeemable Convertible Preferred Stock contains a May 2006 mandatory redemption provision. The Series D and Series E Redeemable Convertible Preferred Stock contain mandatory redemption provisions with a minimum of an 80% favorable vote, by the holders, beginning December 2004. Each share of Convertible Preferred Stock shall be, at the option of the holder, convertible at any time into the number of shares of Common Stock as determined by dividing the original issue price by the conversion price, as defined. At the date of issuance, the conversion price for each series of Convertible Preferred Stock was equal to the original per share issuance price. The conversion price is subject to adjustment for stock splits and stock combinations of outstanding Common Stock. The conversion price for Series C, D and E Redeemable Convertible Preferred Stock, is also adjusted for the forfeiture of Common Stock options outstanding from the date of issuance to the date of conversion. The Convertible Preferred Stock has an automatic conversion feature which provides for each share of Convertible Preferred Stock to be automatically converted into shares of Common Stock based on the then effective conversion price immediately upon the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of shares F-49 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information at September 28, 1998 and for the Nine Months Ended September 30, 1997 and September 28, 1998 is Unaudited) of Common Stock priced above $7.70 per share, with aggregate net proceeds to the Company of not less than $20,000,000. At September 28, 1998, on an unaudited pro forma basis, giving effect to Common Stock option forfeitures through June 30, 1998, each share of Series A and B Convertible Preferred Stock, and Series C, D and E Redeemable Convertible Preferred Stock, was convertible into approximately 1.0, 1.0, .972, .970 and .988 shares of Common Stock, respectively. The as-converted effective per share Common Stock price presented in the table above represents the effective price paid by the holders of the Convertible Preferred Stock for each share of Common Stock to be obtained upon conversion. The Convertible Preferred Stock was converted into 15,191,189 shares of Common Stock upon consummation of the Merger and share reclassification discussed in Note 10. 7. Stock Options The Company has adopted the 1996 Stock Option Plan (1996 Stock Plan) which authorizes members of management to grant non-statutory stock options or incentive stock options to employees and consultants of the Company and its subsidiaries. As of December 31, 1997 and September 28, 1998 the maximum number of shares of Common Stock to be issued under the plan was 4,000,000 and 5,500,000 shares, respectively. All options granted under the 1996 Stock Plan have been made at prices not less than fair market value of the stock at the date of grant. Options granted under the 1996 Stock Plan are exercisable at various dates over their ten-year life. Options granted under the 1996 Stock Plan vest principally 25% after the first year and ratably over the remaining vesting period. The following table summarizes certain information related to options for Common Stock:
Weighted Average Number of Exercise Shares Price Per Share Price ---------------- ------------------- ----------- (in thousands) Balance at January 1, 1996......................... -- Granted during 1996........................... 3,221 $0.10 to $0.75 $0.25 Forfeited..................................... 314 0.10 to 0.75 0.15 Exercised..................................... 74 0.10 to 0.75 0.16 ----- Outstanding at December 31, 1996................... 2,833 0.10 to 0.75 0.26 Granted during 1997........................... 1,110 0.75 to 3.00 1.83 Forfeited..................................... 485 0.10 to 2.00 0.64 Exercised..................................... 726 0.10 to 2.00 0.15 ----- Outstanding at December 31, 1997................... 2,732 0.10 to 3.00 0.86 Granted....................................... 1,999 3.00 to 8.67 6.36 Forfeited..................................... 322 0.10 to 8.00 2.12 Exercised..................................... 517 0.10 to 7.00 0.32 ----- Outstanding at September 28, 1998.................. 3,892 0.10 to 8.67 3.66 =====
Options granted during the year ended December 31, 1997 and the nine months ended September 28, 1998 resulted in a total compensation amount of $272,000 and $1,054,000, respectively, and were recorded as deferred compensation in stockholders equity. The deferred compensation amount will be recognized as compensation expense over the vesting period. During the year ended December 31, 1997 and the nine months ended September 28, 1998, such compensation expense amounted to $10,000 and $356,000, respectively. Options outstanding at December 31, 1996 and 1997 were exercisable for 1,100,000 and 1,135,500 shares of Common Stock, respectively. F-50 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information at September 28, 1998 and for the Nine Months Ended September 30, 1997 and September 28, 1998 is Unaudited) Common Stock available for future grants at December 31, 1996 and 1997 were 1,093,500 and 544,500 shares, respectively. Additional information with respect to outstanding options as of December 31, 1997 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 0.25 1,206 $0.13 8.18 885 $0.12 0.50 to 0.75 631 0.61 8.83 168 0.57 2.00 to 3.00 895 2.02 9.76 83 2.00 ----- ----- 0.10 to 3.00 2,732 1,136 ===== =====
In connection with the Series E Redeemable Convertible Preferred Stock issuance in November 1997, the Company granted warrants to a private placement selling agent to purchase 94,286 shares of Series E Redeemable Convertible Preferred Stock at an exercise price of $8.75 per share in exchange for services. The warrants expire upon a closing of an initial public offering or five years from the grant date, whichever is earlier. The fair value of these warrants was not material at the date of issuance and therefore was included in the amount of Series E Redeemable Convertible Preferred Stock reflected in the accompanying balance sheet. 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. The fair value for these options was estimated at the date of grant using the minimum-value method, which utilizes a near-zero volatility factor.
1996 1997 -------- -------- Expected life (years).............................................. 6 years 5 years Risk-free interest rate............................................ 6.30% 6.30% Dividend yield..................................................... -- --
This option valuation model requires input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option's vesting period. The Company's pro forma information follows: F-51 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information at September 28, 1998 and for the Nine Months Ended September 30, 1997 and September 28, 1998 is Unaudited)
Year Ended December 31, --------------------------------- 1996 1997 ------------ ------------ (in thousands) Net loss, as reported.............................................. $(13,897) $(36,526) Pro forma net loss................................................. (13,953) (36,608) Pro forma basic and diluted historical loss per share.............. $ (1.59) $ (3.87) Pro forma basic and diluted loss per share......................... (1.10) (1.96)
The effects of applying SFAS 123 in this pro forma disclosure may not be indicative of future amounts. Additional awards in future years are anticipated. The weighted-average fair value of options granted during the years ended December 31, 1996 and 1997 was $0.19 and $0.56, respectively, for options granted with an exercise price equal to the deemed fair market value, at the date of grant, of the underlying Common Stock. The weighted-average fair value of options, granted with an exercise price less than the deemed fair market value, at the date of grant, of the underlying Common Stock during 1997 was $1.04. 8. Defined Contribution Plan In July 1997, the Company established a defined contribution plan for certain qualified employees as defined in the plan. Participants may contribute from 1% to 20% of pretax compensation subject to certain liabilities. The plan does provide for certain discretionary contributions by the Company as defined in the plan. No Company contributions were made for the year ended December 31, 1997. 9. Related Party Transactions Included in subscription and service-related party and license and royalty- related party revenues for the year ended December 31, 1997 and the nine months ended September 28, 1998 is approximately $1,044,000 and $1,497,000 of revenues, respectively, generated under the Company's license agreements with stockholders or other related parties. Included in due from licensees at December 31, 1997 and September 28, 1998 is $136,000 and $206,000, respectively, due from stockholders and other related parties. 10. Merger and Related Events 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 the Company, USA Networks, Inc. (USAi), Ticketmaster Group, Inc. (Ticketmaster Group), a wholly-owned subsidiary of USAi, Ticketmaster Corp., a wholly-owned subsidiary of Ticketmaster Group, Ticketmaster Online and Tiberius, Inc. (Tiberius), a wholly-owned subsidiary of CitySearch, Inc., whereby Tiberius was merged with and into Ticketmaster Online, with Ticketmaster Online continuing as the surviving corporation and as a wholly- owned subsidiary of CitySearch, Inc. Under the Merger Agreement, the Company issued 37,238,000 shares of the Company's Common Stock in exchange for 100% of the outstanding common stock of Ticketmaster Online. The Merger was accounted for using the "reverse purchase" method of accounting, pursuant to which Ticketmaster Online will be treated as the acquiring entity and for accounting purposes the assets acquired and liabilities assumed of the Company will be recorded at their respective fair values. Pursuant to the Merger Agreement, USAi, the indirect parent of Ticketmaster Online, commenced a tender offer (the Tender Offer) to purchase up to 2,924,339 shares of the Company's Common Stock for $8.67 per share. The Tender Offer is scheduled to expire 20 days after its commencement. The Merger Agreement contains a put option which provides that in the event of consummation of the Merger, if a Qualified IPO, as defined, is not closed within twelve, eighteen and twenty-four months following the date of the Merger F-52 CITYSEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information at September 28, 1998 and for the Nine Months Ended September 30, 1997 and September 28, 1998 is Unaudited) Agreement, the holders of the Company's Common Stock could, subject to certain conditions, require USAi to commence an exchange offer for all the then- outstanding shares of Common Stock. In addition, concurrently with the execution of the Merger Agreement, the Company received a $50 million loan from USAi in exchange for the convertible promissory note (the Convertible Note). The Convertible Note, in the principal amount of $50 million, bears interest at a rate per annum of 7.00% and, after consummation of the Merger, is generally due and payable on the earlier to occur of (a) August 13, 2005 or (b) 20 days following the closing of a Qualified IPO, as defined. Upon consummation of the Merger, the Company amended its Certificate of Incorporation and Bylaws to provide for, among other things, the authorization of 100,000,000 shares of Class A Common Stock, 250,000,000 shares of Class B Common Stock and 2,883,506 shares of Class C Common Stock. In addition, upon consummation of a share reclassification immediately following the Merger, each share of the Company's outstanding Common Stock was converted into one share of Class A Common Stock entitled to 15 votes per share. In connection with the Merger, all the Convertible Preferred Stock outstanding converted into Common Stock. Such shares of Common Stock were subsequently reclassified as shares of Class A Common Stock. F-53 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts, commissions and certain accountable expenses, expected to be incurred by the Company in connection with the sale of Class B Common Stock being registered. All amounts are estimates except the Commission registration fee and the National Association of Securities Dealers, Inc. ("NASD") filing fee. Amount To Be Paid ----------- SEC Registration Fee............................. $ 12,980 Printing Fees and Expenses....................... 50,000 Legal Fees and Expenses.......................... 150,000 Accounting Fees and Expenses..................... 50,000 Blue Sky Fees and Expenses....................... 5,000 Transfer Agent and Registrar Fees................ 1,000 Miscellaneous.................................... 6,020 -------- Total....................................... $275,000 ======== ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the DGCL permits a corporation to include in its charter documents, and in agreements between the corporation and its directors and officers, provisions expanding the scope of indemnification beyond that specifically provided by the current law. The Registrant's Restated Certificate of Incorporation provides for the indemnification of directors to the fullest extent permissible under Delaware law. The Registrant's Bylaws provide for the indemnification of officers, directors and third parties acting on behalf of the Registrant if such person acted in good faith and in a manner reasonably believed to be in and not opposed to the best interest of the Registrant, and, with respect to any criminal action or proceeding, the indemnified party had no reason to believe his conduct was unlawful. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since inception of Registrant (September 20, 1995), the Registrant has issued and sold the following unregistered securities: (1) From September 20, 1995 to September 30, 1998, CitySearch granted options to purchase 6,338,118 shares of CitySearch Common Stock pursuant to its 1996 Stock Plan at exercise prices ranging from $0.10 to $8.67 per share (or 6,338,118 shares of Registrant's Class A Common Stock pursuant to the reclassification of shares which occurred subsequent to the merger of Ticketmaster Online and CitySearch). (2) From September 20, 1995 to September 30, 1998, CitySearch issued and sold an aggregate of 1,316,932 shares of Common Stock (or 1,316,932 shares of Registrant's 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 $0.10 to $8.00 per share for an aggregate consideration of approximately $273,000. (3) In September 1995, at CitySearch's formation, CitySearch issued and sold 6,622,857 shares of CitySearch Common Stock (or 6,622,857 shares of Registrant's Class A Common Stock) to William Gross for an aggregate cash consideration of $5,000 and for services provided to CitySearch. (4) In October 1995, CitySearch issued and sold an aggregate of 4,233,500 shares of CitySearch Common Stock (or 4,233,500 shares of Registrant's Class A Common Stock) for an aggregate cash consideration of $84,670. These shares were issued to the following key founding employees: Charles Conn, III; Thomas Layton; Jeffrey Brewer; Kristen Ding; Caskey Dickson; David Holtz; Tamar Halpern; Brad Haugaard; Taylor Wescoatt; Linda Gross; Karen DeDea; Lee Husiuk and Michael Radford. (5) From November 1995 to December 1995, CitySearch issued and sold an aggregate of 1,791,173 shares of its Series A Preferred Stock (or 1,791,173 shares of Registrant's Class A Common Stock) for an aggregate cash consideration of approximately $1.6 million. Such shares were issued to the following: David M. Balkin; Robert McLean; Morris Ventures; Robert W. Shaw, Jr.; Philip E. Berney; WS Investment Company 95B; William N. Melton; Stuart Cohen; Robert Kavner; Edwin C. Cohen; Peter R. Bleyleben; Steven Spielberg; Gerald Breslauer; Barry S. Volpert; Pando Associates, Ltd.; John Wylie; Jeffrey Glynn and Victoria Jo Edwards, Co- Trustees of the Edwards Family Trust of 1995; Charles R. Conn, II; Taylor Wescoatt; North American Trust Co., TTEE FBO L&W Dickson #410280. (6) In June 1996, CitySearch issued an aggregate of 157,074 shares of Series B Preferred Stock (or 157,074 shares of Registrant's Class A Common Stock) at $3.4665 per share as part consideration for the acquisition of MetroBeat. Such shares were issued to the following shareholders of MetroBeat: Mark Davies and Joshua White. (7) From May 1996 to July 1996, CitySearch issued and sold an aggregate of 3,261,024 shares of Series C Preferred Stock (or 3,170,356 shares of Registrant's Class A Common Stock) for an aggregate cash consideration of approximately $11.3 million. Such shares were issued to the following: GS Capital Partners II, L.P; GS Capital Partners II Offshore, L.P.; Goldman, Sachs & Co. Verwaltungs GmbH; The Goldman Sachs Group, L.P.; AT&T Venture Fund I, L.P.; AT&T Venture Fund II, L.P.; Steven Spielberg; Edwin C. Cohen; Pamela C. Alexander; Barry S. Volpert; Alexander Communications, Inc.; Jeffrey G. Edwards; IRA MSTC Custodian; Morris Ventures; Byters; David White; Robert W. Shaw, Jr.; Charles R. Conn, II; The Pacific Bank, N.A., Trustee E. Keith Thomson IRA; Michael Barton; Eric Higgs; Mark Lewyn; Emily Martin; Douglas M. McPherson; Ted Meisel. (8) From December 1996 to October 1997, CitySearch issued and sold an aggregate of 4,430,313 shares of Series D Preferred Stock (or 4,297,824 shares of Registrant's Class A Common Stock) for an aggregate cash consideration of approximately $28.9 million and for services provided to CitySearch. Such shares were issued to the following: GS Capital Partners II, L.P.; GS Capital Partners II Offshore, L.P.; Goldman, Sachs & Co. Verwaltungs GmbH; Stone Street Fund 1996, L.P.; Bridge Street Fund 1996, L.P.; Edwin C. Cohen; EnCompass Group, Inc.; Michael Barton; Mark Lewyn; Brian A. Goler; Emily Bloomfield; Bradley Ramberg; Lamar Rutherford; Kristen Brown; James R. McGovern; AnneMarie Weibel; Debra J. Wilkens; Francesca Colloredo-Mansfeld; Kathryn Takach; Byters; Comcast CitySearch, Inc.; Far West Capital Partners, L.P.; Robert McLean; Morris Ventures; Steven Spielberg; David White; CPQ Holdings, Inc.; Intel Corporation; Bayview Investors, Ltd.; Toronto Star Newspapers Limited; AT&T Venture Fund I, L.P.; AT&T Venture Fund II, L.P.; Bill Gross' idealab!; Alexander Communications, Inc.; The Times Mirror Company; Paul S. Larsen; ServiceMaster Venture Fund L.L.C.; Digital Ink Company and Korn/Ferry International. (9) In June 1997, CitySearch issued an aggregate of 68,274 shares of Series B Preferred Stock (or 68,274 shares of Registrant's Class A Common Stock) at $6.5251 per share as additional consideration for the acquisition of Metro Beat. Such shares were issued to the following shareholders of MetroBeat: Mark Davies and Joshua White. (10) In November 1997, CitySearch issued and sold an aggregate of 4,714,286 shares of Series E Preferred Stock (or 4,655,347 shares of Registrant's Class A Common Stock) for an aggregate cash consideration of approximately $33.0 million. Such shares were issued to the following: USAi; Comcast CitySearch, Inc.; Far West Capital Partners, LP; Intel Corporation; Endurance Fund; Gary Lauder; The Thomas and Janet Unterman Living Trust dated 12/30/94; East Peak Partners; Margaret L. Taylor; David A. Duffield Trust dated 7/14/88; Orchid & Co.; Digital Ink Company; Global Retail Partners, L.P.; DLJ Diversified Partners, L.P.; GRP Partners, L.P.; Global Retail Partners Funding, Inc.; DLJ First ESC L.P. and Schibsted ASA. NationsBanc Montgomery Securities LLC acted as placement agent. As consideration for such services, CitySearch paid NationsBanc $1,546,182 in cash and issued a warrant to purchase shares of Series E Preferred Stock which terms and conditions are described in item (11) below. (11) In November 1997, as part consideration for services provided as placement agent, CitySearch issued to NationsBanc a warrant to purchase 94,286 shares of Series E Preferred Stock (or 93,107 shares of Registrant's Class A Common Stock). The warrant was exercisable at any time at an exercise price equal to $8.86 per share of Class A Common Stock and any unexercised portion of the warrant is automatically convertible immediately prior to the closing of this offering. The warrant was exercised in December 1998. (12) In May 1998, CitySearch issued an sold an aggregate of 1,000,000 shares of its Series E Preferred Stock (or 987,500 shares of Registrant's Class A Common Stock) for an aggregate cash consideration of approximately $7.0 million. Such shares were issued to the following: USAi and American Express. (13) In June 1998, CitySearch issued an aggregate of 63,644 shares of Series B Preferred Stock (or 63,644 shares of Registrant's Class A Common Stock) at $7.00 per share as additional consideration for the acquisition of MetroBeat. Such shares were issued to the following shareholders of MetroBeat: Mark Davies and Joshua White. (14) In September 1998, CitySearch issued an aggregate of 37,238,000 shares of CitySearch Common Stock (or 37,238,000 of Registrant's Class A Common Stock) as consideration for the acquisition of Ticketmaster Multimedia Holdings, Inc. Such shares were issued to Ticketmaster Corp. (15) In September 1998, 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 Registrant for no consideration. (16) In March 1999, the Registrant issued 793,726 shares of Class B Common Stock as consideration for the acquisition of CityAuction, Inc. (17) In June 1999, the Registrant issued 1,924,777 shares of Class B Common Stock as consideration for the acquisition of Match.com, Inc. The sales of the securities described in Items 15(1) and 15(2) were deemed to be exempt from registration under the Securities Act in reliance on Rule 701 promulgated under Section 3(b) of the Securities Act as transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The sale of the securities described in Items 15(3) through 15(14) and 15(16) and 15(17) 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 following its merger with Ticketmaster Online in September 1998, Ticketmaster Online--CitySearch or had access, through employment or other relationships, to such information. The sale of securities in Item 15(15) was deemed to be exempt from registration under the Securities Act in reliance on Section 3(a)(9) of the Securities 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 16. EXHIBITS (a) Exhibits Notes ------- 2.1 Agreement and Plan of Reorganization, among CitySearch, Inc., (A)* MB Acquisition Corporation, MetroBeat, Inc., Mark Davies and Joshua White, dated May 31, 1996. 2.2 Amended and Restated Agreement and Plan of Reorganization, (A) among CitySearch, 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 January 8, 1999, (F) by and among Ticketmaster Online--CitySearch, Inc., Nero Acquisition Corp., Inc., CityAuction, Inc., Andrew Rebele and Monica Lee as amended. 2.4 Agreement and Plan of Reorganization, dated as of February 8, (E) 1999, by and 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 Exchange Agreement by and among Cendant Corporation, Cendant + Intermediate Holdings, Inc. and Ticketmaster Online-- CitySearch, Inc. dated as of May 14, 1999. 2.6 Agreement and Plan of Reorganization dated June 10, 1999 + among Ticketmaster Online--CitySearch, Web Media Ventures LLC (dba One & Only Network) and William Bunker, David Kennedy and Glenn Wiggins. Notes ------- 3.1 Form of Amended and Restated Certificate of Incorporation. (C) 3.2 Amended and Restated Bylaws. (C) 4.1 Specimen Class B Common Stock Certificate. (C) 5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional + Corporation, as to the legality of the securities being registered. 10.1 1996 Stock Option Plan and form of agreement thereunder. (C) 10.2 1998 Stock Option Plan and form of agreement thereunder. (C) 10.3 1998 Employee Stock Purchase Plan. (D) 10.4 License Agreement between CitySearch, Inc. and Perly, (A)* Inc., dated March 9, 1996. 10.5 Marketing Agreement between CitySearch, Inc. and American (A)* Express Travel Related Services Company, Inc., dated May 26, 1998. 10.6 Employment Agreement between CitySearch, Inc. and Charles (A) Conn, dated May 9, 1996. 10.7 Unanimous Shareholder Agreement between Tele-Direct (A)* (Services), Inc., Metroland Printing, Publishing & Distributing Ltd., CitySearch Canada, Inc. and 1310818 Ontario, Inc., dated August 31, 1998. 10.8 Limited Partnership Agreement between Metroland Printing, (A)* Publishing & Distributing Ltd., 1310818 Ontario Inc., CitySearch Canada, Inc., Tele- Direct (Services), Inc., Tele-Direct (Publications), Inc., CitySearch, Inc. and Torstar Corporation, dated August 31, 1998. 10.9 Amended and Restated License and Services Agreement (A)* between CitySearch, Inc. and CitySearch Canada, Inc., dated August 31, 1998. 10.10 Sublicense and Services Agreement between CitySearch (A)* Canada, Inc. and toronto.com, dated August 31, 1998. 10.11 Non-competition Agreement between Toronto Star Newspapers (A)* Ltd., Tele- Direct (Services), Inc., CitySearch Canada, Inc. and Metroland Printing, Publishing & Distributing Ltd., dated August 31, 1998. 10.12 Lease Agreement by and between CitySearch, Inc. and West (A) End Land Development Co., L.P., dated November 7, 1996. 10.13 Standard Form of Lease, Aeriel Center Executive Park, (A) between Pizzagalli Investment Company and CitySearch, Inc., dated May 8, 1996. 10.14 Standard Office Lease between CitySearch, Inc. and Sage (A) Realty Corporation, dated May 6, 1997. 10.15 Standard Office Lease between CitySearch, Inc. and H. (A) Naito Corporation, dated March 6, 1997. 10.16 Standard Office Lease between CitySearch, Inc. and Brazos (A) Austin Centre, Ltd., dated August 15, 1996. 10.17 Standard Office Lease between CitySearch, Inc. and Judge (A) Building Group, dated September 10, 199 10.18 Standard Office Lease between CitySearch, Inc. and Sobel (A) Building Development, dated May 31, 199 10.19 Standard Office Lease between CitySearch, Inc. and BPG (A) Pasadena, L.L.C. (later assigned to Spieker Properties), dated September 30, 1996. 10.20 Lease Agreement between CitySearch, Inc. And Secured (A) Properties Investors II, L.P., dated May 13, 1998. 10.21 License and Services Agreement between CitySearch, Inc. (A)* and Classified Ventures, L.L.C. 10.22 Convertible Promissory Note issued to CitySearch, Inc. by (A) USA Networks, Inc., dated August 12, 1998. 10.23 Non-Competition Agreement between CitySearch, Inc., (A) Ticketmaster Corporation, Ticketmaster Multimedia Holdings, Inc., and Charles Conn, dated August 12, 1998. Notes ------- 10.24 Letter Agreement between N2K Inc. and Ticketmaster (B)* Ticketing Co., Inc., dated April 3, 1998, as amended by a Letter Agreement by and between the parties, dated June 16, 1998. 10.25 Development and Services Agreement between Ticketmaster (A) Multimedia Holdings, Inc. and Starwave Corporation, dated June 28, 1996. 10.26 License and Services Agreement between Ticketmaster (A)* Corporation, Ticketmaster Multimedia Holdings, Inc. and USA Networks, Inc., dated August 12, 1998. 10.27 Contribution Agreement dated as of February 8, 1999, by (E) and among USA Networks, Inc., USANi LLC and USA Interactive Inc. 10.28 Stock Option Agreement dated February 8, 1999 between (E) Lycos, Inc. and USA Networks, Inc. 10.29 Stock Option Agreement dated February 8, 1999 between (E) Lycos, Inc. and Ticketmaster Online--CitySearch. 10.30 Registration Rights Agreement dated March 29, 1999 by (G) and among Ticketmaster Online CitySearch, Inc., Charter Venture Capital, GCA Investments, John Montgomery, Monica Lee and Andrew Rebele. 10.31 Non-competition Agreement dated March 29, 1999 by and (G) among Ticketmaster Online--CitySearch, Inc., CityAuction, Inc. and Andrew Rebele. 10.32 Non-competition Agreement dated March 29, 1999 by and among (G) Ticketmaster Online--CitySearch, Inc., CityAuction, Inc. and Monica Lee. 10.33 Employment Agreement dated March 29, 1999 by and between (G) Ticketmaster Online--CitySearch, Inc. and Andrew Rebele. 10.34 Employment Agreement dated March 29, 1999 by and between (G) Ticketmaster Online--CitySearch, Inc. and Monica Lee. 10.35 Registration Rights Agreement dated May 14, 1999 among + Cendant Intermediate Holdings, Inc. and Ticketmaster Online--CitySearch. 10.36 Employment Agreement between Ticketmaster Online--CitySearch (F) and Robert Perkins dated November 25, 1998. 10.37 Employment Agreement between Ticketmaster Online--CitySearch, (F) Inc. and David Hagan dated November 27, 1998. 21.1 Subsidiaries of the Registrant. (A) 23.1 Consent of Independent Auditors. + 23.2 Consent of Counsel (included in Exhibit 5.1). + 24.1 Power of Attorney (See signature page). + 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, 1998. (F) Incorporated by reference to the Company's Report on Form 10-K filed with the Commission on March 31, 1999. (G) Incorporated by reference to exhibits filed in response to Item 7, "Exhibits," of the Report on Form 8-K (File No. 000-25041) with the Commission on April 29, 1999. (b) Schedules Schedule II--Valuation and Qualifying Accounts ITEM 17. UNDERTAKINGS Insofar as indemnification by Ticketmaster Online--CitySearch for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of Ticketmaster Online--CitySearch, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Ticketmaster Online-- CitySearch of expenses incurred or paid by a director, officer or controlling person of Ticketmaster Online--CitySearch in the successful defense of any action, suit, or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by Ticketmaster Online--CitySearch is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. We hereby undertake: (a) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by section 10(a)(3) of the Securities Act; (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (b) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) That, for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by Ticketmaster Online--CitySearch pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective. (d) That, for purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (e) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Pasadena, State of California, on this 28 day of June, 1999. TICKETMASTER ONLINE-CITYSEARCH, INC. By: /s/ Charles Conn ------------------------------------- Charles Conn Chief Executive Officer POWER OF ATTORNEY Know All Men By These Presents, that each person whose signature appears below constitutes and appoints Charles Conn, Brad Serwin and Thomas McInerney, jointly and severally, his attorney-in-fact, each with the power of substitution for him in any and all capacities, to sign any amendments to this Registration Statement (including post-effective amendments), and to sign any registration statement for the same Offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons on the behalf of the Registrant in the capacities and on the dates indicated:
Signature Title Date - ---------------------------------------- ------------------------------------ ------------- /s/ Charles Conn Chief Executive Officer (Principal June 28, 1999 - ---------------------------------------- Executive Officer) and Director Charles Conn /s/ Thomas McInerney Chief Financial Officer, Executive Vice June 28, 1999 - ---------------------------------------- President, Finance and Administration Thomas McInerney and Treasurer (Principal Financial and Accounting Officer) /s/ Barry Baker Director June 28, 1999 - ---------------------------------------- Barry Baker /s/ Terry Barnes Director June 28, 1999 - ---------------------------------------- Terry Barnes /s/ Alan Citron Director June 28, 1999 - ---------------------------------------- Alan Citron /s/ Eugene L. Cobuzzi Director June 28, 1999 - ---------------------------------------- Eugene L. Cobuzzi
/s/ Barry Diller Director June 28, 1999 - ---------------------------------------- Barry Diller /s/ Joseph Gleberman Director June 28, 1999 - ---------------------------------------- Joseph Gleberman /s/ William Gross Director June 28, 1999 - ---------------------------------------- William Gross /s/ Victor A. Kaufman Director June 28, 1999 - ---------------------------------------- Victor A. Kaufman /s/ Robert Kavner Director June 28, 1999 - ---------------------------------------- Robert Kavner /s/ William D. Savoy Director June 28, 1999 - ---------------------------------------- William D. Savoy /s/ Alan Spoon Director June 28, 1999 - ---------------------------------------- Alan Spoon /s/ Thomas Unterman Director June 28, 1999 - ---------------------------------------- Thomas Unterman SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS TICKETMASTER ONLINE-CITYSEARCH, INC.
Balance at Balance Charged to Charged Balance Description Beginning Transferred at Costs and to Other at End of of Period the Merger Expenses Accounts Deductions Period ---------- -------------- --------- -------- ----------- --------- December 31, 1998 $ -- $68,400 $125,200 $65,900 $221,700(a) $57,800
(a) Represents amounts written-off against the allowance for doubtful accounts, net of recoveries and reversals. CITYSEARCH, INC
Balance at Charged to Charged to Balance at Beginning Costs and Other the End of Description of Period Expenses Accounts Deductions Period --------- -------- -------- ---------- ------ Period from September (date of formation) $ --- $ --- $ --- $ --- $ --- December 31, 1995 --- --- --- --- --- Yeaar ended December 31, 1996 --- --- --- --- --- Year ended December 31, 1997 --- $114,000 --- $89,000 $25,000
(a) Represents amounts written-off against the allowance for doubtful accounts, net of recoveries and reversals. EX-2.5 2 EXCHANGE AGREEMENT CENDANT Exhibit 2.5 EXCHANGE AGREEMENT by and among CENDANT CORPORATION, CENDANT INTERMEDIATE HOLDINGS, INC. and TICKETMASTER ONLINE-CITYSEARCH, INC. Dated as of May 14, 1999 TABLE OF CONTENTS
Page ---- ARTICLE I SALE OF STOCK Section 1.1. The Exchange............................................................. 1 Section 1.2. Time and Place of Closing................................................ 2 Section 1.3. Deliveries by the Seller................................................. 2 Section 1.4. Deliveries by the Buyer.................................................. 3 Section 1.5. Books and Records of the Company......................................... 3 Section 1.6. Transition Services...................................................... 3 Section 1.7. Intercompany Accounts.................................................... 3 Section 1.8. Treatment of Seller Guaranty............................................. 4 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SELLER Section 2.1. Organization; Etc........................................................ 4 Section 2.2. Authority Relative to this Agreement..................................... 5 Section 2.3. Capitalization; Ownership of Shares...................................... 5 Section 2.4. Consents and Approvals; No Violations.................................... 6 Section 2.5. Financial Statements..................................................... 6 Section 2.6. Absence of Undisclosed Liabilities....................................... 7 Section 2.7. Absence of Certain Changes............................................... 7 Section 2.8. Litigation............................................................... 7 Section 2.9. Compliance with Law; Permits; Restrictions............................... 7 Section 2.10. Employee Benefit Plans................................................... 8 Section 2.11. Labor Relations.......................................................... 9 Section 2.12. Taxes.................................................................... 9 Section 2.13. Contracts................................................................ 10 Section 2.14. Real Property............................................................ 11 Section 2.15. Intellectual Property.................................................... 11 Section 2.16. Year 2000 Compliance..................................................... 12 Section 2.17. Assets................................................................... 13 Section 2.18. Affiliate Transactions................................................... 13 Section 2.19. Brokers; Finders and Fees................................................ 13 Section 2.20. Independent Contractor Status............................................ 14 Section 2.21. Corporate Minutes........................................................ 14 Section 2.22. Insurance................................................................ 14 Section 2.23. Environmental and Safety Matters......................................... 14 Section 2.24. Acquisition of Buyer Shares for Investment; Ability to Evaluate and Bear Risk................................................... 14 Section 2.25. No Excess Parachute Payments............................................. 15
i
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE BUYER Section 3.1. Organization; Etc........................................................ 15 Section 3.2. Authority Relative to this Agreement..................................... 16 Section 3.3. Consents and Approvals; No Violations.................................... 17 Section 3.4. Acquisition of Shares for Investment; Ability to Evaluate and Bear Risk.. 17 Section 3.5. SEC Reports.............................................................. 18 Section 3.6. Buyer Financial Statements............................................... 18 Section 3.7. Investigation by Buyer; Seller's Liability............................... 19 Section 3.8. Brokers; Finders and Fees................................................ 20 Section 3.9. Additional Information................................................... 20 ARTICLE IV COVENANTS OF THE PARTIES Section 4.1. Conduct of Business of the Company....................................... 20 Section 4.2. Access to Information for the Buyer...................................... 22 Section 4.3. Consents; Cooperation.................................................... 22 Section 4.4. No Solicitation.......................................................... 23 Section 4.5. Best Efforts............................................................. 23 Section 4.6. Public Announcements..................................................... 23 Section 4.7. Tax Matters.............................................................. 23 Section 4.8. Knowledge of Breach; Prior Knowledge..................................... 37 Section 4.9. Employees; Employee Benefits............................................. 37 Section 4.10. Indemnification.......................................................... 39 Section 4.11. Maintenance of Books and Records......................................... 39 Section 4.12. Seller's Trademarks and Logos............................................ 40 Section 4.13. Nasdaq National Market Listing........................................... 40 Section 4.14. Legends.................................................................. 40 ARTICLE V CONDITIONS TO CONSUMMATION OF THE EXCHANGE Section 5.1. Conditions to Each Party's Obligations to Consummate the Exchange........ 41 Section 5.2. Further Conditions to the Seller's Obligations........................... 41 Section 5.3. Further Conditions to the Buyer's Obligations............................ 42
ii
ARTICLE VI TERMINATION AND ABANDONMENT Section 6.1. Termination................................................................ 43 Section 6.2. Procedure for and Effect of Termination.................................... 44 ARTICLE VII SURVIVAL AND INDEMNIFICATION Section 7.1. Survival Periods........................................................... 44 Section 7.2. Seller's Agreement to Indemnify............................................ 45 Section 7.3. The Buyer's Agreement to Indemnify......................................... 47 Section 7.4. Third-Party Indemnification................................................ 48 Section 7.5. Insurance.................................................................. 50 Section 7.6. No Duplication; Sole Remedy................................................ 50 Section 7.7. Indemnification Matters Governed by this Article VII....................... 51 ARTICLE VIII MISCELLANEOUS PROVISIONS Section 8.1. Entire Agreement........................................................... 51 Section 8.2. Severability............................................................... 51 Section 8.3. Notices.................................................................... 51 Section 8.4. Governing Law; Jurisdiction................................................ 52 Section 8.5. Descriptive Headings....................................................... 53 Section 8.6. Counterparts............................................................... 53 Section 8.7. Assignment................................................................. 53 Section 8.8. Fees and Expenses.......................................................... 53 Section 8.9. Interpretation............................................................. 54 Section 8.10. No Third-Party Beneficiaries............................................... 54 Section 8.11. No Waivers................................................................. 54 Section 8.12. Specific Performance....................................................... 55
iii EXCHANGE AGREEMENT ------------------ EXCHANGE AGREEMENT, dated as of May 14, 1999 (this "Agreement"), by and among Cendant Corporation, a Delaware corporation ("Cendant"), Cendant Intermediate Holdings, Inc., a Delaware corporation and a wholly owned subsidiary of Cendant ("Cendant Intermediate" and, together with Cendant, the "Seller"), and Ticketmaster Online-Citysearch, Inc., a Delaware corporation (the "Buyer"). WHEREAS, Cendant Intermediate owns all the outstanding shares of capital stock of Match.com, Inc., a Delaware corporation (the "Company"); and WHEREAS, the Seller desires to sell to the Buyer, and the Buyer desires to purchase from the Seller, 100 shares (the "Shares") of common stock, par value $.01 per share, representing all the issued and outstanding shares of the Company, upon the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties, covenants and agreements contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I SALE OF STOCK ------------- Section 1.1. The Exchange. (a) Upon the terms and subject to the ------------ conditions of this Agreement, at the Closing (as hereinafter defined), Cendant Intermediate will sell, convey, assign, transfer and deliver to the Buyer, and the Buyer will purchase, acquire and accept from Cendant Intermediate the Shares, in consideration for which, at the Closing, the Buyer will (i) issue to Cendant Intermediate the number of fully paid and nonassessable shares of Class B common stock, par value $.01 per share (the "Buyer Class B Common Stock"), of the Buyer (rounded, if necessary, to the nearest share) determined by dividing fifty-three million nine hundred and ninety thousand dollars ($53,990,000) by the Share Price (as defined below) and (ii) pay to the Seller ten thousand dollars ($10,000) in cash, by wire transfer of immediately available funds to an account designated by the Seller. The shares of Buyer Class B Common Stock contemplated to be issued by this Section 1.1 are sometimes herein referred to as the "Buyer Shares" or, together with the cash consideration, the "Con- 1 sideration," and the transactions contemplated by this Section 1.1 are sometimes herein referred to as the "Exchange." (b) For purposes of this Agreement, "Share Price" shall be equal to the average closing price per share of the Buyer Class B Common Stock on the Nasdaq National Market over the ten (10) consecutive trading days ending on the trading day immediately preceding the Closing Date, provided that (i) if such price is greater than $37.95, then the Share Price shall be deemed to be $37.95, and (ii) if such price is less than $28.05, then the Share Price shall be deemed to be $28.05. Section 1.2. Time and Place of Closing. Upon the terms and subject ------------------------- to the conditions of this Agreement, the closing of the transactions contemplated by this Agreement (the "Closing") will take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York 10022, at 9:00 a.m. (local time) on the third business day following the date on which all the conditions that are susceptible to being satisfied prior to the Closing to each party's obligations hereunder have been satisfied or waived, or at such other date, place or time as the parties may agree. The date on which the Closing occurs and the transactions contemplated hereby become effective is referred to herein as the "Closing Date." Section 1.3. Deliveries by the Seller. Subject to the terms and ------------------------ conditions hereof, at the Closing, the Seller will deliver the following to the Buyer: (a) A certificate or certificates representing the Shares, accompanied by stock powers duly endorsed in blank or accompanied by duly executed instruments of transfer; (b) The resignations of all members of the board of directors of the Company; (c) A certificate of non-foreign status as provided in Treasury Regulation Section 1.1445-2(b); (d) The officer's certificate provided for in Section 5.3(c); and (e) All other documents, instruments and writings required to be delivered by the Seller at or prior to the Closing Date pursuant to this Agreement. Section 1.4. Deliveries by the Buyer. Subject to the terms and ----------------------- conditions hereof, at the Closing, the Buyer will deliver the following to the Seller: 2 (a) A certificate or certificates representing the Buyer Shares registered in the name of Cendant or its designee; (b) The officer's certificate provided for in Section 5.2(c); and (c) All other documents, instruments and writings required to be delivered by the Buyer at or prior to the Closing Date pursuant to this Agreement. Section 1.5. Books and Records of the Company. The Seller agrees to -------------------------------- deliver to the Buyer or the Company at or as soon as practicable after the Closing, as requested by the Buyer, all books and records of the Company, including, but not limited to, correspondence, memoranda, books of account, personnel and payroll records and the like, except for the Tax Returns (as hereinafter defined) relating to the Company. Section 1.6. Transition Services. Except as set forth in Section 1.6 ------------------- of the disclosure schedule being delivered by the Seller to the Buyer concurrently herewith (the "Seller Disclosure Schedule") or as contemplated in the Transition Services Agreement to be entered into between Cendant and the Company substantially in the form of Exhibit A attached hereto (the "Transition Services Agreement"), or as otherwise agreed to in writing by the Seller and the Buyer, at the Closing all data processing, accounting, insurance, banking, personnel, legal, communications and other products and services provided to the Company by the Seller or any affiliate of the Seller, including any agreements or understandings (written or oral) with respect thereto, will terminate without any further action or liability on the part of the parties thereto. Notwithstanding the foregoing, in the absence of a written agreement, the provision of any services (similar to those contemplated by the preceding sentence) by the Seller to the Company from and after the Closing shall be for the convenience, and at the expense, of the Buyer only and shall be furnished without any liability on the part of the Seller with respect thereto. Section 1.7. Intercompany Accounts. On or prior to the Closing Date, --------------------- all intercompany accounts between the Company, on the one hand, and the Seller and its affiliates (excluding the Company), on the other hand, shall be converted into equity without any payment of funds in connection therewith. Notwithstanding the foregoing, any existing cash balance on the Company's books as of the Closing will be paid to the Seller. Section 1.8. Treatment of Seller Guaranty. Following the Closing, ---------------------------- the Buyer shall cause the Company to use its reasonable best efforts to have released and cancelled the agreement set forth in Section 1.8 of the Seller Disclosure Schedule (the 3 "Seller Guaranty"); provided, however, that to the extent that the Seller -------- ------- Guaranty cannot be so released and cancelled, the Buyer shall use its reasonable best efforts to cause itself or any of its affiliates to be substituted for the Seller in respect of the Seller Guaranty (or if not possible, added as the primary obligor with respect thereto). If the Buyer is not able to either release and cancel the Seller Guaranty or cause itself or any of its affiliates to be so substituted in all respects in respect of the Seller Guaranty, then the Buyer must (x) obtain letters of credit in favor of the Seller, on terms and conditions, and from financial institutions, which in each case are reasonably satisfactory to the Seller, with respect to all the obligations covered by the Seller Guaranty or (y) otherwise indemnify, defend and hold harmless the Seller with respect to all liabilities or expenses that might arise or be incurred by the Seller with respect to the Seller Guaranty. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SELLER -------------------------------------------- The Seller hereby represents and warrants to the Buyer as follows: Section 2.1. Organization; Etc. (a) The Company (i) is a ------------------ corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, (ii) has all requisite corporate power and authority to own, lease and operate its properties and assets and to carry on its business substantially as it is now being conducted, and (iii) is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership, operation or leasing of its properties makes such qualification necessary, except where the failure to be existing and in good standing, to have such power and authority or to be so qualified would not, individually or in the aggregate, have a Company Material Adverse Effect (as hereinafter defined). The Company does not own any equity interest in any corporation or other entity. The Seller has previously delivered to the Buyer true and correct copies of the certificate of incorporation and by-laws of the Company as in effect on the date hereof. (b) As used in this Agreement, the term "Company Material Adverse Effect" shall mean a material adverse change in, or effect on, the business, financial condition or results of operations of the Company; provided, however, -------- ------- that the effects of changes that exist on the date hereof and have been reflected in this Agreement or disclosed in the Seller Disclosure Schedule or that are generally applicable to the industries in which the Company operates or to the United States economy generally shall be excluded from such determination. 4 Section 2.2. Authority Relative to this Agreement. The Seller has ------------------------------------ the corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all requisite corporate action on the part of the Seller. This Agreement has been duly and validly executed and delivered by the Seller and (assuming this Agreement has been duly authorized, executed and delivered by the Buyer) constitutes a valid and binding agreement of the Seller, enforceable against the Seller in accordance with its terms, except that (a) such enforcement may be subject to any bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other laws, now or hereafter in effect, relating to or limiting creditors' rights generally and (b) enforcement of this Agreement, including, among other things, the remedy of specific performance and injunctive and other forms of equitable relief, may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. Section 2.3. Capitalization; Ownership of Shares. (a) The Shares ----------------------------------- represent all the outstanding capital stock in the Company. All the Shares are duly authorized, validly issued, fully paid and nonassessable. Except for the Shares, there are not, and at the Closing there will not be, any capital stock or other equity interests in the Company issued or outstanding or any subscriptions, options, warrants, calls, rights, convertible securities or other agreements or commitments of any character obligating the Company to issue, transfer or sell any of its capital stock or other equity interests, or any agreements, arrangements, or understandings granting any person any rights in the Company similar to capital stock or other equity interests. (b) All the Shares are owned of record and beneficially by the Seller free and clear of all liens, pledges, charges, claims, security interests or other encumbrances except for liens relating to Taxes not yet due and payable (collectively, "Liens"). The consummation of the Exchange will convey to the Buyer good title to the Shares, free and clear of all Liens, except for those created by the Buyer or arising out of ownership of the Shares by the Buyer. Section 2.4. Consents and Approvals; No Violations. Except as set ------------------------------------- forth in Section 2.4 of the Seller Disclosure Schedule, neither the execution and delivery of this Agreement by the Seller, nor the consummation by the Seller or the Company of the transactions contemplated hereby will (a) conflict with or result in any breach of any provision of the certificate of incorporation or by- laws of the Seller or the Company, (b) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, or require any consent under, any indenture, license, 5 contract, agreement or other instrument or obligation to which the Seller or the Company is a party or by which any of them or any of their respective properties or assets are bound, (c) violate any order, writ, injunction, decree or award rendered by any Governmental Entity (as hereinafter defined) or any statute, rule or regulation (collectively, "Laws" and, individually, a "Law") applicable to the Seller or the Company or any of their respective properties or assets, or (d) except for applicable requirements of the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (the "HSR Act"), require any filing with, or the obtaining of any permit, authorization, consent or approval of, any governmental or regulatory authority, domestic or foreign (a "Governmental Entity"), except in the case of clauses (b), (c) and (d) of this Section 2.4 for any such violations, breaches, defaults, rights of termination, cancellation or acceleration or requirements that, individually or in the aggregate, (x) would not have a Company Material Adverse Effect or would not adversely affect the ability of the Seller to consummate the transactions contemplated by this Agreement or (y) become applicable as a result of the business or activities in which the Buyer is or proposes to be engaged or as a result of any acts or omissions by, or the status of or any facts pertaining to, the Buyer. Section 2.5. Financial Statements. (a) Section 2.5(a) of the Seller -------------------- Disclosure Schedule contains the unaudited balance sheet of the Company as of December 31, 1998 (the "Balance Sheet") and the related unaudited statement of income of the Company for the year then ended (collectively the "Annual Financial Statements"). The Annual Financial Statements present fairly in all material respects the financial condition of the Company as of such date and the results of its operations for the fiscal year then ended. (b) The Annual Financial Statements, including the related schedules and notes thereto, have all been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") applied consistently throughout the periods involved (except as may be indicated in the notes thereto). Section 2.6. Absence of Undisclosed Liabilities. Except for (a) ---------------------------------- liabilities or obligations incurred in the ordinary course of business and consistent with past practice since December 31, 1998, (b) liabilities or obligations accrued or reserved against in the Annual Financial Statements or (c) liabilities or obligations disclosed herein or in the Seller Disclosure Schedule, since December 31, 1998 the Company has not incurred any liabilities or obligations (whether direct, indirect, accrued or contingent) in or outside the ordinary course of the business that individually or in the aggregate would have a Company Material Adverse Effect. 6 Section 2.7. Absence of Certain Changes. Except as set forth in -------------------------- Section 2.7 of the Seller Disclosure Schedule or as otherwise contemplated by this Agreement, since December 31, 1998, there has not been any development or event that has had or would reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect. Section 2.8. Litigation. Except as set forth in Section 2.8 of the ---------- Seller Disclosure Schedule or disclosed in the notes to the Annual Financial Statements, there is no action, suit, proceeding or, to the knowledge of the Seller, governmental investigation pending or, to the knowledge of the Seller, threatened against the Seller or the Company by or before any court or Governmental Entity, the outcome of which is likely individually or in the aggregate to (a) have or reasonably be expected to have a Company Material Adverse Effect or (b) affect adversely the ability of the Seller to consummate the transactions contemplated hereby. Section 2.9. Compliance with Law; Permits; Restrictions. The ------------------------------------------ business of the Company is not being and has not been conducted in violation of any applicable Law or any order, writ, injunction or decree of any court or Governmental Entity, except for any such violations that in the aggregate would not have a Company Material Adverse Effect. The Company has all permits, licenses, and other governmental authorizations, consents, and approvals necessary to conduct its business as currently conducted (collectively, the "Permits"), except for permits, licenses, authorizations, consents, and approvals the absence of which, alone or in the aggregate, would not have a Company Material Adverse Effect. The Company is not in violation of the terms of any Permit, except for violations that, alone or in the aggregate, would not have a Company Material Adverse Effect. There is no material agreement, judgment, injunction, order or decree binding upon the Company which has or would reasonably be expected to have the effect of prohibiting or materially impairing any material business practice of the Company, any acquisition of material property by the Company or the conduct of business by the Company as currently conducted in any material respect. Section 2.10. Employee Benefit Plans. (a) Section 2.10(a) of the ---------------------- Seller Disclosure Schedule sets forth, as of the date of this Agreement, a list of all "employee pension benefit plans" (as defined in Section 3(2) of the Employee Retirement Security Act of 1974, as amended ("ERISA")), "welfare benefit plans" (as defined in Section 3(1) of ERISA), and deferred compensation, bonus, retention bonus, incentive, severance, stock bonus, stock option, restricted stock, stock appreciation right, stock purchase, holiday pay, and vacation pay plans, and any other employee benefit plan, program, policy or arrangement covering employees (or former employees) of the Company that is either maintained by or contributed to by the Company or 7 to which the Company is obligated to make payments or otherwise has any liability or, with respect to the employees of the Company, to which the Seller or any of its subsidiaries or any of their ERISA Affiliates (as defined below) is obligated to make payments or otherwise have any liability (collectively, the "Plans") and each employment, severance, consulting or similar agreement currently in effect that has been entered into by the Seller or a subsidiary of the Seller (including the Company), on the one hand, and any employee of the Company, on the other hand (collectively, the "Employment Agreements"). For purposes of this Agreement, "ERISA Affiliate" shall mean any person (as defined in Section 3(9) of ERISA) that, together with the Company, is or has been a member of any group of persons described in Section 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986, as amended (the "Code"), including, without limitation, the Seller, the Company and their subsidiaries. Accurate and complete copies of all such Plans and Employment Agreements have been made available to the Buyer. (b) No Plan is subject to Title IV of ERISA and neither the Company nor, with respect to employees of the Company, any ERISA Affiliate has ever maintained, sponsored, participated in or contributed to any employee benefit plan which is subject to Title IV of ERISA. The Company is not a participant in, nor required to make contributions to, any "multiemployer plan" within the meaning of Section 3(37) of ERISA and no withdrawal liability has been incurred by or asserted against the Company with respect to any multiemployer plan. The Internal Revenue Service has issued a favorable determination letter for each Plan that is intended to be a "qualified plan" within the meaning of Section 401(a) of the Code. Except as would not have a Company Material Adverse Effect, each of the Plans has been administered and operated in accordance with its terms and all applicable Laws. Section 2.11. Labor Relations. Except as set forth in Section 2.11 --------------- of the Seller Disclosure Schedule, (a) the Company is, and has been, in compliance with all applicable Laws respecting employment and employment practices, terms and conditions of employment, wages, hours of work and occupational safety and health, and is not engaged in any unfair labor practices as defined in the National Labor Relations Act or other applicable Law, except for such failures as would not reasonably be expected to have a Company Material Adverse Effect; (b) there is no labor strike, slowdown, stoppage or lockout actually pending, or, to the knowledge of the Seller, threatened against or affecting the Company; and (c) the Company is not a party to or bound by any collective bargaining or similar agreement with any labor organization. Section 2.12. Taxes. Except as would not have a Company Material ----- Adverse Effect or as set forth on Section 2.12 of the Seller Disclosure Schedule: 8 (a) The Company (i) has filed on a timely basis (or there has been filed on its behalf) with the appropriate taxing authorities all Tax Returns (as hereinafter defined) required to be filed, and all such Tax Returns are true, correct and complete, and (ii) has paid all Taxes (as hereinafter defined) due and payable; (b) There are no outstanding waivers in writing or comparable consents regarding the application of any statute of limitations in respect of Taxes of the Company; (c) There is no action, suit, investigation, audit, adjustment claim or assessment pending or proposed in writing with respect to Taxes of the Company; (d) There are no Liens for Taxes upon the assets of the Company, except for Liens relating to current Taxes not yet due and payable or Liens for Taxes being contested in good faith; (e) The Company has complied with all applicable Laws relating to the payment and withholding of Taxes (including, without limitation, withholding of Taxes pursuant to Sections 1441 and 1442 of the Code or similar provisions under any foreign laws) and has, within the time and manner prescribed by Law, withheld and paid over to the proper Governmental Entities all amounts required to be withheld and paid over under all applicable Laws; (f) No affirmative agreement or consent for federal, foreign, state, or local Tax purposes, which could adversely affect or be binding on the Buyer or the Company after the Closing, had been filed or entered into; and (g) The Company is a member of a consolidated group of which Cendant is the common parent. Section 2.13. Contracts. (a) The Company has made available to the --------- Buyer true, correct and complete copies of all written contracts and agreements (or written summaries of the terms of any oral contracts or agreements) to which the Company is a party or by which any of its properties or assets are bound that are material to the business, properties or assets of the Company, including, without limitation, to the extent any of the following are, individually or in the aggregate, material to the business, properties or assets of the Company: (i) employment, personal services, consulting, non-competition, severance, golden parachute or director, officer or employee indemnification agreements; (ii) contracts granting a right of first refusal or first negotiation with respect to any assets or line of business of the Company; (iii) partnership or joint venture agreements; (iv) agreements for the acquisition, sale or 9 lease of material properties or assets of the Company (by merger, purchase or sale of assets or stock or otherwise) entered into since January 1, 1997; (v) contracts or agreements with any Governmental Entity; (vi) Real Property Leases (as hereinafter defined); and (vii) all commitments and agreements to enter into any of the foregoing (collectively, together with any such contracts entered into in accordance with Section 4.1 hereof, the "Contracts"). (b) Except as set forth in Section 2.13 of the Seller Disclosure Schedule: (i) there is no default under any Contract by the Company or, to the knowledge of the Seller, by any other party thereto, and no event has occurred that with the lapse of time or the giving of notice or both would constitute a default thereunder by the Company, or to the knowledge of the Seller, any other party, in any such case in which such default or event could reasonably be expected to have a Company Material Adverse Effect; (ii) no party to any such Contract has given notice to the Company of or made a claim against the Company with respect to any breach or default thereunder, in any such case in which such breach or default could reasonably be expected to have a Company Material Adverse Effect; and (iii) all the Contracts are valid, binding and enforceable (except as such enforceability may be subject to any bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other laws, now or hereafter in effect, relating to or limiting creditors' rights generally) obligations of the Company. Section 2.14. Real Property. The Company owns no real property. ------------- Section 2.14 of the Seller Disclosure Schedule sets forth a list of all real property leased on behalf of the Company (the "Real Property Leases"). Section 2.15. Intellectual Property. (a) Except as set forth in --------------------- Section 2.15(a) of the Seller Disclosure Schedule, the Company has, or will as of the Closing have, such ownership of or such rights by license or other agreement to use all patents and patent applications, domain names, trademarks and service marks, trademark and service mark registrations and applications, trade names, logos, copyrights, copyright registrations and applications, trade secrets, know-how, proprietary processes and formulae and computer software programs as are necessary to permit the Company to conduct its business as currently conducted (collectively, the "Intellectual Property"), except where the failure to have such ownership, license or right to use would not, individually or in the aggregate, have a Company Material Adverse Effect. Section 2.15(a) of the Seller Disclosure Schedule lists all trademark and service mark registrations and applications, domain names, patent and patent applications and copyright registrations and applications owned by the Company. 10 (b) To the knowledge of the Seller, the conduct of the business of the Company as currently conducted does not infringe upon the proprietary rights of any third party and there are no present or threatened infringements of the Intellectual Property by any third party, except, in either case, for such infringements that would not, individually or in the aggregate, have a Company Material Adverse Effect. Except as set forth in Section 2.15(b) of the Seller Disclosure Schedule, there are no pending or, to the knowledge of Seller, threatened proceedings or litigation or other adverse claims by any person against the use by the Company of any Intellectual Property that is owned by the Company or licensed to the Company. (c) All material computer software programs included in the Intellectual Property are set forth in Section 2.15(c) of the Seller Disclosure Schedule. All such programs (i) were developed by employees of the Company within the scope of their employment, (ii) were developed as "works-made-for- hire" as that term is defined under Section 101 of the United States copyright laws, pursuant to a written agreement, (iii) were assigned to the Company pursuant to a written agreement or (iv) are duly licensed to the Company for use in its business as currently conducted, except, in each case, where the failure to do so would not, individually or in the aggregate, have a Company Material Adverse Effect. (d) Except as set forth in Section 2.15(d) of the Seller Disclosure Schedule, the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not impair the right of the Company in, or to use, sell, enforce, license or otherwise exploit, any rights to the Intellectual Property. (e) The Company has taken reasonable and practicable steps designed to safeguard and maintain the secrecy and confidentiality of, and its proprietary rights in, all Intellectual Property including where appropriate entering into confidentiality and or nondisclosure agreements with officers, subcontractors, independent contractors and full and part-time employees. Section 2.16. Year 2000 Compliance. (a) To the knowledge of the -------------------- Seller, the Company has identified substantially all of its internal systems and software that are subject to Year 2000 Compliance risk and, to the knowledge of the Seller, no Company Material Adverse Effect will result from the failure of such systems or software to be Year 2000 Compliant. As used herein, "Year 2000 Compliant" shall mean, with respect to software, whether embedded or otherwise, the ability to consistently and accurately handle date information before, on and after January 1, 2000 without a material loss of functionality, including but not limited to accepting date input, providing date output, performing calculations on dates or portions of dates 11 and comparing, sequencing, storing and displaying dates (including all leap year considerations). (b) The Company has adopted a Year 2000 Compliance program, which consists of four phases: (i) identification of all mission critical business systems and software subject to Year 2000 Compliance risks; (ii) assessment of such business systems and software to determine the method of correcting Year 2000 Compliance problems; (iii) implementing the corrective measures; and (iv) testing and maintaining Year 2000 Compliance. The Company has completed at least phases (i), (ii) and (iii) above with respect to all of its critical internal systems and software. (c) The Company makes no representation or warranty concerning the Year 2000 Compliance of suppliers of products and services to the Company or of the Company's customers, or as to whether the failure of such suppliers or customers to be Year 2000 Compliant would have a Company Material Adverse Effect. The Company is developing contingency plans intended to minimize the effects of any such failures by crucial third parties. (d) The above stated representation is a Year 2000 readiness disclosure statement pursuant to the Year 2000 Readiness and Disclosure Act. Section 2.17. Assets. Except as set forth in Section 2.17(a) of the ------ Seller Disclosure Schedule, the Company has good and marketable title to, or a valid leasehold interest in or right to use by license or otherwise, the properties and assets used by it on or immediately prior to the date hereof, or reflected in the Annual Financial Statements or acquired after the date thereof (collectively, the "Assets"), free and clear of all Liens, except for (i) properties and assets disposed of in the ordinary course of business consistent with past practice and not in violation of Section 4.1, (ii) Liens for Taxes not yet due and payable or Liens for Taxes that are being contested in good faith and (iii) Liens that are not material to the value of the properties or assets encumbered and that do not impair in any material respect the current use or operation of such properties and assets, and except where the failure to have such title, leasehold interest or right to use would not individually or in the aggregate have a Company Material Adverse Effect. (b) Except as set forth in Section 2.17(b) of the Seller Disclosure Schedule, the Assets include or will include as of the Closing Date, without limitation, all personal property, both tangible and intangible, necessary to conduct the business of the Company in all material respects as conducted by the Company on or immediately prior to the date hereof. 12 Section 2.18. Affiliate Transactions. Section 2.18 of the Seller ---------------------- Disclosure Schedule sets forth a complete and correct list as of the date hereof of all contracts and agreements to which the Company, on the one hand, and the Seller or any of its affiliates (other than the Company), on the other hand, are a party that are in effect as of the date hereof and that are material to the Company. Section 2.19. Brokers; Finders and Fees. Except for ING Baring ------------------------- Furman Selz LLC, whose fees will be paid by the Seller, neither the Seller nor the Company has employed any investment banker, broker or finder or incurred any liability for any investment banking fees, brokerage fees, commissions or finders' fees in connection with this Agreement or the transactions contemplated hereby. Section 2.20 Independent Contractor Status. Section 2.20 of the ----------------------------- Seller Disclosure Schedule sets forth a complete list of persons engaged by the Company since December 31, 1997 to render consulting or similar services to the Company as an independent contractor (the "Company Contractors"). The Company has provided to the Buyer true and complete copies of each and every written agreement between the Company and any Company Contractor. Each Company Contractor is and at all times has been an independent contractor to, and not an employee of , the Company for purposes of all applicable federal and state income tax withholding requirements and otherwise. Section 2.21. Corporate Minutes. The Company has provided to the ----------------- Buyer true and correct copies of all meetings or actions of the Board of Directors of the Company. Section 2.22. Insurance. Section 2.22 of the Seller Disclosure --------- Schedule sets forth a complete and accurate list of all insurance policies maintained by the Seller in respect of the Company and all material insurance loss runs or workmen's compensation claims received in respect of the Company for the past two policy years. All premiums payable under all such policies have been paid in respect of the Company and the Company is otherwise in compliance with the terms of such policies. Such policies of insurance are the type and in amounts customarily carried by persons conducting businesses similar to that of the Company. To the knowledge of the Seller, there have been no threatened terminations of, or material premium increases with respect to, any of such policies. Section 2.23. Environmental and Safety Matters. To the knowledge of -------------------------------- the Seller, the Company is not in violation of any applicable Law relating to the environment or occupational health and safety, except as would not have a Company Material Adverse Effect, and to the knowledge of the Seller, no expenditures are or 13 will be required in order to comply with any such existing Law that would reasonably be expected to have a Company Material Adverse Effect. Section 2.24. Acquisition of Buyer Shares for Investment; Ability to ------------------------------------------------------ Evaluate and Bear Risk. (a) The Seller is acquiring the Buyer Shares for - ---------------------- investment and not with a view toward, or for sale in connection with, any distribution thereof, nor with any present intention of distributing or selling such Buyer Shares. The Seller agrees that the Buyer Shares may not be sold, transferred, offered for sale, pledged, hypothecated or otherwise disposed of without registration under the Securities Act of 1933, as amended, and any applicable state securities Laws, except pursuant to an exemption from such registration under such Act and such Laws. (b) The Seller (i) is able to bear the economic risk of holding the Buyer Shares for an indefinite period, (ii) can afford to suffer the complete loss of its investment in the Buyer Shares, and (iii) has knowledge and experience in financial and business matters such that it is capable of evaluating the risks of the investment in the Buyer Shares. Section 2.25. 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 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 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. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE BUYER ------------------------------------------- The Buyer hereby represents and warrants to the Seller as follows: Section 3.1. Organization; Etc. (a) The Buyer is a corporation duly ------------------ organized, validly existing and in good standing under the laws of the State of Delaware, has all requisite corporate power and authority to own, lease and operate its 14 properties and assets and to carry on its business substantially as it is now being conducted, and is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership, operation or leasing of its properties makes such qualification necessary, except where the failure to be existing and in good standing, to have such power and authority or to be so qualified would not, individually or in the aggregate, have a Buyer Material Adverse Effect (as hereinafter defined). (b) Set forth in Exhibit 2.1 to the Buyer Form 10-K (as hereinafter defined) is a true and complete list of all subsidiaries of the Buyer. Each of the Buyer's subsidiaries (i) is a corporation or other entity duly organized, validly existing and in good standing under the laws of its state of incorporation or formation, (ii) has all requisite corporate or other power and authority to own, lease and operate its properties and assets and to carry on its business substantially as it is now being conducted, and (iii) is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership, operation or leasing of its properties makes such qualification necessary, except where the failure to be existing and in good standing, to have such power and authority or to be so qualified would not, individually or in the aggregate, have a Buyer Material Adverse Effect. (c) As used in this Agreement, the term "Buyer Material Adverse Effect" shall mean a material adverse change in, or effect on, the business, financial condition or results of operations of the Buyer and its subsidiaries, taken as a whole; provided, however, that the effects of changes that exist on -------- ------- the date hereof and have been reflected in this Agreement or disclosed in the disclosure schedule being delivered by the Buyer to the Seller concurrently herewith (the "Buyer Disclosure Schedule") or that are generally applicable to the industries in which the Buyer operates or to the United States economy generally shall be excluded from such determination. Section 3.2. Authority Relative to this Agreement. The Buyer has the ------------------------------------ corporate power and authority to execute and deliver this Agreement and the Registration Rights Agreement to be entered into between the Buyer and Cendant substantially in the form of Exhibit B attached hereto (the "Registration Rights Agreement") and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Registration Rights Agreement and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all requisite corporate action on the part of the Buyer. Each of this Agreement and the Registration Rights Agreement has been duly and validly executed and delivered by the Buyer and (assuming each of this Agreement and the Registration Rights Agreement has been duly authorized, executed and delivered by the Seller) constitutes a valid and binding agreement of the Buyer, enforceable against the 15 Buyer in accordance with its terms, except that (a) such enforcement may be subject to any bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other laws, now or hereafter in effect, relating to or limiting creditors' rights generally and (b) enforcement of this Agreement and the Registration Rights Agreement, including, among other things, the remedy of specific performance and injunctive and other forms of equitable relief, may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. Section 3.3. Consents and Approvals; No Violations. Except as set ------------------------------------- forth in Section 3.3 of the disclosure schedule being delivered by the Buyer to the Seller concurrently herewith (the "Buyer Disclosure Schedule"), neither the execution and delivery of this Agreement by the Buyer nor the consummation by the Buyer of the transactions contemplated hereby will (a) conflict with or result in any breach of any provision of the certificate of incorporation or by- laws of the Buyer, (b) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, or require any consent under, any indenture, license, contract, agreement or other instrument or obligation to which the Buyer or any of its subsidiaries is a party or by which any of them or any of their respective properties or assets may be bound, (c) violate any order, writ, injunction, decree or Laws applicable to the Buyer, any of its subsidiaries or any of their respective properties or assets, or (d) except for applicable requirements of the HSR Act, require any filing with, or the obtaining of any permit, authorization, consent or approval of, any Governmental Entity, except in the case of clauses (b), (c) and (d) of this Section 3.3 for any such violations, breaches, defaults, rights of termination, cancellation or acceleration or requirements that, individually or in the aggregate, would not have a Buyer Material Adverse Effect (as hereinafter defined). Section 3.4. Acquisition of Shares for Investment; Ability to ------------------------------------------------ Evaluate and Bear Risk. (a) The Buyer is acquiring the Shares for investment - ---------------------- and not with a view toward, or for sale in connection with, any distribution thereof, nor with any present intention of distributing or selling such Shares. The Buyer agrees that the Shares may not be sold, transferred, offered for sale, pledged, hypothecated or otherwise disposed of without registration under the Securities Act of 1933, as amended, and any applicable state securities Laws, except pursuant to an exemption from such registration under such Act and such Laws. (b) The Buyer (i) is able to bear the economic risk of holding the Shares for an indefinite period, (ii) can afford to suffer the complete loss of its investment in the Shares, and (iii) has knowledge and experience in financial and busi- 16 ness matters such that it is capable of evaluating the risks of the investment in the Shares. Section 3.5. SEC Reports. The Buyer has previously made available to ----------- the Seller an accurate and complete copy of each (a) final registration statement, prospectus, report, schedule and definitive proxy statement filed since January 1, 1998 by the Buyer or any of its predecessors with the Securities and Exchange Commission (the "SEC") pursuant to the Securities Act of 1933, as amended (the Securities Act"), or the Securities Exchange Act of 1934, as amended (the "Exchange Act") (the "Buyer Reports") and prior to the date hereof, including the Buyer's Annual Report on form 10-K for the fiscal year ended December 31, 1998 (the "Buyer Form 10-K"), and (b) communication mailed by the Buyer or any of its predecessors to its stockholders since January 1, 1998 and prior to the date hereof, and no such Buyer report or communication (including without limitation the prospectus, dated December 2, 1998, filed with the SEC on such date), as of the date thereof, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading, except that information as of a later date (but before the date hereof) shall be deemed to modify information as of an earlier date. Since January 1, 1998, as of their respective dates, all Buyer Reports filed under the Securities Act and the Exchange Act complied in all material respects with the published rules and regulations of the SEC with respect thereto. Section 3.6. Buyer Financial Statements. The financial statements of -------------------------- the Buyer, including the notes thereto, included in the Buyer Form 10-K (the "Buyer 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 the Buyer 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 adjustments). There has been no change in the Buyer accounting policies except as described in the notes to the Buyer Financial Statements. The Buyer has no material liabilities or obligations other than (i) those set forth in the Buyer Financial Statements and (ii) those not required to be set forth in the Buyer Financial Statements under GAAP. Section 3.7. Investigation by Buyer; Seller's Liability. The Buyer ------------------------------------------ has conducted its own independent investigation, review and analysis of the business, operations, assets, liabilities, results of operations, financial condition, software, technology and prospects of the Company, which investigation, review and analysis was 17 done by the Buyer and its affiliates and, to the extent the Buyer deemed appropriate, by the Buyer's representatives. The Buyer acknowledges that it and its representatives have been provided access to the personnel, properties, premises and records of the Company for such purpose. In entering into this Agreement, the Buyer acknowledges that it has relied, and shall be entitled to rely, solely upon the aforementioned investigation, review and analysis, and, other than with respect to the representations and warranties made in Article II of this Agreement as modified by the Seller Disclosure Schedule (and subject to the limitations contained in this Agreement), the Buyer: (a) acknowledges that none of the Seller, the Company, or any of their respective directors, officers, shareholders, employees, affiliates, controlling persons, agents, advisors or representatives makes or has made any representation or warranty, either express or implied, as to the accuracy or completeness of any of the information provided or made available to the Buyer or its directors, officers, employees, affiliates, controlling persons, agents or representatives, and (b) agrees, to the fullest extent permitted by law, that none of the Seller, the Company or any of their respective directors, officers, employees, shareholders, affiliates, controlling persons, agents, advisors or representatives shall have any liability or responsibility whatsoever to the Buyer or its directors, officers, employees, affiliates, controlling persons, agents or representatives on any basis (including, without limitation, in contract or tort, under federal or state securities Laws or otherwise) based upon any information provided or made available, or statements made (including, without limitation, in materials furnished in the Company's data room, in presentations by the Company's management or otherwise), to the Buyer or its directors, officers, employees, affiliates, controlling persons, advisors, agents or representatives (or any omissions therefrom), including, without limitation, in respect of the specific representations and warranties of the Seller set forth in this Agreement, except that the foregoing limitations shall not apply to the extent the Seller makes the specific representations and warranties set forth in Article II of this Agreement but always subject to the limitations and restrictions contained herein. Section 3.8. Brokers; Finders and Fees. Neither the Buyer nor any of ------------------------- its affiliates has employed any investment banker, broker or finder or incurred any liability for any investment banking, financial advisory or brokerage fees, commissions or finders' fees in connection with this Agreement or the transactions contemplated hereby. Section 3.9. Additional Information. The Buyer hereby represents and ---------------------- warrants to the Seller the information set forth in Section 3.9 of the Buyer Disclosure Schedule. ARTICLE IV 18 COVENANTS OF THE PARTIES ------------------------ Section 4.1. Conduct of Business of the Company. During the period ---------------------------------- from the date of this Agreement to the Closing Date, except (x) as otherwise contemplated by this Agreement or the transactions contemplated hereby, (y) for those matters set forth in Section 4.1 of the Seller Disclosure Schedule, or (z) consented to by the Buyer in writing (or, in the case of clause (b)(xvii) below, the Buyer agrees to consider consent requests as promptly as practicable and respond by e-mail), the Seller shall cause the Company: (a) to use its best efforts to conduct its business and operations diligently in accordance with good commercial practice in the ordinary course consistent with past practice and in compliance with all applicable Laws, and to use its commercially reasonable efforts consistent with past practices and policies to preserve intact its present business organization, keep available the services of its present officers and employees and preserve its relationships with customers, suppliers, distributors, licensors, licensees, and others with which it has business dealings, and the Company will promptly notify Buyer of any material event involving its business or operations; and (b) not to (i) sell, license or dispose of any of its material properties or assets, except in the ordinary course of business; (ii) make any loans, advances (other than advances in the ordinary course of business) or capital contributions to, or investments in, any other person; (iii) terminate or materially amend any of its Contracts or licenses, except in the ordinary course of business; (iv) enter into any new material agreement other than renewals of existing agreements or otherwise in the ordinary course of business; (v) enter into any written employment agreement with any employee providing for annual cash compensation in excess of $75,000 or increase in any material respect the compensation of any of the officers or other key employees of the Company, except for such increases as are granted in the ordinary course of business in accordance with its customary practices (which shall include normal periodic performance reviews and related compensation and benefit increases); (vi) adopt, grant, extend or increase the rate or terms of any bonus, insurance, pension or other employee benefit plan, payment or arrangement made to, for or with any such officers or employees of the Company, except (A) increases required by any applicable Law, (B) increases in the ordinary course of business consistent with past practice, (C) amendments to existing options to purchase the common stock of Cendant ("Seller Options"), and (D) any other benefits payable in any form by the Seller; (vii) make any change in any of its present accounting methods and practices, except as required by changes in GAAP; (viii) license any non-exclusive intellectual property rights to any third party or license any intellectual 19 property rights from any third party pursuant to an arrangement other than in the ordinary course of business consistent with past practice; (ix) make or authorize any capital expenditures other than in accordance with its annual plan, other than capital expenditures not exceeding $100,000 individually or $250,000 in the aggregate or other than capital expenditures relating to the launch of Match 2.0 as set forth in Section 4.1(b) of the Seller Disclosure Schedule; (x) settle or compromise any material Tax liability, except in the ordinary course of business or consistent with past practice; (xi) incur any indebtedness for borrowed money other than from the Seller, issue any debt securities or assume, guarantee or endorse the obligations of any other persons other than in the ordinary course, or mortgage or encumber any of their respective properties or assets other than immaterial liens which do not restrict use or detract from value; (xii) amend its certificate of incorporation or by-laws; (xiii) issue, sell, pledge or transfer, or propose to issue, sell, pledge or transfer, any shares of its capital stock, or securities convertible into or exchangeable or exercisable for, or options with respect to, or warrants to purchase or rights to subscribe for, any shares of its capital stock; (xiv) grant any severance or termination pay to any officer or employee except payments in amounts consistent with policies and past practices or pursuant to written agreements outstanding, or policies existing, on the date hereof and as disclosed to the Buyer herein or in the Seller Disclosure Schedule or adopt any new severance plan; (xv) declare or pay any dividends on or make any other distributions (whether in cash, stock , equity securities or property) in respect of any capital stock; (xvi) repurchase or otherwise acquire, directly or indirectly, any shares of capital stock , or any securities convertible into shares of capital stock, or subscriptions, rights, warrants or options to acquire any shares of capital stock or any securities convertible into shares of capital stock, or enter into other agreements or commitments of any character obligation it to repurchase any such shares, (xvii) enter into any material partnership agreements, joint development agreements or strategic alliances; or (xviii) take, or agree to take, any of the foregoing actions. Section 4.2. Access to Information for the Buyer. (a) From the date ----------------------------------- of this Agreement to the Closing, the Seller will cause the Company to (i) give the Buyer and its authorized representatives reasonable access to all books, records, personnel, offices and other facilities and properties of the Company and the Company's accountants, (ii) permit the Buyer to make such copies and inspections thereof as the Buyer may reasonably request and (iii) cause the officers of the Company to furnish the Buyer with such financial and operating data and other information with respect to the business and properties of the Company as the Buyer may from time to time reasonably request; provided, -------- however, that any such access shall be conducted at the Buyer's expense, at a - ------- reasonable time, under the supervision of the Seller's or the Company's personnel and in such a manner as to maintain the confidentiality of this 20 Agreement and the transactions contemplated hereby and not to interfere unreasonably with the normal operation of the business of the Seller or the Company. (b) All such information and access shall be subject to the terms and conditions of the letter agreement (the "Confidentiality Agreement"), between the Buyer and the Seller, dated March 19, 1999. Notwithstanding anything to the contrary contained in this Agreement, none of the Company, the Seller or any affiliate of the Seller shall have any obligation to make available or provide to the Buyer or its representatives a copy of any consolidated, combined or unitary Tax Return filed by the Seller, or any of its affiliates or predecessors, or any related materials. Section 4.3. Consents; Cooperation. Each of the Seller and the Buyer --------------------- shall cooperate, and use its best efforts, to make all filings and obtain all licenses, permits, consents, approvals, authorizations, qualifications and orders of Governmental Entities and other third parties necessary to consummate the transactions contemplated by this Agreement, including, without limitation, under the HSR Act. Each of the Seller and the Buyer shall use its best efforts to make all necessary filings with Governmental Entities contemplated by the preceding sentence no later than ten days after the date hereof. In addition to the foregoing, the Buyer agrees to provide such assurances as to financial capability, resources and creditworthiness as may be reasonably requested by any third party whose consent or approval is sought hereunder. Section 4.4. No Solicitation. Neither the Seller nor any of its --------------- affiliates, or any officers, directors, employees, stockholders, affiliates, agents or representatives of the Seller or any of its affiliates will, directly or indirectly, solicit, initiate or encourage the submission of any proposal or offer from any person other than the Buyer or its directors, officers, employees, or other affiliates or representatives, enter into or continue any discussions or negotiations with, or provide any information to, any person other than the Buyer or its directors, officers, employees or other affiliates or representatives, relating to any (i) merger, consolidation or other business combination involving the Company, (ii) restructuring, recapitalization or liquidation of the Company, or (iii) acquisition or disposition of any material assets of the Company or any of its securities (any such proposal or offer being hereinafter referred to as an "Acquisition Proposal"). The Seller will immediately cease and cause to be terminated any activities, discussions or negotiations conducted prior to the date of this Agreement with any parties other than the Buyer with respect to any of the foregoing. Section 4.5. Best Efforts. Each of the Seller and the Buyer shall ------------ cooperate and use its best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable Laws and 21 regulations to consummate and make effective the Exchange and the other transactions contemplated by this Agreement. Section 4.6. Public Announcements. Prior to the Closing, except as -------------------- otherwise agreed to by the parties, the parties shall not issue any report, statement or press release or otherwise make any public statements with respect to this Agreement and the transactions contemplated hereby, except as in the reasonable judgment of the party may be required by law or in connection with its obligations as a publicly-held, exchange-listed company, in which case the parties will use their best efforts to reach mutual agreement as to the language of any such report, statement or press release. Upon execution hereof and upon the Closing, the Seller and the Buyer will consult with each other with respect to the issuance of a joint report, statement or press release with respect to this Agreement and the transactions contemplated hereby. Section 4.7. Tax Matters. ----------- (a) Section 338(h)(10) Election. The Seller shall join with the Buyer --------------------------- in making a joint election on Form 8023 for the Company pursuant to Section 338(h)(10) of the Code and under any applicable similar provisions of state Law with respect to the purchase of the Shares (the "Section 338 Election"). The Buyer shall be responsible for the preparation and filing of such election. The allocation of purchase price among the assets of the Company shall be made in accordance with Code Sections 338 and 1060 and any comparable provisions of state, local or foreign Law, as appropriate. The Buyer shall initially prepare a complete set of Section 338 Forms (as defined below). The Buyer shall deliver the Section 338 Forms to the Seller for review no later than 90 business days prior to the date the Section 338 Forms are required to be filed. In the event the Seller objects to the manner in which the Section 338 Forms have been prepared, the Seller shall notify the Buyer within 15 business days of receipt of the Section 338 Forms of such objection, and the parties shall endeavor within the next 15 business days in good faith to resolve such dispute. If the parties are unable to resolve such dispute within a 15 day business day period, the dispute shall be resolved in accordance with Section 4.7(i) hereof. Promptly, but not later than 15 business days after its acceptance of appointment hereunder, the accounting firm referred to in Section 4.7(i) will render a written report as to the disputed matters and the resulting preparation of the Section 338 Forms shall be conclusive and binding upon the parties. "Section 338 Forms" shall mean Internal Revenue Service Form 8023 and any similar state forms (together with any schedules or attachments thereto) that are required to be filed in connection with a 338 Election pursuant to applicable Law. The Seller shall be liable for, and shall pay, any Taxes arising from or related to the Section 338(h)(10) election and shall indemnify and hold the Buyer and the Buyer's subsidiaries harmless from and against any Taxes of the 22 Seller or any consolidated, combined or unitary group of which it is a part arising from or related to the Section 338(h)(10) election or any comparable or resulting election under state Law. The Buyer and the Seller shall each adopt and abide by the purchase price allocation reflected in the Section 338 Forms for purposes of all Tax Returns filed by them and shall not take any position inconsistent therewith in connection with any examination of any Tax Return, any refund claim, or any judicial litigation proceeding unless there has been a final "determination" (within the meaning of Code Section 1313(a)) or any other event which finally and conclusively establishes the amount of any liability for Taxes. In the event that such purchase price Allocation is disputed by any Taxing authority, the party receiving notice of the dispute shall promptly notify the other parties hereto of such dispute and the parties hereto shall consult and cooperate with each other concerning resolution of the dispute. (b) Tax Returns. Subject to Sections 4.7(f) and 4.7(p): ----------- (i) The Seller shall file or cause to be filed when due all Tax Returns that are required to be filed by or with respect to the Company for taxable years or periods ending on or before the Closing Date and the Seller shall remit (or cause to be remitted), subject to Section 4.7(c)(i) below, any Taxes due in respect of such Tax Returns. (ii) The Buyer shall file or cause to be filed when due all Tax Returns that are required to be filed by or with respect to the Company for taxable years or periods ending after the Closing Date and the Buyer shall remit (or cause to be remitted) any Taxes due in respect of such Tax Returns. (iii) Any Tax Return required to be filed by the Buyer relating to any taxable year or period beginning on or before and ending after the Closing Date (the "Straddle Period") shall be submitted (with copies of any relevant schedules, work papers and other documentation then available) to the Seller for the Seller's approval not less than 30 days prior to the due date for the filing of such Tax Return, which approval shall not be unreasonably withheld. The Seller shall have the option of providing to the Buyer, at any time at least 15 days prior to the Due Date (as hereinafter defined), written instructions as to how the Seller wants any, or all, of the items for which it may be liable reflected on such Tax Return. The Buyer shall, in preparing such return, cause the items for which the Seller is liable hereunder to be reflected in accordance with the Seller's instructions (unless, in the opinion of nationally recognized tax counsel to the Buyer, complying with the Seller's instructions would likely subject the Buyer to any criminal penalty or to civil penalties under sections 6662 through 6664 of the Code or similar provisions of applicable state, local or foreign Laws) and, in the absence of having re- 23 ceived such instructions, in accordance with past practice, if any, to the extent permissible under applicable Law. (iv) The Seller shall pay to the Buyer the Taxes for which the Seller is liable pursuant to Section 4.7(c)(i)(B) but which are payable with any Tax Return to be filed by the Buyer with respect to any Straddle Period upon the written request of the Buyer, setting forth in detail the computation of the amount owed, no later than 2 days prior to the Due Date. (v) Within 120 days after the Closing Date, the Buyer shall cause the Company to prepare and provide to the Seller a package of Tax information materials, including, without limitation, schedules and work papers (the "Tax Package") required by the Seller to enable Seller to prepare and file all Tax Returns required to be prepared and filed by it pursuant to Section 4.7(b)(i). The Tax Package shall be prepared in good faith in a manner consistent with past practice. (vi) The Seller may, in its sole and absolute discretion, amend any Tax Return filed or required to be filed for any taxable years or periods ending on or before the Closing Date. (c) Indemnification. --------------- (i) The Seller shall indemnify and hold the Buyer and the Buyer's subsidiaries and affiliates harmless from and against the following (net of the amount of any Tax Benefit (as hereinafter defined) Actually Realized (as hereinafter defined) by the Buyer or the Company as a result of the payment or accrual of any of the following): (A) any liability for Taxes imposed on the Company as members of the "affiliated group" (within the meaning of Section 1504(a) of the Code) of which Cendant (or any predecessor or successor) is the common parent that arises under Treasury Regulation Section 1.1502-6(a) or comparable provisions of foreign, state or local law; and (B) any liability for Taxes imposed on the Company, or for which the Company may otherwise be liable, for any taxable year or period that ends on or before the Closing Date and, with respect to any Straddle Period, the portion of such Straddle Period deemed to end on and include the Closing Date; 24 provided, however, that the Seller shall not be liable for and shall not - -------- ------- indemnify the Buyer (and its subsidiaries and affiliates) for (I) any Taxes resulting from transactions or actions taken by the Company on the Closing Date that are properly allocable to the portion of the Closing Date after the Closing except for transactions or actions undertaken in the ordinary course of business; (II) any Taxes that result from an actual or deemed election under Section 338 of the Code or any similar provisions of state law or the law of any other taxing jurisdiction with respect to the Company in connection with any of the transactions contemplated by this Agreement other than Taxes imposed on the Company as a result of the Section 338 Election made by Buyer and Seller pursuant to Section 4.7(a); and (III) any Transfer Taxes for which the Buyer is liable pursuant to Section 4.7(f) hereof (Taxes described in this proviso referred to hereinafter as "Excluded Taxes"). (ii) The Buyer shall indemnify and hold the Seller and the Seller's subsidiaries and affiliates harmless from and against (net of the amount of any Tax Benefit Actually Realized by the Seller or any affiliate of the Seller as a result of the payment or accrual of any of the following): (A) Taxes imposed on the Company for any taxable year or period that begins after the Closing Date and, with respect to any Straddle Period, the portion of such Straddle Period beginning after the Closing Date; (B) Excluded Taxes; and (C) notwithstanding anything to the contrary contained in this Section 4.7, any liability for Taxes for any taxable period incurred as a result of a breach of the Buyer's or the Company's respective obligations under Section 4.7(p)(ii). (d) Computation of Tax Liabilities. ------------------------------ (i) To the extent permitted or required by Law or administrative practice, (A) the taxable year of the Company which includes the Closing Date shall be treated as closing on (and including) the Closing Date and, notwithstanding the foregoing, (B) all transactions not in the ordinary course of business occurring after the Closing shall be reported on Buyer's consolidated United States federal income Tax Return to the extent permitted by Treasury Regulation Section 1.1502-76(b)(1)(ii)(B) and shall be similarly reported on other Tax Returns of the Buyer or its affiliates to the extent permitted by law. For purposes of Section 4.7(c)(i) and (c)(ii), where it is neces- 25 sary to apportion between the Seller and the Buyer the Tax liability of an entity for a Straddle Period (which is not treated under the immediately preceding sentence as closing on the Closing Date), such liability shall be apportioned between the period deemed to end at the close of the Closing Date, subject to Sections 4.7(c)(i) and 4.7(d)(i)(B), and the period deemed to begin at the beginning of the day following the Closing Date on the basis of an interim closing of the books, except that Taxes (such as real property Taxes) imposed on a periodic basis shall be allocated on a daily basis. (ii) In determining the Seller's liability for Taxes pursuant to this Agreement, the Seller shall be credited with the amount of estimated Taxes paid by or on behalf of the Company prior to the Closing to the extent such estimated Taxes are allocable for periods ending on or before the Closing Date. To the extent that the Seller's liability for Taxes for a taxable year or period is less than the amount of estimated income Taxes previously paid by or on behalf of the Company with respect to all or a portion of such taxable year or period, the Buyer shall pay the Seller the difference within two days of filing the Tax Return relating to such income Taxes. (e) Contest Provisions. ------------------ (i) Each of the Buyer, on the one hand, and the Seller, on the other hand (the "Recipient"), shall notify the chief tax officer of the other party in writing within 15 days of receipt by the Recipient of written notice of any pending or threatened audits, notice of deficiency, proposed adjustment, assessment, examination or other administrative or court proceeding, suit, dispute or other claim (a "Tax Claim") which could reasonably affect the liability for Taxes of such other party. If the Recipient fails to give such prompt notice to the other party it shall not be entitled to indemnification for any Taxes arising in connection with such Tax Claim if and to the extent that such failure to give notice materially and adversely affects the other party's right to participate in the Tax Claim. (ii) The Seller shall have the sole right to represent the Company's interests in any Tax Claim relating to taxable periods ending on or before the Closing Date and to employ counsel of its choice at its expense. In the case of a Straddle Period, the Seller shall be entitled to participate at its expense in any Tax Claim relating in any part to Taxes attributable to the portion of such Straddle Period deemed to end on or before the Closing Date and, with the written consent of the Buyer, at the Seller's sole expense, may assume the control of such entire Tax Claim. None of the Buyer, any of its 26 affiliates or the Company may settle or otherwise dispose of any Tax Claim (A) relating to any period ending on or before the Closing Date, without the prior written consent of the Seller, which consent may be withheld in the sole discretion of the Seller, unless the Buyer fully indemnifies the Seller in writing with respect to such liability in a manner satisfactory to the Seller and (B) with respect to any period beginning on or before the Closing Date and ending after the Closing Date, without the prior written consent of the Seller, which consent shall not be unreasonably withheld. The Buyer shall have the sole right to represent the Company's interests in any Tax Claim relating to taxable periods beginning after the Closing Date. (f) Transfer Taxes. All excise, sales, use, transfer (including real -------------- property transfer or gains), stamp, documentary, filing, recordation and other similar taxes, together with any interest, additions or penalties with respect thereto and any interest in respect of such additions or penalties, resulting directly from the transactions contemplated by this Agreement (the "Transfer Taxes"), shall be borne by the Buyer. Notwithstanding Section 4.7(b) of this Agreement, which shall not apply to Tax Returns relating to Transfer Taxes, any Tax Returns that must be filed in connection with Transfer Taxes shall be prepared and filed when due by the party primarily or customarily responsible under the applicable local law for filing such Tax Returns, and such party will use its reasonable efforts to provide such Tax Returns to the other party at least 10 days prior to the Due Date for such Tax Returns. (g) Refunds. ------- (i) Any Tax refund (including any interest in respect thereof) received by the Buyer or the Company, and any amounts credited against Tax to which the Buyer or the Company become entitled (including by way of any amended Tax Returns), that relate to any taxable period, or portion thereof, ending on or before the Closing Date shall be for the account of the Seller, and the Buyer shall pay over to the Seller any such refund or the amount of any such credit within 5 days after receipt or entitlement thereto. The Buyer shall pay the Seller interest at the rate prescribed under Section 6621(a)(1) of the Code, compounded daily, on any amount not paid when due under this Section 4.7(g). For purposes of this Section 4.7(g), where it is necessary to apportion a refund or credit between the Buyer and the Seller for a Straddle Period, such refund or credit shall be apportioned between the period deemed to end at the close of the Closing Date, and the period deemed to begin at the beginning of the day following the Closing Date on the basis of an interim closing of the Company's books, except that refunds or credits of Taxes (e.g., 27 real property Taxes) imposed on a periodic basis shall be allocated on a daily basis. (ii) Buyer shall cooperate, and cause the Company to cooperate, in obtaining any refund that the Seller reasonably believes should be available, including without limitation, through filing appropriate forms with the applicable taxing authorities. (h) Certain Post-Closing Settlement Payments. ---------------------------------------- (i) If the examination of any federal, state, local or other Tax Return of the Seller or the Company for any taxable period ending on or before the Closing Date shall result (by settlement or otherwise) in any adjustment which permits the Buyer or the Company to increase deductions, losses or tax credits or decrease the income, gains or recapture of tax credits which would otherwise (but for such adjustments) have been reported or taken into account (including by way of any increase in basis) by the Buyer or the Company for one or more periods ending after the Closing Date, the Seller will notify the Buyer and provide it with adequate information so that the Buyer can reflect on its or the Company's Tax Returns such increases in deductions, losses or tax credits or decreases in income, gains or recapture of tax credits. The Buyer shall pay to the Seller within 30 days of the receipt of such information, the amount of any resulting Tax Benefit Actually Realized. (ii) If the examination of any federal, state, local or other Tax Return of the Buyer or the Company for any taxable period ending after the Closing Date shall result (by settlement or otherwise) in any adjustment which permits the Seller to increase deductions, losses or tax credits or decrease the income, gains or recapture of tax credits which would otherwise (but for such adjustments) have been reported or taken into account (including by way of any increase in basis) by the Seller for one or more periods ending on or before the Closing Date, the Buyer will notify the Seller and provide it with adequate information so that the Seller can reflect on its Tax Returns such increases in deductions, losses or tax credits or decreases in income, gains or recapture of tax credits. The Seller shall pay to the Buyer within 30 days after such Tax Returns are filed, the amount of any resulting Tax Benefit Actually Realized. (iii) Tax Benefit Actually Realized. For purposes of this ----------------------------- Agreement, "Tax Benefit" shall mean the sum of the amount by which the Tax liability (after giving effect to any alternative minimum or similar Tax) of a corporation to the appropriate taxing authority is reduced (including, without 28 limitation, by or as a result of a deduction, increase in basis, entitlement to refund, credit or otherwise, whether available in the current taxable year, as an adjustment to the taxable income in any other taxable year or as a carryforward or carryback, as applicable) plus any interest from such government or jurisdiction relating to such Tax liability. For purposes of this Agreement, a Tax Benefit shall be deemed to have been "Actually Realized" at the time any refund of Taxes is actually received or applied against other Taxes due, or at the time of the filing of a Tax Return (including any Tax Return relating to estimated Taxes) on which a loss, deduction or credit or increase in basis is applied to reduce the amount of Taxes which would otherwise be payable. In accordance with the provisions of this paragraph (iii), the Buyer and the Seller agree that for purposes of this Agreement, where a Tax Benefit may be realized that may result in the payment to, or reduce a payment by, the other, they will as promptly as practicable take or cause their respective affiliates to take such reasonable or appropriate steps (including, without limitation, the filing of an amended Tax Return or claim for refund) to obtain at the earliest possible time any such reasonable available Tax Benefit. (iv) For purposes of any Tax Benefit Actually Realized determined under Section 4.7(h)(iii): (A) No later than 45 days after the filing of a Tax Return for any taxable period that includes a date after the Closing Date if there has been an examination of any federal, state, local or other Tax Return of the Seller or the Company which results in an adjustment described in Section 4.7(h) of this Agreement or upon which any amount was paid or accrued by the Buyer or the Company in respect of a claim for which the Seller is required to indemnify the Buyer pursuant to this Agreement, the Buyer shall provide the Seller a detailed statement ("Tax Benefit Statement") specifying the amount, if any, of any Tax Benefit that was Actually Realized by the Buyer or the Company for such Tax period. To the extent that any deductions or other Tax items that could give rise to a Tax reduction or savings do not result in the actual realization of such a Tax reduction or savings in the period described in the previous sentence, Section 4.7(h)(iii) shall apply to each subsequent taxable period of the Buyer or the Company, as the case may be, until either such Tax savings are Actually Realized (resulting in a Tax Benefit) or the losses or other carryforwards to which such deductions or other Tax items gave rise expire unused, if applicable. For each relevant taxable period, the Seller shall be provided with full access to the non-proprietary work papers and other materials and information of the Buyer's or the Company's accountants in connection with the review of the Tax Benefit Statement. If the 29 Seller disagrees in any respect with the Buyer's computation of the amount of the Tax Benefit Actually Realized, the Seller may, on or prior to 45 days after the receipt of the Tax Benefit Statement from the Buyer, deliver a notice to the Buyer or the Company setting forth in reasonable detail the basis for the Seller's disagreement therewith ("Tax Benefit Dispute Notice"). If no Tax Benefit Dispute Notice is received by the Buyer or the Company on or prior to the 45th day after the Seller's receipt of the Tax Benefit Statement from the Buyer, the Tax Benefit Statement shall be deemed accepted by the Seller. (B) Within 15 days after the Buyer's receipt of a Tax Benefit Dispute Notice, unless the matters in the Tax Benefit Dispute Notice have otherwise been resolved by mutual agreement of the parties, the Buyer and the Seller shall jointly select a nationally-recognized independent certified public accountant (the "Tax Benefit Accountant"); provided, -------- however, if the Buyer and the Seller are unable to agree upon the Tax ------- Benefit Accountant within such 15-day period, then the Buyer and the Seller shall each select a nationally-recognized independent certified public accountant which shall then jointly choose the Tax Benefit Accountant within 15 days thereafter. The Tax Benefit Accountant shall conduct such review of the work papers and such other materials and information, and the Tax Benefit Dispute Notice, and any supporting documentation as the Tax Benefit Accountant in its sole discretion deems necessary, and the Tax Benefit Accountant shall conduct such hearings or hear such presentations by the parties or obtain such other information as the Tax Benefit Accountant in its sole discretion deems necessary. (C) The Tax Benefit Accountant shall, as promptly as practicable and in no event later than 45 days following the date of its retention, deliver to the Seller and the Buyer a report (the "Tax Benefit Report") in which the Tax Benefit Accountant shall, after reviewing disputed items set forth in the Tax Benefit Dispute Notice, determine what adjustments, if any, should be made to the amount of the Tax Benefit Actually Realized. The Tax Benefit Report shall set forth, in reasonable detail, the Tax Benefit Accountant's determination with respect to the disputed items or amounts specified in the Tax Benefit Dispute Notice, and the revisions, if any, to be made to the amount of the Tax Benefit Actually Realized, together with supporting calculations. All fees and expenses relating to the work of the Tax Benefit Accountant shall be borne equally by the Buyer and the Seller. The Tax Benefit Report shall be final and binding upon the Buyer and the Seller, shall be deemed a final arbitration award that is binding on each of the Buyer and the Seller, and no party shall seek further recourse to courts, other arbitral tribunals or otherwise, other than in connection with the enforcement thereof. The 30 amount, if any, of the Tax Benefit Actually Realized set forth in the Tax Benefit Report shall, in accordance with the provisions of this Section 4.7(h)(iv), be paid to the Seller in immediately available funds no later than five days after delivery of the Tax Benefit Report to the Buyer. (i) Resolution of All Tax-Related Disputes. Subject to Section -------------------------------------- 4.7(h)(iv), in the event that the Seller and the Buyer cannot agree on the calculation of any amount relating to Taxes or the interpretation or application of any provision of this Agreement relating to Taxes, such dispute shall be resolved by a nationally recognized accounting firm mutually acceptable to each of the Seller and the Buyer, whose decision shall be final and binding upon all persons involved and whose expenses shall be shared equally by the Seller and the Buyer. (j) Post-Closing Actions Which Affect Seller's Liability for Taxes. -------------------------------------------------------------- (i) The Buyer shall not permit the Company to take any action (other than any action in the ordinary course of business) on the Closing Date which could increase the Seller's liability for Taxes (including any liability of the Seller to indemnify the Buyer for Taxes pursuant to this Agreement). (ii) None of the Buyer or any affiliate of the Buyer shall (or shall cause or permit the Company to) amend, refile or otherwise modify any Tax Return relating in whole or in part to the Company with respect to any taxable year or period ending on or before the Closing Date (or with respect to any Straddle Period) without the prior written consent of the Seller, which consent may be withheld in the sole discretion of the Seller. (k) Termination of Existing Tax Sharing Agreements. Any and all ---------------------------------------------- existing Tax sharing agreements or arrangements, written or unwritten, between the Seller and the Company, shall be terminated as of the Closing. (l) Conflicts. In the event of a conflict between the provisions of --------- this Section 4.7 and Article VII (including any claim for indemnification relating to Taxes that could be made under both Section 4.7 and Article VII), Section 4.7 shall govern and control. (m) Assistance and Cooperation. After the Closing Date, each of the -------------------------- Seller and the Buyer shall (and shall cause their respective affiliates to): (i) timely sign and deliver such certificates or forms as may be necessary or appropriate to establish an exemption from (or otherwise re- 31 duce), or, subject to Section 4.7(f), file Tax Returns or other reports with respect to Transfer Taxes; (ii) assist the other party in preparing any Tax Returns which such other party is responsible for preparing and filing in accordance with Section 4.7(b); (iii) cooperate fully in preparing for any audits of, or disputes with taxing authorities regarding, any Tax Returns of the Company; (iv) make available to the other and to any taxing authority as reasonably requested in connection with any Tax Return described in Section 4.7(b) or any proceeding described in Section 4.7(e), all information relating to any Taxes or Tax Returns of the Company; (v) furnish the other with copies of all correspondence received from any taxing authority in connection with any Tax audit or information request with respect to any such taxable period; and (vi) retain any books and records that could reasonably be expected to be necessary or useful in connection with the Buyer's or the Seller's preparation, as the case may be, of any Tax Return, or for any audit, examination, or other proceeding relating to Taxes. Such books and records shall be retained until the expiration of one (1) year after the applicable statute of limitations (including extensions thereof); provided, however, that in the event an audit, examination, investigation or other proceeding has been instituted prior to the expiration of the applicable statute of limitations (or in the event of any claim under this Agreement), the books and records shall be retained until there is a final determination thereof (and the time for any appeal has expired). Notwithstanding the foregoing or any other provision in this Agreement, neither the Buyer nor any of its affiliates shall have the right to receive or obtain any information relating to Taxes of the Seller, any of its affiliates, or any of its predecessors other than information relating solely to the Company. (n) Adjustment to Consideration. For all Tax purposes, any payment by --------------------------- the Buyer or the Seller under this Agreement shall be treated as an adjustment to the Consideration. 32 (o) Certain Definitions. For purposes of this Agreement, "Due Date" ------------------- shall mean, with respect to any Tax Return, the date such return is due to be filed (taking into account any valid extensions); "Tax" or "Taxes" shall mean taxes (other than those taxes described in Section 4.7(f) hereof) of any kind, levies or other like assessments, customs, duties, imposts, charges or fees, including, without limitation, income, gross receipts, ad valorem, value added, excise, real or property, asset, sales, use, license, payroll, transaction, capital, net worth, withholding, estimated, social security, utility, workers' compensation, severance, production, unemployment compensation, occupation, premium, windfall profits, transfer and gains taxes or other governmental taxes imposed or payable to the United States, or any state, county, local or foreign government or subdivision or agency thereof, together with any interest, penalties or additions with respect thereto and any interest in respect of such additions or penalties; and "Tax Returns" shall mean all returns, reports, statements, declarations, estimates and forms or other documents (including any related or supporting information), required to be filed with respect to any Taxes. (p) Seller Options/Retention Bonus Payments. --------------------------------------- (i) Promptly after an exercise of a Seller Option, the Seller shall provide the Company with a report detailing such exercise. On a monthly basis, the Seller shall pay over to the Company the amount of all withholding taxes (the "Withholding Taxes") collected by the Seller in respect of the exercise of such Seller Options in the preceding calendar month and a report (the "Tax Report") confirming the exercises occurring during such calendar month. The Buyer and the Company acknowledge that the Seller shall not be obligated to take action to collect Withholding Taxes other than (A) for exercises effected through any cashless exercise program maintained by the Seller from time to time and (B) by making demand on optionees engaging in a cash exercise. The Tax Report shall indicate the amount of any Withholding Taxes due and payable not collected by the Seller. (ii) The Buyer shall cause the Company to pay to the proper Governmental Entity (A) all Withholding Taxes received from the Seller pursuant to Section 4.7(p)(i) or otherwise payable in connection with the exercise of Seller Options and (B) the amount of any FICA or FUTA Tax (or any similar employment Taxes required under state or local law) ("Employment Taxes") required to be paid with respect to the exercise of any Seller Options. To the extent the Tax Report indicates that Withholding Taxes have not been collected with respect to any current employees of the Company, the Buyer shall cause the Company to withhold and collect from the wages or other compensation of such current employees the amount of Withholding Taxes 33 not collected by the Seller, and pay to the proper Governmental Entity the amount of any such Withholding Taxes. In addition, in connection with any payment of any amount with respect to the retention bonus program described in Section 4.9(f), the Buyer or the Company, as the case may be, shall (A) withhold the Withholding Taxes required to be withheld under applicable Law and pay such Withholding Taxes to the proper Governmental Entity and (B) pay to the proper Governmental Entity the amount of any Employment Taxes that are required to be paid under applicable Law. The Buyer shall cause the Company to (A) prepare and file any Tax Returns required to be filed in connection with Withholding Taxes and Employment Taxes within the time and manner prescribed by applicable Law and (B) prepare and provide to persons who exercised Seller Options or received payments from the retention bonus program described in Section 4.9(f) any statement, form or other document required to be provided under applicable Law. (iii) Unless otherwise required by applicable law, the parties to this Agreement shall treat, with respect to any payment described in Section 4.7(p)(i) or (ii), any amount that is required to be included in the gross income of the holders of any Seller Option or the persons who received payments from the retention bonus program described in Section 4.9(f) as an amount that may be properly deductible by the Seller. Section 4.8. Knowledge of Breach; Prior Knowledge. If prior to the ------------------------------------ Closing the Buyer shall have actual knowledge of any breach of a representation and warranty of the Seller, the Buyer shall promptly notify the Seller of its knowledge, in reasonable detail, including the amount that it believes, based on the facts actually known to it, would be payable by the Seller pursuant to the indemnification provisions hereof without reference to any indemnification limitations set forth in Section 7.2 hereof. No breach by the Seller of any representation, warranty, covenant, agreement or condition of this Agreement shall be deemed to be a breach of this Agreement for any purpose hereunder, and neither the Buyer nor any affiliate of the Buyer shall have any claim or recourse against the Seller or its directors, officers, employees, affiliates, controlling persons, agents, advisors or representatives with respect to such breach, under Article VII hereof or otherwise, if the Buyer or any affiliate of the Buyer had actual knowledge prior to the execution of this Agreement of such breach or of the threat of such breach or the circumstances giving rise to such breach. Section 4.9. Employees; Employee Benefits. (a) On and after the ---------------------------- Closing, until at least the first anniversary of the Closing, the Buyer shall cause the Company to provide the employees of the Company with salaries and incentive opportunities no less favorable in the aggregate than those provided to the Buyer's em- 34 ployees in no less comparable positions as of the date hereof and to provide employees of the Company benefit plans, programs and arrangements on the terms described in Section 4.9 of the Buyer Disclosure Schedule. Notwithstanding anything in this Agreement to the contrary, all employees of the Company shall remain at will employees following the Closing. (b) If any employee of the Company becomes a participant in any employee benefit plan, practice or policy of the Buyer or any of its affiliates, such employee shall be given credit under such plan for all service prior to the Closing Date with the Company or any predecessor employer (to the extent such credit was given by the Seller, the Company or any predecessor employer under the comparable plan of such entity), and all service with the Company or the Buyer following the Closing Date but prior to the time such employee becomes such a participant, for purposes of determining eligibility and vesting and for all other purposes for which such service is either taken into account or recognized; provided, however, such service need not be credited to the extent -------- ------- it would result in a duplication of benefits, including, without limitation, benefit accrual under defined benefit plans. Such service also shall apply for purposes of satisfying any waiting periods, evidence of insurability requirements, or the application of any preexisting condition limitations. Employees shall be given credit for amounts paid under a corresponding benefit plan during the same period for purposes of applying deductibles, copayments and out-of-pocket maximums as though such amounts had been paid in accordance with the terms and conditions of the of the comparable Buyer employee benefit plan. (c) In the event that any person who is an employee of the Company immediately prior to the Closing (an "Affected Employee") is discharged by the Company as of or after the Closing, then the Buyer shall be responsible for any and all severance costs for such Affected Employee, owing under those agreements, plans or arrangements listed in Section 4.9(c) of the Seller Disclosure Schedule. The Buyer shall be responsible and assume all liability for all notices or payments due to any Affected Employees, and all notices, payments, fines or assessments due to any government authority, pursuant to any applicable foreign, federal, state or local law, common law, statute, rule or regulation with respect to the employment, discharge or layoff of employees by the Company after the Closing, including but not limited to the Worker Adjustment and Retraining Notification Act and C.O.B.R.A. and any rules or regulations as have been issued in connection with the foregoing. (d) From and after the Closing, the Buyer shall be responsible for, and shall indemnify and hold harmless the Seller and its affiliates and their officers, directors, employees, affiliates and agents and the fiduciaries (including plan administrators) of the Plans, from and against any and all claims, losses, damages, costs and 35 expenses (including, without limitation, attorneys' fees and expenses) and other liabilities and obligations relating to or arising out of (i) all salaries, wages, commissions, employee incentive or other compensation, severance, holiday, vacation, health, dental or retirement benefits accrued but unpaid as of the Closing and post-Closing bonuses (other than as provided in Section 4.9(f)) due to any Affected Employee, (ii) the liabilities assumed by the Buyer under this Section 4.9 or any failure by the Buyer to comply with the provisions of this Section 4.9 and (iii) any claims of, or damages or penalties sought by, any Affected Employee, or any Governmental Entity on behalf of or concerning any Affected Employee, with respect to any act or failure to act by Buyer to the extent arising from the employment, discharge, constructive discharge, layoff or termination of any Affected Employee who becomes an employee of the Buyer or becomes or remains an employee of the Company on or after the Closing. (e) Following the Closing, the Buyer agrees to cooperate with the Seller in order to assist the Seller in communicating with employees or former employees of the Company (i) holding Seller Options, as required by applicable Law or for administrative purposes in connection with the Seller Options or (ii) eligible for participation in the retention bonus program set forth in Section 4.9(f) of the Seller Disclosure Schedule in connection with all payments required to be made in accordance with the terms thereof. (f) Notwithstanding anything to the contrary in this Agreement, the Seller shall provide to the Buyer or to the Company, as the case may be, the funds necessary to satisfy all payment obligations under the retention bonus program set forth in Section 4.9(f) of the Seller Disclosure Schedule and the Buyer shall, or shall cause the Company to, disburse, subject to Section 4.7(p), all such funds provided by the Seller in accordance with the terms of such retention bonus program. Section 4.10. Indemnification. Following the Closing, the Buyer --------------- shall cause the Company not to make any changes to its certificate of incorporation or by-laws that would adversely affect the rights of persons who are currently or were officers and directors of the Company to claim indemnification from such entity under the terms of such certificate of incorporation or by-laws as in effect on the date hereof for acts taken prior to the Closing. The Buyer shall pay (to the extent not paid by the Company) any payments required under such indemnification provisions relating to facts or circumstances occurring prior to the Closing for a period of two years after the Closing. Section 4.11. Maintenance of Books and Records. Each of the parties -------------------------------- hereto shall preserve, until at least the third anniversary of the Closing Date, all pre-Closing Date records possessed or to be possessed by such party relating to the Company. After the Closing Date and up until at least the third anniversary of the 36 Closing Date, upon any reasonable request from a party hereto or its representatives, the party holding such records shall, subject to the confidentiality provisions of Section 4.2(b), (x) provide to the requesting party or its representatives reasonable access to such records during normal business hours and (y) permit the requesting party or its representatives to make copies of such records, in each case at no cost to the requesting party or its representatives (other than for reasonable out-of-pocket expenses). Such records may be sought under this Section 4.11 for any reasonable purpose, including, without limitation, to the extent reasonably required in connection with the audit, accounting, tax, litigation, federal securities disclosure or other similar needs of the party seeking such records. Notwithstanding the foregoing, any and all such records may be destroyed by a party if such destroying party sends to the other parties hereto written notice of its intent to destroy such records, specifying in reasonable detail the contents of the records to be destroyed; such records may then be destroyed after the 30th day following such notice unless another party hereto notifies the destroying party that such other party desires to obtain possession of such records (subject to the confidentiality provisions of Section 4.2(b) above), in which event the destroying party shall transfer the records to such requesting party and such requesting party shall pay all reasonable expenses of the destroying party in connection therewith. Section 4.12. Seller's Trademarks and Logos. Notwithstanding ----------------------------- anything to the contrary contained in this Agreement, it is expressly agreed that (i) the Buyer is not purchasing, acquiring or otherwise obtaining, and the Company will not be entitled to retain following the Closing Date, any right, title or interest in any trade names, trademarks, identifying logos or service marks employing the word "Cendant" or any part or variation of such word or anything confusingly similar thereto (collectively, the "Seller's Trademarks and Logos") and (ii) neither the Company nor the Buyer or its affiliates shall make any use of the Seller's Trademarks and Logos from and after the Closing. Section 4.13. Nasdaq National Market Listing. Prior to the Closing, ------------------------------ the Buyer agrees to prepare and submit with Nasdaq, a notification for the listing on the Nasdaq National Market the Buyer Shares. Section 4.14. Legends. In addition to any legends required by ------- applicable federal and state securities or blue sky laws, each certificate representing the Buyer Shares shall be imprinted with the following legend in substantially the following form: "THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED PURSUANT TO AN EXEMPTION FROM THE REGISTRATION 37 REQUIREMENTS UNDER THE SECURITEIS ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED, EXCHANGED, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH THE REQUIREMENTS OF THE ACT." ARTICLE V CONDITIONS TO CONSUMMATION OF THE EXCHANGE ------------------------------------------ Section 5.1. Conditions to Each Party's Obligations to Consummate the -------------------------------------------------------- Exchange. The respective obligations of each party to consummate the - -------- transactions contemplated hereby is subject to the satisfaction at or prior to the Closing Date of the following conditions: (a) No statute, rule, regulation, executive order, decree, or injunction shall have been enacted, entered, promulgated or enforced by any court or Governmental Entity that remains in force and prohibits the consummation of the Exchange; (b) There shall not be any suit, action, or other proceeding pending by any Governmental Entity or administrative agency or commission that seeks to enjoin or otherwise prevent consummation of the transactions contemplated hereby, other than suits, actions or proceedings that, in the reasonable opinion of counsel to the parties hereto, are unlikely to result in an adverse judgment; provided, however, that the provisions of this Section 5.1(b) shall not apply to - -------- ------- any party that has directly or indirectly encouraged such suit, action or proceeding; and (c) Any waiting periods applicable to the transactions contemplated by this Agreement under the HSR Act shall have expired or been terminated. Section 5.2. Further Conditions to the Seller's Obligations. The ---------------------------------------------- obligation of the Seller to consummate the transactions contemplated hereby are further subject to satisfaction or waiver of the following conditions: (a) The representations and warranties of the Buyer contained in this Agreement (without giving effect to any "materiality" or Buyer Material Adverse Effect qualification or exception contained therein) shall be true and correct at and as of the Closing Date as though such representations and warranties were made at and as of such date (except to the extent expressly made as of an earlier date, in which 38 case, as of such date), except where the failure of such representations and warranties to be so true and correct does not have, and is not likely to have, individually or in the aggregate, a Buyer Material Adverse Effect; (b) The Buyer shall have performed and complied in all material respects with all agreements and obligations required by this Agreement to be performed or complied with by it on or prior to the Closing; (c) The Buyer shall have delivered to the Seller an officer's certificate to the effect that each of the conditions specified above in Sections 5.2(a) and (b) is satisfied in all respects; (d) The Seller shall have received an opinion from counsel to the Buyer dated as of the Closing Date in substantially the form set forth in Exhibit C attached hereto; and (e) The Buyer shall have executed and delivered the Registration Rights Agreement. Section 5.3. Further Conditions to the Buyer's Obligations. The --------------------------------------------- obligation of the Buyer to consummate the transactions contemplated hereby are further subject to the satisfaction or waiver at or prior to the Closing Date of the following conditions: (a) The representations and warranties of the Seller contained in this Agreement (without giving effect to any "materiality" or Company Material Adverse Effect qualification or exception contained therein) shall be true and correct at and as of the Closing Date as though such representations and warranties were made at and as of such date (except to the extent expressly made as of an earlier date, in which case, as of such date), except where the failure of such representations and warranties to be so true and correct does not have, and is not likely to have, individually or in the aggregate, a Company Material Adverse Effect; (b) The Seller shall have performed and complied in all material respects with all agreements and obligations required by this Agreement to be performed or complied with by it on or prior to the Closing; (c) The Seller shall have delivered to the Buyer an officer's certificate to the effect that each of the conditions specified above in Sections 5.3(a) and (b) is satisfied in all respects; and 39 (d) The Buyer shall have received an opinion from counsel to the Company and the Seller dated as of the Closing Date in substantially the form set forth in Exhibit D attached hereto. ARTICLE VI TERMINATION AND ABANDONMENT --------------------------- Section 6.1. Termination. This Agreement may be terminated and the ----------- transactions contemplated hereby may be abandoned at any time prior to the Closing Date: (a) by mutual written consent of the Seller and the Buyer; (b) by the Seller or the Buyer at any time after June 30, 1999 if the Closing shall not have occurred by such date; provided, however, that the right -------- ------- to terminate this Agreement under this Section 6.1(b) shall not be available to (i) the Seller, if the Seller has breached any of its representations, warranties or covenants hereunder in any material respect and such breach has been the cause of or resulted in the failure of the Closing to occur on or before such date or (ii) the Buyer, if the Buyer has breached any of its representations, warranties or covenants hereunder in any material respect and such breach has been the cause of or resulted in the failure of the Closing to occur on or before such date; provided, further, however, that this Agreement -------- ------- ------- may be extended not more than 30 days by either the Seller or the Buyer by written notice to the other party if (i) the Exchange shall not have been consummated as a direct result of the Seller or the Buyer having failed to receive all regulatory approvals required to be obtained under Section 5.1(c), (ii) the parties are endeavoring in good faith to obtain all outstanding regulatory approvals required under Section 5.1(c), and (iii) the reason that such outstanding regulatory approvals have not been obtained by June 30, 1999 is not due to a breach by the party seeking to extend this Agreement under this proviso of its obligations under this Agreement; and (c) by the Seller or the Buyer if the other shall have breached or failed to perform in any material respect any of its respective representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform (i) would give rise to the failure of a condition set forth in Section 5.2 or 5.3, as applicable, and (ii) cannot be or has not been cured within 30 days after the giving of written notice to the Seller or the Buyer, as applicable. 40 Section 6.2. Procedure for and Effect of Termination. In the event --------------------------------------- of termination of this Agreement and abandonment of the transactions contemplated hereby by the parties hereto pursuant to Section 6.1 hereof, written notice thereof shall be given by a party so terminating to the other party and this Agreement shall forthwith terminate and shall become null and void and of no further effect, and the transactions contemplated hereby shall be abandoned without further action by the Seller or the Buyer. If this Agreement is terminated pursuant to Section 6.1 hereof: (a) each party shall redeliver all documents, work papers and other materials of the other parties relating to the transactions contemplated hereby, whether so obtained before or after the execution hereof, to the party furnishing the same, and all confidential information received by any party hereto with respect to the other party shall be treated in accordance with the Confidentiality Agreement and Section 4.2(b) hereof; (b) all filings, applications and other submissions made pursuant hereto shall, at the option of the Seller, and to the extent practicable, be withdrawn from the agency or other person to which made; and (c) there shall be no liability or obligation hereunder on the part of the Seller or the Buyer or any of their respective directors, officers, employees, affiliates, controlling persons, agents or representatives, except that the Seller or the Buyer, as the case may be, may have liability to the other party if the basis of termination is a willful, material breach by the Seller or the Buyer, as the case may be, of one or more of the provisions of this Agreement, and except that the obligations provided for in Sections 4.2(b), 6.2 and 8.8 hereof shall survive any such termination. ARTICLE VII SURVIVAL AND INDEMNIFICATION ---------------------------- Section 7.1. Survival Periods. Each of the representations and ---------------- warranties made by the parties in this Agreement shall survive for a period of one year after the Closing; provided, however, that (i) the representations and -------- ------- warranties contained in Sections 2.2, 2.3, 2.24, 3.2, 3.4 and 3.7 hereof and Subsection 1 of Section 3.9 of the Buyer Disclosure Schedule shall survive the Closing without limitation (subject to any applicable statutes of limitations), other than the termination of this Agreement, (ii) the representations and warranties contained in Section 2.15 shall survive for a period of two years after the Closing Date and (iii) the representations and warranties contained in Sections 2.12 and Section 2.23 shall survive for the applicable period of the relevant statute of limitations (taking into 41 account valid extensions thereof). Except as provided in clause (i), (ii) or (iii) above, the parties intend to shorten the statute of limitations and agree that no claims or causes of action (other than in the case of fraud or willful misrepresentation) may be brought against the Seller or the Buyer based upon, directly or indirectly, any of the representations, warranties or agreements contained in Articles II and III hereof after the applicable survival period or, except as provided in Section 6.2(c) hereof, any termination of this Agreement. This Section 7.1 shall not limit any covenant or agreement of the parties that contemplates performance after the Closing, including, without limitation, the covenants and agreements set forth in Sections 4.7, 4.9 and 4.10 hereof. Section 7.2. Seller's Agreement to Indemnify. (a) Subject to the ------------------------------- terms and conditions set forth herein, from and after the Closing, the Seller shall indemnify and hold harmless the Buyer and its directors, officers, employees, affiliates, controlling persons, agents and representatives (collectively, the "Buyer Indemnitees") from and against all liability, demands, claims, actions or causes of action, assessments, losses, damages, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) (collectively, the "Buyer Damages") asserted against or incurred by any Buyer Indemnitee as a result of or arising out of (i) a breach of any representation or warranty of the Seller contained in this Agreement pursuant to and subject to the terms of Section 7.1; provided, however, that with respect to -------- ------- a breach under Section 2.12, Buyer Damages shall not include any Buyer Damages that result from the Company not having Tax attributes (including basis in assets, net operating loss carryovers or credit carryovers); or (ii) a breach of any covenant or agreement on the part of the Seller under this Agreement. (b) The Seller's obligation to indemnify the Buyer Indemnitees pursuant to clause 7.2(a) hereof is subject to the following limitations: (i) No indemnification pursuant to clause (i) of Section 7.2(a) shall be made by the Seller unless the aggregate amount of Buyer Damages exceeds $810,000, each individual amount of Buyer Damages alleged exceeds $100,000 and, in such event, indemnification shall be made by the Seller only to the extent Buyer Damages exceed $405,000; it is acknowledged that the Buyer shall not have the right to indemnification for individual amounts below $100,000 and that such amounts shall not count towards the $810,000 threshold amount referenced in this clause (i); provided, however, -------- ------- that solely for purposes of determining the amount of Buyer Damages for which the Seller may be entitled to indemnification under Section 7.2(a)(i), any materiality or Material Adverse Effect standard in a representation or warranty of the Seller shall be disregarded. 42 (ii) In no event shall the Seller's aggregate obligation to indemnify the Buyer Indemnitees exceed $13,500,000; (iii) The amount of any Buyer Damages shall be reduced by (A) any amount received by a Buyer Indemnitee with respect thereto under any insurance coverage or from any other party alleged to be responsible therefor and (B) the amount of any Tax Benefit Actually Realized available to the Buyer Indemnitee relating thereto. The Buyer Indemnitees shall use reasonable efforts to collect any amounts available under such insurance coverage or from such other party alleged to have responsibility. If a Buyer Indemnitee receives an amount under insurance coverage or from such other party with respect to Buyer Damages at any time subsequent to any indemnification provided by the Seller pursuant to this Section 7.2, then such Buyer Indemnitee shall promptly reimburse the Seller for any payment made or expense incurred by the Seller in connection with providing such indemnification up to such amount received by the Buyer Indemnitee; (iv) The Seller shall be obligated to indemnify the Buyer Indemnitees pursuant to clause (i) of Section 7.2(a) only for those claims giving rise to Buyer Damages as to which the Buyer Indemnitees have given the Seller written notice thereof prior to the end of the applicable survival period (as provided for in Section 7.1). Any written notice delivered by a Buyer Indemnitee to the Seller with respect to Buyer Damages shall set forth with as much specificity as is reasonably practicable the basis of the claim for Buyer Damages and, to the extent reasonably practicable, a reasonable estimate of the amount thereof; and (v) Notwithstanding anything to the contrary in this Agreement, the Seller shall have no obligation to indemnify any Buyer Indemnitee for incidental, consequential, exemplary, special or punitive damages. Section 7.3. The Buyer's Agreement to Indemnify. (a) Subject to the ---------------------------------- terms and conditions set forth herein, from and after the Closing, the Buyer shall indemnify and hold harmless the Seller and its directors, officers, employees, affiliates, controlling persons, agents and representatives and their successors and assigns (collectively, the "Seller Indemnitees") from and against all liability, demands, claims, actions or causes of action, assessments, losses, damages, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) (collectively, "Seller Damages") asserted against or incurred by any Seller Indemnitee as a result of 43 or arising out of (i) a breach of any representation or warranty of the Buyer contained in this Agreement and (ii) a breach of any covenant or agreement on the part of the Buyer under this Agreement. (b) The Buyer's obligation to indemnify the Seller Indemnitees pursuant to Section 7.3(a) hereof is subject to the following limitations: (i) No indemnification pursuant to clause (i) of Section 7.3(a) shall be made by the Buyer unless the aggregate amount of Seller Damages exceeds $810,000, each individual amount of Seller Damages exceeds $100,000 and, in such event, indemnification shall be made by the Buyer only to the extent that the aggregate amount of Seller Damages exceed $405,000; it is acknowledged that the Seller shall not have the right to indemnification for individual amounts below $100,000 and that such amounts shall not count towards the $810,000 threshold amount referenced in this clause (i); provided, however, that solely for purposes of determining the amount of -------- ------- Seller Damages for which the Buyer may be entitled to indemnification under Section 7.3(a)(i) any materiality or Material Adverse Effect standard in a representation or warranty of the Buyer shall be disregarded. (ii) In no event shall the Buyer's aggregate obligation to indemnify the Seller Indemnitees under clauses (i) and (ii) of Section 7.3(a) exceed $13,500,000; (iii) The amount of any Seller Damages shall be reduced by (A) any amount received by a Seller Indemnitee with respect thereto under any insurance coverage or from any other party alleged to be responsible therefor and (B) the amount of any Tax Benefit Actually Realized available to the Seller Indemnitee relating hereto. The Seller Indemnitees shall use reasonable efforts to collect any amounts available under such insurance coverage or from such other party alleged to have responsibility. If a Seller Indemnitee receives any amount under insurance coverage or from such other party with respect to Seller Damages at any time subsequent to any indemnification provided by the Buyer pursuant to this Section 7.3, then such Seller Indemnitee shall promptly reimburse the Buyer for any payment made or expense incurred by the Buyer in connection with providing such indemnification up to such amount received by the Seller Indemnitee; (iv) The Buyer shall be obligated to indemnify the Seller Indemnitees pursuant to clause (i) of Section 7.3(a) only for those claims 44 giving rise to Seller Damages as to which the Seller Indemnitees have given the Buyer written notice thereof prior to the end of the applicable survival period (as provided for in Section 7.1). Any written notice delivered by a Seller Indemnitee to the Indemnifying Party with respect to Seller Damages shall set forth with as much specificity as is reasonably practicable the basis of the claim for Seller Damages and, to the extent reasonably practicable, a reasonable estimate of the amount thereof; and (v) Notwithstanding anything to the contrary in this Agreement, the Buyer shall have no obligation to indemnify any Seller Indemnitee for incidental, consequential, exemplary, special or punitive damages. Section 7.4. Third-Party Indemnification. The obligations of the --------------------------- Seller to indemnify the Buyer Indemnitees under Section 7.2 hereof with respect to Buyer Damages and the obligations of the Buyer to indemnify the Seller Indemnitees under Section 7.3 with respect to Seller Damages, in either case resulting from the assertion of liability by third parties (each, as the case may be, a "Claim"), will be subject to the following terms and conditions: (a) Any party against whom any Claim is asserted will give the indemnifying party written notice of any such Claim promptly after learning of such Claim, and the indemnifying party may at its option undertake the defense thereof by representatives of its own choosing. Failure to give prompt notice of a Claim hereunder shall not affect the indemnifying party obligations under this Article VII, except to the extent the indemnifying party is materially prejudiced by such failure to give prompt notice. If the indemnifying party, within 30 days after notice of any such Claim, or such shorter period as is reasonably required, fails to assume the defense of such Claim, the Buyer Indemnitee or the Seller Indemnitee, as the case may be, against whom such claim has been made will (upon further notice to the indemnifying party) have the right to undertake the defense, compromise or settlement (subject to the terms of Section 7.4(c)) of such claim on behalf of and for the account and risk, and at the expense, of the indemnifying party, subject to the right of the indemnifying party to assume the defense of such Claim at any time prior to settlement, compromise or final determination thereof. (b) So long as the indemnifying party has assumed the defense of any Claim in the manner set forth above, the indemnifying party shall have the exclusive right to contest, defend and litigate such Claim and, except as expressly provided in Section 7.4(c), shall have the exclusive right, in its sole discretion, to settle any such claim, either before or after the initiation of litigation at such time and 45 on such terms as the indemnifying party deems appropriate. If the indemnifying party elects not to assume the defense of any such Claim (which shall be without prejudice to its right at any time to assume subsequently such defense), the indemnifying party will nonetheless be entitled, at its own expense, to participate in such defense. The indemnified party shall have the right to participate, with separate counsel (which counsel shall act in an advisory capacity only), in any such contest, defense, litigation or settlement conducted by the indemnifying party. After notice from the indemnifying party to such indemnified party of the indemnifying party's election to assume the defense of such Claim, the indemnifying party will not be liable to such indemnified party for any expenses of the indemnified party's counsel that are subsequently incurred in connection with the defense thereof; provided, however, that the -------- ------- expense of such indemnified party's counsel shall be paid by the indemnifying party if (i) the indemnifying party requested such separate counsel to participate or (ii) in the reasonable opinion of counsel to the indemnified party, a significant conflict of interest exists between the indemnifying party, on the one hand, and the indemnified party, on the other hand, that would make such separate representation clearly advisable. (c) Without the prior written consent of the indemnified party (which consent shall not be unreasonably withheld or delayed), the indemnifying party shall not admit any liability with respect to, or settle, compromise or discharge, any Claim or consent to the entry of any judgment with respect thereto, except in the case of any settlement that includes as an unconditional term thereof the delivery by the claimant or plaintiff to the indemnified party of a written release from all liability in respect of such Claim. In addition, whether or not the indemnifying party shall have assumed the defense of the Claim, the indemnified party shall not admit any liability with respect to, or settle, compromise or discharge, any Claim or consent to the entry of any judgment with respect thereto, without the prior written consent of the indemnifying party (which consent shall not be unreasonably withheld or delayed), and the indemnifying party will not be subject to any liability for any such admission, settlement, compromise, discharge or consent to judgment made by an indemnified party without such prior written consent of the indemnifying party. (d) Upon execution of this Agreement and delivery of the Seller Disclosure Schedule, the Seller shall be deemed to have satisfied the notice requirement of Section 7.4(a) with respect to all matters set forth in Section 2.8 of the Seller Disclosure Schedule. (e) The indemnifying party and the indemnified party shall cooperate fully in all aspects of any investigation, defense, pre-trial activities, trial, compromise, settlement or discharge of any claim in respect of which indemnity is 46 sought pursuant to this Article VII, including, but not limited to, by providing the other party with reasonable access to employees and officers (including as witnesses) and other information. Section 7.5. Insurance. The indemnifying party shall be subrogated --------- to the rights of the indemnified party in respect of any insurance relating to Buyer Damages or Seller Damages, as the case may be, to the extent of any indemnification payments made hereunder. Section 7.6. No Duplication; Sole Remedy. (a) Any liability for --------------------------- indemnification hereunder shall be determined without duplication of recovery by reason of the state of facts giving rise to such liability constituting a breach of more than one representation, warranty, covenant or agreement. (b) The Buyer's and the Seller's respective rights to indemnification as provided for in Sections 7.2 and 7.3, as applicable, for a breach of the other's representations or warranties contained in this Agreement, shall constitute such party's sole remedy for such a breach and the breaching party shall have no other liability or damages to the other party resulting from the breach; provided, however, that nothing contained herein shall prevent an -------- ------- indemnified party from pursuing remedies as may be available to such party under applicable law in the event of an indemnifying party's failure to comply with its indemnification obligations hereunder. Section 7.7. Indemnification Matters Governed by this Article VII. ---------------------------------------------------- The indemnification and other provisions of this Article VII shall govern the procedure for all indemnification matters under this Agreement, except to the extent otherwise expressly provided in Sections, 4.7 and 4.9(d) of this Agreement (it being understood that, among other things, the limitations on indemnification set forth in Sections 7.2(b) and 7.3(b) shall not apply to the indemnification matters set forth in Sections 4.7 and 4.9(d) hereof). ARTICLE VIII MISCELLANEOUS PROVISIONS ------------------------ Section 8.1. Entire Agreement. This Agreement (including the Seller ---------------- Disclosure Schedule and the Buyer Disclosure Schedule), the Transition Services Agreement, the Registration Rights Agreement and the Confidentiality Agreement constitute the entire agreement of the parties relating to the subject matter hereof and 47 supersede other prior agreements and understandings between the parties both oral and written regarding such subject matter. Section 8.2. Severability. Any provision of this Agreement that is ------------ held by a court of competent jurisdiction to violate applicable law shall be limited or nullified only to the extent necessary to bring the Agreement within the requirements of such law. Section 8.3. Notices. Any notice required or permitted by this ------- Agreement must be in writing and must be sent by facsimile, by nationally recognized commercial overnight courier, or mailed by United States registered or certified mail, addressed to the other party at the address below or to such other address for notice (or facsimile number, in the case of a notice by facsimile) as a party gives the other party written notice of in accordance with this Section 8.3. Any such notice will be effective as of the date of receipt: (a) if to the Seller, to Cendant Corporation 6 Sylvan Way Parsippany, New Jersey 07054 Telecopy: (973) 496-5335 Attention: General Counsel with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP 919 Third Avenue New York, New York 10022 Telecopy: (212) 735-2000 Attention: Eric J. Friedman, Esq. (b) if to the Buyer, to Ticketmaster Online-City Search, Inc. 790 E. Colorado Boulevard; Suite 200 Pasadena, CA 91101 Telecopy: (626)-405-9929 Attention: General Counsel 48 with a copy to: Wilson Sonsini Goodrich & Rosati Professional Corporation 650 Page Mill Road Palo Alto, CA 94304 Telecopy: 650-493-6811 Attention: John T. Sheridan, Esq Section 8.4. Governing Law; Jurisdiction. This Agreement shall be --------------------------- governed by, enforced under and construed in accordance with the laws of the State of New York, without giving effect to any choice or conflict of law provision or rule thereof. Each of the parties hereto hereby irrevocably and unconditionally consents to submit to the non-exclusive jurisdiction of the courts of the States of California, New York and of the United States of America in each case located in the County of New York or the County of Los Angeles for any litigation arising out of or relating to this Agreement and the transactions contemplated hereby (and agrees not to commence any litigation relating thereto except in such courts) and further agrees that service of any process, summons, notice or document by U.S. registered mail to its respective address set forth in Section 8.3 (or to such other address for notice that such party has given the other party written notice of in accordance with Section 8.3) shall be effective service of process for any litigation brought against it in any such court. Each of the parties hereto hereby irrevocably and unconditionally waives any objection to the laying of venue of any litigation arising out of this Agreement or the transactions contemplated hereby in the courts of the States of New York or California or of the United States of America in each case located in the County of New York or the County of Los Angeles and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such litigation brought in any such court has been brought in an inconvenient forum. Section 8.5. Descriptive Headings. The descriptive headings herein -------------------- are inserted for convenience of reference only and shall in no way be construed to define, limit, describe, explain, modify, amplify, or add to the interpretation, construction or meaning of any provision of, or scope or intent of, this Agreement nor in any way affect this Agreement. Section 8.6. Counterparts. This Agreement may be signed in ------------ counterparts and all signed copies of this Agreement will together constitute one original of this Agreement. This Agreement shall become effective when each party hereto shall have received counterparts thereof signed by all the other parties hereto. 49 Section 8.7. Assignment. Neither this Agreement nor any of the ---------- rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. Section 8.8. Fees and Expenses. Whether or not this Agreement and ----------------- the transactions contemplated hereby are consummated, and except as otherwise expressly set forth herein, all costs and expenses (including legal and financial advisory fees and expenses) incurred in connection with, or in anticipation of, this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses. Each of the Seller, on the one hand, and the Buyer, on the other hand, shall indemnify and hold harmless the other party from and against any and all claims or liabilities for financial advisory and finders' fees incurred by reason of any action taken by such party or otherwise arising out of the transactions contemplated by this Agreement by any person claiming to have been engaged by such party. Section 8.9. Interpretation. Throughout this Agreement, nouns, -------------- pronouns and verbs shall be construed as masculine, feminine, neuter, singular or plural, whichever shall be applicable. Unless otherwise specified, all references herein to "Section" shall refer to corresponding provisions of this Agreement. Whenever the words "include," "includes" or including" are used in this Agreement, they are deemed to be followed by the words "without limitation." As used in this Agreement, the word "subsidiary" when used with respect to any party, means any corporation, partnership, limited liability company, or other organization, whether incorporated or unincorporated, which is consolidated with such party for financial reporting purposes. The phrase "to the knowledge of the Seller" or any similar phrase shall mean such facts and other information that as of the date hereof are actually known to any executive officer of Cendant or the Company. The phrase "to the knowledge of the Buyer" or any similar phrase shall mean such facts and other information that as of the date hereof are actually known to any executive officer of the Buyer. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement. Section 8.10. No Third-Party Beneficiaries. Except as expressly ---------------------------- provided in this Agreement, this Agreement shall not benefit or create any right or cause of action in or on behalf of any person other than the parties hereto; provided, - -------- 50 however, that this Agreement will be binding upon, inure to the benefit of, and - ------- be enforceable by, the parties and their respective successors and permitted assigns. Section 8.11. No Waivers; Modification. Any waiver of any right or ------------------------ default hereunder will be effective only in the instance given and will not operate as or imply a waiver of any other or similar right or default on any subsequent occasion. No waiver, modification or amendment of this Agreement or of any provision hereof will be effective unless in writing and signed by the party against whom such waiver, modification or amendment is sought to be enforced. Section 8.12. Specific Performance. The parties hereto agree that if -------------------- any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached, irreparable damage would occur, no adequate remedy at law would exist and damages would be difficult to determine, and that the parties shall be entitled to specific performance of the terms hereof and immediate injunctive relief, without the necessity of proving the inadequacy of money damages as a remedy, in addition to any other remedy at law or equity. 51 IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be duly signed as of the date first above written. CENDANT CORPORATION By:______________________________________ Name: Title: CENDANT INTERMEDIATE HOLDINGS, INC. By:______________________________________ Name: Title: TICKETMASTER ONLINE-CITYSEARCH, INC. By:______________________________________ Name: Title: 52 Buyer Disclosure Schedule (S)3.3 None. 1 Buyer Disclosure Schedule (S)3.9 Subsection 1: Capitalization; Ownership of Shares ----------------------------------- (a) The authorized capital stock of the Buyer consists of (i) 352,883,506 shares of common stock of which 100 million shares are designated as shares of Class A common stock, par value $.01 per share ("Buyer Class A Common Stock"), 250 million shares are designated as shares of Buyer Class B Common Stock, 2,883,506 shares are designated as shares of Class C common stock, par value $.01 per share, ("Buyer Class C Common Stock"), and (ii) 2 million shares of preferred stock, par value $.01 per share, of Buyer ("Buyer Preferred Stock" and, together with Buyer Class A Common Stock, Buyer Class B Common Stock and Buyer Class C Common Stock, "Buyer Capital Shares" ). As of May 4, 1999, 63,175,984 shares of Buyer Class A Common Stock were issued and outstanding and no shares thereof were held in treasury, 9,247,109 shares of Buyer Class B Common Stock were issued and outstanding no shares thereof were held in treasury, no shares of Buyer Class C Common Stock were issued and outstanding or held in treasury, and no shares of Buyer Preferred Stock were outstanding or held in treasury. All of the Buyer Capital Shares are, and all of the Buyer Shares when issued will be, duly authorized, validly issued, fully paid and nonassessable and free of preemptive rights with no liability attaching to the ownership thereof. As of the date hereof, except pursuant to this Agreement, the outstanding Buyer Class A Common Stock and the terms of stock options issued pursuant to the 1998 Employee Stock Purchase Plan and the CitySearch, Inc. 1996 Stock Option Plan as in effect as of the date hereof (the "Buyer Stock Plans"), the Buyer does not have and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the purchase or issuance of any shares of Buyer Capital Stock or any other equity securities of Buyer or any securities representing the right to purchase or otherwise receive any Buyer Capital Shares. As of the date hereof, no Buyer Capital Shares were reserved for issuance, except for (i) shares of Buyer Class A Common Stock and, as disclosed on Schedule 3.3 of the Buyer Disclosure Schedule, shares of Buyer Class B Common Stock reserved for issuance upon the exercise of stock options pursuant to the Buyer Stock Plans, (ii) shares of Buyer Class B Common Stock reserved for issuance upon conversion of the outstanding shares of Buyer Class A Common Stock; and (iii) approximately 800,000 shares reserved for issuance or which Buyer otherwise is committed to issue in respect of the transactions contemplated by a definitive agreement to acquire City Auction. Since May 4, 1999, Buyer has not issued any shares of its capital stock or any securities convertible into or exercisable for any shares of its capital stock, except for options issued in the ordinary course of business. 2 (b) The Buyer owns, directly or indirectly, all of the issued and outstanding shares of capital stock or other equity interests of each of the Buyer's subsidiaries, free and clear of all Liens, and all such shares or equity interests are duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no liability attaching to the ownership thereof. None of the Buyer's subsidiaries has or is bound by any outstanding subscriptions, options, warrants, calls, rights, convertible securities or other agreements or commitments of any character obligating the Buyer or any of its subsidiaries to issue, transfer or sell any of its capital stock or other equity interests of such subsidiary. 3 Subsection 2: Compliance with Law; Permits; Restrictions -------------------------------------------- The business of the Buyer is not being and has not been conducted in violation of any applicable Law or any order, writ, injunction or decree of any court or governmental entity, except for any such violations that in the aggregate would not have a Buyer Material Adverse Effect. The Buyer has all permits, licenses, and other governmental authorizations, consents, and approvals necessary to conduct its business as currently conducted (collectively, the "Permits"), except for permits, licenses, authorizations, consents, and approvals the absence of which, alone or in the aggregate, would not have a Buyer Material Adverse Effect. The Buyer is not in violation of the terms of any Permit, except for violations that, alone or in the aggregate, would not have a Buyer Material Adverse Effect. There is no material agreement, judgment, injunction, order or decree binding upon the Buyer which has or would reasonably be expected to have the effect of prohibiting or materially impairing any material business practice of the Buyer, any acquisition of material property by the Buyer or the conduct of business by the Buyer as currently conducted in any material respect. 4 Subsection 3: Litigation ---------- Except as set forth below or disclosed in the Buyer Reports or in the draft Form 10-Q previously provided to the Seller, there is no claim, action, suit, proceeding or, to the knowledge of the Buyer, governmental investigation pending or, to the knowledge of the Buyer, threatened against the Buyer or any of its subsidiaries by or before any court or Governmental Entity the outcome of which is likely individually or in the aggregate to (a) have or reasonably be expected to have a Buyer Material Adverse Effect or (b) affect adversely the ability of the Buyer to consummate the transactions contemplated hereby. 5 Subsection 4: Absence of Certain Changes -------------------------- Except as set forth below, or as otherwise disclosed in the Buyer Reports filed prior to the date hereof or as otherwise contemplated by this Agreement, since December 31, 1998, there has not been any development or event that has had or would reasonably be expected to have, individually or in the aggregate, a Buyer Material Adverse Effect. 6 Subsection 5: Year 2000 Compliance. -------------------- (a) To the knowledge of the Buyer, the Buyer has identified substantially all of its internal systems and software that are subject to Year 2000 Compliance risk and, to the knowledge of the Buyer, no Buyer Material Adverse Effect will result from the failure of such systems or software to be Year 2000 Compliant. (b) The Buyer has adopted a Year 2000 Compliance program, which consists of four phases: (i) identification of all mission critical business systems and software subject to Year 2000 Compliance risks; (ii) assessment of such business systems and software to determine the method of correcting Year 2000 Compliance problems; (iii) implementing the corrective measures; and (iv) testing and maintaining Year 2000 Compliance. The Buyer has completed at least phases (i), (ii) and (iii) above with respect to all of its critical internal systems and software. (c) The Buyer makes no representation or warranty concerning the Year 2000 Compliance of its suppliers of products and services to the Buyer or of its customers, or as to whether the failure of such suppliers or customers to be Year 2000 Compliant would have a Buyer Material Adverse Effect. The Buyer is developing contingency plans intended to minimize the effects of any such failures by crucial third parties. (d) The above stated representation is a Year 2000 readiness disclosure statement pursuant to the Year 2000 Readiness and Disclosure Act. 7 Buyer Disclosure Schedule (S)4.9 See attached. 8 Draft #1 1/6/99 99r06xxb.doc Release:_______ For More Information Contact: James G. Evans, Jr. Van Negris / Phillip J. Denning Superconductor Technologies Inc. Kehoe, White, Van Negris & Company, Inc. (805) 683-7646 (212) 396-0606 www.suptech.com FOR IMMEDIATE RELEASE - --------------------- SUPERCONDUCTOR TECHNOLOGIES INC. COMPLETES $5.0 MILLION PRIVATE EQUITY FINANCING SANTA BARBARA, CA -- JUNE X, 1999 -- Superconductor Technologies Inc. (Nasdaq: SCON) ("STI"), a leader in the development of wireless communications filter products utilizing superconducting materials and cryogenic technologies, today announced that it has completed a private equity financing of gross proceeds of $5.0 million with Tredegar Investments and Wilmington Securities Inc., a subsidiary of The Hillman Company. The financing will take place in two tranches. Under the first tranche of the agreement, the Company raised $3.8 million in new equity in the form of convertible preferred stock. The Company sold 77,296 shares of Convertible Preferred Stock, the shares have a cumulative dividend of 6% and are convertible into 1,545,920 shares of STI common stock. The preferred shares have certain voting rights, liquidation preferences, and registration rights. In connection with this financing, the Company also issued warrants to purchase up to 154,592 shares of common stock at $3.00 per share. The second tranche, which will have the same terms as the first tranche, will be completed after the Company obtains shareholder approval. Superconductor Technologies Inc. (NASDAQ: SCON) is a leader in the development of wireless communications filters products utilizing superconducting materials and cryogenic technologies. The Company has additional applications in government communications and cryogenic markets. With headquarters in Santa Barbara, California, Superconductor Technologies Inc. ("STI") designs and manufactures systems for high-performance wireless applications. Additional information on STI may be obtained by visiting the Company's web site at http://www.suptech.com. "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: The statements contained in this press release that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, including without limitation, statements regarding the Company's expectations, beliefs, estimates, intentions and strategies about the future. Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates", variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements as a result of certain factors including, but not limited to, product demand and market acceptance risks, general economic conditions, the impact of competitive products, technologies and pricing, equipment capacity constraints or difficulties, availability of necessary additional debt or equity financing on acceptable terms and other risks described in the Company's Securities and Exchange Commission filings. EX-2.6 3 AGREEMENT AND PLAN TO REORGANIZE DATED JUNE 10, 1999 Exhibit 2.6 Execution Copy June 10, 1999 ================================================================================ AGREEMENT AND PLAN OF REORGANIZATION Dated as of June 10, 1999 ================================================================================ INDEX OF EXHIBITS Exhibit A Agreement of Merger to be attached following execution Exhibit B Form of Noncompetition Agreements Exhibit C Reserved Exhibit D Affiliate Agreements to be attached following execution -iv- TABLE OF CONTENTS
Page ---- SECTION 1 THE MERGER.................................................... 1 1.1 Merger; Effective Time........................................ 1 1.2 Closing....................................................... 2 1.3 Effects of the Merger......................................... 2 1.4 Articles of Incorporation; Bylaws; Directors; Officers........ 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 AND THE MEMBERS................................................... 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.......................................... 10 3.6 Absence of Certain Changes or Events.......................... 11 3.7 Litigation.................................................... 11 3.8 Contracts..................................................... 12 3.9 Compliance With Laws.......................................... 13 3.10 Absence of Changes in Benefit Plans; Employment Agreements; Labor Relations..................................................... 13 3.11 ERISA Compliance.............................................. 13 3.12 Taxes......................................................... 14 3.13 No Excess Parachute Payments.................................. 14 3.14 Title to Properties........................................... 15 3.15 Intellectual Property......................................... 15 3.16 Year 2000 Compliance.......................................... 16 3.17 Voting Requirements........................................... 17 3.18 Payments...................................................... 17 3.19 Transactions with Related Parties............................. 17 3.20 Restrictions on Business Activities........................... 17 3.21 Accounts Receivable; Inventory................................ 18 3.22 Minute Books.................................................. 18 3.23 Environmental Matters......................................... 18 3.24 Insurance..................................................... 19 3.25 Warranties; Indemnities....................................... 19
-i-
3.26 Information Supplied.......................................... 19 3.27 Representations Complete...................................... 20 SECTION 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB.............. 20 4.1 Organization, Standing and Corporate Power.................... 20 4.2 Authority/Noncontravention.................................... 21 4.3 Capitalization; Ownership of Shares........................... 22 4.4 SEC Documents; Parent Financial Statements.................... 22 4.5 Parent Common Stock........................................... 23 4.6 Information Supplied.......................................... 23 SECTION 5 COVENANTS..................................................... 23 5.1 Conduct of Business of the Company............................ 23 5.2 No Solicitation............................................... 25 5.3 Preparation of Registration Statements........................ 26 5.4 Member Approval............................................... 27 5.5 Access to Information......................................... 28 5.6 Confidentiality............................................... 28 5.7 Expenses...................................................... 28 5.8 Public Disclosure............................................. 28 5.9 Consents...................................................... 29 5.10 Reasonable Efforts............................................ 29 5.11 Notification of Certain Matters............................... 29 5.12 Blue Sky Laws................................................. 29 5.13 Noncompetition Agreement; Voting and Employment Arrangements.. 29 5.14 Listing of Parent Common Stock................................ 30 5.15 Affiliate Agreement........................................... 30 5.16 Brokers or Finders............................................ 31 5.17 Tax Returns................................................... 31 5.18 Distributions to Members...................................... 31 5.19 Employees; Employee Benefits.................................. 31 5.20 Post-Closing Operations of the Company........................ 31 SECTION 6 CONDITIONS TO THE MERGER...................................... 32 6.1 Conditions to Obligations of Each Party to Effect the Merger.. 32 6.2 Additional Conditions to the Obligations of Parent and Sub.... 33 6.3 Additional Conditions to Obligations of Company............... 34 6.4 Effect of Waiver.............................................. 34
-ii-
SECTION 7 INDEMNIFICATION............................................... 35 7.1 General Indemnification....................................... 35 7.2 Limitation and Expiration..................................... 35 7.3 Indemnification Procedures.................................... 36 7.4 Right of Set-off.............................................. 39 7.5 Members' Representative....................................... 39 7.6 Survival of Representations, Warranties and Covenants......... 40 SECTION 8 TERMINATION, AMENDMENT AND WAIVER............................. 40 8.1 Termination................................................... 40 8.2 Effect of Termination......................................... 42 8.3 Amendment..................................................... 42 8.4 Extension; Waiver............................................. 42 8.5 Notice of Termination......................................... 42 SECTION 9 MISCELLANEOUS................................................. 42 9.1 Notices....................................................... 42 9.2 Interpretation................................................ 44 9.3 Counterparts.................................................. 45 9.4 Entire Agreement; Assignment.................................. 45 9.5 Severability.................................................. 45 9.6 Other Remedies................................................ 45 9.7 Governing Law................................................. 45 9.8 Further Assurances............................................ 45 9.9 Absence of Third Party Beneficiary Rights..................... 46 9.10 Mutual Drafting............................................... 46 9.11 Further Representations....................................... 46
-iii- AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and entered into as of June 10, 1999 among Ticketmaster Online - CitySearch, Inc., a Delaware corporation ("Parent"), Web Media Ventures, LLC, a Texas limited liability company (dba One & Only Network) (the "Company"), and William Bunker, David Kennedy and Glenn Wiggins, members of the Company (collectively, the "Members" and individually, a "Member"). BACKGROUND A. The Boards of Directors of each of the Company and Parent believe it is in the best interests of each company and their respective owners that the Company and TM Acquisition Corporation, a Texas corporation to be formed by the Parent as a wholly-owned subsidiary of Parent ("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. B. Pursuant to the Merger, all of the issued and outstanding membership units, of the Company (the "Units") shall be converted into the right to receive shares of Class B Common Stock, $.01 par value, of Parent (the "Parent Common Stock"), or in certain instances the right to receive cash of the Parent. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the parties agree as follows: SECTION 1 THE MERGER 1.1 Merger; Effective Time. Subject to the terms and conditions of this ---------------------- Agreement and an Agreement of Merger the form of which will be prepared and attached hereto within five business days after the date hereof and which will be in a form mutually acceptable to all Parties hereto (the "Merger Agreement"), Sub will be merged into the Company (the "Merger") in accordance with the Texas Limited Liability Company Act (the "Texas Act"). The Merger Agreement will provide, among other things, the mode of effecting the Merger and the manner and basis of converting each issued and outstanding Unit for the Purchase Price (as defined in Section 2.1(d) below). 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 Texas Act 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 Texas Act. 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 Regulations of the Company shall be the Regulations of the Surviving Corporation; (ii) the directors of Sub shall be the managing members 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 Regulations of the Surviving Corporation, as the same may be amended from time to time or otherwise as provided by law; and (iii) the officers as set forth in the Merger Agreement shall be the initial officers of the Surviving Corporation. 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 be converted into one validly issued, fully paid and non- assessable Unit of the Surviving Corporation. Each stock certificate of Sub evidencing ownership of any such shares shall evidence ownership of Units of the Surviving Corporation. (b) Cancellation of Certain Units of the Company. All Units 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 Units of the Company. Subject to Sections 2.1(e), ---------------------------------- (f) (g), (h) and (i) below, each issued and outstanding Unit of the Company (other than Units to be canceled -2- 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 the Purchase Price (as defined in Section 2.1(d)) divided by the number of Units (including Units subject to issuance upon exercise of outstanding options, warrants or other rights) outstanding immediately prior to the Effective Time (excluding Units to be canceled pursuant to Section 2.1(b)). All such Units, 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 Units shall cease to have any rights with respect thereto, except the right to receive the Purchase Price in consideration therefor upon the surrender of such certificate in accordance with Section 2.2 of this Agreement. The distribution of each installment of the Purchase Price (as set forth in Section 2.1(e)) shall be paid to the Members prorated based upon their respective holdings of Units divided by all outstanding Units (including Units subject to issuance upon exercise of outstanding options, warrants or other rights) at the Closing. (d) Purchase Price. The aggregate purchase price (the "Purchase -------------- Price") to be paid by Parent in the Merger for all outstanding Units of the Company and rights therefor will be equal to $40,650,000, provided that the Company's accrued but not deferred revenues for calendar year 1999, determined in accordance with generally accepted accounting principles (the "Company Accrued Revenues") equal $9 million. If the Company Accrued Revenues are more than $9 million, then the Purchase Price shall be $40,650,000 plus an amount equal to $4.065 for each $1 in Company Accrued Revenues above $9 million. If the Company Accrued Revenues are less than $9 million, then the Purchase Price shall be $40,650,000 minus an amount equal to $4.065 for each $1 in Company Accrued Revenues below $9 million. Notwithstanding the preceding sentence, in no event shall the Purchase Price be less than $36,585,000 nor greater than $44,715,000. The final determination of the Purchase Price shall be based upon an audit of the Company's 1999 financial statements to be performed by the independent accounting firm of Ernst & Young (the "Audited Financial Statements"). Parent and the Members agree to use their best efforts and to cooperate fully with such auditors to complete the audit by March 1, 2000 (the date of delivery of the auditor's report and the audited financial statements is referred to as the "Determination Date."). The amount of the Company's Accrued Revenues as set forth in the Audited Financial Statements shall be final and non-appealable by the parties hereunder for purposes of calculating the Purchase Price in the manner set forth above. (e) Purchase Price Payments. Subject to Sections 2.1(f), (g), (h) ----------------------- and (i) below, the Purchase Price shall be payable by Parent to the Members in shares of Parent Common Stock as follows: (i) At the Closing, Parent shall deliver at the places indicated by the Members a number of shares of Parent Common Stock equal to $30 million divided by the Value (as defined below in this Section 2.1(e)); provided, however, that in no event shall the total shares of Parent Common Stock to be delivered at the Closing be more than 1,442,308 shares or less than 961,539 shares. -3- (ii) Subsequent installments of the Purchase Price shall be paid as follows (each such payment date referred to herein as a "Payment Date"): (A) On the dates that are 90 days and 180 days after the Closing, Parent shall deliver at the places indicated by the Members a number of shares of Parent Common Stock equal to $2,195,000 divided by the Value; provided, however, that in no event shall the total shares of Parent Common Stock to be delivered on either date be more than 168,847 shares or less than 56,283 shares. (B) On the date that is the later of (i) 270 days after the Closing or (ii) the date the Company's 1999 audit is completed, Parent shall deliver at the places indicated by the Members a number of shares of Parent Common Stock equal to the Remaining Purchase Price (as defined below) divided by the Value: provided, however, that in no event shall the Value used for this purpose be more than $39 per share or less than $13 per share. (C) The term "Remaining Purchase Price" means the Purchase Price determined as pursuant to Section 2.1(d) minus $34,390,000. (D) The value of the Parent Common Stock (the "Value") with respect to the payments due on the Closing Date and each Payment Date shall be determined based upon the average closing price per share of Parent Common Stock on the Nasdaq National Market (or other National Securities Exchange as defined below) over the five consecutive trading days ending on the trading day two days preceding the Closing Date or the respective Payment Date. (iii) Prior to the Closing, the Parties will enter into an escrow agreement with a mutually acceptable commercial bank (the "Escrow Agent") pursuant to which an escrow account will be established (the "Escrow") the purpose of which is to hold a portion of the Purchase Price for the benefit of Parent in the event Parent is entitled to indemnification hereunder. The cash and securities in Escrow will be released to the Members on the first anniversary of the Closing Date unless released prior thereto to the Parent pursuant to Section 7.4 (a) hereof or unless the release date is deferred pursuant to Section 7.4 (b). (A) There shall be no escrow of the payment made at Closing or at the first Payment Date after Closing. (B) The entire number of shares distributed as the payment made on the second Payment Date after Closing will be deposited into the Escrow; provided however that in the event the Value of the shares issued on the second Payment Date after Closing exceeds $4,065,000, only that number of shares with a Value equal to $4,065,000 will be deposited into the Escrow with the rest distributed to the Members pro rata. (C) That portion of the shares distributed as the payment made on the last Payment Date with a Value which, when added to the Value of the shares already in Escrow (determined as of the date such shares were first placed into Escrow) (and/or the cash already in Escrow), equals $4,065,000 will be deposited into the Escrow with the rest of such shares distributed -4- to the Members pro rata. The Value of the shares held in Escrow will not be readjusted thereafter for any purpose. (D) Pursuant to the terms of the Escrow, the Members will be entitled to cause the Escrow Agent to sell all or any portion of the shares deposited into Escrow so long as (i) in the case of the shares deposited in Escrow from the second Payment Date, all of the aggregate net proceeds are deposited into the Escrow and (ii) in the case of the shares deposited in Escrow from the last Payment Date, an aggregate portion of the net proceeds of such sales are retained in the Escrow which, when added to the value of the shares or cash remaining in Escrow equals at least $4,065,000; provided, however, that if the proceeds from the sale of all of the shares held in Escrow is less than $4,065,000, the Members will not be obligated to add additional cash or other securities to the Escrow to increase the value of the Escrow to $4,065,000; provided, further, however, that if the aggregate proceeds of such sale, which when added to the value of the cash and securities in the Escrow exceed $4,065,000 the Escrow will distribute such excess to the Members pro rata. Also pursuant to the terms of the Escrow, the Members will be entitled to cause the Escrow Agent to invest all or any portion of the proceeds of the cash in Escrow in any investment grade debt security with a maturity of one year or less. (f) Right to Pay Cash in Lieu of Parent Common Stock. Parent shall ------------------------------------------------ have the right to elect, in its sole discretion, to pay any portion of any installment of the Purchase Price in cash rather than Parent Common Stock. If Parent elects to pay cash for a portion of the Purchase Price on any Payment Date, it shall notify the Members' Representative (as defined in Section 7.5) in writing of its election no later than three days prior to the Payment Date. In addition, Parent shall have the obligation to pay an installment of the Purchase Price in cash rather than Parent Common Stock if (i) three days prior to the respective payment date the Class B Common Stock of Parent has ceased trading on either the Nasdaq National Market, the New York Stock Exchange or another national securities market (a "National Securities Exchange") or (ii) prior to the respective payment date, Parent has merged or otherwise been acquired by a company whose securities are not listed or trading on a National Securities Exchange. The Parties agree that in the event of such a merger or acquisition by a publicly held company, subject to all of the other terms and conditions herein, such survivor or acquiror will be obligated to pay installments in its publicly traded common stock or in cash. (g) Reserved. -------- (h) Dissenters' Rights. Any Units held by a holder who has properly ------------------ exercised dissenters' rights for such Units in accordance with the Texas Act 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 Texas Act. The Company shall give Parent prompt notice of any demand received by the Company to require the Company to purchase Units, 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 Texas Act, it will not voluntarily make -5- any payment with respect to, or settle or offer to settle, any such purchase demand. Each holder of Dissenting Shares (a "Dissenting Member") who, pursuant to the provisions of the Texas Act, becomes entitled to payment of the value of Units 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 a portion of the Purchase Price to any holder of Units who shall have failed to make an effective purchase demand or shall have lost its status as a Dissenting Member, Parent shall issue and deliver, upon surrender by such Dissenting Member of such holder's certificate or certificates representing Units, the portion of the Purchase Price to which such Dissenting Member is then entitled under this Section 2.1 and the Merger Agreement. (i) Fractional Shares. No fractional shares of Parent Common Stock ----------------- shall be issued, but in lieu thereof each holder of Units 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 (as determined in Section 2.1(e) with respect to each payment date of the Purchase Price) 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 Member shall be aggregated, so that no Member shall receive cash in an amount greater than the value of one full share of Parent Common Stock. (j) Stock Options. At the Effective Time, no Company Unit Options ------------- (as defined in Section 3.2) shall be outstanding. 2.2 Exchange of Certificates. ------------------------ (a) Exchange Agent. Prior to the Effective Time, Parent shall act, -------------- or at its election 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. Prior to the Effective Time and ------------------------------ prior to each Payment Date, Parent shall deliver to the Exchange Agent in accordance with this Section 2, the shares of Parent Common Stock or cash issuable pursuant to Section 2.1 in exchange for the outstanding Units, as well as cash in an amount sufficient for payment in lieu of fractional shares pursuant to Section 2.1(i). (c) Exchange Procedures. Subject to other arrangements mutually ------------------- agreed upon by the Parties, prior to 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 Units (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 the Purchase Price. Upon surrender of a Certificate for -6- 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 portion of the Purchase Price to which he is entitled pursuant to Section 2.1. The Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of Units which is not registered on the transfer records of the Company, the appropriate portion of the Purchase Price 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 a portion of the Purchase Price as provided by this Section 2 and the provisions of the Texas Act. (d) No Further Ownership Rights in Units of the Company. The --------------------------------------------------- Purchase Price delivered and deliverable by the Parent upon the surrender for exchange of Units in accordance with the terms hereof shall be deemed to have been delivered in full satisfaction of all rights pertaining to such Units and following the Effective Time, the Certificates shall have no further rights to, or ownership in, Units. There shall be no further registration of transfers on the Unit transfer books of the Surviving Corporation of the Units 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 Units 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 portion of the Purchase Price as the holder is entitled; 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 Units 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. -7- SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE MEMBERS 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 Members and certified by a duly authorized officer of the Company and the Members as contemplated below (the "Company Schedules"), each of the Company and the Members severally and not jointly represents and warrants to Parent as set forth below. Notwithstanding anything to the contrary contained herein, if the Company has not, as of the date hereof (the "Signing Date"), completed and/or delivered one or more of the Sections in the Company Schedules referred to in this Agreement and required to be delivered by the Company pursuant hereto, then the Company shall be permitted to complete and deliver such Sections in the Company Schedules to the Parent after the Signing Date, but in no event later than five business days from the Signing Date. The Parent shall be deemed to have accepted any such revised or newly delivered Sections to the Company Schedules unless within four business days after receipt thereof it shall have delivered to the Company a notice terminating this Agreement. If the Parent's approval of such revised or newly delivered Sections in the Company Schedule is granted or is deemed granted, any Sections in the Disclosure Schedule attached hereto as of the Signing Date and delivered by the Company which have subsequently been revised shall be deemed to be amended in accordance with such revised Sections in the Company Schedules as of the Signing Date and such late-delivered Sections in the Company Schedules shall be deemed delivered by the Company as of the Signing Date. 3.1 Organization, Standing and Corporate Power. The Company is a limited ------------------------------------------ liability company 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 necessary, other than in jurisdictions where the failure to be so qualified or not be in good standing would have a Material Adverse Effect on the Company. The Company has delivered to the Parent complete and correct copies of its Regulations. 3.2 Company Capital Structure. ------------------------- (a) The capital of the Company consists of 3,000,000 Units which are issued and outstanding. All of such outstanding Units have been issued in compliance with all applicable federal and state securities laws. There are no voting agreements or voting trusts with respect to any of the outstanding Units. The outstanding Units are held by the persons and in the amounts set forth in Section 3.2 of the Company Schedules. -8- (b) The Company has reserved 300,000 Units for issuance to employees and consultants pursuant to the Company's Unit Option Plan (the "Company's Unit Option Plan"), of which options to purchase 110,000 Units have been granted as of the date of this Agreement (the "Company Unit Options") and 190,000 Units remain available for future grant under the plan. Section 3.2 (b) of the Company Schedules sets forth for each outstanding Company Unit Option the name of the holder of such option, the number of Units subject to such option, the exercise price of such option and the vesting schedule for such option, including the extent vested to date. No Company Unit Options shall be outstanding as of the Closing. Except for the Company Unit Options described in Section 3.2 (b) of the Company Schedules, 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 Units 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 Unit Options have been issued in compliance with all applicable federal and state securities laws. As a result of the Merger, Parent will be the record and beneficial owner of all outstanding Units and rights to acquire Units of the Company. 3.3 Subsidiaries. The Company does not have and has never had any ------------ subsidiaries 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 Members, to consummate the transactions contemplated by this Agreement. The execution, delivery and performance of this Agreement by the Company and the Members and the consummation by the Company and the Members of the transactions 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 Members. This Agreement has been duly executed and delivered by the Company and the Members and constitutes a valid and binding obligation of the Company and the Members, enforceable against them 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 Members 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 or the Members -9- under, any provision of (a) the Regulations 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 the Members or any of their respective 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 or the Members in connection with the execution and delivery of this Agreement by the Company or the Members 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 Texas 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. 3.5 Financial Statements. -------------------- (a) The Company has previously furnished to Parent true and complete copies of the following financial statements of the Company (the "Financial Statements"): (i) audited balance sheet as of December 31, 1998, certified by Ernst & Young; (ii) audited statement of operations and cash flows for the year ended December 31, 1998, certified by Ernst & Young; (iii) the unaudited balance sheet (the "Company Balance Sheet") as of March 31, 1999 (the "Balance Sheet Date"); and (iv) the unaudited statement of operations and cash flows for the three-month period ended March 31, 1999. (b) The Financial Statements were prepared in accordance with GAAP (except in the case of the unaudited financial statements, for normal and recurring year-end adjustments and the omission of footnote information) and were prepared on the basis of the books and records of the Company (in each case, as of the date of such Financial Statements) and present fairly, in all -10- material respects, the financial position of the Company as of the dates thereof and the results of its operations and changes in cash flows and stockholders' equity for the periods then ended in conformity with GAAP. (c) 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 Units, (c) any split, combination, reclassification or repurchase of any of the Units or any issuance or the authorization of any issuance of any other securities in respect of, in lieu of or in substitution for Units, (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 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 (g) any tax election that individually or in the aggregate would have a Material Adverse Effect on the Company or (h) any material liabilities or obligations of the Company which are not required under GAAP to be recorded on the Company's financial statements. 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 -11- 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 its 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 Unit option plan, Unit appreciation rights plan or Unit 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, 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, a memorandum of all material oral contracts to which the Company is a party, 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 -12- 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. 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 Internal Revenue Code (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 -13- 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 paid or withheld all Taxes it is required to ----- pay or withhold. The Company has not been delinquent in the payment of any Tax. No audit or other examination of any Return of the Company is presently in progress, nor has the Company been notified of any request for such an audit or other examination. There are (and as of immediately following the Closing there will be) no Liens on the Assets of the Company relating to or attributable to Taxes. The Company has no knowledge of any basis for the assertion of any claims which, if adversely determined, would result in a Lien on the Company. The Members shall pay all and any of sales and use tax imposed by any state, and any local taxes imposed on the Members or the Company, as a result of the Merger. Nothing in this Agreement alters the obligations of the Members to pay federal, state, and local income or other Taxes, if any, attributable to their allocable share of the Company's operations prior to the Closing, including without limitation those Taxes attributable to the Member's income for the short year ending immediately prior to the Closing as if the Members were to close the Company's books on that day, none of which are to be assumed by Parent. 3.13 No Excess Parachute Payments. Except as disclosed on the Company ---------------------------- Schedules, no amount that could be received (whether in cash or property or the vesting of property) in -14- 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 Company has not granted to any officer, director or employee of the Company any right to receive any Parachute Gross-Up Payment. The Members agree to reimburse the Company for any Parachute Gross-Up Payment which it may become obligated to pay as a result of the Merger, if any. 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 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) Except as set forth in the Company Schedules, 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, domain 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 -15- 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, or prior to the Closing shall have taken, all reasonable steps necessary or appropriate (including, entering into appropriate confidentiality, nondisclosure agreements with officers, Members, independent contractors working more than 1/2 of their professional time for the Company as of the Closing Date and full-time and part-time employees (collectively, the "Covered Persons")) to safeguard and maintain the secrecy and confidentiality of, and the proprietary rights in, the Company IP Rights. A list of all the Covered Persons is set forth in Section 3.15 of the Company Disclosure Schedule. (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, 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 to third parties 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 business. 3.16 Year 2000 Compliance. -------------------- (a) All of the current or past products and services offered by the Company to third parties, 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 knowledge of the Company, there is no basis for any such claim, regulatory action, investigation or proceeding. To the knowledge of the Company, as of the Closing, 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 knowledge of the Company, as of the Closing, 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. -16- (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 Members executing this Agreement are the only votes of the Company necessary to approve and adopt this Agreement and approve the transactions contemplated hereby. 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. 3.19 Transactions with Related Parties. Except as set forth on the Company --------------------------------- Schedules, 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 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 includes each of the Members, 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 as presently -17- conducted, any acquisition of property (tangible or intangible) by the Company or the conduct of business by the Company as presently conducted. 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 were incurred in the ordinary course of business. The Company has no reason to believe that a material amount of the Accounts Receivable not collected as of the Closing will not be collectable subsequent to the Closing. 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. 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 managers (or committees thereof) and Members or actions by written consent since the date of incorporation of the Company. 3.23 Environmental Matters. --------------------- (a) Except as set forth in Section 3.23 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, -18- 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 knowledge of the Company, threatened, concerning any 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 3.24 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 3.25 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 3.25 of the Company Schedules also indicates all warranty and indemnity claims in excess of $5,000 made against the Company. 3.26 Information Supplied. The information supplied by the Company for -------------------- inclusion in the Registration Statements on Form S-4 to be filed with the Securities and Exchange Commission ("SEC") by Parent in connection with the issuance of the Parent Common Stock in or as a result of the transactions contemplated hereby (the "Form S-4") and any other registration statement on any -19- applicable form to be filed with the SEC to facilitate the resale of shares issued to the Members hereunder (collectively, the "Registration Statements"), shall not at the time the respective Registration Statement is declared effective contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. The information supplied by the Company for inclusion in the proxy statement/prospectus to be sent to the Members of the Company in connection with the meeting of the Company's Members to consider the transactions contemplated by this Agreement (the "Members' Meeting") (such proxy statement/prospectus as amended or supplemented is referred to as the "Proxy Statement/Prospectus") shall not at the date the Proxy Statement/Prospectus is first mailed to the Members, at the time of the Members' Meeting and at the Effective Time, and the information supplied by the Company for inclusion in any prospectus to be used in connection with any Registration Statement filed by the Parent to facilitate the resale of shares issued hereunder by affiliates of the Company (a "Prospectus") shall not at the date such Prospectus is first delivered to offerees and at the effective date of such Prospectus, be false or misleading with respect to any material fact required to be stated therein, or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they are made, not misleading. Notwithstanding the foregoing, the Company and the Members make no representation or warranty with respect to any information about, or supplied or omitted by, the Parent which is contained in any of the foregoing documents. 3.27 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, when taken as a whole, 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 knowledge of the Company, 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 certified by a duly authorized officer of the Parent prior to the date of this Agreement the ("Parent Schedules"), Parent represents and warrants to the Company as follows: 4.1 Organization, Standing and Corporate Power. The Parent is, and Sub, ------------------------------------------ once formed will be, a corporation duly organized, validly existing and in good standing under the laws of -20- the jurisdiction of its organization and has or will have as of the Closing Date all requisite corporate power and authority to carry on its business as now being conducted. The Parent is, and Sub as of the Closing Date will be, 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. Parent has delivered to the Company completed correct copies of its Certificate of Incorporation and Bylaws. 4.2 Authority/Noncontravention. The Parent has, and as of the Closing -------------------------- Date Sub will have 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, or as of the Closing Date will be, 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 is, or will be, necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been, or as of the Closing Date will be, duly executed and delivered by each of the Parent and Sub and constitutes or will constitute 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 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 -21- 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 Capitalization; Ownership of Shares. The authorized capital stock of ----------------------------------- Parent consists of (i) 352,883,506 shares of common stock of which 100 million shares are designated as shares of Class A common stock, par value $.01 per share ("Parent Class A Common Stock"), 250 million shares are designated as shares of Parent Class B Common Stock, 2,883,506 shares are designated as shares of Class C common stock, par value $.01 per share ("Parent Class C Common Stock"), and (ii) 2 million shares of preferred stock, par value $.01 per share, of Parent ("Parent Preferred Stock" and, together with Parent Class A Common Stock, Parent Class B Common Stock and Parent Class C Common Stock, "Parent Capital Shares"). As of May 4, 1999, 63,175,984 shares of Parent Class A Common Stock were issued and outstanding and no shares thereof were held in treasury, 9,247,109 shares of Parent Class B Common Stock were issued and outstanding no shares thereof were held in treasury, no shares of Parent Class C Common Stock were issued and outstanding or held in treasury, and no shares of Parent Preferred Stock were outstanding or held in treasury. All of the Parent Capital Shares have been duly authorized, validly issued, fully paid and nonassessable and free of preemptive rights with no liability attaching to the ownership thereof. As of the date of this Agreement, except pursuant to this Agreement, the outstanding Parent Class A Common Stock, the obligation to issue Class B Common Stock to the equity holders of Match.com upon the closing of the acquisition of that company by the Parent or its wholly-owned subsidiary and the terms of stock options issued pursuant to the 1998 Employee Stock Purchase Plan and the CitySearch, Inc. 1996 Stock Option Plan as in effect as of the date hereof (the "Parent Stock Plans"), the Parent does not have and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the purchase or issuance of any shares of Parent Capital Stock or any other equity securities of Parent or any securities representing the right to purchase or otherwise receive any Parent Capital Shares. As of the date hereof, no Parent Capital Shares were reserved for issuance, except for (i) shares of Parent Class B Common Stock reserved for issuance upon the exercise of stock options pursuant to the Parent Stock Plans, (ii) shares of Parent Class B Common Stock reserved for issuance upon conversion of the outstanding shares of Parent Class A Common Stock; and (iii) shares reserved for issuance or which Parent otherwise is committed to issue in respect of the transactions contemplated by a definitive agreement to acquire Match.com. Since May 4, 1999, Parent has not issued any shares of its capital stock or any securities convertible into or exercisable for any shares of its capital stock, except for options issued in the ordinary course of business and shares of Class B Common Stock issued upon the routine exercise of options issued in the ordinary course. 4.4 SEC Documents; Parent Financial Statements. Parent has furnished or ------------------------------------------ made available to the Company a true and complete copy of its Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and its Report on Form 10- Q for the three-months ended March 31, 1999 (the "SEC Documents"), which Parent filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with the SEC. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange 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 -22- made, not misleading. There has been no change in the Parent's operations resulting in a Material Adverse Effect of the Parent since March 31, 1999. The financial statements of Parent, including the notes thereto, included in the SEC Documents (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. 4.5 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. 4.6 Information Supplied. The information supplied by the Parent for -------------------- inclusion in the Registration Statements shall not at the time the respective Registration Statement is declared effective contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. The information supplied by the Parent for inclusion in the Proxy Statement/Prospectus shall not at the date the Proxy Statement/Prospectus is first mailed to the Members, at the time of the Members' Meeting and at the Effective Time, and the information supplied by the Parent for inclusion in any other Prospectus shall not at the date such Prospectus is first delivered to offerees and at the effective date of such Prospectus, be false or misleading with respect to any material fact required to be stated therein, or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they are made, not misleading. Notwithstanding the foregoing, the Parent makes no representation or warranty with respect to any information about, or supplied or omitted by, the Members or the Company which is contained in any of the foregoing documents. The Parent agrees to defend and hold the Members harmless from any violation of this representation and warranty. SECTION 5 COVENANTS 5.1 Conduct of Business of the Company. Subject to the provisions of ---------------------------------- Section 5.18 hereof, 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 -23- 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 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 Units distributions (whether in cash, stock or property) in respect of any of its Units, or split, combine or reclassify any of its Units, or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its Units, or repurchase or otherwise acquire, directly or indirectly, any Units; (b) Issue, deliver or sell, authorize or propose the issuance, delivery or sale of, or purchase or propose the purchase of, any Units 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) Solicit approval for or effect any amendments to the Company's Regulations; (d) 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; (e) 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); (f) 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; (g) 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 Date in the ordinary course of business; (h) Adopt or amend any employee benefit or employee unit purchase or employee option plan, or enter into any employment contract, pay any special bonus or special remuneration to -24- 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; (i) Commence a lawsuit other than for the routine collection of bills; (j) 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; (k) 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; (l) 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; (m) 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; (n) Engage in any activities or transactions that are outside the ordinary course of its business consistent with past practice; (o) 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 (p) Enter into any material contract; (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 and the Members 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. --------------- (a) Unless and until the termination of this Agreement pursuant to the provisions of Section 8.1, neither the Company nor the Members will (nor will the Company or the Members permit any of the Company's officers, directors, agents, representatives or affiliates to) directly or -25- indirectly, take any of the following actions with any party other than Parent and its designees: (a) solicit, encourage, initiate or 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, 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 capital stock or assets (each of the foregoing, an "Acquisition"), (b) provide any information to, or otherwise cooperate with, facilitate or encourage any effort or attempt by any person to do or seek any Acquisition, (c) enter into an agreement with any person, providing for any Acquisition of the Company or (d) make or authorize any statement, recommendation or solicitation in support of any possible Acquisition other than by Parent. In addition to the foregoing, if the Company or any Member receives any offer or indication of interest regarding any Acquisition, the Company or the Member (as the case may be) shall immediately notify Parent thereof, including the specific terms of such each such offer, indication of interest or request, including the identity of the third party. (b) Except as contemplated in this Agreement in connection with the transactions contemplated by this Agreement, for a period of one year following a termination of this Agreement pursuant to Section 8.1, neither Parent nor Sub shall directly or indirectly solicit for employment or employ any employee of the Company as of the date of this Agreement or any employee hired by the Company after the date of this Agreement. 5.3 Preparation of Registration Statements. -------------------------------------- (a) The Company shall promptly provide to Parent and the counsel for inclusion in the Form S-4 and, if utilized, any other registration statement on which shares issued to the Members are registered for resale, in a form reasonably satisfactory to Parent and its counsel, such information concerning the Company, its operations, capitalization, technology, capital ownership and other material as Parent or its counsel may reasonably request. The Company shall furnish to Parent all information concerning the Company and the Members as may be reasonably requested in connection with any action contemplated by this Section 5.3. (b) As promptly as practicable after the date hereof, but in no event longer than 45 days from the date hereof, Parent and the Company shall prepare and file with the SEC the Form S-4 and any other documents required by the Exchange Act or the Securities Act of 1933, as amended, in connection with the Merger and the resale by affiliates of the Company of Parent Common Stock received at the Closing pursuant to the Merger. Each of Parent and the Company shall use its reasonable best efforts to have the Form S-4 declared effective under the Securities Act as promptly as practicable after such filing. Parent shall also take any action required to be taken under any applicable state securities or "blue sky" laws in connection with the issuance of the Parent Common Stock in the Merger. The Parent will pay all of the costs relating to this registration statement except that the Members agree to pay (and not charge the Company) the cost of separate securities counsel for the Company and/or the Members, if any, and the cost of services provided by the Company's accountants in connection with such registration statement. -26- (c) As promptly as practicable after the satisfaction of the conditions required by this paragraph 5.3(c), the Parent will register for resale the shares of Parent Common Stock to be distributed to the Members on the last Payment Date either (i) on Form S-3 , (or at the Parent's option, add such shares to an existing registration statement filed by the Parent by an appropriate amendment to Form S-1 or Form S-3, as the case may be) or (ii) by amending the prospectus forming a part of the Form S-4, at the Parent's option, and maintain such registration statement (or addition to an existing registration statement) or updated prospectus for at least 30 days after the later of effectiveness or the applicable Payment Date if the following conditions are met: (i) The average weekly trading volume of the Parent's Common Stock on a National Securities Exchange for the eight weeks ending on the date 30 days prior to the expected date of the last Payment Date would be insufficient to allow the Members, individually, to sell all of the shares expected to be distributed to them on the last Payment Date under Rule 145 under the Securities Act of 1933, as amended ("Rule 145"), within a 90 day period absent such registration; and (ii) The Members' Representative shall have provided the Parent with written notice that the Members desire such registration to go forward; and (iii) The Parent shall not have elected to pay all or such portion of the installment to be paid on the last Payment Date in cash such that the Members cannot, individually, sell all of the shares expected to be distributed to them on the last Payment Date under Rule 145 absent such registration. (d) The Members will pay all of the expenses relating to a registration, addition to an existing registration or a prospectus update pursuant to Section 5.3(c), which obligation will be capped at $30,000. (e) In the event that any registration statement, or prospectus contained therein, which the Parent causes to be effective under Section 5.3(c) shall become materially deficient and the Parent shall have given written notice of same to the Members' Representative, the Members will immediately cease use of such registration statement or prospectus upon receipt of such notice until such time as the Parent shall have amended the registration statement or prospectus to cure such deficiency. The Parent shall be obligated to take action to cure such deficiency promptly. The 30 day period during which the registration statement is required to be available will be extended by the number of days that use of the registration statement is suspended under this Section 5.3(e). 5.4 Member Approval. The Company will call the Members' Meeting to be --------------- held as promptly as practicable for the purpose of obtaining the Member 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 Members Meeting, the Company shall submit materials to its Members (the "Member 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 Members of the Company in favor -27- of the Merger. The Member 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 Member Materials to Parent for its review and approval prior to distributing the Member Materials to the Company's Members. The Company shall coordinate and cooperate with the Parent with respect to the timing of the Members' Meeting. The Company shall not change the date of the Members' Meeting without the prior written consent of the Parent, nor shall the Company adjourn the Members' 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 Members' Meeting shall announce at such meeting the time and place of the adjourned meeting. 5.5 Access to Information. Upon reasonable notice, the Company shall --------------------- afford Parent and its accountants, counsel and other representatives, reasonable access during normal business 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 5.5 or otherwise 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. 5.6 Confidentiality. Each of the parties agrees to keep such information --------------- or knowledge obtained in any investigation pursuant to Section 5.5, or pursuant to the negotiation and execution of this Agreement or the effectuation of the transactions contemplated hereby, confidential pursuant to the prior existing mutual Nondisclosure Agreement by and between Parent and the Company (the "Confidentiality Agreement"). 5.7 Expenses. Subject to the provisions of Section 5.3, whether or not -------- the Merger is consummated, all 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 (i) Parent with respect to all such fees and expenses incurred by Parent and (ii) by the Members with respect to all such fees and expenses (including the fees of Donaldson, Lufkin and Jenrette) incurred by the Company or the Members; provided, however, that if the Merger is not consummated, the Members may, in their sole discretion, cause the Company to pay expenses incurred in connection with the transaction. 5.8 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 -28- 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. 5.9 Consents. Each of Parent, the Company and each Member 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 and the Members 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 5.9 of the Company Schedules. 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 the Members, on the one hand, and Parent on the other, 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, each Member 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 5.12 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 Agreement; Voting and Employment Arrangements. Upon ------------------------------------------------------------ execution of this Agreement, Parent and each of the Members shall execute and deliver the -29- noncompetition agreements in the form attached as Exhibit B (the "Noncompetition Agreements"). Each Member hereby agrees to vote all of their Units in favor of the Merger and the other transactions contemplated herein at the Members Meeting and at any adjournments and postponements thereof, or pursuant to an Unanimous Written Consent . Each Member further agrees to take any action and execute any document deemed necessary or advisable by Parent to effect such vote, including without limitation the execution of an irrevocable proxy in compliance with applicable laws. Each Member agrees not to transfer, sell exchange, pledge or otherwise dispose of or encumber any of his Units, or to make any offer or agreement relating thereto, at any time prior to the termination of this Agreement (other than consummation of the Merger). The Noncompetition Agreements shall become effective as of the Effective Time. The Parent and Messrs. Kennedy and Bunker agree to negotiate in good faith the terms of employment agreements or offer letters which will be mutually acceptable to the parties prior to the Closing. Such agreements will include, among other matters, agreements about Messrs. Kennedy and Bunker's salaries and benefits (which will be commensurate with those of similarly situated Parent executives) and grants of options to purchase Parent Common Stock. 5.14 Listing of Parent Common Stock. The shares of Parent Common Stock to ------------------------------ be issued by Parent in the Merger shall be qualified and listed on the Nasdaq National Market as of the Effective Time. 5.15 Affiliate Agreement. The Members are the only persons who are, in ------------------- the reasonable judgment of the Company and the Members, an affiliate of the Company within the meaning of Rule 145 (an "Affiliate") . Each Member agrees to negotiate in good faith and execute an Affiliate Agreement with the Parent and the Sub, in customary form, within five business days from the date hereof, which agreements will be attached hereto following execution hereof. Parent shall be entitled to place appropriate legends on the certificates evidencing any Parent Common Stock to be received by the Affiliate pursuant to the terms of this Agreement, and to issue appropriate stop transfer instructions to the transfer agent for Parent Common Stock, consistent with the terms of the Affiliate Agreements. Parent will use its best efforts to comply with the reporting requirements of the Exchange Act after the Effective Time. Upon being informed in writing by any Affiliate that such person intends to sell any shares of Parent Common Stock acquired in the transactions contemplated by this Agreement under Rule 145, Parent will certify in writing to such person that it has been subject to the reporting requirements of the Exchange Act for at least 90 days and it has filed all of the reports required to be filed by it under the Exchange Act to enable such person to sell such person's Parent Common Stock acquired in the transactions contemplated by this Agreement under Rule 145. Parent will further supply such person with any information in its possession which he or she may reasonably request in connection with any such proposed sale. If any of the certificates representing any Parent Common Stock acquired in the transactions contemplated by this Agreement are presented to Parent's transfer agent for registration of transfer in connection with any sale theretofore made under paragraph (d) of Rule 145, provided such certificate is duly endorsed for transfer or accompanied by a duly executed stock power and is accompanied by an opinion of counsel satisfactory to Parent that such transfer has complied with the requirements of Rule 145, -30- Parent will promptly instruct its transfer agent to register such transfer and to issue one or more new certificates free of any stop transfer order or restrictive legend. 5.16 Brokers or Finders. Except for payments to be made by the Members to ------------------ Donaldson, Lufkin and Jenrette, each of Parent, Sub, the Company and the Members represents that no agent, broker, investment banker or other firm or person is or will be entitled to any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement. 5.17 Tax Returns. The Company shall timely file all federal and state ----------- income tax returns for taxable periods ending on or prior to the Effective Time and have paid or will pay all Taxes attributable to such periods. Such returns will be prepared and filed in accordance with applicable law and in a manner consistent with past practices and shall be subject to review and approval by Parent. After the Effective Time, Parent and the Company, on the one hand, and the Members, on the other hand, will make available to the other, as reasonably requested, all information, record or documents relating to the liability for Taxes of the Company for all periods prior to or including the Effective Time and will preserve such information, records or documents until the expiration of any applicable statute of limitations or extensions thereof. 5.18 Distributions to Members. Notwithstanding anything herein to the ------------------------ contrary, the Members will be entitled prior to or at Closing to distribute from the Company to themselves an amount (the "Distribution") equal to (i) the Company's net income (determined in accordance with GAAP continuously applied) for the period January 1, 1999 through and including the Closing Date, plus (ii) an amount equal to those transaction-related expenses expensed under GAAP by the Company prior to and including the Closing Date which are included in the determination of the Company's net income and which are assumed from the Company by the Members. The parties agree to work together in good faith to mutually agree upon the calculation of the Distribution prior to the date the Distribution is made. 5.19 Employees; Employee Benefits. On and after the Closing Parent shall ---------------------------- provide the employees of the Company with salaries and incentive opportunities no less favorable in the aggregate than those provided to Parent's employees in no less comparable positions as of the date hereof and to provide employees of the Company benefit plans, programs and arrangements on the terms described in Section 5.19 of the Parent Schedules. Notwithstanding anything in this Agreement to the contrary, all employees of the Company shall remain at will employees following the Closing. 5.20 Post-Closing Operations of the Company. Parent and the Members agree -------------------------------------- that without the prior consent of Parent and the Member Representative, neither Parent nor the Members will take any action during calendar year 1999 which will materially change the manner in which the Company is operated after the Closing. -31- 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 or written waiver at or prior to the Effective Time of the following conditions: (a) Member 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 Members, in person or by proxy, at the Members Meeting contemplated by Section 5.4, in compliance with applicable law and the Company's Regulations. (b) Form S-4. The Form S-4 shall have become effective under the -------- Securities Act and shall not be the subject of any stop order or proceedings seeking a stop order. (c) Listing. The shares of Parent Common Stock to be issued in ------- connection with the Merger shall be qualified and listed on the Nasdaq National Market. (d) 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. (e) 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. (f) Lease Consents. The landlord of the Company's headquarters -------------- facility shall have consented to the Merger in accordance with the terms of applicable leases. (g) Hart-Scott-Rodino. All applicable waiting periods following the ----------------- filing of necessary Hart-Scott-Rodino filings, if any, shall have run without notification of further review by regulatory authorities. (h) Escrow Agreement. The Parties and the Escrow Agent shall have ---------------- entered into an agreement governing the Escrow upon terms reasonably acceptable to all parties thereto. -32- (i) Employment Arrangements. The Parent and Messrs. Kennedy and ----------------------- Bunker shall have agreed upon employment agreements and/or offer letters which set forth the terms under which such person will be employed by the Parent which terms shall be reasonably acceptable to all 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 or written waiver 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 Members in this Agreement shall be true and correct in all material respects on and as of the date of this Agreement and (except to the extent such representations and warranties speak of an earlier date) as of the Closing Date as though such representations and warranties were made on and as of such time and the Company and the Members shall have performed and complied in all material respects 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 ------------- Jenkens & Gilchrist, legal counsel to the Company, in form and substance reasonably acceptable to the Parent and its counsel. (c) Board of Directors Approval. The Parent's Board of Directors --------------------------- shall have approved the Merger and the transactions contemplated herein; provided, that in the event this condition is not satisfied by June 23, 1999 at the close of business then the Parent and the Company have termination rights under Section 8.1(h) (d) No Dissenters. Holders of more than 5% of the outstanding Units ------------- 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. (e) Resignation of Managers. The managers of the Company in office ----------------------- immediately prior to the Effective Time of the Merger shall have resigned as managers of the Surviving Corporation effective as of the Effective Time of the Merger. (f) Affiliate Agreements. Parent shall have received from the -------------------- Affiliates of the Company an executed Affiliate Agreement which shall be in full force and effect. (g) Proprietary Information Agreements. The Company shall have ---------------------------------- entered into proprietary information agreements in a form satisfactory to Parent with each of the persons listed in Section 3.15 of the Company Disclosure Schedule. -33- (h) Members' Representative. The Members shall have designated one ----------------------- of them as the Members' Representative (as defined) hereunder. (i) Technical Documentation. The Company shall have created a set ----------------------- of manuals documenting the technical architecture of its computer hardware and software systems in form and substance reasonably acceptable to the Parent. (j) Alternative Connections. The Company shall have obtained a ----------------------- perpetual, non-exclusive license to use the service mark "Alternative Connections" for online dating services from the Chicago, Illinois based company known as "Alternative Connections" at no post-closing cost to the Company (or, with the Parent's prior consent the Company shall have made other acceptable arrangements for this mark) or, in the alternative, taken all actions reasonably necessary to cease using the service mark "Alternative Connections" in connection with the Company's operations and commenced using a different name which shall be reasonably approved in advance by the Parent. (k) UCC-3. The Company shall have obtained a release of the UCC-1 ----- Financing Statement filed by Compass Bank. 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 or written waiver 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 in this Agreement shall be true and correct in all material respects on and as of the date of this Agreement and (except to the extent such representations and warranties speak of an earlier date) as of the Closing Date as though such representations and warranties were made on and as of such time and Parent shall have performed and complied in all material respects with all covenants (including the obligation to deliver the Parent Common Stock to be delivered hereunder in certificate or book entry form as directed by the Members), obligations and conditions of this Agreement required to be performed and complied in all respects material 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) Legal Opinion. The Company shall have received a legal opinion ------------- from Wilson, Sonsini, Goodrich & Rosati, legal counsel to Parent, in form and substance reasonably acceptable to the Company, the Members and their counsel. (c) Release of Personal Guarantees. The Members shall have been ------------------------------ released from all personal guarantees to which they are party relating to the Company's operations or the Parent shall have agreed to indemnify the Members for all obligations under such guarantees. 6.4 Effect of Waiver. To the extent a condition herein above is waived in ---------------- writing, the party which was responsible for satisfaction of such condition shall have no further liability to the other parties for failure to satisfy such condition. -34- SECTION 7 INDEMNIFICATION 7.1 General Indemnification. The Members covenant and agree to ----------------------- indemnify, defend, protect and hold harmless Parent and the Surviving Corporation and their respective officers, directors, employees, Members, 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 Members set forth in this Agreement or any certificate, document or instrument delivered by or on behalf of the Company or the Members in connection herewith; (ii) any nonfulfillment of any covenant or agreement on the part of the Company or the Members in this Agreement; and (iii) the operation of the "Alternative Connections" portion of the Company's business prior to Closing to the extent such Damages are owed to the Chicago, Illinois based company known as "Alternative Connections"; and (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 $200,000 (the "Indemnification Threshold"), in which event the liability for indemnification will apply to the entire aggregate amount of Damages in excess of the first $200,000. The maximum liability for indemnification under this Section 7.1 shall be $10.0 million except with respect to Claims (as defined below) relating to any breach of the representations and warranties set forth in Section 3.12 (Taxes), 3.15 (Intellectual Property) and 3.23 (Environmental Matters) or for Claims relating to fraud or willful misconduct. Any Damages payable pursuant to this Section 7 shall be a several and not joint obligation of the Members. The indemnification provided with respect to the Alternative Connections matter shall not be subject to the $200,000 deductible. -35- (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), 3.15 (Intellectual Property) and 3.23 (Environmental Matters), 3.26 (Information Supplied) 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. (c) Notwithstanding anything in this Agreement to the contrary, all claims for Damages pursuant to the indemnification or other remedy provisions of this Agreement that are received by Parent or Sub from the Company or the Members shall first be set off against cash in the Escrow, next against securities in the Escrow, next against future payments to be received pursuant to this Agreement under the procedures set forth in Section 7.4, and only in the event the Escrow and all future payments to be received are insufficient to cover such Damages shall the Company have the right to pursue other remedies against such parties. In addition to the right to recovery from the Escrow and the right of set-off set forth in this Section 7.3(c), Parent shall have the right to any and all equitable remedies available under law. 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) with respect to such Claim to the Member Representative (as defined in Section 7.5 below). If the Member Representative does not notify the Indemnified Party within 45 days from the date of receipt of such Claim Notice that the Members dispute such Claim, the amount of such Claim shall be conclusively deemed a liability of the Members hereunder. In case the Member 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 Member 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 -36- 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 Members' 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 Members 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 Member Representative of such 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 Member 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 Member Representative disputes the Members' liability to the Indemnified Party hereunder with respect to such Claim and (ii) if the Member Representative does not dispute such liability, whether or not the Member Representative desires, at the sole cost and expense of the Members, to defend against such Claim, provided that the Member is hereby authorized (but not obligated) prior to and during the Notice Period to file any -37- motion, answer or other pleading and to take any other action which the Member Representative shall deem necessary or appropriate to protect the Members' interests. In the event that the Member Representative notifies the Indemnified Party within the Notice Period that the Member Representative does not dispute the Members' obligation to indemnify hereunder and desires to defend the Indemnified Party against such Claim and except as hereinafter provided, the Member Representative shall have the right to defend by appropriate proceedings, which proceedings shall be diligently settled or prosecuted by the Member Representative to a final conclusion; provided that, unless the Indemnified Party otherwise agrees in writing, the Member 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 Member Representative elects not to defend the Indemnified Party against such Claim, whether by failure of the Member Representative to give the Indemnified Party timely notice as provided above or otherwise, then the Indemnified Party, without waiving any rights against the Members, 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 Members 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 Members 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 Member Representative written notice of the same. If the Indemnified Party should elect to exercise such right, the Member 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 Members. Notwithstanding the foregoing, the Indemnified Party shall not settle any Claim without the written consent of the Member Representative, which consent shall not be unreasonably withheld. (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 Member Representative of any actual, threatened or possible claim or demand which may give rise to a right of indemnification hereunder shall not relieve the Members of any liability which the Members may have to the Indemnified Party unless the failure to give such notice materially and adversely prejudiced the Members. -38- (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 Member -------- Representative shall not be obligated to seek any payment pursuant to the terms of any insurance policy. 7.4 Right of Set-off. ---------------- (a) Any amounts payable by the Members to Parent pursuant to the indemnification provisions of this Section 7 shall be paid, to the extent funds or securities are available, by distribution of amounts or securities from the Escrow. Parent shall be entitled to cause its future payment obligations hereunder to be made into Escrow to the extent it in good faith determines that such an indemnification amount may be owed to it pursuant to this Section 7 in excess of the amount in Escrow; provided, however, if a final determination is made subsequently in accordance with the provisions of this Section 7 that Parent is not entitled to such excess indemnification amount, such amount shall be payable out of Escrow to the Members promptly following such determination. In addition to the right of recovery from the Escrow and the right of set-off set forth in this Section 7.4, Parent shall have the right to any and all remedies available under law. The agreement governing the Escrow will provide for compliance by the Escrow Agent with the provisions of this Section 7.4(a). (b) In the event that there shall exist a Pending Claim at the time that the funds and securities in the Escrow would be distributed to the Members in the ordinary course, the distribution of such funds and securities with a market value equal to the highest reasonable estimate of the indemnifying party's obligations to the indemnified party with respect to the Pending Claim(s) will be deferred until such time as the indemnifying party's obligations under the Pending Claim shall have been finally determined and any amounts due to be distributed from the Escrow to the indemnified party in satisfaction of indemnification obligations shall have been distributed. 7.5 Members' Representative. ----------------------- (a) Upon the closing of the Merger, one of the Members shall be constituted and appointed as agent and attorney-in-fact (the "Members' Representative") for and on behalf of each of the Members to give and receive notices and communications, 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 Members' 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 Members from time to time upon not less than thirty (30) days prior written notice to Parent. No bond shall be required of the Members' Representative, and the Members' Representative shall receive no compensation for its services, except for payment by the Members of expenses, including fees of counsel, reasonably incurred by the Members' Representative in connection with the performance of its duties hereunder. -39- (b) The Members' Representative shall not be liable for any act done or omitted hereunder as Members' 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 Members shall severally indemnify the Members' Representative and hold such agent harmless against any loss, liability or expense incurred without bad faith on the part of the Members' Representative and arising out of or in connection with the acceptance or administration of the Members' Representative's duties hereunder. (c) A decision, act, consent or instruction of the Members' Representative shall constitute a decision of all Members and shall be final, binding and conclusive upon each Member, and Parent may rely upon any decision, act, consent or instruction of the Members' Representative taken in such manner as being the decision, act, consent or instruction of each and every Member. 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 Members' Representative. 7.6 Survival of Representations, Warranties and Covenants. All ----------------------------------------------------- representations, warranties and covenants made by the Company and, the Members 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. All representations, warranties and covenants made by the Parent 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 first anniversary of the Closing; provided, however that the representations and warranties made in Section 4.6 (Information Supplied) shall survive until the expiration of the applicable statute of limitations and the conclusion of all claims pending on such date. 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 Members 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 September 30, 1999 if the Form S-4 has not been declared effective by the SEC as of such date or October 31, 1999 for any other reason; 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 Form S-4 to become effective or the Merger to occur on or before such dates; -40- (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 or Company if the Form S-4 shall not have been filed with the SEC on or prior to 45 days after the date of execution of this Agreement; provided, however, that a party shall not have a right to terminate this Agreement pursuant to this Section 8.1(e) if it is the primary cause of the failure to file the Form S-4 within such period; (f) by Parent if it is not in breach of its obligations under this Agreement and there has been a material breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of the Company or the Members and such breach has not been cured within five (5) business days after written notice to the Company and the Members (provided that no cure period shall be required for a breach which by its nature cannot be cured); (g) by the Company if it is not in breach of its obligations under this Agreement and there has been a material 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); or (h) by the Parent or the Company if the Parent's Board of Directors does not approve the Merger and the other transactions contemplated herein by the close of business on June 23, 1999. (i) by any Party if the Value of the Parent Common Stock on the Closing Date is less than $20.80 (the "Minimum Price"); provided, however, that in the event of termination by the Members or the Company on the one hand, the Parent and the Sub on the other hand shall have the option to supercede such termination by establishing the actual average closing price per share of Parent Common Stock on the Nasdaq National Market over the five consecutive trading days ending on the trading day two days preceding the Closing instead of the Minimum Price for purposes of determining the number of shares to be issued upon Closing; provided, further, however, that in the event of termination by the Parent and the Sub on the one hand, the Members and the Company shall have the option to supercede such termination by establishing the Minimum Price as the price to be used in determining the number of shares to be issued upon Closing. -41- 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 or Board of Members (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 Members, or their respective officers or directors, 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 5.2(b), 5.6, 5.7, and 5.8 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 Members 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. Subject to the provisions of Section 8.1(i), --------------------- 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 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): -42- (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 Bradley K. Serwin, General 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: with a copy to: WebMedia Ventures, LLC 5307 East Mockingbird Lane Suite 102 Dallas, Texas 75206 Attention: David Kennedy William Bunker Glenn Wiggins Telephone No.: (214) 827-2262 Facsimile No.: (214) 827-2937 with a copy to: Jenkens & Gilchrist, P.C. 1445 Ross Avenue Suite 3200 Dallas, Texas 75202 Attention: John R. Holzgraefe, Esq. Telephone No.: (214) 855-4500 Facsimile No.: (214) 855-4300 -43- (c) if to the Members Representative, to: c/o Wiggins & Company 5307 E. Mockingbird, Suite 610 Dallas, Texas 75206 Attention: David Kennedy Telephone No.: (214) 827-7830 Facsimile No.: (214) 827-1534 with a copy to: Jenkens & Gilchrist, P.C. 1445 Ross Avenue Suite 3200 Dallas, Texas 75202 Attention: John R. Holzgraefe, Esq. Telephone No.: (214) 855-4500 Facsimile No.: (214) 855-4300 9.2 Interpretation. -------------- (a) 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) For purposes of this Agreement the term "knowledge" means with respect to a party hereto, with respect to any matter in question, any actual knowledge that any of the chief executive officer, chief operating officer, president, chief financial officer, general counsel or controller of such party, or knowledge that could be reasonably expected to be had by any such person by virtue of his position with respect to such matter. (c) 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 -44- 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) 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 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 Delaware, 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 -45- 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. 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, Member, 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 Members. -46- IN WITNESS WHEREOF, Parent, Sub, the Company and the Members have entered into this Agreement as of the date first written above. WEB MEDIA, LLC TICKETMASTER ONLINE - CITYSEARCH, INC. By: By: --------------------------- ----------------------------------- Name: Name: ------------------------- --------------------------------- Title: Title: ------------------------ -------------------------------- MEMBERS - ------------------------------ William Bunker - ------------------------------ Dave Kennedy - ------------------------------ Glenn Wiggins [Signature page to Reorganization Agreement] EX-5.1 4 OPINION OF WILSON SONSINI GOODRICH & ROSATI EXHIBIT 5.1 [LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI] June 28, 1999 Ticketmaster Online-CitySearch, Inc. 790 E. Colorado Boulevard, Suite 200 Pasadena, California 91101 Re: Registration Statement on Form S-1 Ladies and Gentlemen: We have examined the Registration Statement on Form S-1 to be filed by you with the Securities and Exchange Commission (the "Commission") on or about June 28, 1999 (as such may be further amended or supplemented, the "Registration Statement"), in connection with the registration under the Securities Act of 1933, as amended (the "Act"), of 2,046,574 shares of your Class B Common Stock, par value $0.01 per share (the "Shares"), all of which are authorized and have been previously issued. The Shares are to be offered by the Selling Stockholders for sale to the public as described in the Registration Statement. As your counsel in connection with this transaction, we have examined the proceedings proposed to be taken by you in connection with the sale of the Shares. Based on the foregoing, it is our opinion that, upon conclusion of the proceedings being taken or contemplated to be taken prior to the sale of the Shares and upon completion of the proceedings taken in order to permit such transactions to be carried out in accordance with the securities laws of various states where required, the Shares, when sold in the manner described in the Registration Statement, will be legally and validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement, and further consent to the use of our name wherever appearing in the Registration statement, including the prospectus constituting a part thereof, which has been approved by us, as such may be further amended or supplemented. Sincerely, WILSON SONSINI GOODRICH & ROSATI Professional Corporation EX-10.36 5 REGISTRATION RIGHTS AGREEMENT DATED MAY 14 Exhibit 10.36 REGISTRATION RIGHTS AGREEMENT ----------------------------- REGISTRATION RIGHTS AGREEMENT, dated as of May 14, 1999, among Cendant Intermediate Holdings, Inc., a Delaware corporation ("Intermediate"), and a wholly-owned subsidiary of Cendant Corporation, a Delaware corporation ("Cendant Corp." and together with Intermediate, the "Seller"), and Ticketmaster Online- City Search, Inc., a Delaware corporation (the "Company"). WHEREAS, the Seller and the Company have entered into an Exchange Agreement, dated as of the date hereof (the "Exchange Agreement"), pursuant to which, among other things, the Company has agreed to provide registration rights to Intermediate with respect to the Class B Common Stock of the Company ("Common Stock") issued to Intermediate in connection with the Exchange Agreement, or any equity securities of the Company or any successor or assign of the Company (whether by merger, consolidation, sale of assets or otherwise) which may be issued in respect of, in exchange for, in substitution of, or as a distribution on such Common Stock (the "Registrable Shares"). NOW, THEREFORE, the parties hereby agree as follows: 1. Demand Registration; Shelf Registration. --------------------------------------- 1.1 Request for Registration. At any time following the date hereof, ------------------------ Intermediate may make a written request to the Company for registration of a minimum of 700,000 of the Registrable Shares under the Securities Act of 1933, as amended (the "Securities Act"), and the securities or blue sky laws of any jurisdictions designated by Intermediate (the "Demand"). Each Demand shall specify the number of Registrable Shares proposed to be sold and shall also specify the intended method of disposition thereof. Promptly upon receiving the Demand and in accordance with the procedures set forth in Section 3 of this Agreement, the Company shall use its reasonable commercial efforts to effect the registration under the Securities Act of all Registrable Shares requested to be registered so as to permit the disposition thereof (in accordance with the methods described in the Demand). The registration of the Registrable Shares so effected by the Company pursuant to this Section is referred to herein as a "Demand Registration." Notwithstanding the foregoing, the Company 1 shall not be required to (i) effect more than two Demand Registrations with respect to the Registrable Shares (ii) effect any registration in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration unless the Company is already subject to service in such jurisdiction or (iii) effect a Demand Registration pursuant to a request for such received by the Company until 60 days shall have elapsed following the effective date of a registration statement previously filed by the Company pursuant to this Section 1.1. In addition, if (i) counsel to the Company (which counsel shall be experienced in securities law matters) has determined in good faith that the Company then is unable to comply with its disclosure obligations (because it would otherwise need to disclose material information which the Company has a bona fide business purpose for preserving as confidential) or Securities and Exchange Commission (the "Commission") requirements in connection with a registration statement and (ii) the Company shall have provided Intermediate notice of the determination contemplated by clause (i) above within 3 business days of such determination, then the Company shall not be required to file a registration statement pursuant to this Section 1.1 for a period expiring upon the earlier to occur of (x) the date on which such material information is disclosed to the public or ceases to be material or the Company is able to comply with its disclosure obligations and Commission requirements or (y) 60 days after counsel to the Company makes such good faith determination. 1.2 Effective Registration. A Demand Registration shall not be ---------------------- deemed to be effective unless the registration statement relating thereto has been declared effective by the Commission. Additionally, a Demand Registration shall not be deemed to have been effected if: (1) the registration statement relating thereto does not remain effective, current and usable by Intermediate until the earlier of (A) the 360th day following the date on which such registration statement became effective, subject to the last sentence of Section 3.1 herein and (B) the date on which all of the Registrable Shares requested in the Demand to be sold pursuant to such registration statement are sold; (2) after the registration statement relating thereto has become effective, such registration statement is interfered with by any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason prior to the earlier of (A) the 360th day following the date on which 2 such registration statement became effective, subject to the last sentence of Section 3.1 herein and (B) the date on which all of the Registrable Shares requested in the Demand to be sold pursuant to such registration statement are sold; and (3) the conditions to closing specified in any purchase agreement or underwriting agreement entered into in connection with such Demand Registration are not satisfied, unless the failure to satisfy such conditions to closing is due to some act or failure to act of Intermediate. 1.3 Underwritten Offerings. ---------------------- (1) If in any Demand, Intermediate proposes to dispose of the Registrable Shares in an underwritten offering, Intermediate shall notify the Company and the Company and Intermediate shall agree, with each party acting in good faith, to appoint the investment banking firm to act as the manager that will administer the offering. The Company will enter into an underwriting agreement with the underwriters for such offering (such agreement to be reasonably satisfactory to both the Company and Intermediate), which agreement will contain such representations and warranties by the Company and such other terms as are generally prevailing in agreements of this type, including without limitation, indemnities at least to the effect and to the extent provided in Section 5 hereof. The Company and Intermediate will cooperate with each other in good faith in the negotiation of the underwriting agreement; provided, however, that -------- ------- nothing contained herein shall diminish the foregoing obligations of the Company. Intermediate shall be a party to such underwriting agreement and may, at its option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of Intermediate. Intermediate shall not be required to make any representations or warranties or agreements, other than representations regarding Intermediate, the Registrable Shares and Intermediate's intended method of distribution. 3 (2) If the managing underwriter of an underwritten offering pursuant to Section 1.1 delivers a written statement to Intermediate that the total amount of securities requested to be included in such offering is sufficiently large so as materially and adversely to affect the distribution thereof, then the managing underwriter of such offering shall include in such offering: (i) first, all the Registrable Securities which Intermediate proposes to sell in such offering pursuant to the applicable Demand and (ii) second, to the extent of the amount which the Company is so advised can be sold in (or during the time of) such offering, shares being registered by the Company for its own account and/or by other holders of shares in such manner and amounts and by the Company or such other holders, as the Company may determine. 1.4 Price Determination. Intermediate shall have the sole right to ------------------- determine the offering price per share and underwriting discounts, if applicable, in connection with any resales of Registrable Securities pursuant to this Section 1, after consultation with the Company and due regard for the Company's views relating thereto. 1.5 Shelf Registration. The Company shall prepare and, as soon as ------------------ reasonably practicable after the date hereof, file with the Commission a registration statement (the "Shelf") for an offering to be made on a delayed or continuous basis pursuant to Rule 415 under the Securities Act (or any similar rule that may be adopted by the Commission) and permitting sales in ordinary course brokerage or dealer transactions not involving an underwritten offering, the initial filing to be made not more than 45 days after the date hereof. The registration of the Registrable Shares so effected by the Company pursuant to this Section is referred to herein as a "Shelf Registration". The Company shall keep the registration statement relating to the Shelf Registration effective pursuant to Rule 415 (or any similar rule that may be adopted by the Commission) until such date as is the earlier of (i) the date on which all of the Registrable Shares have been sold, (ii) the date on which the Registrable Shares (in the opinion of counsel to the Seller) may be immediately sold without restriction (including without limitation as to volume) without registration under the Securities Act and (iii) 360 days following the date of effectiveness. 2. Piggy-back Registration. ----------------------- 4 2.1 Request for Registration. If at any time the Company proposes to ------------------------ register under the Securities Act an offering of Common Stock or any other class of its equity securities, then, as promptly as possible (but in no event later than twenty business days prior to the filing of the registration statement relating to such offering), the Company shall give to Intermediate a written notice describing in detail the proposed registration (including the intended method of distribution and the jurisdictions in which registration under the securities or blue sky laws is intended). Within fifteen business days after receipt of such notice, Intermediate shall notify the Company of the number of Registrable Shares, if any, that Intermediate wishes to have included in such registration statement. The Company will use its reasonable commercial efforts to effect the registration under the Securities Act of the number of Registrable Shares that Intermediate shall have requested, to the extent required to permit the disposition of such Registrable Shares upon the same terms (including the method of distribution), as any other Company equity securities to be included in such offering. The registration of the Registrable Shares so effected by the Company pursuant to this Section 2.1 is referred to herein as a "Piggy-back Registration." 2.2 Underwritten Offerings. If the securities proposed to be ---------------------- registered by the Company pursuant to Section 2.1 are to be disposed of in an underwritten public offering, the notice of the Company's intention to effect such registration shall designate the proposed managing underwriters of such offering (which shall be one or more underwriting firms of recognized national standing) and shall contain the Company's agreement to use its reasonable commercial efforts to arrange for such underwriters to include in such underwriting any Registrable Shares that Intermediate requests the Company to register pursuant to Section 2.1. Notwithstanding the foregoing, if the managing underwriter determines that marketing factors require limitations or the number of shares to be underwritten, the managing underwriter may limit (or exclude entirely) the Registrable Shares to be included in such registration. The Company shall advise Intermediate and any other holders distributing their securities through such underwriting of any such limitation, and the number of Registrable Shares and other securities that may be included in the registration and underwriting shall be allocated among Intermediate and such other holders in proportion as nearly as practicable to the respective amounts of securities proposed to be sold by each such person in the registration. 2.3 Exceptions. Notwithstanding the provisions of Section 2.1, the ---------- Company (i) shall not be required to give notice or effect a Piggy-back Registration if the Company's proposed registration is (a) a registration of an employee stock ownership, stock option, stock purchase or other employee incentive plan or arrange- 5 ment adopted in the ordinary course of business on Form S-8 (or any successor form) or (b) a registration of securities on Form S-4 (or any successor or other appropriate form) proposed to be issued in exchange for securities or assets of, or in connection with a merger or consolidation with, another corporation; or (ii) may withdraw, without the consent of Intermediate, a registration statement that the Company had filed as contemplated by Section 2.1 and abandon the proposed offering in which Intermediate had requested to participate. 2.4 Price Determination. The Company shall have the sole right to ------------------- determine the offering price per share and underwriting discounts in connection with any resale by Intermediate of Registrable Shares pursuant to an underwritten offering in connection with a Piggy-back Registration, after consultation with Intermediate and due regard for Intermediate's view relating thereto. 2.5 Effect of Piggy-back Registration. Subject to compliance with --------------------------------- the terms of Section 1.1, no Piggy-back Registration effected by the Company shall relieve the Company from its obligations to effect any Demand Registration or a Shelf Registration. 2.6 Conversion of Other Securities. If any holder of Registrable ------------------------------ Shares offers any options, rights, warrants or other securities issued by it or any other person that are offered with, convertible into or exercisable or exchangeable for any Registrable Shares, the Registrable Shares underlying such options, rights, warrants or other securities shall be eligible for registration pursuant to Section 1 hereof. 3. General Provisions. ------------------ 3.1 Registration Procedures. If and whenever the Company is required ----------------------- to effect a Demand Registration, a Shelf Registration or a Piggy-back Registration, the Company shall: (1) (a) in the case of a Demand Registration or a Piggy-back Registration, promptly (but in no event, with respect to a Demand Registration only, later than 45 days following the delivery of the Demand) prepare and file with the Commission a registration statement on a form for which the Company then qualifies or which counsel for the Company shall deem appropriate with respect to such Registrable Shares (and which form shall be available for the sale of the Registrable Shares in accordance with the intended methods of 6 distribution thereof); (b) use its reasonable commercial efforts to cause such registration statement to become effective as soon as reasonably practicable following the delivery of the Demand or request for Piggy-back Registration, as the case may be, or the date of filing in the case a Shelf Registration; and (c) furnish to Intermediate prior to the filing of such registration statement copies of drafts and final conformed versions of such registration statement as is proposed to be filed; (2) (a) promptly prepare and file with the Commission such amendments, post-effective amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the rules, regulations or instructions of the registration form utilized by the Company, the Securities Act and the rules and regulations thereunder with respect to the disposition of all Registrable Shares and other securities covered by such registration statement until such time as Intermediate shall have disposed of all such Registrable Shares in accordance with the intended methods of disposition or, in the case of a Shelf Registration, as provided in Section 1.5; provided, however, -------- ------- notwithstanding the foregoing of this Section 3.1(ii)(a), in all events the Company shall keep the registration statement effective as required by the Securities Act; (b) promptly furnish to Intermediate, in the case of a Demand Registration or a Shelf Registration prior to the filing thereof, a copy of any amendment, post-effective amendment or supplement to such registration statement or prospectus; and (c) not file any such amendment, post-effective amendment or supplement with respect to a Demand Registration or a Shelf Registration to which Intermediate shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or of the rules and regulations thereunder; and in connection therewith, Intermediate agrees to respond with any such objection as promptly as practical; (3) promptly prior to the filing of any document that is to be incorporated by reference into the registration statement or the prospectus (after initial filing of the registration statement), with respect to a Demand Registration, provide copies of such documents 7 to counsel for Intermediate, make the Company's representatives available for discussion of such document and in good faith consider such changes in such document prior to the filing thereof as counsel for Intermediate may reasonably request; (4) immediately notify Intermediate and confirm such advice in writing (a) when or if the prospectus or any prospectus supplement or post- effective amendment has been filed, and with respect to the registration statement or any post-effective amendment, when the same has become effective; (b) of any request by the Commission for amendments or supplements to the registration statement or the prospectus or for additional information; (c) of the issuance by the Commission of any stop order suspending the effectiveness of the registration statement or the initiation of any proceedings for that purpose; (d) of the receipt by the Company of any notification with respect to the suspension of the qualification of Registrable Shares for sale in any jurisdiction or the initiation or threat of any proceeding for such purpose; (e) of the existence of any fact that makes any statement made in the registration statement, the prospectus or any document incorporated therein by reference untrue or that requires the making of any changes in the registration statement, the prospectus or any document incorporated therein by reference to make the statements therein not misleading; and (f) of the occurrence or existence of any pending material corporate development that, in the reasonable discretion of the Company, makes it appropriate to suspend the availability of the registration statement; provided that, for not more than 20 consecutive trading days (or a total of not more than 60 trading days in any 12 month period), the Company may delay the disclosure of material nonpublic information concerning the Company (as well as prospectus or registration statement updating) the disclosure of which at the time is not, in the good faith opinion of the Company, in the best interests of the Company (an "Allowed Delay"); provided further that the Company shall promptly (i) notify Intermediate in writing of the existence of (but in no event shall the Company disclose to Intermediate any of the facts or circumstances regarding) material nonpublic information giving rise to an Allowed Delay and (ii) advise Intermediate in writing to cease all sales under the registration statement until the end of the Allowed Delay. Intermediate agrees it shall cease all sales under the registration statement following receipt 8 of the notification set forth in (i) above until the end of the Allowed Delay. Upon expiration of the Allowed Delay, the Company shall again be bound by the provisions of Section 3.1(v) with respect to the information giving rise thereto with such actions contemplated by Section 3.1(v) being taken in connection therewith on or prior to the expiration of the Allowed Delay; (5) if any fact contemplated by clause (iv)(e) above shall exist, promptly (a) prepare and file a supplement or post-effective amendment to the registration statement or the related prospectus or any document incorporated therein by reference or (b) file any required document so that, as thereafter delivered to the purchasers of Registrable Shares, the prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (6) if requested by the underwriter or underwriters or Intermediate in connection with an underwritten offering of Registrable Shares, immediately incorporate in a prospectus supplement or post-effective amendment such information as the underwriters and Intermediate agree should be included therein relating to the plan of distribution with respect to such Registrable Shares, including, without limitation, information with respect to the principal amount of Registrable Shares being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of such underwritten offering of Registrable Shares, and the Company shall make all required filings of the prospectus supplement or post-effective amendment promptly upon being notified of the matters to be incorporate in such prospectus supplement or post-effective amendment; (7) use its reasonable commercial efforts to obtain the withdrawal of any order suspending the effectiveness of the registration statement at the earliest possible moment; (8) in connection with any underwritten offering, participate in a reasonable manner in any "roadshow" marketing efforts reasonably requested by the underwriters; and 9 (9) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission and make available to its securities holders, as soon as reasonably practicable, an earnings statement that satisfies the provisions of Section 11(a) of the Securities Act and covers the period beginning with the first month of the first fiscal quarter after the effective date of the registration statement and ending between twelve months and eighteen months thereafter. In determining the 360 day period for purposes of clauses (i) and (ii) of Section 1.2 or clause (iii) of Section 1.5, any day for which a stop order is in effect or has been initiated as contemplated by clause (iv)(c) above or any day on which any fact contemplated by clause (iv)(c) above exists shall not be counted, and the period shall correspondingly be extended by the number of such uncounted days. 3.2 Blue Sky Qualification. The Company shall use its reasonable commercial efforts to cause the Registrable Shares that are the subject of a Demand Registration, a Shelf Registration or a Piggy-back Registration to be qualified for sale under the securities or blue sky laws of such jurisdictions as Intermediate may reasonably request and shall cause such registration or qualification to remain in effect in such jurisdictions until such time as Intermediate shall have disposed of all of the Registrable Shares in accordance with the intended methods of disposition or, in the case of a Shelf Registration, as provided in Section 1.5. The Company shall do any and all other acts and things that may be necessary or advisable to enable Intermediate to consummate the disposition of Registrable Shares in such jurisdictions. Notwithstanding the foregoing, the Company shall not be required to effect any registration in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration unless the Company is already subject to service in such jurisdiction. 3.3 Copies Provided. The Company shall furnish to Intermediate --------------- the number of copies of the applicable registration statement and of each amendment and supplement thereto (in each case, including all exhibits), the number of copies of the prospectus contained in such registration statement (including each preliminary prospectus) in conformity with the requirements of the Securities Act, such documents, if any, incorporated by reference in such registration statement or prospectus and any other documents that Intermediate may reasonably request to facilitate the disposition of the Registrable Shares. 10 3.4 Requested Information. The registration rights granted to --------------------- Intermediate by this Agreement are subject to the condition that Intermediate shall provide the Company with information about the Registrable Shares to be sold including the plans for the proposed disposition thereof, and other information that is necessary, in the reasonable opinion of counsel for the Company, to enable the Company to include in a registration statement all material facts required to be disclosed with respect to the offering. 3.5 Other General Obligations of the Company. With respect to ---------------------------------------- any registration statement pursuant to Section 1.1, 1.5 or 2.1 herein, the Company shall: (1) make such representations and warranties to the underwriters, if any, and agree to such indemnification and contribution agreements, in form, substance and scope as are customarily made by issuers to underwriters in comparable underwritten offerings; (2) furnish Intermediate with (a) an opinion (and updates thereof) of the Company's counsel to the effect that the registration statement complies as to form with the Securities Act and any other securities or blue sky laws that Intermediate requests pursuant to Section 3.2 hereof and that such counsel has no knowledge or reason to know of any material misstatement or omission in the registration statement and (b) a "comfort" letter (and updates thereof) signed by the independent public accountants that have certified the Company's financial statements included or incorporated by reference in such registration statement covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and with respect to events subsequent to the date of such financial statements, as are customarily covered in accountants' letters delivered to underwriters in underwritten public offerings of securities; (3) if requested, provide the indemnification in accordance with the provisions and procedures of Section 5 hereof to all parties to be indemnified pursuant to such Section; (4) deliver such documents and certificates as may be reasonably requested by Intermediate and the underwriters, if any to 11 evidence compliance with Section 3.1(iv) hereof and with any customary conditions contained in any underwriting agreement or other agreement entered into by the Company; and (5) make available for inspection by Intermediate, any underwriter participating in any disposition pursuant to such registration statement, and any attorney, accountant or other agent retained by Intermediate or underwriter, all financial and other records and other information, pertinent corporate documents and properties of the Company and its subsidiaries and affiliates, as shall be reasonably necessary to enable them to exercise their due diligence responsibility. 3.6 Participation in Underwritten Registration. Subject to the ------------------------------------------ provisions of Section 2, Intermediate may not participate in any underwritten registration under Section 2 of this Agreement unless Intermediate (i) agrees to sell its Registrable Shares on the basis provided in any underwriting arrangements entered into by the Company and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. 3.7 Listing. The Company shall cause all Registrable Shares covered ------- by any registration statement to be listed on each securities exchange or inter- dealer quotation system on which similar securities issued by the Company are listed. 3.8 Holdback. In connection with any underwritten registered -------- offering pursuant to Section 1.1 or 2.1, the Company agrees to enter into an agreement with the underwriters of such offering not to effect any public sale or distribution of its equity securities during the period commencing seven days prior to and continuing until 90 days after the registration statement for such offering has become effective, except as part of such underwritten registered offering, which agreement shall be subject to waiver by the underwriters of such offering in their sole discretion; provided that the foregoing shall not apply to registrations on Form S-8, Form S-4 or any successor or other appropriate forms. 4. Registration Expenses. The Company shall pay all expenses arising --------------------- from or incident to the performance of, or compliance with, the Shelf Registration and any Piggyback Registration, including without limitation: (i) all registration, filing, 12 listing and stock exchange fees; (ii) all fees and expenses incurred in complying with securities or blue sky laws; (iii) all printing, messenger and delivery expenses; (iv) all fees and disbursements of counsel and accountants for the Company, including the expenses of any "comfort" letters; (v) all expenses incurred in connection with making "roadshow" presentations and holding meetings with potential investors to facilitate the distribution and sale of Registrable Shares; and (vi) all of the internal expenses incurred by the Company, including, without limitation, salaries and expenses of officers and employees performing legal and accounting duties, expenses of conducting the annual audit of the Company's financial statements by its independent accountants, costs in obtaining liability insurance on behalf of the Company, its officers and directors, and the reasonable fees and expenses of any special experts retained in connection with any registration statement pursuant to the terms of this Agreement, regardless of whether such registration statement is declared effective. Intermediate shall be responsible for all such expenses (other than those contemplated by clause (vi)) with respect to Demand Registrations. In all cases, Intermediate will be responsible for underwriters discounts, selling commissions and fees and disbursements of counsel for Intermediate with respect to the Registrable Shares being sold by it. 5. Indemnification and Contribution. -------------------------------- 5.1 Indemnification by the Company. In connection with each Demand ------------------------------ Registration, Shelf Registration or Piggy-back Registration effected by the Company hereby, the Company will indemnify and hold harmless Intermediate, its officers and directors, each underwriter of the securities registered, and each person who controls, within the meaning of Section 15 of the Securities Act, Intermediate or any underwriter against any and all losses, claims, damages, liabilities or expenses to which they or any of them may become subject under the Securities Act or any other statute or common law, including any amount paid in settlement of any commenced or threatened litigation (collectively, the "Damages"), insofar as any such Damages arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus (as amended or supplemented) or any preliminary prospectus or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made. The Company shall not be bound by the indemnification provision of the preceding sentence with respect to Intermediate or any underwriter if such Damages arise solely out of or are based upon any untrue statement or alleged untrue statement, or any omission or alleged omission that was made in reliance upon and in 13 conformity with information furnished in writing to the Company by Intermediate or such underwriter, as the case may be, for use in connection with the preparation of the registration statement, any preliminary prospectus, any prospectus contained in the registration statement, or any such amendment thereof or supplement thereto. In addition, the indemnification provided in this Section 5.1 shall not inure to the benefit of any underwriter from whom the person asserting any such Damages purchased the securities that are the subject hereof (or to the benefit of any person controlling such underwriter), if the underwriter failed to send or give a copy of the final prospectus or any such amendment thereof or supplement thereto, whichever is most recent, to such person at or prior to the written confirmation of the sale of the securities to such person if there would have been no liability if the final prospectus had been delivered. 5.2 Indemnification by Intermediate. In connection with each Demand ------------------------------- Registration, Shelf Registration or Piggy-back Registration effected by the Company hereby, Intermediate agrees to indemnify and hold harmless the Company, each person, if any, who controls, within the meaning of Section 15 of the Securities Act, the Company, its directors and its officers against all Damages based upon or arising out of any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus (as amended or supplemented) or any preliminary prospectus or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, only if such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company by Intermediate for use in connection with the registration statement or any post-effective amendment thereof or any preliminary prospectus or prospectus contained in such registration statement or any such amendment thereof or supplement thereto. Notwithstanding the foregoing, with respect to a Piggy-back Registration, the indemnification provided in this Section 5.2 shall not inure to the benefit of the Company, each person, if any, who controls, within the meaning of Section 15 of the Securities Act, the Company, its directors and its officers, if the person asserting any such Damages did not receive from the Company or the underwriter or underwriters of the offering as designated according to Section 2.2 herein a copy of the final prospectus or any such amendment thereof or supplement thereto, whichever is most recent, at or prior to the written confirmation of the sale of the securities by such underwriter or underwriters to such person. 5.3 Notice of Claim Triggering an Indemnity; Waiver. Promptly after ----------------------------------------------- the receipt of notice of the commencement of any action, proceeding, claim or investigation or other similar event against any party entitled to indemnity under 14 Section 5.1 or 5.2 (an "Indemnified Party") in respect of which indemnity may be sought from any other party (an "Indemnifying Party") on account of an indemnity agreement contained in Section 5.1 or 5.2 (an action triggering the liability under Section 5.1 or 5.2, an "Action"), the Indemnified Party will notify the Indemnifying Party in writing of the commencement thereof. The failure of any Indemnified Party to notify an Indemnifying Party of any Action shall not relieve the Indemnifying Party from any liability in respect of such Action, unless and to the extent the failure to provide prompt notice materially prejudices the Indemnifying Party in its ability to defend against or settle such Action. In addition, any failure to give such notice shall not relieve the Indemnifying Party from any other liability that it may have to the Indemnified Party. If any Action is brought against any Indemnified Party and the Indemnified Party notifies an Indemnifying Party of the commencement thereof, the Indemnifying Party will be entitled to participate therein and to assume the defense of the Action (the "Assumed Action") with counsel satisfactory to the Indemnified Party, provided that the Indemnifying Party promptly notifies in writing the Indemnified Party of its election to assume the defense of the Action and acknowledges in writing that the claim in question is one for which the Indemnifying Party is obligated to indemnify the Indemnified Party. Upon receipt by the Indemnified Party of this written notice and acknowledgment, the Indemnifying Party will not be liable to the Indemnified Party for any legal or other expenses that the Indemnified Party subsequently incurs in connection with the Assumed Action, other than reasonable costs of investigation; however, if the Indemnified Party has a reasonable basis to believe and does in fact believe that its interests in such Assumed Action conflict with those of the Indemnifying Party, then the Indemnified Party may so notify the Indemnifying Party and the Indemnifying Party will remain liable to the Indemnified Party for all legal or other expenses that the Indemnified Party incurs in connection with the Assumed Action. The Indemnifying Party may not compromise or settle any Assumed Action without the prior written consent of the Indemnified Party, unless such settlement or compromise releases and forever holds harmless the Indemnified Party from all Damages and any culpability in connection with or arising out of the Assumed Action. The Indemnified Party may not compromise or settle any Action without the prior written consent of the Indemnifying Party, which may not unreasonably withhold its consent. 5.4 Contribution. To provide for contribution in circumstances in ------------ which the indemnification provided for in Section 5.1 or 5.2 is for any reason held to be unavailable from the Indemnifying Party, after deducting any contribution received by either the Company or Intermediate, including from persons who control, within the meaning of Section 15 of the Securities Act, either the Company or Intermediate, 15 officers of the Company who signed the registration statement, and directors of either of them who may also be liable for contribution, the Company and Intermediate shall each contribute to the aggregate Damages of the nature contemplated by the indemnification provisions set forth in Sections 5.1 and 5.2 herein (including any investigation, legal, and other expenses incurred in connection with and any amount paid in settlement of any action, suit, proceeding or asserted claims) to which either the Company or Intermediate may be subject. The Company and Intermediate each shall contribute an amount that shall reflect the relative fault of the parties in connection with the statement or omission that resulted in such Damages. The relative fault of a party shall be determined by reference to whether any matter in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such party. The amount paid or payable by a party as a result of the Damages referred to above shall be deemed to include, subject to the limitations set forth in Section 5.3 hereof, any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5.4 were determined by pro rata allocation or by any other method of allocation that does not take into account the considerations referred to in the immediately preceding paragraph. Notwithstanding the foregoing provisions of this Section 5.4, in accordance with Section 11(f) of the Securities Act, no person guilty of fraudulent misrepresentation shall be entitled to obtain contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 5.4, each person, if any, who controls, within the meaning of Section 15 of the Securities Act, the Company or Intermediate, each officer of the Company who shall have signed the registration statement, and each director of the Company or Intermediate shall have the same rights to contribution as the Company or Intermediate, subject in each case to the provisions of the preceding sentence. 6. Filing Requirements; Cooperation. -------------------------------- (1) The Company covenants that it will file any reports required to be filed by it under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations adopted by the Commission thereunder and that it shall take such further action as Intermediate may reasonably request, to the extent required from time to time to enable Intermediate to sell Registrable Shares without registration under the Securities Act within the limita- 16 tion of the exemptions provided by (i) Rule 144 under the Securities Act, as such rule may be amended from time to time, (ii) Rule 144A under the Securities Act, as such rule may be amended, from time to time, or (iii) any similar rule or regulation hereafter adopted by the Commission. Upon Intermediate's request, the Company shall deliver to Intermediate a written statement as to whether it has complied with such requirements. (2) The Buyer agrees to participate in a reasonable manner in marketing efforts in connection with any proposed hedging transaction of the Registrable Shares by Intermediate to the extent such proposed transaction is not otherwise contemplated in Section 1 or 2 hereof. 7. Miscellaneous. ------------- 7.1 No Inconsistent Agreements. The Company shall not enter into -------------------------- any agreement with respect to its securities that is inconsistent with the rights granted to Intermediate in this Agreement. 7.2 Specific Performance. The parties hereto agree that if any -------------------- of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached, irreparable damage would occur, no adequate remedy at law would exist and damages would be difficult to determine, and that the parties shall be entitled to specific performance of the terms hereof and immediate injunctive relief, without the necessity of proving the inadequacy of money damages as a remedy, in addition to any other remedy at law or equity. 7.3 Amendments and Waivers. Any waiver of any right or default ---------------------- hereunder will be effective only in the instance given and will not operate as or imply a waiver of any other or similar right or default on any subsequent occasion. No waiver, modification or amendment of this Agreement or of any provision hereof will be effective unless in writing and signed by the party against whom such waiver, modification or amendment is sought to be enforced. 7.4 Notices. Any notice required or permitted by this Agreement must ------- be in writing and must be sent by facsimile, by nationally recognized commercial overnight courier, or mailed by United States registered or certified mail, addressed to the other party at the address below or to such other address for notice (or facsimile 17 number, in the case of a notice by facsimile) as a party gives the other party written notice of in accordance with this Section 7.4. Any such notice will be effective as of the date of receipt: Mailed notices should be addressed as follows: (i) If to Intermediate, to: c/o Cendant Corporation 6 Sylvan Way Parsippany, NJ 07054 Attention: General Counsel Telecopier: (973) 496-5331 with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP 919 Third Avenue New York, NY 10022 Attention: Eric J. Friedman, Esq. Telecopier: (212) 735-2000 (ii) If to the Company, to: Tickemaster Online-CitySearch Inc. 790 E. Colorado Boulevard; Suite 200 Pasadena, CA 91101 Attention: General Counsel Telecopier: (626) 405-9929 with a copy to: Wilson Sonsini Goodrich & Rosen Professional Corporation 650 Page Mill Road Palo Alto, CA 94304 Attention: John T. Sheridan, Esq. Telecopier: (650) 493-6811 18 7.5 Successors and Assigns. The registration rights granted to ---------------------- Intermediate under this Agreement shall be non-transferrable; provided that this Agreement may be assigned to any Affiliate of Intermediate to which the Registrable Shares shall have been transferred; provided, further, that this Agreement may be assigned to the purchaser of all or substantially all of the assets of Cendant Corp., Intermediate or any Affiliate of Intermediate to which the Registrable Shares shall have been transferred. The rights and obligations created by this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties and to transferees of Registrable Shares as provided in the immediately preceding provisos. 7.6 Counterparts. This Agreement may be signed in counterparts and ------------ all signed copies of this Agreement will together constitute one original of this Agreement. 7.7 Headings. The descriptive headings herein are inserted for -------- convenience of reference only and shall in no way be construed to define, limit, describe, explain, modify, amplify, or add to the interpretation, construction or meaning of any provision of, or scope or intent of, this Agreement nor in any way affect this Agreement. 7.8 Governing Law; Jurisdiction. This Agreement shall be governed --------------------------- by, enforced under and construed in accordance with the laws of the State of New York, without giving effect to any choice or conflict of law provision or rule thereof. Each of the parties hereto hereby irrevocably and unconditionally consents to submit to the non-exclusive jurisdiction of the courts of the States of California and New York and of the United States of America in each case located in the County of New York or the County of Los Angeles for any litigation arising out of or relating to this Agreement and the transactions contemplated hereby (and agrees not to commence any litigation relating thereto except in such courts), and further agrees that service of any process, summons, notice or document by U.S. registered mail to its respective address set forth in Section 7.4 (or to such other address for notice that such party has given the other party written notice of in accordance with Section 7.4) shall be effective service of process for any litigation brought against it in any such court. Each of the parties hereto hereby irrevocably and unconditionally waives any objection to the laying of venue of any litigation arising out of this Agreement or the transactions contemplated hereby in the courts of the States New York or California or of the United States of America in each case located in the County of New York or the County of Los Angeles and hereby further irrevocably and unconditionally waives 19 and agrees not to plead or claim in any such court that any such litigation brought in any such court has been brought in an inconvenient forum. 7.9 Severability. Any provision of this Agreement that is held by a ------------ court of competent jurisdiction to violate applicable law shall be limited or nullified only to the extent necessary to bring the Agreement within the requirements of such law. 7.10 Entire Agreement. This Agreement constitutes the entire ---------------- agreement of the parties relating to the subject matter hereof and supersedes other prior agreements and understandings between the parties both oral and written regarding such subject matter. 7.11 Interpretation. References herein to a specified number of -------------- Registrable Shares are subject to equitable adjustment for shares of Common Stock issued as a dividend or distribution on account of Registrable Shares and for any combination or subdivision of outstanding Registrable Shares into a less or greater number of securities (by reclassification, stock split or otherwise). In the event that shares of Common Stock deemed to be Registrable Shares are exchanged for any other securities issued by the Company, such other securities shall constitute Registrable Shares and the provisions of this Agreement shall be interpreted and construed in order to provide registration rights with respect to such other securities constituting Registrable Shares that are substantially identical to the registration rights granted hereunder with respect to the exchanged shares of Common Stock. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement. 7.12 Termination. This Agreement and all of the parties' respective ----------- obligations hereunder shall terminate upon the termination of the Exchange Agreement in accordance with the terms of Article VI thereof. [SIGNATURE PAGE FOLLOWS] 20 IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. CENDANT CORPORATION By:__________________________________ Name: Title: CENDANT INTERMEDIATE HOLDINGS, INC. By:__________________________________ Name: Title: TICKETMASTER ONLINE CITYSEARCH, INC. By:__________________________________ Name: Title: 21 EX-23.1 6 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Expert" and "Selected Financial Data" and to the use of our report dated March 11, 1998 (except Note 10, as to which the date is September 28, 1998), with respect to the financial statements for the period from September 20, 1995 (date of formation) to December 31,1995 for each of the two years ended December 31, 1997 of CitySearch, Inc. included in the Registration Statement Form S-1 and related Prospectus of Ticketmaster Online-CitySearch, Inc. dated June 25, 1999. We also consent to the use of our report dated January 29, 1999 with respect to the financial statements of Ticketmaster Online-CitySearch, Inc. for each of the two years ended January 31, 1998 and the eleven month period ended December 31, 1998 included in the Registration Statement Form S-1 and related Prospectus of Ticketmaster Online-CitySearch, Inc. dated June 25, 1999. Our audits also included the financial statement schedule of CitySearch, Inc. for the periods from September 20, 1995 (date of formation) through December 31, 1995 and for each of the two years ended December 31, 1997 and the financial statement schedule of Ticketmaster Online-CitySearch, Inc. for the eleven months ended December 31, 1998 listed in Item 16(b). The schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the schedules based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Woodland Hills, California /s/ Ernst & Young LLP June 25, 1999 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 1,000 YEAR 3-MOS DEC-31-1998 DEC-01-1998 FEB-01-1998 FEB-01-1998 JAN-31-1998 MAR-31-1998 106,910 99,284 0 0 1,249 1,160 175 58 0 0 111,189 104,478 5,893 6,140 (1,323) (2,100) 416,725 426,416 10,498 10,303 0 0 0 0 0 0 419,633 447,122 (16,045) (33,777) 416,725 426,416 27,873 15,971 27,873 15,971 13,863 11,478 42,192 34,854 0 0 0 0 813 (17,683) (14,268) 57 2,951 (17,740) (17,219) (17,740) 0 0 0 0 0 0 (17,219) (17,740) (.38) (.25) (.38) (.25)
-----END PRIVACY-ENHANCED MESSAGE-----